Thank you for standing by, and welcome to the Coloplast Financial Statement Webcast. At this time, all audio participants are in a listen-only mode. During the presentation, we will have a question and answer session. At this time, if you wish to ask a question, you will need to press star and 1 on your telephone keypad. I must advise you that this webcast is being recorded today, on Tuesday, the 11th of August, 2015. I'd now like to hand the webcast over to your presenter today, Lars Rasmussen. Please go ahead.
Thank you very much. Good afternoon. Welcome to our Q3 2014-2015 conference call. I'm Lars Rasmussen, CEO of Coloplast, and I'm joined by our CFO, Anders Lønning-Skovgaard, and our investor relations team. We'll open up with the usual presentation by Anders and myself. Open up for questions. Please turn to slide number 3. Q3 2014-2015 was a very challenging quarter for Coloplast. Unfortunately, we had to lower our guidance for the year due to continued challenges in our UK home care business, as well as the commercial impact of the ongoing US subpoena. We also included DKK 100 million to cover for a write-down in connection to negative pressure wound therapy, bad debt in Greece, and the potential liability for settling the subpoena with the Department of Justice in the US.
With all this in mind, we delivered on the adjusted guidance in Q3, with both a year-to-date and quarterly growth of 7% organically. This was driven by good performance in many of our markets, which I'll come back to later. We delivered 32% EBIT margin year-to-date, and 30% for the quarter as a consequence of the DKK 100 million in non-reoccurring costs that I just mentioned. On a positive note, I'm very glad to announce that we today have kicked off the launch of the new convex range of products. The convex market is about 30% of the total ostomy market, growing 5%-8%. This also completes the introduction of the superior technologies behind the new products into all segments of the ostomy markets.
For 2014-2015, we continue to expect an organic revenue growth of 7% and an EBIT margin of around 32% in fixed currencies. Please turn to slide number 4. Revenues were up by 7% organically and 12% in DKK, and amounted to around 10.3 billion DKK. In ostomy care, organic growth was 6%, and growth in DKK was 9%. In Q3, the growth continued to be 7%. Growth continues to be driven by our SenSura and Brava portfolio, especially in our largest European markets, like the UK, Germany, and France. In the U.S., we had a very strong quarter within our accessory line. We continue to see significant price pressure in the Netherlands and more competition in the German home care segment, as I also mentioned in Q2.
Our Assura portfolio growth was driven by good performance in China, Mexico, and Turkey, which was partly offset by low performance in Russia and Algeria. I would like to provide an update on our progress in Charter in the U.K. We are now meeting all our internal operational requirements, and we provide a service fully in line with other DACs in the market. We will still be working on further IT upgrades and expansion of our Charter organization, which will provide for the foundation for normalized growth rates in the beginning of 2016. In continence care, organic growth was 7%, and growth in Danish kroner was 12%. In Q3, growth slowed to 5%, primarily due to the current issues in the U.K. and U.S. The SpeediCath ready-to-use intermittent catheters continue to drive growth, and especially the compact versions performed well.
In the compact segment, we see strong performance in markets like France, U.K., U.S., and Germany. A tender win in Saudi Arabia in Q1 contributed to growth. Underlying U.S. performance in all catheter categories continues to improve after the weak start of the year, whereas Algeria contributed negatively to growth in the catheter segment. Performance in our Conveen collecting device portfolio was not satisfactory and was driven by increasing competition in the Urotex segment, especially in Holland and in the U.K. Finally, the Peristeen sales growth remains satisfactory, especially in the U.K., France, Germany, and Italy. In urology care, organic growth was 5%, and growth in Danish kroner was 13%. In Q3, in isolation, the growth came in at 6%. The end Urology business continues its satisfying performance, especially in Europe and Saudi Arabia.
Sales of the Titan range of inflatable female implant devices continue to drive the performance. We continue to experience a lower number of procedures and higher competition for these products in the US. We also continue to experience low growth within female pelvic health, explained by declining sales of our older Aris sling. In wound and skincare, organic growth continued at 9%. Growth in DKK was 16%. Organic growth for wound care in isolation was 12%. For Q3, the organic growth rate was also 9%. The growth was driven by Biatain sales, in particular, Biatain Silicone in Europe, very good growth rates in China and Greece. Finally, a tender win in Saudi Arabia earlier this year. The skincare business saw good growth rates also in Q3, whereas our contract manufacturing of Compeed impacted growth rates negatively.
