Thank you for standing by, and welcome to the Coloplast Earnings Conference Call, Q1 2015-2016. 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 will need to press star and one on your telephone. I must advise you, the conference is being recorded today on Tuesday, the 2nd of February, 2016. I would now like to hand the conference over to your presenter today, Lars Rasmussen. Please go ahead, sir.
Thank you. Good afternoon, welcome to our Q1 2015-2016 conference call. My name is Lars Rasmussen. I am the CEO of Coloplast, and I'm joined by CFO Anders Lonning-Skovgaard and our investor relations team. We will start with a short presentation by Anders and myself, and then we will open up for questions. Please turn to slide number three. Today, Coloplast delivered a set of numbers exactly in line with our expectations when we entered the financial year. I'm glad to see that we are succeeding with our efforts, especially in the U.K., and that the Department of Justice investigation in the U.S. is now fully behind us. It is satisfying to see that us deliver a 33% EBIT margin in Q1, considering that we have increased our transfer activities and invested further in markets like U.S., U.K., and China.
Today, the board of directors approved a new share buyback program of DKK 1 billion. The program will run over the next two fiscal years and underlines our commitment to shareholder returns. Our organic revenue guidance for 2015-2016 is unchanged, with a growth of 7%-8%, whereas our growth in DKK is now expected at around 7%. In addition, our EBIT margin guidance in fixed currencies is unchanged at 33%-34%, but we now expect around 33% in DKK. Please turn to slide four. Revenues grew 7% organically and 11% in DKK and amounted to DKK 3.7 billion. In Ostomy Care, organic growth was 8%, and growth in DKK was 9%.
Growth continues to be driven by our SenSura and Brava portfolio, especially in the U.K., the U.S., and our Nordics region. The situation in Charter was improved significantly. We are currently increasing our market share with new customers. We have had some success with the win-back campaigns. Finally, we received very good feedback from existing customers to the changes we made to Charter earlier. Overall, I'm very satisfied with what I see in the U.K. at the moment. SenSura Mio Convex has now been launched in 12 markets. We are experiencing a very satisfying response from nurses and users. Finally, our Assura portfolio growth was driven by good performance in Russia, Algeria, and China. In Continence Care, organic growth was 6%. Growth in DKK was 10%.
The SpeediCath ready-to-use intermittent catheters continue to drive growth. Especially the compact versions performed well. In the compact segment, we see strong performance in markets like France and the U.K. The tender win in Saudi Arabia in Q1 last year, increasing competition in selected European markets and inventory buying patterns in the U.S. all contributed negatively to growth in the quarter. Performance in our convene collecting device portfolio was satisfactory in the emerging markets region and in the U.K. Sales growth for our Peristeen product remained satisfactory, especially in the U.K., France, and the U.S. In Urology Care, organic growth was 7%. Growth in DKK was 15%. Sales of the Titan range of inflatable penile implant devices continued to drive the performance. We saw a satisfying performance in the quarter. We also had a good quarter with female pelvic health.
Our endourology business continues its satisfying performance, especially in Europe. In Wound & Skin Care, organic growth was 10%, and growth in DKK was 15%. Organic growth for Wound Care in isolation was 9%. The growth was driven by Biatain sales, in particular Biatain Silicone in Europe, as well as strong growth rates in China and Greece. The Skin Care business saw a satisfactory growth in the quarter. The contract manufacturing of Compeed contributed to the growth. Turning to our geographical segments, we saw organic growth of 5% in Q1 in our European markets. The growth was satisfactorily driven by U.K. and the Nordics, whereas both the Netherlands and Germany continue to have low growth rates. The pricing pressure remains centered around these two markets.
Organic revenue growth in other developed markets was 6% for the year so far. Quarter buying patterns from one of our largest U.S. customers continued to impact quarterly performance in the U.S., and the impact in Q1 was negative within Continence Care. During the quarter, we fully normalized our campaign activities in the U.S. Finally, our growth rates in Canada, Japan, and Australia all remains satisfactory. Revenue in emerging markets grew organically by 16% in Q1. The growth was driven by China, Russia, Argentina, Algeria, and Greece, where Saudi Arabia impacted the growth rates negatively. With this, I'll now give the word to Anders, and please turn to slide number five.
Thank you, Lars, good afternoon, everybody.
Gross profit was up by 11% to around DKK 2.5 billion. This equals a gross margin of 69% on par with last year. We continue to see improvements in our production efficiency at our volume sites, which compensates for the negative gross profit margin by impact from the launch of new products, where the production economy is not yet fully optimized. The gross profit was also impacted by increasing costs in emerging markets and increasing depreciation, as well as costs associated with the expansion of our Tatabánya site and relocation of manufacturing to Hungary. The distribution to sales ratio came in at 28%, 1 percentage point lower than last year. The ratio was impacted by incremental sales investments in the U.S., China, and the U.K. of around DKK 35 million.
