Good day, and welcome to the First Quarter 2016 and 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lars Rasmussen, CEO. Please go ahead, sir.
Thank you. Welcome to our Q1 2016/2017 Conference Call. My name is Lars Rasmussen, I'm CEO of Coloplast, I'm joined by CFO Anders Lønning-Skovgaard and our investor relations team. We will start with a short presentation by Anders and myself, then we will open up for questions. Please turn to slide number three. Today, Coloplast delivered 6% organic growth, which is in line with our expectations.
As anticipated, the quarter was heavily impacted by our inventory reductions within primarily Continence Care, but also Ostomy Care at our largest distributors in the U.S. The inventory reductions amounted to approximately DKK 70 million. I'm pleased to say that the inventory levels are now normalized. Going forward, we expect to see our reported sales growth in the U.S. normalize towards the double-digit level that we are seeing in the end market sales. I am excited about the prospects of the US business.
The underlying demand for our products is solid. We have built a strong consumer platform with our Coloplast Care program and direct-to-consumer initiatives. Within Ostomy Care, we continue to see growing momentum in the acute channel. In Q1, we secured a number of additional hospital wins, predominantly within the Vizient GPO, including, for example, Yale New Haven Health. The acquisition of the US distributor, Comfort Medical, has now been completed.
We see an attractive opportunity to accelerate the ongoing upgrades in the market towards more advanced hydrophilic catheters. A key pillar in our new strategy is innovation. Across our business areas, we continue to roll out new products this year, including SenSura Mio Convex, SpeediCath Flex, and Biatain Silicone sizes and shapes. In Q1, we also relaunched an upgraded version of our legacy Comfeel Plus portfolio.
In the first quarter, an important milestone was reached with the introduction of reimbursement for intermittent catheters in South Korea. Emerging markets remains a challenging region. In Q1, we saw weaker growth, primarily due to weaker to the lower tender value in Saudi Arabia this year compared to last year. A weak quarter in Brazil due to funding challenges and continued weaker momentum for our wound care business in China. We expect our wound care performance in China to improve over the course of the year.
It is satisfying to see us deliver a 33% EBIT margin in Q1, considering that we have continued focus on our transfer activities and have invested further in the U.S. and wound care. Our organic revenue guidance for 2016/2017 is unchanged with a growth of 7%-8%, whereas our growth in Danish kroner is now expected to around 7%-8%. Our EBIT margin guidance is fixed in fixed currencies, and in Danish kroner is unchanged at 33%-34% and around 33% respectively.
Please turn to slide number four. Revenues grew 6% organically and 3% in Danish kroner and amounted to DKK 3.8 billion. In Ostomy Care, organic growth was 6%, and growth in Danish kroner was 3%. Growth continues to be driven by our SenSura and Brava accessory portfolios. Our SenSura portfolio saw satisfactory growth in the U.K., Germany, and Southern Europe. In particular, SenSura Mio Convex continues to contribute to growth.
We look forward to bringing additional capacity on SenSura Mio Convex to the market at the end of March to meet the strong demand. Growth in Q1 was negatively impacted by the anticipated inventory reductions at our largest distributors in the U.S. and a weaker quarter in a number of the emerging markets, including Saudi Arabia and Brazil. In Q4 last year, growth was negatively impacted by backorders on urostomy bags. The backorder level normalized in Q1, as expected.
Our Assura Alterna portfolio growth was driven by satisfactory performance in China, Russia, and Spain. In Continence Care, organic growth was 5%, and growth in Danish kroner was 1%. The SpeediCath ready-to-use intermittent catheters continue to drive growth, and especially the compact versions performed well. In the compact segment, we saw strong growth in the U.S., as well as satisfactory growth in the U.K., France, and Germany. As anticipated, inventory reductions at our largest distributors in the U.S. had a negative impact on growth.
In addition, the lower tender value in Saudi Arabia this year compared to last year, had a significant negative impact on growth. Our Conveen collecting device portfolio posted slightly positive growth due to a satisfactory growth in France. Finally, sales growth for our Peristeen products remained satisfactory, especially in the U.K., U.S., and France. SpeediCath Flex has now been launched in 11 markets, and the initial feedback is very positive. In Urology Care, organic growth was 8%, and growth in DKK was 9%.
The growth was primarily driven by sales of female pelvic health products, where we continue to gain market shares. We also continue to see satisfactory growth in sales of the Titan range of inflatable penile implant devices. Our Interventional Urology business saw satisfactory growth in Europe. However, overall growth was dampened by weaker emerging markets performance. In Wound & Skin Care, organic growth was 5%, and growth in Danish kroner was 4%.
Organic growth for wound care in isolation was 8%. The growth was driven by Biatain sales, in particular Biatain Silicone in Europe and Biatain Super in Greece. In Greece, performance was lifted by stock building due to a shift to a new product portfolio as a result of healthcare reforms. The inventory is expected to be reduced in Q2. As mentioned earlier, Saudi Arabia, China, and Brazil contributed negatively to growth.