Turning to our geographical segments, we saw organic growth of 5% year to date, and 4% in Q3 in our European markets. The growth continues to be very satisfactory in France, the Nordics, and Southern Europe, whereas both the Netherlands and the UK continue to have unsatisfactory growth rates. The price pressure remains and has even increased a bit in Netherlands, and the performance in the UK, I have already talked about. Finally, we are experiencing increasing competition in the German home care market segments. Organic revenue growth in other developed markets increased to 5% for the first nine months of 2014-2015, and 8% in Q3 alone.
Other buying patterns from order buying patterns from one of our largest US customers continue to impact quarterly performance in the US, but the growth trend is improving over the year. The US business also remains impacted by the US subpoena investigation, which is reducing the level of campaign activities in the US. We have achieved an agreement in principle with Department of Justice over the summer on the subpoena, and we are waiting for the Department of Justice to finalize this. Finally, our growth rates in Canada, Japan, and Australia all remain satisfactory. Revenue in emerging markets grew organically by 20% year to date, and 19% in Q3. The growth was driven by China, Saudi Arabia, Argentina, Greece, whereas Russia, Algeria, and Brazil impacted the growth rates negatively.
We continue to see high growth rates in China, especially in ostomy care and wound care, and both Saudi Arabia and Argentina are delivering on tender wins from earlier this year. It should be mentioned that last year we decided to change distributors, or the distributor in Nigeria, which led to a DKK 20 million stock building with that distributor impact in Q1 and Q2 this year. I'll hand over to Anders. Please turn to slide number 5.
Thank you, Lars. Good afternoon, everybody. Let's take a look at the remaining financials. Gross profit was up by 11% to DKK 7 billion. This equals a gross margin of 68% on par with last year. The improvement continues to be driven by a higher production efficiency at our volume sites. We continue to see a negative 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 associated with higher CapEx levels. The quarter included a DKK 25 million write-down of the NPWT inventory. The distribution to sales ratio came in at 29%, against 28% same period last year. The ratio continues to be impacted by incremental sales investments in China, emerging markets, U.S., and the U.K. of around DKK 150 million.
Q3 in isolation was in line with last year. The admin to sales ratio came in at 5% of sales, up DKK 111 million compared with last year. In Q2 last year, we reversed a provision of DKK 20 million, mainly related to bad debt in Spain. Also, Q3 this year, we took a total provision of DKK 75 million, partly due to DOJ subpoena investigation in the U.S., and partly to increase the provision for bad debt in Greece. Adjusted for this, our admin spend in Q3 is as last quarter. The R&D to sales ratio came in at 3% of sales. This year has been impacted by higher general activity levels compared to the same period last year, but also restructuring costs in connection with the organizational changes announced earlier this year.
All in all, this results in an EBIT margin of 32%, down 1 percentage point compared with the same period last year. Operating cash flow amounted to almost DKK 2 billion and was slightly lower than the same period last year. We continued to see a positive impact from higher absolute earnings and remaining insurance payment of DKK 150 million, but this could not offset a high voluntary on account tax payment and cash settlements on currency hedging activities. We continued to deposit on the escrows when needed for mesh settlements and continued to transfer cash from escrows to finalized settlements. Cash flow from investing activities was impacted by investments in capacity expansion, both in machines for production of new products and the site expansion near Nyírbátor in Hungary.
CapEx increased to DKK 447 million, up 23% compared to last year. Please turn to slide 6. For 2014-2015, we continued to expect revenues to grow around 7% organically and 12% in Danish kroner. The difference is explained by movements in U.S. dollar and British pound exchange rates against the Danish kroner. The guidance includes lower expectations to the growth rates for U.K. and U.S., as communicated in June, whereas we expect our remaining key markets to continue their current stable performance for the rest of the year. We continue to expect negative price pressure of up to 1 percentage point on our top line, and this is reflected in our guidance. The negative pricing pressure is especially driven by Holland. For 2014-2015, we still expect an EBIT margin of around 32% in both fixed currencies and in Danish kroner.
The guidance includes DKK 100 million for a write-down of the NPWT stock, a provision for bad debt in Greece, and the settlement amount in relation to the DOJ subpoena, which we also communicated in connection with the profit warning in June. The guidance continued to include investments in sales-enhancing initiatives, which are expected to be around DKK 200 million for 2014-2015. We currently expect our net financials to end the fiscal year around minus DKK 300 million, impacted primarily by cash flow hedge losses on especially the British pound and the US dollar. CapEx guidance for 2014-2015 remains unchanged at around DKK 650 million and is driven especially by investments in more capacity and for new products like SenSura Mio, Biatain Silicone, and CompactCath . Finally, our effective tax rate is still expected to end around 24%.
