Ladies and gentlemen, thank you for standing by, and welcome to your conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you'll need to press * and 1 on your telephone. I would now like to hand the conference over to your first speaker today, Lars Rasmussen. Thank you. Please go ahead.
Thank you. Good morning, welcome to this conference call following our stock exchange announcement yesterday evening. I'm Lars Rasmussen, CEO of Coloplast, and I have with me today CFO Anders Lønning-Skovgaard , and our investor relations team. Globally, Coloplast has invested into building a strong consumer platform based on our Coloplast Care program and direct-to-consumer initiatives. In the U.S., the Coloplast Care program has grown into a strong patient program, with currently a third of total U.S. care NPDs within ostomy care enrolled into the Coloplast Care, and a rapidly growing enrollment into Coloplast Care within Continence Care. Due to the market structure in the U.S., Coloplast has decided, as a complement to our consumer strategy, to actively participate in the ongoing forward integration into the distribution channel by manufacturers in the U.S.
Coloplast has entered into a definitive agreement to acquire Comfort Medical for a cash consideration of $160 million, equal to approximately DKK 1.1 billion on a cash and debt-free basis. Comfort Medical is a privately owned U.S. direct-to-consumer durable medical equipment nationwide dealer of catheters and ostomy supplies, with a forecasted revenue for 2016 of $38 million, or approximately DKK 270 million. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in the first quarter of 2016/17. The strategic rationale behind the acquisition is threefold. First, Coloplast has a stated consumer ambition, whereby we plan to get closer to our end users to provide them with the product support they need. Support is provided through our strong Coloplast Care program.
Comfort Medical will continue to be part of Coloplast Care's dealer landscape, helping us to ensure that Coloplast users get access to products. Second, within Continence Care, Coloplast is committed to driving the shift in the market towards hydrophilic catheters. Coloplast's growth in hydrophilic catheters is strong, and through the acquisition of Comfort Medical, the growth can be accelerated. Finally, Comfort Medical is a small player in the market today, yet Coloplast has a strategic plan in place with the intention of growing the scale of the business. If completed, the acquisition will result in a revised guidance for the financial year 2016/2017. The organic sales growth guidance of 7%-8% is unchanged, as is the EBIT guidance of 33%-34% in constant currencies. Sales growth in Danish kroner is expected to increase by 1 to 2 percentage points.
The EBIT guiding in DKK is expected to be unchanged at around 33%. The transaction will be financed through a credit facility, and it is assumed that the debt will be repaid over a 2–3-year period. The acquisition has no impact on our dividend policy. With that, I would like to open up for questions. Operator, could you open up the questions, please?
Ladies and gentlemen, we'll now begin our question-and-answer session. If you wish to ask a question, we will, you can press * 1 on your telephone and wait for your name to be taken by an operator. If you wish to cancel your request, you can press the # key. Again, that is * 1 on your telephone. We have questions coming in. Please stand by while we compile the queue. Our first question is coming from the line of Michael Jüngling. You should go ahead and ask your question. Your line is open.
Thank you, and good morning, I have 3. Firstly, how much was the acquisition driven by your SpeediCath patent expiry in 2017? Number 2 is what is the Coloplast share of intermittent catheters and ostomy bags within Comfort Medical? Thirdly, on forward integration, I think earlier this year, at your CMD, I asked the question whether you were interested in doing more forward integration in the U.S., as we've seen with Bard and with Convatec, and I thought there was a little bit of hesitation to do this. Does the acquisition today indicate that you are more fond of pursuing forward integration?
Thank you, Michael. The reason why we do this acquisition is because we feel that we have a very strong traction on the current direct-to-consumer channel in the U.S. As I mentioned in my opening statements, we have a significant part of in-patient discharges already on care. We have a market in the U.S. on catheters, which is a very unlike all other markets, still dominated by old-fashioned technologies. We have the best products in the markets, and we also have the broadest range of products in the markets. By the way, as we speak, we are launching a new non-touch solution in the U.S.