The admin to sales ratio came in at 4% of sales on par with the recent trend. The R&D to sales ratio came in at 3% of sales, but increased 15% compared with the same period last year. This is due to a higher general activity level compared to last year. Overall, this results in an increase in operating profit of 11%, corresponding to an EBIT margin of 33% in both fixed and actual currencies. Operating cash flow amounted to DKK 629 million and was slightly lower than last year. We saw a positive impact from higher absolute earnings and higher paid taxes last year, which was offset by cash settlements on currency hedging activities and payments on escrow accounts to settle misc claims.
Cash flow from investing activities was impacted by investments in capacity expansion, both in machines for production of new products and the site expansion in Tatabánya in Hungary. CapEx amounted to 124 million DKK for the quarter. Finally, the sale of bonds provided a 317 million DKK cash contribution. Please turn to slide six. Concerning the misc litigation situation in the U.S., we don't have much to news to share. Our legal strategy remains unchanged, and we continue to make good settlement progress, as reflected by the increase in restricted cash in our balance sheet. Our organic revenue guide for 2015-2016 is unchanged, with a growth of 7%-8%, whereas our growth in DKK is now expected at around 7%.
Our guidance assume stable growth rates in Europe, and we now expect that the good Charter performance can continue throughout the year. We also assume growth rates in the North America will follow the stable trend seen last year, but it should be noted that due to distributor buying patterns last year, combined with the impact from contractual changes, we expect the Q2 performance in the U.S. to be flat, which also will have a negative impact on our Q2 sales growth in Continence Care. We expect a negative pricing pressure of around 1 percentage point on our top line, and this is reflected in our guidance. The negative pricing pressure is especially driven by Holland and to a lesser extent, by the German home care market and the price reform in Norway within Continence Care.
For 2015-2016, we continue to expect an EBIT margin of 33%-34% in fixed currencies and around 33% in DKK. Higher growth from our new product launches still means pressure on the gross margin. We are on track with the relocation of manufacturing from Denmark to Hungary, and more than 15 production lines are currently in the process of being transferred. In Q1, we saw stable trends for most of our cost base, which we expect to continue. We also expect incremental sales investments of around DKK 150 million. The changes to the guidance in DKK, both for the top line and the EBIT margin, are related to changes of the British pound and the Argentinian peso against the DKK. Further, several smaller currencies, like the Brazilian real and the Norwegian kroner, also have provided some headwind in the calculations.
We continue to expect our net financial to end the financial year 2015-2016 around minus DKK 100 and 100 million, impacted primarily by cash flow hedge losses on the US dollar, gain on British sterling, as well as devaluation of the Argentinian peso. CapEx guidance for 2015-2016 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 Compactive, and the Tatabánya expansion. 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 very much, sir. We would now like to begin the question and answer session. If you would like to ask a question, please press star and 1 on your telephone and wait for your name to be announced. Your 1st question comes from the line of Ian Douglas-Pennant from UBS. Your line is now open.
Thanks very much for taking my question. The first one is on the guidance for the year, because the Q4 results, you said that the guide this year was going to be H2 weighted because of the U.K. and the U.S. taking time to ramp up. Now you're talking up the U.K. and the U.S., well, at least in Ostomy. Why are we not seeing a stronger quarter this quarter, both in terms of revenue growth and margin accretion? Is there some factor that you weren't aware of offsetting? That, and then I've got a follow on as well, please.
Yeah, I think that's a good starting point, and it's primarily because the U.S. is not where it should be yet. U.S. is delivering as we expected, a lower growth rate. If you look at what is, what we are selling to the dealers in the U.S., but if we look at the underlying growth, if we look at the market sales growth, it is where it should be. We feel quite confident about that, but it is the U.S. You are right, that the U.K. is off to a stronger start than what we had expected.
We are very happy to see how U.K. is doing. U.K. is now in a situation where we see nice growth in the traditional business, but we also see nice growth in Coloplast Charter. Even to an extent where we can see that we are winning customers back, so we're very happy with that.
Okay. Just if I could follow up on that was actually gonna be my second question anyway. Could you just go into a little bit more detail on what you're seeing in the U.S. markets? It seems I'm just a bit confused by the message on distributors here. It seems like on the one hand, the Ostomy Care business is going really well, at the same time, you're talking about the weakness in the Continence Care business.
Yeah.
Obviously the overall developed markets numbers looks very weak, especially considering the very easy comp you had, last year. I mean, maybe you could just go into a little bit more detail on what you're seeing there. Thank you.
Yeah. I think that you can actually see the both the Continence Care low growth rates and the U.S. performance. You can see that in sort of under the same umbrella, because in the U.S., we have had lower sales through distributors, lower sales out of Coloplast than what we had last year. As we also said at the 1st quarter conference call, we are in a situation where we have changed the contracts with the distributors. That also means that if they have any excess stock, they will reduce that now.
It seems as if there have been some stock inside of catheters, and that's why we are selling less out of Coloplast of catheters this quarter. I mentioned the Continence Care growth rate, there are two explanations to that. One is the reduction of stocks in the UK, or US, sorry, and of course, the fact that we had a very large order in Saudi Arabia last year, or tender in Saudi Arabia last year, that we are not delivering on this year. We won it again, but it doesn't come in as growth. That also talks to the other question that you had, what is it that impacting our growth rate in emerging markets in the first quarter?