This concludes our presentation. Thank you very much, operator. We are now ready to take questions.
Thank you. If you wish to ask a question, please press star and 1 on your telephone and wait for your name to be announced. If you wish to cancel the request, please press the hash key. Star and 1 if you wish to ask a question. Your first question comes from the line of Ian Douglas-Pennant of UBS. Please ask your question.
Hi, thanks very much for having me on. First question, can we assume, given the recent changes to the defendant list, and your comment on changes in the buying patterns of one of your major U.S. distributors, that things are returning to a kind of pre-DOJ normal in the U.S.? Have you sensed Hollister restarting campaigns as well, if that is the case? What kind of incremental investment is required again, if that is the case? On my second question, thanks for the divisional split of profitability. That's interesting to see. I see your wound care margin declined year-over-year.
Is this because of the incremental spending on your sales force, or are those margin figures not particularly reliable? When do you hope to realize the operating leverage from your Biatain Silicone revenues coming through? Thanks very much.
Let me start off with the first question then. In the U.S., yes, we have started the campaign activities again, not to the same activity level as we had before, but we have started that. We, I can't comment on what the competitors are doing in this area at this point in time, but we certainly work with campaigns now. Would that mean that we are investing more? We are already investing in the U.S., especially on the consumer care side, and we continue to do that. We are looking further into how we can increase the growth in the U.S., which is high, but not as high as we would like to see it due to the recent events.
I can confirm that we are doing that. Yeah, I think that's as much as I can say now. I think we have said early on that we have hired more sales reps in the U.S., and they are included in the investments that we talked about early on. Maybe, Anders.
Yeah.
like to comment on the profitability in wound care.
So the situation in wound care is that we decided a couple of years ago to start to invest quite significantly into our wound care in emerging markets in China. That's one of the reasons why you can see that in the figures. In regards to the Biatain Silicone production economy, we are working on it, and we expect to see an improvement over the next couple of years when we move out the production from Denmark to Hungary.
Okay. I mean, is there any reason why you couldn't get it, you couldn't lift the kind of wound care margin once you've allocated overhead costs towards, you know, the same levels that some of your larger competitors do?
It's just a matter of size. I think that we need to, we need more scale in that business in order to become more profitable. It's a business that does have a quite interesting gross margin from the outset, but due to the lack of scale, we invest, you could say, too much in the sales organization. The current sales organization can carry a bigger, in many markets, can carry a bigger portfolio of products, which we just don't have. In that sense, we just a little bit hampered by the scale that we have. As we grow the business, we also expect it to become more profitable.
Great. Thanks very much.
Thank you. The next question comes from the line of Michael Jüngling of Morgan Stanley. Please ask your question.
Good afternoon, everyone. I have three questions, please. Firstly, when we look at the DOJ settlement, what is the likelihood that you need to change selling practice in the United States? Are the current activities that you've restarted different to the ones that were in place previously? Second question is on the United States growth. I think on one of the others, you've been quoted that the DOJ investigation has sort of materially impacted your growth in the US. Could you maybe sort of quantify of how much growth you have lost in the US as a result of the DOJ investigation for the current fiscal year?
The third question I have is, in relation to the margin guidance for 2016, what will be the reference point in how you will measure that? Is it going to be 32%, or will it be the 33%, if you exclude the non-recurring items that you flagged in the last quarter when you had revised guidance? Those are my three questions, please.
Yeah. On the first one, it's very hard for us to comment directly on the DOJ campaign or the DOJ investigations. I think that's, you know, that's just how it is. There are two things that we have been concerned about in this connection. One is, will our Care program stand the test? And it did. The Care program is continuing as completely as it was before. The second one was, are we in a situation where we will be able to run campaigns with dealers afterwards? That's the business model that the industry has in the U.S., and we are able to do that. Will there be tweaks and so on to the way that we do it? Maybe.
We are able to run campaigns, and we feel that we can do that with confidence, with where we are with this case at this point in time. We can't put a number on how much this impacts us negatively. We are growing nicely in the US. We are certainly also investing to do that, and with the investments that we're doing in the US, for the time being, we would expect to grow more. Had we not had the DOJ situation, we would also had higher growth at this point in time.
It is the combination of U.K. and U.S., which are our two biggest markets, that have pulled us down from the approximately 9% growth to 7% growth. That's basically how it is. With regards to the margin for next year, we're not going to give you a guidance for next year at this point in time. Of course, the outset will be this year's EBIT margin, and that's where we start.
A brief follow-up then. When you say the margin for this year, you're referring to your 32%-
Yes.
reported margin?