We think that we have an access which, or a product offering which is second to none. We are very keen to push that into the market. With the strong traction of the DTC channel, which is actually stronger than we believed it to be, we think that we are now ready to take one further step into the market and get even closer to the patients. This, that is what we do now. We don't disclose what our share products are inside of Comfort. What I can say is that the biggest part of the business is within catheters.
So there is this more catheters than ultimately in that setup. This is not a global change of strategy, if that is what you mean by your last question. As you know, we are forward integrated in the chain in the U.K. We are forward integrated in Germany, and now we're also more forward integrated in the U.S. With the distribution of profits in the chain in the U.S., we think that it's actually a pretty profitable and fast-growing channel that we are part of here. We have a plan for how to expand that, but as you also said, it's not a big investment that we have done.
It's not a big dealer that we have bought, but it gives us the access that we interested in at this point in time.
Thank you.
Thank you very much. Your next question is coming from the line of Ian Douglas-Pennant. Your line is open.
Thanks very much for taking my question. It seems like this is a change in strategy in the U.S. As Michael says, you've been pretty vehemently opposed to the idea of vertical integration for a while. Now that you've started on this track, presumably you can't go halfway in. You know, with a manufacturing market share of, what, 50%, 60%, and a retail market share of, what, 3%, there's a bit of a mismatch there. Is this the start of a long chain of M&A that we're gonna see in the U.S. retail space, or are you gonna be putting a lot of money organically into this business to build that market share up as quickly as I think you need to?
Secondly, in terms of your midterm guidance, if you do a lot of focus on retail in the U.S., as you say, this is margin accretive for you quite strongly, does this mean that your longer term guidance is potentially upside down?
To start with the last part first, this is definitely strengthening our growth in the U.S. Our reported growth in the U.S. is not strong right now, but our underlying growth, as we have said, at several occasions, is very strong, and we are going to show that also in this current fiscal year. I think that with what we have done now is that we have entered into the dealer segment in the U.S., with this acquisition. We do that because we feel that we have everything else in order. We do that because we can scale the business.
We have a plan for that, and we will talk more about that later on, once we have closed this deal, and once we have integrated Comfort Medical into Coloplast.
Okay. You'll give us update next capital markets day or before that?
We'll give you an update once we are ready to do that.
Okay, great. Thank you.
Thank you very much. Your next question is from the line with Martin Parkhøi. Please ask your question. Your line is open.
Yes, Martin Parkhøi, Danske Bank. Two questions, I believe. Firstly, going into forward integration, are there any risk of any kind of collateral damage where you become competitor to some of your existing clients, which will not be satisfied by this move? Also, the fact that you now highlight this Comfort Medical, that you expect to be building it more aggressively, organically. Second question, just to understand that the impact on the top line, adding the sales from Comfort Medical, I guess there is also some sales elimination, since you're already selling through Comfort Medical. How much would this sales elimination be?
It's, I think, it's more detail than we are ready to answer right now, Martin. We, as we are saying, it will give us 1-2 percentage points on the Danish kroner for the year, or for this fiscal year. That is the accuracy that we are ready to give at this point in time, and it doesn't have any impact on the EBIT margin. What was your first question?
Collateral damage.
We, with the DTC program that we have built or with the digital marketing channel that we have built in the U.S., we are producing a vast number of, what we call leads, contacts. That is what have given us a very strong collaboration with the DME dealers today. There is plenty for all parties, but this gives us an opportunity to get the product brands that we have, especially inside of Continence Care, to get that to the markets in a very different way than we can do that today. It is, as I also said, very, very profitable.
We think that this is doable, and if you wanted to sort of, go after Convatec because we now, it's also a competitor, you know, I think we're the last manufacturers who now have this as a channel. I don't know where to go. I think it is the market model today.
Okay, thank you.