Contract manufacturing of Compeed contributed to growth, while the Skin Care business impacted growth in the quarter negatively due to a strong quarter in Q1 last year. Turning to our geographical segments, we saw organic growth of 6% in Q1 in our European markets. The growth continues to be satisfactory across the portfolio of countries, and in particular in the U.K. , where [Inaudible] Tiada continued to take market share. The quarter also saw satisfactory growth in France and Southern Europe.
Organic revenue growth in other developed markets was 4% in Q1. As explained earlier, and as expected, inventory reductions at our largest distributors in the U.S. impacted performance negatively. Our growth rates in Canada, Japan, and Australia all remained satisfactory. Revenue in emerging markets grew organically by 7% in Q1. The growth was driven by Greece, Argentina, China, and Russia. The lower tender value in Saudi Arabia this year, compared to last year, had a negative impact on the group sales of approximately DKK 30 million.
China contributed to growth, due to a satisfactory growth within Ostomy Care. The wound care business posted another weak quarter. Brazil had a weak quarter as a result of municipal elections that caused delays in orders, due to budget constraints. With this, I'll now give the word to Anders, please turn to slide five.
Thank you, Lars, and good afternoon, everyone. Gross profit was up by 3% to around DKK 2.6 billion. This equals a gross margin of 69%, which is on par with last year. We continue to see improvements in production efficiency at our volume sites, and in particular, a positive impact from the relocation of SenSura Mio and Comfeel Plus 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 increasing depreciation levels and costs associated with relocation of production to Hungary. The distribution to sales ratio came in at 28%, on par with 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. Included in the quarter are 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 10% increase in R&D costs reflects a higher general activity level. Overall, this resulted in an increase in operating profit in fixed currencies of 8% and 3% in actual currencies, corresponding to an EBIT margin of 33% in both fixed and actual currencies. Operating cash flow amounted to DKK 254 million, compared with DKK 629 million last year.
The positive impact from higher absolute earnings was offset by payments on escrow accounts to settle mesh claims. In Q1, mesh payments totaled DKK 1.2 billion, and total mesh payments to date now amount to DKK 3.6 billion. Cash flow from investing activities was impacted by the acquisition of Comfort Medical and capacity expansion in machines for the production of new products at the site, and the site expansion in Tatabánya in Hungary.
Investments in intangible assets and property, plant, and equipment amounted to DKK 112 million for the quarter. The sale of bonds provided a DKK 110 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 1.4 billion, compared to DKK 1.3 billion last year.
The latest update on the mesh litigation in the U.S. is that we have now settled more than 95% of the cases against Coloplast. 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. Finally, the second half of the approved share buyback program of, in total, DKK 1 billion, is expected to be initiated in the second quarter. Please turn to slide six. Our organic revenue guidance for 2016, 2017 is unchanged with a growth of 7%-8%.
Our growth in DKK is now also expected at 7%-8%. Our guidance assumes stable growth rates in Europe. We also assume higher growth rates in North America this year compared to last year. We assume that growth in emerging markets will be in line with the level we saw last year, which assumes an improved growth outlook for China Wound Care. We expect a negative price pressure of around -1% point on our top line, and this is reflected in our guidance.
The negative pricing pressure is expected to be driven by reimbursement pressure in France and price reform in Greece. For 2016/2017, we continue to expect an EBIT margin of 33%-34% in fixed currencies and around 33% in DKK. High growth from our new product launches still means pressure on the gross margin. We continue to relocate manufacturing out of Denmark to Hungary, and we will reduce the number of production workers in Denmark by additional 100 in 2016/2017, as previously communicated.
We expect the benefits to be absorbed by the cost of relocation and restructuring costs in 2016/2017. We also expect depreciation to increase at the same level as last year, as a consequence of the last couple of years increasing CapEx. The change to the top-line guidance in Danish kroner is primarily related to the acquisition of Comfort Medical, as well as the appreciation of the British pound and US dollar against the Danish kroner, since our last financial results were published in November.
We expect our net financials to end the financial year 2016/2017 at around -DKK 100 million, impacted primarily by cash flow hedge losses on the US dollar, Brazilian real, 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 particularly by investments in more capacity and for new 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 and 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.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one to ask a question. We will take an opening question from Veronika Dubajova of Goldman Sachs. Please go ahead. Your line is open.
Good afternoon, gentlemen, thank you for squeezing me in. I have three questions, please. My first one is on the ostomy business. I am curious, Lars, if you saw any changes in the competitive environment in the market in the first quarter? Looking at the fact that you were supposed to see some rebound from the fourth quarter in the urostomy business, I'm just surprised by the degree of slowdown that you have seen sequentially in the ostomy business.