That's among other things, the Saudi Arabia tender that we did win again, it doesn't come in as incremental sales because we also had it last year. We came in without any history pre to that.
That's great. I want to ask about the U.K. as well. I'll jump back in the queue. Thank you.
All right.
Thank you very much. Your next question comes from the line of Michael Jüngling from Morgan Stanley. Your line is now open.
Thank you very much, and I have three questions. Firstly, on organic growth momentum. If I look at your growth on a comp adjusted basis, there is weakness across the board, either by division or by geographic markets. Is there something more, more broadly challenging than perhaps just the United States? Because if you slice it in different ways, there seems to be an overall slowdown in the Coloplast growth rates. Secondly, when it comes to net financial, could you provide some guidance for the full year, especially after the fairly weak Q1 net financial charge? In relation to the European market, can you provide a bit more color on what you mean by the more competitive environment in Continence Care? Is this very much driven perhaps by Hollister and VaPro? Is it pricing?
Is it more volume? Some more color, I think would be useful. Thank you.
All right. On the geographical side, I think that if you take other markets, it's primarily U.S., that we see a lower growth than we saw the year before. I think that the explanations for that were what I talked about before and also, what we explained when we started this fiscal year, that we think that we will have a back-end loaded fiscal year because we changed the contracts in the U.S. Therefore, if there is any excess stock, it will be consumed during the first half of this fiscal year. Therefore, we expect a higher growth in the second half than we had in the first half.
It is correct that we did not have a very strong growth in emerging markets this quarter. One of the reasons was, for example, the Saudi Arabia tender. The growth in China was still high. It was just about, just below 30%. Actually, you could say that that's a little lower than what it used to be, but it's still actually very nice growth. For Europe, yeah, some quarters we have 5% growth, some quarters 6% growth. It's hard for me to say what is it that gives us 5% or 6%, but 5% growth is more or less double up compared to the market growth.
That's not, that's more or less in line with what we expected. When we talk about the weaker growth on Continence Care, will be very much impacted by the U.S. situation. That's the prime, that's the prime thing about it. Then there is one place where we feel that there is a pressure from WellSpect, and that would be in Germany on the male segment, but that would be it.
Please, on the net financial guidance.
Yeah.
for the year?
Our guidance on net financial is minus DKK 100 million. We continue to expect to have it in that level. It's, again, as I said earlier, it's from cash flow hedge losses on the US dollar. It's the devaluation of the Argentinian peso, we now expect to have a gain on the hedges on the British pound.
Okay. I guess to get to DKK 100 million or so, you need to have a fairly sharp acceleration or so, a positive acceleration beginning in Q2. Is that a fair assumption?
Yeah, that's a fair assumption on the British Sterling.
Okay. that's all. Thank you very much.
You're welcome.
Thank you very much. Your next question comes from the line of Annette Lykke from Handelsbanken. Your line is now open.
Yes, thank you very much. First of all, I'd like to talk a little bit about the marketing. Can you, Lars, put a bit of color on what you are doing differently in the U.S. in terms of marketing? As I understood, you are beefing up your sales force over there. How much is that, and what effect do you think it'll have over time, and would you do even further? You also say that you are sort of normalizing your activity or marketing activity levels. Can you put a little bit of light into that? What more is needed, and are those DTC direct to the consumer campaigns working for you?
Mm-hmm.
Are you considering maybe in the Continence Care, that you should expand your product portfolio maybe to something like Wellspect, or similar solutions? I have a question on Coloplast Charter afterwards.
Okay. yeah, so this was quite specific on the US.
Yeah.
-let me start by saying that, as I said before, if we're looking at the underlying growth in the U.S., it's actually, really, nice. In that sense, I feel good about that. We have increased our sales presence in the U.S. We have increased it inside of Continence Care, so we are covering more accounts than we did before. We have not revealed how many extra resources that we have put in, but it's significant. Of course, I also expect that to pay off in the coming years. We are also in a situation now where we have the Department of Justice behind us, and that was completely concluded on the 23rd of December.
We already were back to normal campaign level last quarter, and we continue that throughout this year. We are running as fast as we can on campaigns there. It's correct that we have this year's a very important investment in value to consumer. Let me just reiterate, it's not because we want to move away from covering nurses in any market at all. This is a supplement where we also want to be able to cover the community part of the market. We are satisfied with what we see.
It does add in a meaningful way to the growth rates in Coloplast. As you may have noticed, we are growing more than the market. It takes many things. It's not just the product, it's also how we market ourselves. We continue to invest into that, and where we are most advanced are also in the U.S., because the market in the U.S. is more used to this kind of marketing through the patient referral programs, for example, that have been used in the hospitals for many years now. It's an accepted kind of marketing that is actually promoted by the nurses in the hospitals. Therefore, we're just adding to that, and that was actually something that we missed in the past.
Yeah, there you can say that we have been in a catch-up situation.