Thank you very much, Martin. Your next question is coming from the line of Carsten Madsen. Please ask your question. Carsten, your line is open.
Yeah. Can you hear me?
Yeah.
Good. Thank you very much, Carsten from SEB. Just one question, actually, I think, can you talk about some of the strategic observations or considerations you made when buying exactly this player? It is sort of a relatively small player in this market, and you will probably, or at least I assume, have also to invest in building a market share going forward. How do you see these investments? Is it something that can be leveraged easily, or will you be sort of spending money to grow this channel? If it correct, say, roughly 5% market share, is that the correct number? Thanks.
It's around the 5%, so it's a small market share. You're right about that. A major part, as we talked about earlier on, a major part of the rationale here is that the market in the U.S. for catheters is underdeveloped. For the same money that are already in the markets, people could get a significantly better product offering, and all of the manufacturers also make a significantly better margin. This is what we are tapping into here, and as we said, we have plans for how to scale this business once we have the business model lined up in a correct way.
That is as much as I can comment on now, but it is a major driver for us to change the market into hydrophilic catheters. Now that we are talking about that, as we speak, we are launching what we call the SpeediCath Flex, which is at the front page of the investor presentation, which is which you can find at the conference homepage. That's the latest addition to the catheter line, and we have been approved by FDA in the U.S., and it has also been approved into into the A4352 category, which is also called the Code A category, which is a high-value category. We'll launch into that as we speak.
Thanks.
Thank you very much, Carsten. Your next question is coming from the line of Annette Lykke. Please ask your question. Your line is open.
Thank you very much, Annette Lykke, Handelsbanken.
Mm-hmm.
Lars, just a question on why Comfort Medical. I think previously, when you have discussed the options of doing forward integration, then in the U.S., you were very keen on not owning warehouses and stuff like that. Could you put a little bit more color on why it has been this company and not others? Is this simply because this is the only one available, or is there other options you would consider expanding your position in this area? 5% is maybe less of the ambitions you would have normally. Also, the timing aspect. Why is this now and not 1 or 2 years ago?
Is that associated with the, some of the other challenges you have had in the U.S.? I'm thinking DOJ or could you say a little bit about the timing in this respect?
Yeah, you got it perfectly right that we are not very keen on owning stocks and so on. It's hard when you, when you are going forward in the chain, of course, you will, have more of that. In this specific case, Comfort Medical effectively has outsourced, all of this to a third-party company, but of course, we pay for that as we speak. The main reason why now is because, we have invested significant, both money and efforts into making the digital, channel work, and, it works extremely well.
We see, for example, in the U.K., how well the DTC that we have created and the physical distribution that we also have, the whole charter set up that we have, how well they work together. Now we feel that we have this basic strength in the U.S. We are generating an exceptional amount of a number of patients in care and also through the DTC channel. We think that we can drive more value out of our business and grow faster by taking this step forward. We were not ready to do that two years ago, so we needed to have this in place first.
There's a limit to how much you can cope within an organization at the same point in time. I think that's the major part of it. Then as you also alluding to, we had the DOJ investigation last year, and we would under no circumstances under such an investigation, go in and do a persistence and forward integrating, because we didn't understand what it was about until afterwards. Of course, that also means that on the other side of it, for last day, we know the stakes of our business. We know how what we are, you know, what are the risks in the business, very well, very well.
We feel very comfortable going forward in the team with the knowledge that we have today.
What about potentially other targets or this company and why Comfort Medical? Maybe I didn't get it right there. Why this one, and will there be other options?
Yeah. I'm sure there are plenty of other options, because there are many dealers in this space. Comfort Medical is a very good starting point to think. It's growing really, really fast. That's also, you can almost see it in the price, because we tell you about the price for all the sales for the full year. Actually, the price that we pay is based on the last quarter's run rate, because you basically can't even use the full year numbers just to put the price on it. It is high growth.