If you can comment on that, or if there's anything else that happened in the quarter, that would be helpful. My second question is on emerging markets. Can you give us any sense on what the growth would have been in the business if you stripped out the Saudi tender? Related to that, is your expectation that that tender happens just at a later point in time in the year, or should we be writing that business off now? My last very quick question is just on the guidance for net financial items for the full year. Thank you.
Thank you very much, Veronika. I think that let me take the emerging markets question first. It's approximately corresponding to around 5% of the growth rate that we are losing because of the DKK 30 million that we had at the tender loss in Saudi Arabia. That's, that's the magnitude. When it comes to Ostomy Care and the competitive environment, we had a very high growth in the last quarter in Ostomy Care.
However, if we then look at what's the ostomy part of the stock reduction in the U.S., what's the ostomy part of the tender that I just talked about in Saudi Arabia, and other weakening in the emerging markets, actually, we have more or less the same growth rate in this quarter as we had in the previous quarter. I.e.,
it's a very strong growth rate that we are having, and as we also say in the presentation that we have here, we can't wait to bring on more capacity, because the demand is really present. I can't remember your third question. I'm sorry about that.
I have that.
It was for Anders, yes.
Yeah.
Yeah. So you asked about the guidance on our net financials. We're expecting minus DKK 100 million in net financials for the year, driven by cash flow hedge losses on the US dollar, the Brazilian real, Argentinian peso, partly offset by hedging gains on the British pound.
Fantastic. If I can follow up quickly on Saudi Arabia. Lars, is your expectation that this tender happens later in the year, or Was the tender awarded to someone else? If you can just give us some color on that would be great.
No, we want it, but it's just the value of it, which is really really low, and it's been...
I see.
over time that they sort of squeeze it down.
Understood. Understood. Thank you. Thank you both very much.
We will take our next question from Christopher Cooper of Jefferies. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. Just two, please. Firstly, working capital cash, there's a big negative swing. It's mostly around the trade payables. Should we be expecting some kind of normalization through the first half of this year, or is this a structural change, perhaps related to the new distributor contracts? Any commentary here would be helpful. We're talking almost a DKK 1 billion swing, and I'll come back with the second.
Overall, our net working capital for the first quarter is around 25%, and it's very much driven by our inventory levels that has increased. in the first quarter as we are preparing for launches for the rest of the year. We have also eliminated, you can say, or resolved the backorder situation within our ostomy area. That's the net working capital situation. What was the other one?
Yeah, I mean, that was the question. I mean, I was referring more to the swing in the payables line. I mean, is this, there's no structural change I'm getting to.
No.
with the change in terms of this contract?
Yeah. In terms of the accounts payable side, it's more a timing from quarter to quarter.
Right. Okay. We expect normalization in the second quarter, presumably?
Yeah, we are expecting normalization over the coming quarters. My expectation in terms of net working capital for the year is in the level of 24%, as we also had last year.
Fine, thank you. Second question, just on the mesh cases and your greater than 95% settlement rate. It does seem like you're ahead of the competition here slightly. Can you just confirm whether new cases are continuing to come forward, or whether indeed there's any reason to suspect that the last 5% will be any different from the last 5% in terms of risk profile?
It's not, if your question is if we have, sort of pushed the more heavy cases in ahead of us, that's not the case. We expect the remaining cases of the known ones to be, as the average cases that we have seen. I take that's the question that you had on that part?
Mm-hmm. Whether there's any new cases coming forward.
Is that correct? Well, it's a very slow pace, I would say. It is correct that we have had a different way of handling this than many of the other companies that are out there, because we have not been in the courtroom, but we have taken the settlement route. That's why we are at a different point than most of the other companies that are involved in this mesh litigation.
Mm-hmm. Okay, thanks for the help.
We will take our next question from Ian Douglas-Pennant of UBS. Please go ahead. Your line is open.
Thanks very much. Actually, most of my questions have already been answered. I know we're early in the call. First on the wound slowdown, you mentioned an emerging market slowdown. Could you go into a little bit more detail there?
We've heard from other people that China is still reasonably weak, is that what you're talking about there, or are there other regions that we should think about that are significant as well? On R&D, you've had double-digit growth there for a few years now. What is the kind of end game that you're expecting? Is your original commentary around 3%-4% of sales? At what point would you revise that, or are you still happy to reiterate that? Thanks.
Wound Care was in isolation was 8% growth. We had a negative growth in Skin Care, but if you take the Wound Care part on isolation, it was 8%. We had a weak quarter in China and in Saudi Arabia and in Brazil. Those were the markets that were sort of pulling us down. It's a little bit difficult to comment specifically on China for the market, because we actually see two different things in China.
One is that our Ostomy Care business is growing at a very, very nice speed. That's of course also a much more private market than the Wound Care market is. Wound care is we see that wound care is sort of stabilized, and we also expect it to be better. We just can't guide you on when we expect China to be back into a very healthy growth when it comes to wound care. We can confirm that the market has softened a bit, but we expect it to come back, and we have not pulled the plug on the investments that we're doing in China.