Have you seen in this quarter any changes in, I mean, as I understand, you are losing patients from newly discharged patients to your overall market share? You're losing patients down that road to some extent.
Mm-hmm.
Is that changing?
I think it's you're getting into an area where we start to reveal something that we haven't revealed before. What I can say is that we are closing the gap between our hospital market share and our community market share. Our hospital market share is still higher than our community market share is. This program is the bridging between those.
I'll jump back in the queue. Thank you.
All right.
Thank you very much. Your next question comes from the line of Chris Cooper from Jefferies. Your line is now open.
Hi there. Thanks for taking my questions. Just a couple of quick ones, please. Firstly, on the US Continence, I know you've touched upon it briefly with the major distributor and the buying patterns. I mean, potentially, you could just tell me a bit more about the proportion of the sales mix that these guys are responsible for? Secondly, on the MDL, I know you can't say too much, but could you first of all just confirm that it was DKK 491, that was the cash amount paid out in settlements in the first quarter? Maybe just some sense of how far through the 200 cases that went to discovery from September we are.
The 200 cases that went to discovery are, that was Judge Goodwin's order that they should go and start discovery. What was then the follow-up on that was that we settled a large amount of cases and therefore he was actually okay that we stayed on that. That means that we just run those 200 cases at a minimum level right now, because there's a very high likelihood that we settle. In that case, the 200 cases are not off the table. But it's, they're running, you could say, at a low cost level right now, most of them.
On, I'm sorry, the MDL questions that you had, the 491, what was that?
Yes, sorry. I just wanted to confirm that it was, I've interpreted your release correctly. It's DKK 491 million cash payment in Q1 for the settlements for the MDL?
I think, I might need some help from Anders to take that question because I'm not I can't find that line while I'm speaking to you.
We have increased our restricted cash with amount in that level. That's what happened in Q1.
Got it. Okay, that's taken against the provision that you made the last September?
Yes.
Okay.
Are you asking about the customer care question? Are you asking about the split between Self Care, Easy Care, and Speedy Care? Or what's your question? Or is it more what channel that they have been sold in?
No, sorry. I'm talking more about the major distributor that you've highlighted in the release and the changing buying patterns.
Okay.
I would just like to get a sense, please.
Yeah, but.
What portion of the overall US sales?
It's a part which is big enough to really impact our sales. It is a very significant part of our sales in the U.S. that goes through that distributor.
I mean, are we talking more than a third? More than a half?
Yeah, no, I'd, I would rather not go there. But, you know, since it's something that can really impact us, and since we talk about it in this sense, and we will actually feel it also in this quarter, then of course it is enough, that it's meaningful.
Okay, great. Thanks. Just one last question, please. Just quickly on Charter. The use of the word satisfactory is in there a couple of times. I was wondering if you could just put a bit more.
Yes
meat around the bone of the word satisfactory, please. How might that?
Yes, I can do that.
How might that business shape up for the rest of the year? Thank you.
It's, it means that we are back to the growth rates that we had before we went into problems with Charter. It also means that we are winning back patients from other home care companies. It's, I'm actually positively surprised to see that we are already in that position. We thought that we would actually be there at the end of the current quarter, until we are in that situation.
Mm-hmm. In absolute terms, the growth rates are back to where they were before the disruption?
Yes.
Okay. We are lapping now the anniversary of the disruption in the first place?
We are very happy to see what is going on. We think that we basically, at this point in time, we are in a situation where we see that we have very strong process to run Coloplast Charter, that we have a very well-trained staff there, and that we have answer times that are some of the best you can find, whether you are a private patient or whether you are a nurse that calls in. We have given some consumer promises there, and we are fully living up to them.
Great. Thanks for your help.
Thank you very much. Your next question comes from line of Romain Simon from Exane BNP Paribas. Your line is now open.
Yeah, good afternoon. Thanks for taking my questions. I've got two left, actually. Can you hear me well?
Yes.
Yeah. Just first on the gross margin evolution, should we expect a net positive impact of the product mix on the full year? That's my first question, and the second one is more housekeeping regarding the tax rate, which was actually much lower than last year, and if you can guide us for a fair assumption for the full year.
If we should take the gross margin, in Q1, our gross margin is on level with last year. We are working on moving production lines to Hungary. Right now we are working on more than 15 production lines that we are moving to Hungary, and we have already started also production of SenSura and Mio in Hungary. But the transfer will continue throughout the year, and that is impacting the gross margin. But over time, it will start to improve our gross margin.
Basically, not for this year, but maybe rather for next year?
We are not guiding specifically on our gross margin, but over time, we expect that also the gross margin will contribute to our EBIT margin expansion.
Tell me the tax rate?
again?
Tax rate.
Oh, the tax rate. The tax rate, yeah, it's our guidance is 23%. There are no changes to that.
Well, yeah, so our tax rate guidance is following the corporate Danish tax rate, and it will probably be in the same level next year.
Okay, thank you.
Thank you very much. Your next question comes from the line of Martin Parkhøi from Danske Bank. Your line is now open.