It is a management team that we feel fits with the values of Coloplast, and we think that is very important, because they are quite independent in the way that they work, but it needs to be something that is adding to Coloplast, not something that we are afraid would subtract from it. It's a good fit, and it's the fit that we could see right now, and that's why we're acting on it.
Thank you very much.
Thank you. Your next question is from the line of Veronika Dubajova. Your line is open. Please ask your question.
Good morning, gentlemen. Thank you for taking my questions. I have 3, please. I actually want to follow on the price comment, Lars, that you've made. Looking at the acquisition multiple here, it is substantially higher than what Bard paid for Liberator. I think it's almost 2x that. Can you just elaborate a little bit on the comment that you just made? Either, you know, are sales really growing that fast? Are we really talking about, you know, significant double-digit growth in the business, which would put the multiple more on par, or is there something else that meant to you that the price that you paid was worth paying? That's kind of my first question. My second question is just, what do you think is a realistic pace of conversion within Comfort to expand your share?
I know you don't want to comment on what your own share is today. Let's assume for the sake of argument that it is 20%. I mean, do you think it's realistic to get it to 50% in a 12-month timeframe, or is this going to be a more prolonged process? Just, you know, your generic general thoughts on how quickly can you convert the products from competitors to your own within Comfort would be really helpful. I have 1 question after that, but I'll let you answer the first 2 first.
I think, Lars, you will take the first one.
Yeah. So the trading multiple is based on the Q4 run rate because Comfort has done a number of acquisitions throughout of 2016. It's the Q4 run rate that we have used for the multiple.
That means that the multiple that we are paying is very, very much comparable with what you have seen other companies are paying for these type of companies.
Okay, thank you.
At the pace of conversion, it's very hard to be specific on that. We have a very high growth of how to feed the catheters in the U.S. We have also a very large base, very large base of standard catheters that we're selling in the U.S. We don't have to do a lot of actions to that big base in order to even improve on the number or the speed of the conversion. I don't know, or we don't have a target for how fast we can convert the market.
We have a target for how fast we want to grow, and we are improving or lifting that number, or that ambition now with this acquisition, of course.
Okay. My last question is sort of more big picture. If I look at, you know, how the especially on the continent side, the market has changed. Obviously, we've had quite a lot of vertical integration in the U.S. over the past 5 years. Is your expectation that, you know, your competitors step up their efforts here in terms of vertically integrating in response to your own efforts? And I guess, to what extent are you worried about, I don't want to call it a race to the bottom, but, you know, race to for everyone to vertically integrate, and effectively, your share will become a function of your control over retail. I mean, do you think that's ultimately where the U.S. market is headed, or is that too extreme of a view?
There are a very large number of the scripts in the U.S. that are unbranded. As it works today, because the market is very transparent, if an unbranded script is handled in a normal dealer business. People will get the cheapest possible version of a product. That's just a fact. The whole drive we have is to get is to promote modern products. It's not more expensive to society, but it just gives a much better quality of life for people. By the way, it also gives a better business to Danske Test, and that is what we are chasing. We are not chasing a race to the bottom, so to speak.
We don't think that what we are doing here, that we're taking value out of the market from a manufacturer standpoint, we're actually creating value. In that sense, this is the most logical step we can do. We're just not ready to do it before now.
Okay. Okay. Thank you very much, Lars. Really appreciate it.
Thank you very much, Veronika. Our next question is from the line of Christian Sørup Ryom. Please ask your question. Your line is now open.
Yes, hello, this is Christian Sørup Ryom from Danske Bank Markets . I have 3 questions, please. My first one is, can you elaborate a little bit on to what extent your experiences from your European home care companies might be relevant for your managing of Comfort Medical? That is, whether you're confident that you won't see any surprises in going about managing Comfort Medical. Can you also elaborate a little bit more about what this ambition for organic growth in Comfort Medical translates into? Will this mean that you have to expand upon your previously announced DKK 2 billion investment plan towards 2020? Finally, can you say a little bit about whether there is also potential for using the Comfort Medical platform in wound care?