Yes.
Okay, great. Then just briefly on the US again, can I just sort of confirm that maybe when you said to on the earnings interview that it was a material slowdown in growth, were you sort of referring, broadly speaking, maybe 1% or 2% growth to the group, or is it more in the sort of below 1% range?
I think that we cannot be very precise on that one. I think we'll have to dig back into our notes to see what you're exactly referring to. The downgrade of the top line growth this year, it's UK and it's US. I think they're both materials to the group.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Alex Kleban of Barclays. Please ask your question.
Yeah, thanks. First question is on the R&D, you mentioned about a restructuring cost hitting in the Q3. Just if I look at the run rate between the two quarters, there's a delta around about DKK 10 million. Is it fair to say that's the level of the restructuring cost?
Yes.
If we add that back, we're taking another 30 odd basis points, which means your margin actually rounds up to 33 in the quarter, if I'm not mistaken, or?
You are correct. The restructuring cost is in the level of around DKK 10 million.
Okay.
in our Q3.
actually, the underlying margin is actually a little bit more toward the 33% than the 32% range, if we round it up, let's put it that way.
Yeah, if you do that kind of math, you're correct.
Okay. Okay, thanks. The second one, again, it's a numbers question and quite small, but we're talking about, I guess, $11 million for the provision, and you're including legal fees within that. If we strip out some of the legal fees, again, is it fair to say that the actual amount here being paid to DOJ is looking more like mid-single digit millions in USD?
We have made the provision of DKK 75 million to cover the DOJ and to cover an increased provision for Greece. We cannot comment more on this at this point in time.
All right. Okay, sorry. Okay, Greece is also within that. Okay, it's even further south. Okay.
That's a bad one. You know, the, the moment that the write-up from the Department of Justice is done, it will probably be a public document, so you can read about it. It becomes very precise at some point in time, but we cannot be more precise at this point in time.
Okay, that's fair enough. I'll shift gears a bit, and maybe just ask about negative pressure. Now that we're reasonably far beyond the termination of Mentor, any updates on your thoughts and your quest for a negative pressure product? I mean, in terms of doing it in-house and starting a program or lining up other partners, or maybe there's another kind of technology you wanna target in terms of maybe Biolac or just something else, and really just bypass negative pressure altogether.
No, we don't have any further updates on this in this particular area or technology area at this point in time.
Okay, that's all for me. Thanks a lot.
Thank you. Our next question comes from the line of Niels Leth of Carnegie . Please ask your question.
Good afternoon. It's Niels Leth from Carnegie .
Ah.
A question about the price competition that you're mentioning on urine bags. Could you talk around whether this price competition is just on those two markets that you are referring to, or is it something that could kind of spread to other markets? How much of your continence care business would urine bags represent? Secondly, just talk around also the competition situation that you are referring to on the German home care market and which impacts your GHD business. Thank you.
The price competition that we mentioned for Holland and the UK are primarily in Holland, and it's very much the home care trade in Holland that are pushing their own brands and making false conversions, because an ostomy bag is a very personal product, and a catheter is a very personal product, but and it's sort of on your body or in your body. Whereas urine bags are very often a bit further away and thereby more commoditized. That's basically what is happening. There are plenty of low-cost manufacturers in the world of urine bags, and have been there for ages.
That's basically what is just happening there. It's a minor part of the total IC or continence care business. I can't remember if we used to say that. We actually used to say something about what the collecting business all in all is, and that's approximately 20% of the total continence care business. Collecting consists of high value of the male external catheters, and then a smaller value of the urine bags. That's how it's distributed. I could say that the external catheters is maybe more like the personal product that I talked about before, and still the urine bags are a bit further away.
Yeah, I hope that was covering for that part. The other question you had was the competition in the home care channel in Germany. I also mentioned that in connection to the Q2 results. Basically our, you could say, our core business in Germany is actually doing really well. We have a smaller home care business in Germany, and there we feel that there is a lot of competition in that area, and it's like it's been for ages, but it's basically what we're referring to.
Thank you. Your next question comes from Anusha Pally of J.P. Morgan. Please ask your question.
Good afternoon. That's Anusha Pally from J.P. Morgan. I've got three questions for you. Firstly, obviously the first nine months has been a bit of a disappointment, and hopefully you'll clear up the issues. Where do you see the downside from here? Your guidance seems to assume a quick resolution of these issues. What happens if they're not resolved as quickly as you thought, and what's assumed in your long-term guidance? Secondly, there's been some pretty large settlements in the mesh cases in recent periods. Is there a risk that you may not, you may need to increase your DKK 1.5 billion Danish current provision, and how many of your cases are left to be settled?