Yes, good Martin, good afternoon, Martin. Good Martin. I have three questions. Firstly, with respect to U.K., because now it seems like it's going much, much better. Before you went into all these problems, you had started to use these additional sales initiatives in U.K. I think you had made the first out of 3 waves. I think that you said to me, at least once, that when you were 100% sure you were over these problems, you will maybe take over and go into second wave world. Should we expect you to start to also put more, even more effort into U.K. now? That was the first question.
On emerging markets, at the Capital Markets Day, back in June 14, you guided for these 20%-25% growth, or that was one I think you have included in your long-term targets. If you should take a fresh look at this now, would we still end at the 25%?
Will you give us a time horizon for that?
On your long-term targets, on the 7%-10%, are you still assuming that you can deliver 25% in emerging markets in this, in your current long-term target period? Final questions, which may be a little bit a soft one. It's on the GPO contracts. We have the two largest one getting renegotiated this year, and also, we also have a third one. How disappointed will you be if we end up this year, Coloplast will still not be on the list with the ostomy products on these on these GPOs?
Yeah. If our U.K. country manager is now listening into this meeting, he will then already here, get an answer to his request for the second wave. That's not really good. Of course, of course, the moment that we see that what we have in the U.K. is stable, we will also invest further in the U.K., because that is one of the big opportunities that we have in Europe, and it is the biggest ostomy market in Europe. Definitely, yes, and we are very happy with what we see. That one I would say, put a check mark on. Emerging markets, plus 25%, it's just difficult right now.
When we discussed that, I think that we had almost open gates on both Russia, Brazil, and China. Out of those, you could say that they are all working to some extent, but China is the one that, you know, is in the best shape, and it's actually, I think, in a good shape. Brazil, over the last 18 months, has slowed down significantly due to oil price and also due to the other raw materials that is financing the country. Russia is, that's a story of its own. Right now it's hard to see that we do 25%, I have to admit. We are doing quite well.
Last quarter, we had more than 20%, this quarter, 16%. I think that we can be there about, but to promise 25%, no, I don't think that's realistic. I'll be happy if we do, but at this point in time, I don't think so. On the GPO contracts, yeah, well, it's really an interesting topic because, as you know, we are in Innovation at this advanced technology contract, which means that we are allowed to sell all of our new ostomy products in the hospitals covered by Innovation. In that sense, we already have access, but that one is one of the ones that are being renegotiated this year.
For those of you who don't know it, the GPO contracts are running for four years. They are dual source contracts, that means that right now it's Hollister and ConvaTec that have them. You can only, the member hospitals can only buy 20% of the volume outside of the GPO contract. That means that there's a limit to how much you can sell to a hospital if you're not inside of the GPO contract. Longer term, we cannot become the company we want to become in the U.S. unless we are at the GPO contracts. We would love to get there now.
I don't know if we get there, we can still survive some years without being there, but at some point in time, we need to be there. We take our best shot to get on board, of course.
Thank you very much.
Thank you very much. Your next question comes from the line of Niels Leth from Carnegie Bank. Your line is now open.
Afternoon. My first question would be around the change of distributor contracts in the US. Could you talk about which type of distributors that still needs to be converted here in the next quarter? Secondly, could you also discuss whether this change in contracts in the US has caused any loss of customers over there? Thirdly, just a question on the.
Oh, oh, I'm sorry, could you repeat the second question?
Yeah. Could you talk about whether this change of contracts in the U.S. have caused any customer losses in the U.S. Then just thirdly, on the competitive situation in Germany, could you elaborate on what actually causes this increased competitive situation in Germany? Thank you.
Yes. Okay. Well, the distributor contract was actually changed in the middle of last year. Yeah, well, a bit up over the middle of last year, and the nature of the change, basically, is that of course, big customers always negotiate a rebate, and we give a rebate because our bonus, it's the same thing, we give it because we are, we get information back. In this case, we get information back on what is the sales out into the market. We get it with a delay, but we know what they're selling in the market. So that's the one thing that we get. Then, of course, there's the volume commitment.
Uh, and historically, we basically had a contract where we paid the rebate or the bonus, uh, based on what they bought from us, and what it was changed to was, uh, that we-- uh, that they get the bonus based on what they sell in the market. Uh, and, and we did this, this to, uh, avoid that, that we had these big swings in, in what we sold in one quarter over the next quarter, because our, uh, consumption in the market is pretty stable.
There was no need to have these big swings, but the swings were sort of triggered by, if, for example, a distributor was not really having the full volume that they needed to have in order to get the rebate, then they could buy a little bit more, and we would then consequently sell a little bit less in the next quarter, and thereby we would get these swings. That is what we're evening out now. Because of that, if there is any excess stocks, there's no incentive for the companies to keep them on board, and therefore it will be consumed here.
It could be distributors like Cardinal Health at-Home or the like. We don't expect that we get any loss of customers because it doesn't have any consequence in that sense, it's just a change of contract. Does that answer your question?
Yes, that's fine.