Is it fair to say that, sorry, the wound business in China, you'd still expect 20%-30% growth?
Not this year.
Okay, sure.
We expect the market to rebound, and I just don't know at what point in time that will happen. We have stayed put with the investments that we have put into China, but we are not topping it up with extra investments in the current market situation for wound care.
Okay, thanks.
For the R&D, I think that we have said at many occasions that we are willing to invest what it takes to stay ahead of the game when it comes to R&D. For the time being, we think that the level of 3%-4% is what we need, but if we need more, we'll come back and inform you about it. You have seen that it has climbed up a little bit over the last period. We have a very healthy pipeline of new products coming up, and we are very excited to back those.
Great. Thanks very much.
We will take our next question from Carsten Madsen of SEB. Please go ahead. Your line is open.
Thanks a lot. Just one additional question here on emerging markets. This is Saudi Arabian tender that was also sort of a challenge for you last year. Still, you're not even close to go down to the 7% reported growth that you have today in, sorry, organic growth. You mentioned the other areas that suffer. What's your visibility on seeing improvement in the market for the coming three quarters here in emerging markets in particular? It seems at a relatively low level, you're reporting.
Then a more sort of overall question on sort of a US presidential status. There's been some focus on Trump implementing competitive bidding. I don't think it's on the table right now, but maybe if you could share some of your thoughts on the future of pricing levels in the US market and maybe also import bans, whatever.
For it's like the first part of the question suddenly became much easier after you came with the second one. But for Saudi Arabia, it's correct that we had it also last year. It's sort of just tailing off. It becomes every year we win it, but it's just smaller. We expect that the emerging markets will be growing at a higher pace for the rest of the year than what we've seen in the first year. We have little visibility, but we do expect it to be more or less around up to the same level as we had last year. So like 10%-15% for the full year.
So that's where we are on emerging markets, and that's the kind of visibility that we have. It is very much, you know, the oil-dependent countries that are pulling us down because they have less buying power for the time being. For the U.S., I think that you know the situation when it comes to medical devices. For most of the medical devices, we have lower prices in the U.S. than we have in the rest of the world.
Yeah, I think what's the case for trying to really go for it. A lot of people are underserved, I would say, in the U.S., when it comes to at least the chronic care patients. We are watching what is going on as you are. We will take stock of any new development. The fact is that we have tens of thousands of customers in the U.S., and we have a lot of employees. We feel very committed, and will invest whatever it takes to keep winning in the market.
Mm. Okay, cool. Thanks.
We will take our next question from Martin Parkhøi of Danske Bank. Please go ahead. Your line is open.
Thank you very much. Martin Parkhøi, Danske Bank. A couple of questions. Firstly, the M&A effect. I think that when you acquired Comfort Medical, you say, you could say more when it has been finalized, and now it's finalized, and actually think that it's a pretty wide gap to say it will have an impact of 1%-2% in 2016, 2017. That's between DKK 150 million-DKK 300 million. What was actually the annualized top line sales, if you look at the sales in Q4, both before and after sales elimination?
Secondly, now you mention yourself that you have been able to get some more hospital contracts in U.S. How big a percentage do you actually cover now where you have contracts on each of your divisions? Thirdly, South Korea, as you mentioned on your front page, and we already knew that there was some positive change to reimbursement. Could you quantify?
Because it's actually a quite big number if you look of the if you calculate that it's 50 DKK per day that they get in reimbursement, then it's actually DKK 450 million in potential sales in Danish krone, but that's of course a blue sky scenario. How much do you think that you can get, and how long time will it get to get there? That was all, yes. That was all. Thank you. Could you start with the last one, Anders?
I'll take the first one around the Comfort Medical, Martin.
Mm-hmm.
Our guidance in the DKK for the year is now 7%-8%.
Yes.
That includes, what we, earlier have said around Comfort Medical, that Comfort Medical will contribute around 1%-2% point.
Yes.
It also includes a slightly improved currency from the US dollar and the British pound effect of 0%- 1% point.
Yes
Compared to when we had the Q4 announcement. Overall, our Danish krone guidance for the year is 7%-8%.
Yes. I understand that, but.
If I can, yeah, and if I can top it off, Martin, then now we have had a chance to look further into it, and we have got confirmed what we also believed upfront, that to put together the care strategy that you know very well, and then the skills of Comfort Medical, that gives us the desired edge in the U.S.
We think that the business case that we have behind this is definitely being confirmed, very much so. We are very positive about this, but at this point in time, we can't give you more strict numbers than what you're looking for, which is what you're looking for here.
Yep.
Um-
That was not a good start.
No, but it, for us, it's a very good start, and we are very satisfied with what we see in Comfort Medical.
Okay. Yes.
When it comes to the hospital contracts, as we have talked about earlier on, we have access to more than 50% of all the hospitals, significantly more than 50% of all hospitals in the U.S. We just get that confirmed as we move along, because we are closing a very nice number of new hospital contracts, and we also mentioned one during the call. We think we get that confirmed, and that's also in the underlying numbers that we have. We actually, for the first time, gave you a number of what was the value of the stock reduction that we had in the U.S.?