Thank you.
We think that the U.K. experience that we have, and also the German experience to a certain extent, are relevant in this context, because what we have, as I said earlier on, is an extremely strong direct to consumer platform on the digital side. That can be used with a more physical activity that we have when we talk about the dealers, because the dealers, they take care of the insurance claims and the physical distribution and so on and so forth. They do link together in a very nice way.
We can see that we can give a better service to hospitals because we have this, we can give a better service experience to the end users because we have call centers that are extremely well educated. We have home pages that are that have the, you know, the level that they have. We have tracking tools on what we send to people and so on and so forth. So we can definitely utilize the experience that we have there. It's been a tough ride in the U.K., as those of you who have followed us know, knows well.
It's also been a very encouraging last 12 months, because we have seen how much we have been able to improve the experience, both from the professional side, but also from the end user side. That has given us a lot of comfort in what we can do going forward in the chain in the U.S. also. We feel very confident about that. Certainly it's very relevant. We are not prepared to talk about what are the specific ambitions inside of the different units of Danske Test.
What we can confidently say is that this acquisition and this route that we're taking now in the U.S. will accelerate our growth, and that is why we're doing this. You had a question about Comfort Medical, and what was that? Oh, yes. You know, we don't see that as we speak. It would be great if that would be the case at some point in time, but for now, it is Continence Care and OstomyCare.
Great. Thank you.
Thank you very much. Your next question is on the line of David Adlington. Please ask your question. Your line is now open.
Morning, guys. Can I take questions? Apologies if you've covered this off already, I just wondered if you'd give us an idea of whether you continue to supply your competitors' products through them, and for how long? I mean, do you anticipate still supplying those products in 5 years' time? Secondly, just wanted you to give us a sort of high level view of the margin structure around gross margin and EBITDA margins of the business would be great. Thank you.
Yes, of course, we will still continue to sell our competitors' products through this channel. We are also selling a lot of our products through our competitors' channels in the U.S. We also continue to drive a very large number of leads to other dealers who are not manufacturers also. There's nothing there. It's the difference of... The way I could comment on the margins is to say that when we are inside of OstomyCare, the margins that you enjoy as a dealer are relatively low. As soon as you work with catheters, the margins that you have are significantly higher.
Of course, in the case where we are selling Danske Test products through this channel, the margins are really, really high. Back to what I said before, we have just launched the SpeediCath Flex, it was not a category, which is a really high-value category, and this is probably the least scaled product that you have in that category. So, in that sense, I think that it is, it's just a very first time that you come out with that. I think that we are ready for the last question.
Okay, thank you. Your question, the last question is from Niels Leth. Please ask your question. Your line is open.
Yes, good morning. First question, could you comment on the number of customers that Comfort Medical is serving? Secondly, just for way of understanding this move, could you also talk about what is the average price of an ostomy bag that you receive as a wholesaler, as opposed to becoming a kind of retailer of ostomy bags? Thank you.
I'm afraid I can't answer any of your questions, Niels. We don't give the number of customers out at this point in time. I don't have what you're asking for at the top of my head. There is no doubt that, as I said before, it's more profitable to any dealer to handle Continence Care patients than to handle ostomy patients. Of course, a colostomy patient, whether it's ostomy or Continence Care in Comfort Medical, is quite very appreciative to the company. With that, I think that we'll close down the call.
The last thing that I'll mention is that we also came out with that very young this week, is that we have also, and now that we have everybody together, we have also obtained reimbursement for multi catheters in Korea, and we have a very strong position in Korea. That is adding to what is going on in that region, because not that long ago, we talked about that we have gotten a better access to reimbursement in both Japan and Australia. We are very happy about that our efforts in that region have yields such a great success. With that, I wish you all a very good day. Thank you very much.
That does conclude our conference for today. Thank you all for participating. You may all disconnect.