Thirdly, what exactly are you doing in the Charter Healthcare business, and how do you hope this will bring back your lost customers? Thank you.
You would like to understand what our further downsides are to this, full fiscal year?
Yes, compared to, the long-term guidance that you've given.
That's compared to the long-term guidance that we've given. The long-term guidance is 7%-10% and 50-100 basis points improvement on the bottom line. Well, I think it's very clear this year, well, we are just within the guidance on the top line, but we don't have the guidance in place for or not hitting the long-term guidance at the bottom line. But for the guidance that we gave in June and that we're now reiterating for the last quarter or for the full year here, that's what we believe for this year.
it contains whatever upsides and downsides we can imagine for the remainder of the year. In regards to your questions about the mesh cases, yeah, you're right. Our mesh provision was made in May last year, based on the settlements that were done at that point in time by AMS. And there are still T.V. commercials in the U.S. where litigators, they are telling the public that they should join this mass tort litigation. Therefore, it's not a picture which is completely stable. And what we have said about the mesh cases at this point in time is to the best of our knowledge, so I can't say anything else about that.
We are in dialogue with approximately 2/3 of or lawyers to 2/3 of the cases that we know of at this point in time. We have also settled quite a large part of them. That's basically, I think, what I can say about that at this point in time.
Okay, the Charter Healthcare.
Oh, yeah. Well, Charter Healthcare, the good news about Charter Healthcare is that we are past the, as I also mentioned during my presentation, we are past the point where we have process problems. That means that our processes, they have now been corrected. We can benchmark against other DACs in the markets, and we know what their delivery time is and their delivery precision, and we are on par. We have the same delivery time. We have a good delivery precision. We feel that we are where we should be in that sense.
We have lost customers during this process. The next step is, of course, to see how can we win customers back, and then grow the business from where we are. This is a quite large business to us, so even though we have the, I would say, the processes in steer, it will still take some time for us to see the performance that we have invested to get in the UK because we have a low growth there compared to what we had expected to have at this point in time. We feel that we are on the other side of the issues, and from here on, we are building up.
Okay, thank you.
Thank you. Your next question comes from the line of Yi-Dan Wang of Deutsche Bank. Please ask your question.
Thank you very much. I was hoping that you could give some color about Brazil. I mean, there was a bit of disruption earlier in the year, then it got better. Now it seems to have slowed down again. Any color on that would be helpful. In terms of the restructuring cost in R&D, will there be any further costs that we should expect to come through, or are you largely done? Finally, quickly on the financials for the year, and also for 2015-2016, if you can, what would the impact be if current exchange rates remain? Thank you.
I'll take the first one, on, in Brazil. We had a weak start of the year. We also discussed that at length because it was hard for us to get any orders because due to the election out there were some of the provinces that were simply didn't have the political leadership in place in order to issue orders. That had actually cleared up, so we actually feel that Brazil is going in the right direction. The numbers that you see this year are impacted to some extent by the fact that we have pulled back some negative pressure wound therapy products there. That you can see in the numbers.
Brazil is not as strong as it should be, but it's definitely going in the right direction. The two other questions you have, I think I will hand you over to Anders.
In terms of restructuring costs in Q4, we don't have any plans of including any restructuring costs. In regards to the financial items, as I said earlier, we expect to have around minus DKK 300 million in financial items for the year, and I'm not going to guide our view on next year at this point in time. We will come back to that when we announce our full year in November.
Okay. If I could add one more. You commented slightly on the GHD situation in Germany. I mean, I understand that that's been ongoing, but why did you guys highlight it, particularly this quarter? Has anything changed in a significant way to make you do that? If so, what has changed?
No, that's just in the spirit of full disclosure, as we always give.
Oh, okay. All right, bye. Thank you.
Thank you. Our next question comes from the line of Annette Lykke of Handelsbanken. Please ask your question.
Thank you so much, Annette Lykke, Handelsbanken here. First of all, in respect to the DOJ case, I know it's hard for you to discuss details and fully understand that. However, when listening to your conference call, June 16th, you sort of highlighted that you have intentions to go for a settlement. My question here is, how a significant step slash progress is it when you are signing a principal agreement, and what does that means to you?
Yeah.
Yes.
Maybe I could take that.
Yes
... first. It's that is a settlement. That means that we understand the price tag, so to speak. Basically what we are doing now is that we are waiting for the administrative work to take place, and that's basically a document being formed, which either contains, you know, the findings with Coloplast or whatever findings Department of Justice have in this whole industry investigation. We don't know that the full size of that document. That's basically what we're waiting for.