Yes.
That was $10 million.
Mm-hmm.
That you have a chance also to see what's at least the underlying growth. We can only give you this deeper insight, because during the course of the last quarter, we have come very, very close with our distributors. We can see effects in the market. That also explains that, if you look at the growth of the company, when you take this into consideration, it's actually very, very strong.
Mm.
I think that it's just confirming that what we're doing in the U.S. is really healthy. I can only echo what you're saying for South Korea. If I take the full value of and put that into the spreadsheet of what's the value of a patient, and if we can get all of them and the full value and so on, then it's of course fantastic. We are a little bit more cautious in the way that we are guiding. We are off to a very good start, and we have very strong growth in South Korea.
Yeah. Thank you very much.
We will take our next question from Scott Bardo of Berenberg. Please go ahead. Your line is open.
Thanks very much for taking my questions. A few questions, please. First question, just relates to the Q day category in North America. I just wondered if you could explain a little bit about SpeediCath Flex and whether that gets reimbursement in this Q day category. Just perhaps talk a little bit about, does that then limit this product to a niche indication, which is my understanding for Q day, or is it your expectation that this is more, you know, a widespread product under that sort of heightened reimbursement framework?
If you could just talk a little bit about Flex and how you see that sort of positioning in the market, please. Second question just relates, I wonder if you could give us a little bit of an update. I know we've sort of been around the houses on this, SpeediCath patent expiry, but it was my understanding that there was a lot of discussion about this being a 2017 sort of expiry. Correct me if I'm wrong, we're starting to see some players enter the market now with sort of ready-to-go hydrophilic catheters that are already sort of pre-lubricated and things.
I just wonder, is it the fact that actually the patent is now gone in the U.S. and in Europe, or are these sort of launching at risk or got around the patent? Or if actually you could just talk a little bit about that, Lars, please. I have a follow-up. Perhaps I'll give that after.
Okay.
After that take place.
All right. When it comes to the Q day category, it's a category which is growing at a very healthy rate. It's growing 15%-20%. The SpeediCath Flex is in that category. We have approximately a 40% market share in it already, but that's with the uncoated catheters. Here we can make or give people an upgrade.
By the way, also, make sure that we don't see... Well, there's basically no competitors then. That it's not a generic product anymore that we have there. That's actually, we think that's not just niche. It's actually real value per patient that we're talking about there. Was that what you were after?
Yeah, I just, I mean, just wanted to, 'cause my understanding is that these products were for sort of in patients with enlarged prostates. What I'm just trying to understand is that a very small sort of segment of the market, or are we talking a big segment of the market under this?
It's 25% of the total IC market in value.
In value?
Yes.
In volume, probably 10%.
Yeah, that's a different number. It's.
Yeah.
It's probably lower.
Yeah.
Um.
Okay, thank you.
Yeah. Your second question was regarding the patent expiry. Of course, the patent is expiring at, you know, at the end of our fiscal year. We do see what you're also seeing, and of course, we are defending ourselves to the last day.
just
There's no changes compared to what we did beforehand.
How does that work, Lars, if you don't mind me sort of asking that? Because the patents are there for a reason to be enforced, and if it expires at the end of this year, how comes already you are seeing people enter the market? I would have thought that's sort of stepping on sort of legal frameworks and things. Why is that?
It is. In the cases where that happens, and where we have patents in those countries, we take the legal route. Sometimes in some jurisdictions, you can block people out immediately, and in others, they are allowed to sell, or they are not allowed to sell, but they can sell while you try to block them. If at court level, they are, it's obvious that they are violating your patents, they will then have to pay you a fine and compensation for your losses. They do it at their own risk.
Okay, understood. Just, for a little bit of comfort, Lars, obviously, you know, this has been talked about a lot. You're now upgrading to the sort of compact versions in the U.S., and that seems to be going very nicely now. Can you at least give us a flavor now of how much of your sort of US business, your volume in the U.S., and your value in the U.S. is now these compact versions, just so we can, you know, sort of get some level around this?
Yeah, well, I could do that. In the U.S. , 40% of IC sales is now hydrophilics, and that is up from 15% five years ago.
Mm-hmm. That's pretty much all Coloplast last year?
It's it varies from gender, you could say. More on the female than on the males.
Excellent stuff. Perhaps just one last-.
We don't go further down on that one.
Understood. Yeah, well, that's kind of you to give that disclosure. Just last sort of bigger picture question, if I may? Sorry, I appreciate we've been having a bit of a dialogue. At your capital markets day.
And by the way, I would like to say that, you know, taking this market share from 15%- 40% over this period of time, shows impact in the market. I think that's, you know. You know how the dynamics works when it comes to money in the U.S.
Yeah.
You know, I'm pretty proud of this.
