Thank you for standing by, welcome to the Change of Financial Guidance for 2014 and 2015 Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question- and- answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, on Tuesday, the 16th of June, 2015. I would now like to hand the conference over to your speaker today, Lars Rasmussen. Please go ahead, sir.
Thank you very much, and welcome to this change of financial guidance for 2014-2015. We have lowered our organic revenue expectation from 8%-9% down to 7%, which is from 13%-14% in DKK, down to 12% in DKK. We have lowered our EBIT margin from 34% to 32%, and that is both in constant exchange rates and in DKK. There are two reasons why we have lowered our growth guidance. One is U.K., and the other is U.S., and I'll just take you briefly through those.
If we go back to Q1 in 2014-2015, the U.K. performance in our home care business in the U.K., Charter, went from strong single-digit revenue growth to negative revenue growth as a result of our inadequate response to NHS regulatory change involving prescription handling. We said in that quarter that the needed changes in Charter would be implemented within six to nine months, and that growth rates within Charter would stay affected until the implementation had been finalized. In Q2, we basically reiterated that, and we also saw an improved momentum in Charter, but performance was flat. We said that within three to six months, we would need to implement. We would have done the needed changes.
Today, we can see that our expectations with regards to the pickup here in Q3 and four have been optimistic. Therefore, we think it takes to the end of the fiscal year to do all of the needed changes. It's especially the time to train people in the new system that takes time for us. What we can also see is that we are on the other hand, having a very successful launch of Mio, and we have a net positive inflow of patients into Charter, and we have not lost markets yet due to this development. It is a temporary situation, but unfortunately, a little longer than what we thought in the beginning.
For the U.S., in the first quarter, we talked about our distributor buying patterns, and that actually came out as we expected, so we see a pickup in Q2 and expect to see a pickup in Q3 also. What is hurting us in the U.S. is our lack of ability to run external marketing campaigns due to the Department of Justice subpoena. That was issued first to us, but which is now in effect, also with a number of our distribution partners. Therefore, there is some uncertainty on this. Those are the two reasons.
It's been the same reason since the beginning of the year, but it takes longer to get out of the issues than what we thought at the beginning of the year. If you look at the EBIT changes, we have lowered our EBIT margin by 2 percentage points. Approximately half is coming from the lower sales, and the other half are for three issues. One is a provision for the DOJ situation, where we have taken an undisclosed provision for the cost associated with that. DOJ have finished their investigations, and we are in dialogue with them, and they have informed us about their conclusion.
We are not in agreement with their conclusion, however, in the interest of the business, we have agreed to pursue a settlement route, and that's what we have provisioned for. We have also increased the provision for bad debt in Southern Europe, very much related to the situation in Greece. Finally, we have fully written down the stocks and so on, everything we had on a negative pressure wound therapy deal with Devon. That's the other half of the lowering of the EBIT. That's basically where we are, and of course, not a situation that we are very happy with.
With that, I would like to hand you back to Q&As, and I forgot to say in the beginning that I'm joined by Anders Lonning-Skovgaard, who is the CFO of the company, and our investor relations team. We are ready to take questions.
Thank you very much, sir. As a reminder, please press star and one on your telephone if you wish to ask a question today, and wait for your name to be announced. Your first question comes from the line of Ian Douglas-Pennant from UBS. Please ask your question.
Hi, thanks very much for taking me on. As a result of the DOJ, you know, assessment that you've flagged that you wanna take there, are there any behaviors that you're gonna have to change in the long term? I mean, should we expect that these external marketing campaigns are never gonna come back? In the light of that, how do you feel confident that your longer-term revenue target is still valid? Then secondly, can you break out the importance of the U.K. and the U.S. factors driving the revenue downgrade? You know, I can see that the data that say you're not losing market share in the U.K. Within your original guidance, were you expecting to increase market share in the U.K.?
I mean, how should we think about that?
Thank you for those questions, and, it's, I think the first question that you are asking, is a question which we are all having on our minds. What does this DOJ investigation means for our ability to execute our direct-to-consumer strategy in the U.S.? As I said, Department of Justice have finished their investigations. They have also played back to us what they have found. It's our expectation that we will be able to fully run our direct-to-consumer strategies as they were planned to be run. That also includes that we'll be able to implement the Care, also the next versions of Care, exactly as we expected it, to do.
We feel that we are in a very comfortable situation in regards to our long-term strategy on the direct-to-consumer in the U.S., in the U.K., and our ability to run the business there. Precisely what is it that you're looking for again?