Then the competitive situation in Germany. Basically, what we see is that there's been for a long time a lot of competitive actions in the home care segment. There is a limit to how much how aggressive we are in that segment in Germany, because we do not like in the UK have a situation where all competitors also have a home care channel. That's not the case there. We actually also have a large number of customers that are home care companies. In that sense, we need to be careful because we don't want to compete with our own customers.
That means that sometimes, we lose out on a contract in the home care part in Germany, but then we win it on the other parts. If we look at it all in all, we actually still win market shares in Germany, so it's not a situation where we don't win market shares.
Okay, thank you.
Thank you very much. Your next question comes from the line of Scott Bardo from Berenberg. Your line is now open.
Thanks so much for taking my questions. Just first question, just relates to the U.S. market. I think, you know, you've spoken quite a lot about stocking patterns here in the first quarter. Just wondered if you could comment a little bit as to how you see this net stocking effect throughout the course of the year. Do you expect it to be broadly aligned with the underlying end market growth? I think, as you highlighted, some stronger performance in the second half of the year, could you actually be seeing some net stocking benefit here as a result of all these changes? Perhaps if you can just comment a little bit there, so we can get a better feel for underlying performance.
Also like to just talk a little bit about the recent industry consolidation. I understand that a pretty big marketing partner for you has been Liberator Medical in the U.S., which is now I think been acquired by one of your competitors in the first quarter. Similarly, I think one of your Urology Care competitors has been acquired by Boston Scientific. Just wonder if you two had any feelings about how that could impact you, or what you're hearing on the ground would be helpful for the U.S. I have a follow-up question, actually, for a different market region, but perhaps if you could answer those first, I'd appreciate it. Thanks.
As much as I would love to talk about it's actually hard to put some light on the stock effect in the US because the reason why we use the language about it that we do is that we do not have insight to what kind of stock levels our distributors have. Therefore, when we change the contract, there is a component there which is unknown to us. Therefore, we take a big interest in understanding what kind of sales growth do we see in market sales. That's really what we're looking at. If we look at that scenario, I expect this year to have a stronger growth than we had last year. That is as close as I can get to it.
I hope that makes it at least.
Sorry.
a little bit.
Just to. Thanks, just to understand, I mean, there's a lot of swings here, obviously in a negative one, will there be a net stocking benefit baked within your guidance or not? I'm sorry that I'm less clear about.
I'm not sure I understand what a net stocking benefit is.
You've talked about an acceleration in the second half of the year.
Yes.
I just wondered whether you expect positive stocking effects to contribute there or not reversing the negatives we've seen?
No, I, actually, the whole reason why we made this contract was to try to avoid the swings that we see from positive and negative stock movements. I don't know, of course, if there's, in a sense, that they destock too much and therefore have to restock some. That's why what I'm saying is that we actually have visibility into what is the in-market sales in the U.S.
Mm-hmm.
We just have it with a delay, and if we look at those numbers, I feel comfortable.
Understood. Thank you. If you wouldn't mind casting light on this Liberator Medical...
Yeah.
AMS consolidation.
Yeah, that's, I mean, it's very hard to be positive about the fact that Boston have been acquired, or Boston have acquired AMS, for example. Because, in a sense, when AMS was with Endo for a very long time, it was up for sale. Therefore, therefore, I mean, that's never a good situation. I expect that they are now in an environment where it's more stable. I mean, I only think that will make them more competitive, but so far we are actually doing quite well.
Liberator, as you point out, have been one of our customers in IC, in the U.S., and they have been acquired by Bard. What does that mean? Does that mean that Bard tries to fill in the whole portfolio there? I guess they have bought it because they want to utilize that, but it's also a business, and it needs to run as a business. Let's see what kind of impact that's gonna have going forward.
As I mentioned before, we have employed quite a significant number of salespeople in the IC field in the U.S., as we are stepping up our activities there, so that we have, both the clinical side to our sales, and we also and that is to back up the direct-to-consumer activities that we're doing on IC to convert the market. There's nothing here that is, in any way is holding us back from putting full pressure on converting the markets.
Thank you very much. Just the second question then, and it relates a little bit to the previous question about emerging market growth. I think, you know, it sounds like there's some pretty encouraging signs in terms of ostomy development in China, but you're cautioning, I beg your pardon, maybe I've got that the other way around, in catheter development in China. But in ostomy, a slowing trend there, which seems to be going a little bit against some of the investments you made there. Perhaps can you just talk a little bit about that? Is that a one-off, or is that some sort of signal that life could be getting a bit tougher in that environment, in ostomy? Thank you.
Are you talking Ostomy China?
Yes.
I think that it's important to understand that for China, we have two big investments going. We have one in Wound Care, and we have one in Ostomy Care.
Mm-hmm.
The one in Wound Care is doing a little bit better than the one in Ostomy Care right now. It's not, we're not in a situation where we think that we are facing problems or anything else.