I can understand that. Just to understand, at your capital markets day, just the day before Brexit, you highlighted, you know, this journey to hire an extra 3,000 employees to drive growth. Can you, I appreciate, you know, you've just hired some with Comfort Medical, but excluding that, can you give us a sense of where you are with this journey and how far along you are with sort of, you know, getting out human resources and making these offers?
Well, first of all, we are around 11,000 people in the company today. We are hiring at the speed that we think makes sense given where we are in the different markets. You always have plans, and then you have to take stock of reality.
But... You could say that reality have changed quite a bit in the U.K. and in the U.S. , but by the way, in those two markets, we have not held back. We basically push on to upgrade as fast as we can. I think that if we're looking at both markets, where there have been the biggest changes, since we had the Capital Markets Day, we actually have very healthy growth in both markets.
Scott, a big majority of the 3,000 extra employees that we talked about at the Capital Market Day is also going into our production.
Uh-
We have just announced that we are going to open up a new facility near Nyírbátor, and here we will hire more people in order to produce our products.
Understood. Thanks so much, guys.
We will take our next question from Romain Zana of Exane BNP Paribas. Please go ahead. Your line is open.
Thank you for taking my question. Most of them have already been answered, but I still have two. The first one on the Wound Care. Over the past couple of quarters, you've been mentioning that you were switching efforts outside of China to other emerging markets, and I was wondering if you already see the benefits of this change in strategy?
I'm not sure I understand the question. Could you elaborate a little bit on it? I, yeah, I don't get it.
According to my understanding, the weakness in China, you were mentioning it, that you are mentioning that the sales and marketing efforts could be switched to some other emerging markets where you have more potential.
No, that's, at least, if we have communicated that's wrong, because we are keeping the pressure on the wound care market in China. What we are doing is that we are very concentrated on a number of accounts that we really follow through on. We have not taken out people from China to relocate them elsewhere in other markets.
Okay. Sorry for the misunderstanding. The other one is a bigger picture question on the profitability. Taking into account the current full year guidance, the EBIT margin should be, let's say, virtually flat, around 33% for the fourth years in a row.
What should significantly boost the operating leverage in the long term to achieve your long-term target? I'm thinking especially also about the pricing pressure, and was wondering in what extent do you still have a net benefit of the relocation of the manufacturing to Hungary, or is it just balancing the pricing pressure on the market?
Yeah. As you are aware, our financial ambition in the coming planning period is to grow 7%- 9%, at the same time, improve our EBIT margin with 50- 100 basis points, and that is on a fixed currency scenario. You are aware also that we are impacted by especially the sterling. We were impacted by that the last financial year with around 50 basis points, that's also what we have been impacted by in the first quarter this year.
As we are growing in the level of 7%- 9%, if we are growing in the lower end of our guidance, we also are expecting to improve in standard currencies in the lower end of our EBIT margin guidance, around 50 basis points. That is very much driven by scale effects and leverage throughout the organization. On top of that, we are working on the initiative of moving production out from Denmark to Hungary.
As a consequence of those transfers, we are reducing the number of employees, of production employees in Denmark with 300. Last year, we reduced it with 100, and our expectation is also that we will reduce with 100 this year, and 100 again in 2017/2018. The total saving from this initiative is going to be DKK 80 million-DKK 100 million. We also expect that that initiative will contribute to our overall EBIT margin expansion.
Then to top that off, a lot of the leverage effect in the company also comes from the commercial organization, where in many of the markets that we're in, we have a very healthy growth without adding extra sales people. So that also is part of why we expect to still increase the EBIT margin. But there's no doubt that we had quite a quite an impact from the sterling.
Thank you very much.
We will take our next question from Inês Silva of Bank of America Merrill Lynch. Please go ahead. The line is open.
Hello, good afternoon. Thank you for taking my questions. I just have three quick ones, please. The first one is just a follow-up on a previous question regarding China, and specifically, wounds. You commented that the growth was a bit weak there, but could you just comment on what happened this quarter versus last quarter? Is it decelerating, accelerating? How do you see that market?
The second one is, I know you're not willing to, at this point, to give any numbers on Comfort Medical, but can you just explain to us a little bit now that you've looked at this business for a couple of months, what kind of benefits you think it can bring to your Continence growth in the future, or are we seeing already anything in the short term?
Then the third one was just if you could comment on the potential tax reform in the U.S., and how do you see that impacting your business, specifically potential tax rate reduction and the border tax? Thank you.
China is, as I said, a mixed picture, because we actually have a fantastic growth in Ostomy Care, and from an extremely strong position. The weakness that we have in China is the growth rate of the Wound Care business. If we look at how it is this quarter compared to last quarter, it is more or less the same picture. We just expect it to improve as an overall situation for the rest of the year. We do have double-digit growth totally, in China as we speak.