Sorry, in terms of the guidance downgrade for the year, you helped us think about the where the EBIT downgrade is coming from, the EBIT margin guidance downgrade. The revenue margin downgrade, I mean, is the UK just as important as the U.S. in terms of where your disappointment has come from, or is one more important than the other?
That's a very good question. I don't know if we are able to, at this point in time, split out exactly how that is. We have half of the half of the downgrade on the EBIT comes from the revenue loss, so to say, or the missing revenue, and the other half come from the. That is from U.S. and U.K. The other half come from the three things that I mentioned on Department of Justice, on Southern Europe, and so on. The half that comes from U.S. and U.K., that's the one that you'd like to have split out further. I haven't prepared for that.
I would say that U.K. is, of course, important to us, and that's probably a bit more than half. That's just back of the envelope.
Okay, great. Thank you very much.
Thank you very much. Your next question comes from the line of Alex Kleban from Barclays. Please ask your question.
Yeah, hi. Thanks for taking the questions. I just had two. First one, and I ask that you can give us as much detail as you can, but how closely aligned do you think the provision you're taking on DOJ will be with the ultimate settlement or at least with, the kind of conversations you're having now with the DOJ? I'll ask a second one as a follow-up.
I'm not sure I follow your question. Could.
Well, in other words...
Elaborate just a little bit?
Yeah. You're taking a provision here, and you're in discussions with DOJ. You've received, you know, what sounds like a final kind of ruling from them, or at least a final opinion from them.
Yeah.
To what extent is that provision you're taking, and you mentioned a settlement, is that gonna be close to what we need to think about for the settlement you could potentially make, or is it too early to say?
Since we haven't finished all of our negotiations, so to speak, it's, you know, I can't be final on this. This is our estimate, but it's an estimate based on what we know, and we know quite a bit at this point in time.
Is that driven by, in terms of, A, you know, an amount of sales that you've had in the U.S., or amount of profitability you've had in the U.S.? Can you give us some color on what factors are going into that provision?
No. Since we have not finished that, we cannot give you more flavor on it. If we didn't feel that we were in within a range which we feel is certain, then we would not talk about it.
Okay, yeah, fair enough. The second question was on surgical urology in the U.S. That was weak last quarter. Is anything in the guidance downgrade related to surgical urology, and how has that looked in the U.S. in the quarter?
Well, I can't update you on the current quarter, apart from what we say on the U.S. and the U.K. We'll come back to that when we finish the quarter. You know, everything that we learned, that maybe I should just give you a few more insights on this. The reason why we are, at this point in time, are coming with a change to guidance, every month, we have a monthly performance review where we go through the performance of the different units and also their take on the future. We had such a meeting yesterday.
It's basically based on the two things that I talked about here, that we have changed our guidance. It's those are the explanations.
Okay. I guess it's fair to say then that at this stage, what you know of surgical urology, excuse me, this far, is actually already factored in to what you're doing today? Okay. Okay, that's all for me. Thank you very much.
Thank you very much. Your next question comes from the line of Martin Brunninger from Jefferies. Please ask your question.
Hi, thanks for taking my questions. I have just one question actually, because you said, you have not lost market share, despite the factors that you mentioned.
In the U.K.
Confirmed.
In the U.K.
Yeah, I know. Have you even won market share in a declining market, you think? Do you think that. Can you catch up with that trend? Maybe you can elaborate on that a little bit, because it seems like you've mentioned that on the last calls as well. It seems like this could become a chronic problem. Thank you. It's only one question I have today.
The, yeah, that what could become a chronic problem?
The situation in the U.K. with the, with the home care business.
Ah!
The volumes.
Well, okay. Thank you very much. I, that's the, you know, I think you are touching on a very important topic. That's, that's what does this mean for the future of the U.K. Charter business? I think that we come out, we will come out very strongly of this, but of course, we have lost, we have lost customers in the home care business. There's no doubt about that. We have probably primarily lost customers that are not using Coloplast products, because we are serving everybody who is in the market. We are having all competitors products at the shelf also.
Do I expect that we will start to grow from the new level that we have when we are fully through this? Of course I do. Do I see that things are progressing extremely well in the U.K. when it comes to ostomy and the launch of Mio ? Yes, definitely. We're also now launching SpeediCath Compact Eve in the U.K. I actually expect us to be very strong again in the UK when we are on the other side of this.
The fact that we, even though that we have, so big problems as we have right now in the U.K., the fact that we are not losing market shares in this situation, just speaks to the strength of the business that we have there, and the strength of the product portfolio. I take this as a low point from where we are actually progressing quite well.