Can you say anything in general in terms of what sort of expectation should we have on timelines? Is this something that?
No. No, unfortunately not. It's completely out of our hands. I think we said early on that we expect it to be within this year, that's also the most precise I can be at this point in time.
Okay. In respect to, the investigations of the dealers or distributors, has there been any progress there since June 16?
Well, we don't know because we are not part of what is going on with them. I guess that as we had clarity on, you could say, our situation, it must be the same case for some of the dealers, because, as I said, we have started campaign activities again, and that's the normal business model in that market. That's what we're running, it's increasing at actually at increasing speed at this point in time. We also know that there was a couple of the dealers that's where the cases were dismissed, and that is RGH Enterprises, 180 Medical, and Byram.
Okay. Thank you so much.
You're welcome.
Thank you. Your next question comes from Scott Bardo of Berenberg. Please go ahead, Scott.
Yeah, thanks very much for taking my questions. Just referring to the North American market, you've highlighted the growth in the other developed markets are around 5% organic for the first 9 months. Even in June, your expectation was to grow some double digit in the North American market. I wonder whether that's still an outlook that you hold, given the slower growth that you've seen in that combined region to date. Just like to just clarify, it's my understanding that the ongoing litigation with the Department of Justice has been stayed until the 21st of September.
I just wondered if you could confirm that and perhaps add to some comments as to why, if everyone settles, we've still got a period of several weeks before we have some clarity there. Also,
Sorry. Could you repeat that again?
sorry, Lars. Yeah. It's my understanding that the litigation or has been stayed until the 21st of September.
Oh, yeah, that's just an administrative thing. I mean, they do it 60 days. You know, they can't do it 57 days. They do it 60 days whenever they do something.
Got it. Okay, thanks very much. That's when we get some clarity. And just following on from that.
Okay, I'm sorry. I just jumped to conclusions.
No, no.
No, no. If they don't feel that they are ready at the, you know, at the next date, they just give another 60 days, and then they come whenever they're ready.
I see.
In that sense, it's just an administrative thing.
Administrative thing.
... that whenever you are prolonging something, it's 60 days.
Got it. All right, thanks so much for clarifying. Quite encouraged to hear that you feel like you've resumed some external marketing campaign activities. I know this was somewhat of an uncertainty back in June. Just wonder then if you can help us understand, do you consider now the mix of marketing campaign activities to be more centered on Coloplast internal activities going forwards? Or do you expect to have the sort of historic mix that you've had in the past, clearly that has some bearing on the degree of investments you need in the US? That's the North American question. Growth, is that still 10% mix of campaign activity?
The ambition for the US is unchanged. That's what we are shooting for, no doubt about that. When it comes to the mix of marketing, there's no doubt that we are investing a lot in the US to have growth and to convert the market to our technology as much as possible. We are experimenting with the different models. I can't guarantee you that the mix is going to be the same next year as it was this year. If we find a way to get more growth, and, you know, we'll invest for that, whether that is more internally or more partnerships.
We are definitely committed to grow and to convert, as much as possible in the U.S.
Great. Thank you very much. Just two follow-up questions, please. I just wondered if you could help explain the reason or rationale for providing operational segment reporting. Obviously, it's very helpful from an analyst standpoint, but it seems somewhat strange to be doing so after many years of you reporting your figures. I just wonder if we should be reading into this at all. Is this highlighting a potential disposal acquisition or anything that we should be aware of? If you could just comment on the rationale for doing that for the first time, that would be helpful. Last question, again, and apologies for coming back to this, but you seem to be talking down GHD in terms of the magnitude of your German business.
It was always my understanding that, you know, you are number two player in Germany, and this was critical actually, to your overall German operation. Is it your expectation that business in Germany deteriorates further from here, given the competition effects you mentioned, or that we should be just expecting a slightly lower growth component, given this ongoing pressure in line with what you're currently delivering? Thanks.
Well, first of all, the rationale for changing the external, the way we talk externally is that the external world has to reflect the internal world. That's, that's basically what the accounting rules are saying. We're just, yeah, well, that's just what we are correcting. When it comes to GHD, we just see that one of the, one of the bigger home care companies in Germany are stepping up their, the battle, so to say. We, we feel that, but we also feel that on a positive note, in, in the, you could say the GmbH business, that we have the, the normal business that we have in Germany.
We feel it's positively one place and negatively in another place, but it's basically just the comments to reflect that that is how it is.