Understood. Just lastly on that, I think at the turn of the year, the group obviously outlined 7%-8% top line growth. I think, you're good enough to give us some sense of regional perspective there, suggesting you would have similar 5% organic growth in Europe. Similar, if not a slightly improved growth in developed markets, as I understand, around 6%, and then some similar 21% or so growth rate in emerging markets. If I do understand you on this messaging, that you're perhaps a little bit, you know, more mindful of the macroeconomic environment in emerging markets, that might be a little bit lower.
Please correct me if I'm sort of misinterpreting this, are you expecting to then catch up in some of these other areas, which you thought would be broadly similar growth at the start of the year?
We expect that we will have a stronger growth in the second half in the U.S.
Mm-hmm.
That's the main driver for this. I also think that what we see right now in emerging markets with 16%, that's on the low side.
Mm-hmm. Okay. Understood. Thanks, Lars.
Thank you very much. Your next question comes from the line of Alex Gilden from Barclays. Your line is now open.
Yeah, hi, can you hear me okay?
Yeah.
Okay. Hi, great, thanks. A lot of questions already asked, just one, I wanted to follow up on the FX and the hedging. You say you stick to the DKK 100 million this year, normally you get the offsets on kind of a four to five quarter lag. Do we have an offset coming in Q1 of the next fiscal year that would, you know, absorb some of the, the hit that we saw this quarter?
As I said earlier, we are expecting to gain on our British Sterling-
Mm-hmm
... from Q2 and onwards, and that will also continue into next year. That's at least the expectations right now.
Okay, so some of that change in guidance, the financial, sort of the currency impact gets absorbed a bit by the Q1, next year, as it rolls over.
Our full year guidance on net finances for this financial year, that's - DKK 100 million.
Yeah.
After Q1, we had a minus of DKK 123 million.
Yeah.
for this.
Yeah.
we expect to gain some of on our Sterling hedge the rest of this year. That will most likely also continue into Q1 2016, 2017.
... Okay, and then, okay, yeah, that's kind of what I was after. There's a DKK 43 million net exchange adjustment. Is that the write down, the devaluation impact?
Yeah, that's primarily the devaluation of the Argentinian Peso.
That does not come back, I guess, that's just, that's a goner.
No, that's something that was included in Q1.
Okay, We never get, there's no offset on a hedge at any point?
No.
coming in the future, so?
No, that was a one, that was a one timer.
Okay, good. Good. No, good. Okay, that's clear. Second then question was just on urology, and I think you covered a bit of this already with the AMS part. If we look into last year, especially the men's health side, had weakened in urology, and there were just various issues, and some of it seemed to be utilization driven. It just seems as if that's had a pretty strong quarter, and utilization's back up. Is that a fair statement in that, you know, kind of we've reached a more stabilized market environment in there?
No, that's true, what you say. I, as I said, unfortunately, I said many times on when we have the questions on growth rates for this specific area in Urology Care, we have little visibility, and we have the explanations on the growth rates that we see from quarter- to- quarter, whether it's a bit on the negative side or a bit on the positive side. It's hard for us to be very precise, because it's not that visible to us. No, I can't say it. I, unfortunately, can't say that that's the case.
Okay. Okay, that's fair enough. Then you also touched a bit on the direct-to-consumer in the U.S., but just you've run, I guess, a limited number of ads at this point. Just wondering if you could talk about, you know, lessons learned in terms of what you're learning about the process, and when you get to a point where you'll have enough knowledge to really understand the sensitivity to your investment. In terms of-
Mm.
you know, for every DKK 100 million you put in or whatever the case may be, you know, what kind of return are you going to expect in terms of growth rate? Can you just talk to me about that?
It's too early to be that specific. We are still in a situation where we are gaining knowledge on how we invest in a profitable way in our own campaigns. So far, we have better outcomes in campaigns that we do with partners because the partners always come with a much more direct TV exposure experience than we have. We are building that experience now, and we have learned a lot over the last six months. We are not in a place where I could start answering questions to the detail level that you just laid out here.
Oh, no, I mean, I think it's fair enough. I guess, you know, the question is more in six months time, nine months time, do you anticipate getting to that stage where you're going to have really good visibility in terms of, you know, what kind of returns you can drive from that investment versus, let's say, traditional sales force target?
At this point in time, I can't give you a perspective on that. The only reassurance that I can also give is that until we have better visibility, we're not going to go and see responding on it.
Yeah, fair enough. Fair enough. Okay, thanks a lot. That's it for me. Have a good afternoon. Thanks.
Thanks.
Thank you very much. Your next question comes from the line of Veronika Dubajova from Goldman Sachs. Your line is now open.
Good afternoon, gentlemen, and thank you for taking my questions. I have three, please. The first one is just, I'm wondering, Lars, if you can give us a sense, relative to where you were a quarter ago, what is your level of confidence in that you achieving the 8% range of the guidance that you've given? Is it greater, lower, about the same than where you were a year ago? It would just be helpful to get your indication on that. I'm sorry, I meant where it was a quarter ago. My second question is just on the competition in the U.S. in the catheter space. I think you mentioned obviously, that the basic uncoated catheters declined in the quarter. I don't think that's surprising, but I'm more curious about whether you've seen any impact from the Rochester acquisition at Bard.