You don't think there will be pricing pressures following that trend? I mean, I'm just thinking of the home care business on the service side, Healthcare at Home, they have been quite successful, and the NHS has put so much pressure on them that the EBIT margin has gone really down significantly. Isn't there a risk on the product side as well, from what you're doing is slightly different, I appreciate that, but still, I mean, it's a trend that the NHS is putting quite a lot of pressure on prices at the moment?
I think that the pricing pressure that we see is not bigger at this point in time than at any other point in time over the last few years, where we also had the financial crisis. I can't see why this change or our current problems, which are basically, unfortunately, Coloplast problems, why they would trigger any further price pressure than what we see now. We live with the price pressure. We have done that for many years. They are here to stay, we know that, but I don't see them accelerating in the U.K.
Okay, thanks so much.
You're welcome.
Thank you very much. Your next question comes from the line of Ed Ridley from Bank of America. Please ask your question.
Thank you. Thanks very much. Firstly, if just on guidance, Lars, if I could follow up on the guidance. You're obviously maintaining your longer term EBIT margin development guidance. Is that sort of 50-100 basis points a year from the, as it were, underlying margin guidance that you're giving for full year 2015 of what is roughly 33% or from the reported margin? That'd be my first question.
Yeah, that's a very good question. We will come back to that when we are guiding for the new year. It's not a question that we have been preparing for today.
Okay, fair enough. Just a follow-up on Devon Medical. I don't know if you want to take the opportunity to talk about that, just in terms of the, what have been going on there, and should we say the Devon Medical response, which is in the market?
there's... Are you talking about the legal case or what-?
Yes, exactly. If you could just.
Yeah. You know, it's an ongoing case. It's important, or it's impossible for me really to comment on it. It's actually, we're just in a situation here where we say, "Let's take out of the books what we have, because this is a legal situation." That's why we do it. I can't comment on the ongoing case. It's hardly started. It's very new, actually.
Fair enough. Thanks very much.
Thank you very much. Your next question comes from the line of Veronika Dubajova from Goldman Sachs. Please ask your question.
Good morning, gentlemen, and thank you for taking my questions. I just have a couple questions, follow-ups on the DOJ investigation, and I think the first one is: Why do you think the scrutiny or the level of marketing activities has decelerated so significantly in the last quarter or so? As a follow-up to that, I appreciate that you feel that your activities won't be impacted, but have you had the same conversations with your dealers and distributors? Do you sense that once the, do you sense actually from them, that once the investigation disappears, they're happy to resume the activities as they used to with you?
It's a bit, little bit of a rippling effect because it started with Coloplast, then you have seen that over time, it's been spreading to the distributors. Therefore, we are much further progressed in this matter than the other parties involved at this point in time. Therefore, we know about the business practices that we have had in the past. Of course, I can only vouch for what I know about Coloplast and the business practices that we have been conducting. We see no reason why we should not be able to run direct campaigns going forward.
Of course, we need to see that the dealers will go through the same processes as we have been through.
Okay. Do you, Lars, have any views on when that process might conclude for them?
No.
Okay. If I were to look at your medium-term guidance of 7%-10% top line growth, and assume that you're unable to do any marketing activities via dealers and distributors, and instead, any activities that you undertake have to be direct on your behalf, do you venture a guess for what that guidance range would look like under that scenario?
No. That's a very good question. I think I'll park that for next time that we're giving guidance, because that's probably be irrelevant to speak about.
Okay. Okay, thanks very much.
Thank you very much. Your next question comes from the line of Martin Parkhøi from Danske Bank. Please ask your question.
Yes, two questions. Again, back to the U.S. market. I just want to dig a little bit more into it, because as you say, you see some lost sales from lag on campaign activity. Do you know if this has actually hurt market growth for the products area where you are affected, or is it isolated, you has been hurt? I guess there's at least another of your competitors, which also is included in the case, in the equation.
Yeah.
And then, uh-
I take that first because that's a good question. What we said in the first quarter was that we could see that our accessories was impacted. We had a lot of accessory sales last year due to our direct campaign activities. It's been much harder for us to lift this year because we have not had the same kind of pressure on the market. I would actually expect that in the U.S., that we have probably, we are probably impacting the growth of the accessory market. I'm guessing, I don't have facts to underline this, but I'm just saying that we have significantly lower sales on accessories this year. We see a significantly lower pressure in the market.
Second question, just to be 100% sure: Does this have any kind of impact on your investments, on additional sales initiatives, both for this year and for the coming years?