Scott, I should add on the segment note, we're showing the revenue for each of the businesses and also the directly allocated costs. We are not allocating, for instance, the corporate staff and all that into each of the businesses.
Sure. Thanks very much, guys. Apologies, I lied. I have one last follow-up. You've been very kind to provide us a sort of steer on patient enrollment numbers for Coloplast Care, that being some sort of proxy to your future growth in North American market. My concern was that given all of this bad press, that some of those enrollments might have started to slow in the North American market. Can you add some comments around that, how current enrollment growth is going for Coloplast Care in North America, please?
I have to be honest, I can't remember that we had given those numbers out. What I can say is that we have known for quite a while that the Care Program is fit and proper. Therefore, what we see on the Care Program is that we have the traction that we also expected to have on it.
Okay, great. Thanks very much, Lars.
Thank you. Your next question comes from Veronika Dubajova of Goldman Sachs. Please ask your question.
Good afternoon, gentlemen, and thank you for taking my questions. I have 3, please, if I can. The first one is I just conceptually want to talk about what's gone wrong in the business this year, and I know you've helped us think through the UK and the US. Correct me if I'm wrong, but is it fair to assume that as you think about those businesses, you would expect both of those to see a recovery over the next 6-12 months? Is that a fair assumption based on what you're signaling on the UK and the pace of resolution with the DOJ?
The only reason why I'm holding a little bit back is that these are two big businesses, and I have not been in this situation before in these two markets, so I don't know how fast the recovery is. I don't like the growth rates that we have in U.S. or U.K. We are investing quite heavily in both markets to get much better growth. I just don't want to promise at what point in time we see the pickup. We don't like the numbers that we have now, growth-wise, and we are investing to get out of that.
Okay, understood. Taking that one step further, when you do see that recovery, whether that's in six months, 12 months, and 18 months' time, I understand you don't want to comment on that. Would you expect to recapture the lost leverage that you missed in the PNL this year?
Are you trying to get a future guidance from us?
No, no. I'm conceptually asking, because I think what surprised people this year, right, is your guiding, your medium-term guidance is 7%-10%, with five, 50-100 basis points of margin improvement. You're at 7% this year, you're not seeing any margin improvement. In fact, you know, margins are going down. Yes, there are some one-offs, but.
Yes.
you're not seeing margin leverage. I'm trying to understand, you know, conceptually, why you haven't seen that leverage. Is this some, you know, is this leverage just forever gone? Or at some point in time, when you can re-accelerate growth to 9%, whenever that is in the future, you know, would you expect to then see twice the amount of leverage because the, some of these investments that have weighed on the PNL start driving growth? That's kind of what I'm trying to get at.
Yeah. This is, yeah, and of course, the missing growth, I mean, it's a very big difference to your bottom line also, whether you have 9% growth or 7% growth, right? Because the costs that you have are more or less the same. In that sense, we feel the loss of top line growth this year. Secondly, we have one-offs here, basically, we are also investing this year, DKK 200 million in further sales initiatives. We do see in the next year also that there are still investment opportunities that make sense, and we will also pursue them.
Therefore, I'm not going to give you a guidance now, but of course, the bottom line is very dependent on the top line growth, and I think that goes without saying.
Okay, final question, also margin related. It's just getting an update on the transfer of manufacturing, since that's been a big, I mean, that's been one of the other things that has weighed on the P&L this year. There's, I don't know if you can give us a better sense for how you're getting on with the SenSura Mio transfer and when we might start seeing some leverage from that growth on a gross margin level?
As you can see, this year, we are impacted by higher unit costs for our new products that we're launching, or have been launched over the last 6 to 12 months. That has impacted or that is impacting our gross margin. We are working on moving the production of new Mio Biatain Silicone, and also other things, to Hungary. Those plans are on track. It will continue into 2015-2016.
Any update on when you'd expect that process to be completed or, you know, mostly completed?
It will take still some time, a couple of years until we are done with the activities that I just mentioned.
Okay. Okay. Okay, thank you very much for that. I appreciate it. I'll jump back into the queue.
The next question comes from Michael Jüngling of Morgan Stanley. Please ask your question.
Great. Thank you for allowing me to ask a follow-up. I just wanted to ask one more clarification question on the margin. I want to make sure I didn't misinterpret it. If I purely look at your your midterm margin guidance of 50-100 basis points, if I purely follow that guidance for 2016, is it mathematically correct to say 32% for this year, plus 5,000 basis points for next year should be a reasonable guidance for 2016, based on your midterm guidance? Is that the correct approach? Have I misinterpreted that when I asked the question the first time?