I think that, you know, it's not what we have invested for, but it's not, it's not something where we are saying that we should reconsider the way that we're investing. We actually believe that we will be able to use this new situation in China to even improve or to further improve our business there. When it comes to Comfort Medical, what we looked for when we acquired Comfort Medical was to see if we could accelerate the product upgrades that we talk about. That's across the board when we talk of our products.
It's both for IC or intermittent catheters and also for Ostomy Care. We think that that is definitely doable. That is not least because we already have a very strong program in the market, our direct-to-consumer program, which we call Care. Where this is a place where people who have a chronic condition, they become a member of our care program, and in that context, we can now offer them a much better service than what we could beforehand. We get much more leads in care than we would ever be able to take care of ourselves.
We are still a very attractive partner for other dealers also. This gives us an opportunity to accelerate the product upgrade in the U.S. The U.S. is behind when it comes to the technology that people are using on a daily basis. There is an unmet potential. The population of especially people who use intermittent catheters in the U.S. can, for the same price as society and they pay today, they can get a significant upgrade, and that is what we're using Comfort Medical for.
That's, by the way, also a good business to us. We have just got that confirmed with what we know by now, and we think that we have gotten a very strong asset and a very strong management team on board with this acquisition. If anything, it's just increased our appetite.
In connection with your question around the tax rate, we are today paying most, the majority of our taxes paid out of Denmark, actually around 80%. A potential corporate tax reduction in the US will not have a significant impact on our overall tax rate. We are expecting that our corporate tax rate of around 23%, we also expect that in the future.
Are you willing to comment on a potential border tax or no?
It's we think it's speculative, and, you know, would that change our commitment to the US market? It will not.
Okay, great. Just a quick follow-up on the Comfort Medical. If the main objective with this acquisition is to accelerate the upgrades, then when you talk about these upgrades, these are only within the population that's served by Comfort Medical, right?
The whole idea of us investing in Care in the U.S. and the way that we have tailored Care in the U.S. is to be able to inform users of their rights, of the opportunities that they have, the kind of products that they can get if they understand what to ask for and how to ask for it. As I said before, you can, as a user in or as a patient in the U.S., you can actually ask for significantly better products without any extra cost to themselves and to society. That's the whole idea why we have created Care. It works extremely well.
We get more and much more people are signed up than what we believed in. We, of course, will take some of those patients also into Comfort Medical. We tested out this model in connection to the changes that we did to our direct business in the U.K. We have seen a significant improvement of our competitiveness in the UK market due to the changes that we did there.
It's of course, those experiences and what we learned from that we are taking into the way that we are handling the acquisition that we did of Comfort Medical. We have just got that confirmed as we are looking deeper into that business.
It's fair to say you bought knowhow, just like in the U.K. , you also get know how from your Charter business?
Of course, of course, because now we work directly with the health insurance companies, so we understand much more, you know, what that angle of it is also. We are, of course, also, just expanded our contact with the users compared to what we had before. We already had a pretty large call center in the U.S. but now we have one which is significantly bigger.
Thank you very much.
We will take our next question from David Adlington of JP Morgan. Please go ahead. Your line is open.
Hi, guys. Thanks. Most of my questions have been answered. Just a very boring housekeeping question, I'm afraid. The DKK 100 million headwind in net financial items, I'm wondering if we get some phasing on that. Is it going to be phased towards Q2 and Q3? Thank you.
The headwind we're going to have on the net financial items, my expectation that is more or less equal split across rest of the year. That is my expectation, David.
Great. Thanks, and sorry for the boring question.
It's quite okay.
We will take our next question from Christian Ryom of Nordea Markets. Please go ahead. Your line is open.
Thank you. This is Christian Ryom from Nordea Markets. I have a couple of questions. First, can you elaborate on your decision to relaunch the Comfeel Plus wound care product, and how this fits with your overall wound care strategy, and what your expectations are for this product? Secondly, on your skin care performance in the U.S. this quarter, is this entirely down to a tough comparator in the first quarter of last year, or is there something else that affects this quarter?
Finally, if you wouldn't mind, can you give us a clarification on exactly when the new tender prices in Saudi Arabia has been implemented, i.e., should we expect this effect of this Saudi Arabian tender of around DKK 30 million in drag to persist throughout the year? Thank you.
All right. For the last one, I can say no, you should not expect that. That was a quarterly award. And then I take it in that order. The next one, the skincare numbers, it's the only explanation is it's just brutal comps. Nothing else but that. As we said last quarter, we as part of the of our LEAD20 strategy, we are investing in Wound & Skin Care in the U.S. Now we have a new head of Wound & Skin Care in place in the U.S., and we are. That piece of the work is progressing as it should.
We do expect to step up our investments in the U.S. to get a much stronger position in the U.S. in the coming years, as we also discussed last year. With the relaunch of, you could say, a pretty old product portfolio, it is a product portfolio of a technology which is quite well recognized in the market and which is used in many markets as the primary choice. With this relaunch, we have given the product, you could say 2016 features. It's actually been received more positively than what we had expected.