Clearly, Bard are starting to make a lot more noise on investor calls about wanting to push, harder in the, coated market. If you can comment on that would be great. My last question is sort of related to Scott's question about Liberator, but it's more conceptual in that you've now seen a couple of your competitors effectively vertically integrate, and become distributors in the U.S. market. I'm just curious, one, what impact do you think it will have on the market dynamics overall? Two, is this something that now that you're seeing some of your other competitors doing, is it something that you yourself might start considering? Thank you.
I'm at this point in time, we are not prepared to start tomorrow, the gap in the 7%-8% guidance. That will unfortunately have to stand as it is, as open as it is right now. On your questions on what does it really mean that we see the vertical integration of some of the dealers in the US?
Now I'm just speculating because I don't know, and I haven't really seen it, since Bard is also a high, you could say, high quality player, a player where they also come in with, good technology to the market, I would expect that they'll use that channel to drive it. To drive that, to drive a preference for, I would almost say, products that people deserve to have. Coated catheters that are more high-end. In that sense, I think that's great. They are offering different solutions than we are. If you look at the market as it is right now, it's so underserved with modern technology that I think there's plenty of space for all of us.
I just see it as a positive. Would we be interested in moving forward in the value chain by buying distributors, or would we rather consider to do what we do right now and build a digital platform? We would like to stay with where we are right now and go the digital way. We don't see ourselves being a forward integrator company in a traditional sense, where you have a company that is a, I mean, where we're owning dealers. That's not how I see us at all.
In terms of more competition from Bard following the Rochester deal, now that they've integrated, are you seeing any changes in the competitive dynamics on the Continence Care side in the U.S.?
No, we don't see that.
Okay. Okay, sir, second just thought. My first question was really, do you feel more confident or less confident than you did a quarter ago in your ability to achieve the guidance?
I would like to answer in a different way. I'm very happy with the first quarter, and I'm very happy with it because U.K. is stronger than what we thought a quarter ago. The fact that we can sit here and talk about that we are winning back patients and also in a meaningful way in the U.K. I had that exact question at the last call, and I said: "Why should people come back just because you have fixed your problems?" It actually means that we have better service than some of the other guys out there, I'm very encouraged about that.
Okay. Thank you very much.
Thank you very much. Now moving on to follow-up questions. Your first follow-up question comes from the line of Ian Douglas-Pennant. Your line is now open.
Thanks very much. I've actually only got one left, which is on the U.K. Could you comment on your market share in terms of products and how that's developing? I mean, I appreciate you're winning a lot of people back to Charter, but I think one of the key concerns at least we had, was that you were losing market share in the product space. Could you comment on that, please?
Yes, and no. What we said during last year was that we were actually losing sales in the U.S. because when you lose a patient out of Charter, you lose the on cost or the distribution fee. We had a growth in our volume last year, which was actually over the market growth, but our value was declining or not, was flat because of this loss of the distribution fees. What we see now is that we. We didn't lose market shares during the period where we were struggling, and what we see now is a very clear gain. That is as far as I can go.
You're not... Okay. You're not going to comment on the actual products and sales then?
No, I'm not going to give you percentages on what we have on Ostomy Care and Continence Care and so on.
Okay. We'll have to wait another four months then. Thank you.
I think we're in for the last question now.
Okay, thank you very much. Your last question, it's a follow-up question, and that comes from Scott Bardo. Your line is now open.
Yeah, thanks very much, guys. Just a very quick one for Anders, please. Now, I appreciate you've given some stubborn reported progression for the group for 2016. Just wondering if you can clarify, I'm a little bit confused. You're suggesting now a 7% reported growth on the top line. Do you get a 7% reported growth if you get 7% underlying or 8% underlying, which I think is the sort of range that you have? Same question for EBIT margin. Are you expecting a 33% reported EBIT margin, regardless of whether you get 33% underlying or 34% underlying? Just wondering if you could clarify that a little bit. It seems a little confusing.
Hi, Scott. I will not go more into detail about what are our assumptions behind our, the 7% growth in DKK and the 33% EBIT margin in DKK. I will not go further into details about our assumptions there.
Okay. Historically then, just to understand, because historically, I think, you know, you would have highlighted whether there was a percentage point tailwind or headwind on currencies, and obviously this will flip back and that's no one's fault. Are there other additional effects on the margin here, given the moves in currencies, particularly in the DKK, such that, you know, your underlying progression, you know, might start to diverge from your reported progression on the bottom line, at least?
The main reason for the reduced top line growth in DKK, that is the sterling.
Yeah.
Also, some of the emerging markets currencies. It's also the main reasons for our EBIT margin guidance of 33% in DKK. Also because, U.K. is one of our most profitable markets.
Yeah.
That's the reason for our 33.0 guidance in DKK.
Okay, thanks so much, guys.
All right. That concludes the meeting, and thank you very much for listening in, and looking forward to meeting a number of you over the next weeks.
Thank you very much. This does conclude the conference call for today. Thank you all for participating. You may now disconnect. Speakers, please stay on the line.