I think that what I said the first time is I would hesitate to give a guidance for next year at this point in time. That our outset for the guidance that we do next year is this year's result, which is 32%.
Mm-hmm.
to take that to the, to the extreme, where you say, this means that you will add 50 to 100 basis points next year, that that is the right answer.
Okay.
You know, we'll have to take that when we get to the point in time where we are guiding.
All right. The reason I'm asking, because if you look at consensus, it's currently at 34% for next year, and it seems the market's taken 33 as the clean number and have added your midterm guidance to that to get to around 34. That's the reason I was asking for some clarification, whether there was maybe a misinterpretation at the time of the profit warning, that maybe it should be 33 plus midterm guidance rather than 32% plus midterm guidance, given there were non-recurring items in there.
Yeah. Michael, our baseline for next year's guidance is this year's result of around 32 percentage points. That's. We will come back with a more precise guidance when we announce our full year results in November. Our overall financial ambition, that is to deliver a year-on-year improvement in our EBIT margin of 50 to 100 basis points.
Great. Then the final question on the DOJ, also clarification. Have you actually been told as part of the settlement with the DOJ of what the selling guidelins will be, meaning you're trying to sort of preempt what they may be, or have you been told what they should be and you're acting accordingly in your refreshed, if you like, marketing campaign?
I have to say that we have said what we can say about the Department of Justice case. There are a ton of details, but we can't go any further than what we have said at this call up until this moment.
I didn't really want to know what the specific changes are. All I really wanted to know is have you been made, or has the industry been made aware of what the guidelines are now, rather than telling us whether there's a change in the guidelines?
Yeah. I'm sorry, Michael, you know, I can't comment any further on it, unfortunately.
Okay. Thank you.
Thank you. You have our next question from Alex Owen of Barclays. Please ask your question.
Hi, sorry to push on this, but I was going to ask the margin question maybe a bit differently. If we bridge back and we say on a clean underlying basis, you're at 33% for this year, you talk about DKK 200 million in commercial investments, we take that out, that gets us to around about 34.5%. That's how I would say, your starting point of the business as it stands before reinvesting, right? If you do 50-100 basis points on top of that, in terms of leverage, if you get back to growth, it gets you to 35.5%, which means if you only do 33% for next year, you only deliver 32% for next year, you'll be investing 2.5% of sales in initiatives, behind growth.
Is that the right way to look at it? If it is, what kind of return do you think you're going to get for that 2.5% of sales?
You know, we did foresee that you guys were going to see if you could get next year's guidance on this call. We would very much like to give you next year's guidance when we have the release for Q4. In the meantime, we'll do whatever we can in order to guide you in the best possible way. The outset for next year's guidance will be this year's results.
In adjusted terms or in reported? In reported.
Yes. Yes.
Okay. Okay, thanks a lot.
Thank you. Your next question comes from Scott Bardo of Berenberg. Please ask your-
Thank you very much for taking my follow-up question. Just a couple of quick questions on geographical performance. Historically, you've pulled out the accessories market in the UK as being quite a strong growth driver. Obviously, we've had a little bit of disruption with Charter. Can you just comment a little bit about how that market is progressing in the UK for you guys, and whether you see, you know, strong growth there, or whether that started slow a little bit? Also, on France, that looks to be a very robust region for you at the moment. It was my understanding as part of the French reforms, some time ago, that there will be sort of 5% annual price cuts. Obviously, we've had that in previous years.
I just wonder, is that also on the cards, into 2016, as you currently see it? Thanks so much.
Well, I would say that accessories, in general are doing quite well, both in the US and also in the UK. With regards to France, your question was? Sorry, about that.
Apologies. France seems to be doing very well. Historically there's been some reimbursement changes or in the past, a little bit of pricing pressure in that market, which you seem to have brushed off rather well. I just wonder, should we anticipate an annual price cut in France? I mean, is this something you also need to accept into next year, as you currently understand it, or are there no further negative reimbursement effects in France?
I think we are on the other side of it at this point in time. We would expect. Well, I would say that in France, they have been doing periodic price reviews, and therefore, they come up every so often. Maybe, I don't know if we'll have one for 15, 16. It might be, then if not, then 16, 17, we'll have a look at it again.
Okay. Okay, Lars, thanks very much indeed.
All right. I think we are in.
Thank you. There are no further questions on the line.
Oh, okay. That's perfect.
Thank you.
That's also approaching the end of the hour. Thank you very much for participating, and we're looking forward to see a lot of you during the quarter. Thank you very much.
Thank you. That does conclude our webinar for today. Thank you all for participating. You may all disconnect.