That's also the reason why it even pops up in the announcement that we come with, because it is actually giving an extra, you could say, an extra go for this product portfolio, which is kind of one of the cornerstones in the old portfolio in, in this area. We think that that's, that means that it's going to live for quite some years still. That's all positive.
Thank you.
We will take our next question from Gunnar Rømer of Deutsche Bank. Please go ahead. Your line is open.
Gunnar Rømer, Deutsche Bank. Thanks for taking my questions. Just to follow up on the stocking effects, you mentioned DKK 70 million drag in the first quarter. I was wondering whether you can break that down by your business lines. Same question also for the tender, or at least provide an indication where you saw most of the effects of these two. I would have a follow-up afterwards.
It's for both of them, it's probably approximately something like two-thirds Continence Care and 1/3 Ostomy Care.
Mm-hmm. That's very helpful. Thank you. Regarding emerging markets, I understand there was a significant drag of the Saudi tender. You indicated, I think, that you would expect growth for the full year in a range of 10% or 12% to 15%. Backing that out, I mean, you could be in that range already in the second quarter. Is that the right way to think of the acceleration in emerging markets, or is there anything else to bear in mind?
Yeah, you should bear in mind that we have had, you could say some stock filling this quarter in Greece for the new product that comes in, because in Greece there was a very severe reform on wound care. That means that the products that we used in the past in Greece, they can no longer be sold because there's simply no funding for them.
We have been filling up the stock with the new products that are going to be sold, and that means that in the coming quarter, we are then going to reduce the stock of the current portfolio. In that sense, we will see for the full year, it's going to improve over the year, but there will be some effect in the second quarter from Greece, in emerging markets.
All right. Thank you very much.
We have a follow-on question from Scott Bardo of Berenberg. Please go ahead. Your line is open.
Thanks, guys, for squeezing me in. Just a couple of quickies. Anders, would you mind giving us your expectation for what you think absolute debt or net debt will be for the company on a full year basis? Second question, Lars, the only one I don't think has been answered, surrounding your dissecting growth.
Can you give us how much of this 8% wound comes from Greece? It sounds like a good chunk of that growth comes from Greece, but if you could just give us a flavor for what sort of, you know, how much that contributes. Lastly, you talked about increased appetite for this sort of, you know, experience with Comfort.
You've now got a bit of a taste of debt, which we haven't seen for some time in Coloplast. Am I to take that signal as, you know, there is a real sort of step change within the organization towards deploying capital and starting to mop up assets in the supply chain, or emboldened to move in urology or something like that? If you could just talk a little bit strategically about capital deployment, please, Lars, I'd appreciate it.
I can do that. As I said, at several occasions, we don't have much appetite for anything that have to do with non-organic growth in Urology Care.
Yeah
For good reasons. That is back to the fact that we do have the mesh litigations going on, and we concentrate on that. You could also say that while we do that, and when you look at the moving parts in that specific space in the market, we are actually actually doing quite well. We have over the course of the last five years, we have increased our EBIT margin significantly inside of Urology Care. You know, we have around 8%-9% growth in the business area. I think that we're doing really well.
When it comes to comfort, and our experiences with that, I think it's, you know, that we are not a company that have done a lot, when it comes to inorganic growth. This is not to us at this point in time, a change of strategy. It is an opportunity that we think that we'd like to pursue. We have been positively surprised by what we have found.
If that means that we at some later point in time, change our mind about this, you know, how much should be organic and inorganic and so on, we'll come back and tell it to you in good time. We think that we can grow 7%-9% organically, and that is what we're dedicated to do.
Yeah.
That's just to make that very clear.
Scott, in terms of the net debt position end of the year, my estimation is around the minus DKK 1 billion. That is very much depending on my expectations to the cash outflow from the mesh. Currently, I expect that we will have a cash outflow of minus DKK 2.6 billion at the end of the year.
Yeah. Very clear. Thank you. Just lastly, on wound, just sort of how impactful was Greece?
It's not a number that we give out, but it's not what was sort of constituting the growth for the first quarter.
Okay.
There were many sources for that.
Perfect. Thank you so much.
We will take a follow-on question from Inês Silva of Bank of America Merrill Lynch. Please go ahead.
I think that. Yeah, okay.
I'm sorry. It's just a quick last one.
Yeah, no, that's fine. I was just too slow.
I'm very sorry. I was just wondering if you are still comfortable with the guidance you gave us in the Capital Market Day on the impact that your business could see from the patent expiry, both on potential positive or negative. If you think it could be more than 10%-15% of revenue or less than that?
We gave a guidance of approximately DKK 100 million in one-off effect in the year where we go out of patents, and that's unchanged.
Okay. Thank you very much.
Yeah. I think if there's one last question, we take that, and then we close.
We have no further questions in the queue.
Okay. Thank you very much. We are looking forward to seeing you all in the coming weeks.
Thank you.
All right. Could you see how many participants we have?