As we said at the capital market day, not long ago, then we have decided to keep the pressure on the investments because we fully acknowledge that top line growth is extremely important. And we think that the long-term guidance we have is the right one. We think that is still valid, and therefore, we keep investing to deliver in that specific range that we have laid out, which is 7%-10% top line growth and 50-100 basis points expansion on the bottom line every year.
The expansion that we, you had, expected for U.K.
Yes.
I guess that is not, which I guess you had in some steps. I guess that that is not, folding out as you initially had expected.
For this year? No.
Yeah.
I have to say that, well, this year is in that sense, this year is extremely difficult, because when we did the guidance for this year, we had absolutely no idea about the issues that have unfolded in the U.K.
I consider that to be a one-off, and I think that we have dealt and are dealing with it, in the most force, the strongest way that we're able to do, and that's certainly not something that I expect to see every year. Mind you, that this year, well, we are going to deliver 7% growth in a year where we see where we don't see at all the impact growth-wise, that we would expect to see from both U.S. and U.K. They are our number one and two biggest markets, at all, and they're not performing like they should. It, that talks a little bit to what the rest of the business is really doing.
Okay, thanks.
Thank you very much. Your next question comes from the line of Yi-Dan Wang from Deutsche Bank. Please ask your question.
Okay. Thank you very much. I have, I think three questions. The first question is relating to the external campaigns that you're able to run. When do you think you could initiate that for yourself? To what extent do you actually require the collaboration of your distributors to for that to have a meaningful impact on your business? Then the second question is on Greece. I think you've been in this sort of situation before at the height of the financial crisis. Can you give us some color on, you know, how big of a, I suppose, challenge that your distributor is facing this time around relative to last time?
How much of a provision you actually had to use last time? The third question is on the I suppose, the relative sizes or the NPWT business, NPWT, write-off. That seems to be. You were in a pilot launch, so I was kind of surprised that you actually mentioned that as a factor, given that it should be quite immaterial as a factor.
Anders will talk to Greece and the negative pressure wound therapy, he will start out with that.
In terms of Greece, yes, in 2008, 2009, there was also some financial challenges in Greece. We managed also in that period to handle our Greece business without any bad debt. This time, we also see some challenges due to the economic situation in Greece, and we have decided to make a provision for bad debt in Greece. I'm not going to disclose any numbers. In relation to the second question around the NPWT, can you just repeat that?
Yeah. The, I think, part of the, I suppose, non-revenue driven downgrade to your margin, you mentioned, is due to writing down the NPWT inventory. My understanding is that you were in a pilot launch.
Yeah
... I wasn't expecting there to be much inventory at all. Somewhat surprised that you actually mentioned it. Perhaps that is bigger-
Yeah
than what I thought it would be. If you could comment on that.
The NPWT, as you might recall, we had a pilot in Brazil, in Switzerland, and also in Greece. We, over the autumn and the winter, started to plan for a global launch, and that's why we have had a stock related to that. Due to the safety situation of the product, we decided to stop the cooperation with Devon.
Maybe it would be helpful to just comment, I suppose prioritize the size of the three non-revenue related downgrades to your margin, which is the biggest and which is the smallest, would be helpful.
Yeah. We're not going to disclose any further on that at this point in time.
Okay.
When it comes to the external campaigns or the campaigns that we're doing in the U.S., as it's quite clear that right now we are very limited in our abilities to do external campaigns. Actually, they come to a complete full stop. That we are running internal campaigns, which we can do, of course. It is with the way that we're running our business in the U.S. right now, it's more, it have more traction when we do it as in a collaboration with external partners.
Of course, this means that we will have to look at how can we step up our abilities to do internal campaigns and to run more growth that way around. That's just how it is. I can't give you a timeframe on when when the Department of Justice is fully done, therefore, it's hard for me to comment, you know, on the timing of this.
Okay. You won't be able to start any internal ... When you say internal, you just mean Coloplast only campaigns-
Yes
Internal involved with dealers?
That is actually, that is, those are running as we speak.
Okay. The, it's only the external ones that-
Yes
The Department of Justice.
Yes
is, limiting you on at this stage?
No, they are not. They, they are not limiting us. What we are saying here is that because, I think that we all been in doubt, what is, what is it the Department of Justice is really looking for? Now we are, we know, we know what is the outcome for Coloplast, because that is where we are at this point in time, and we feel that we are ready now to go to do also external campaigns. You need an external partner in order to do that, and the external partners are still under investigation, they do not have the same clarity on their business practices as we have.
Therefore, we don't do any external campaigns right now because the dealers, they have the same doubts as we had. What is this really about?
... Okay. Do you have any sense of how soon after the DOJ started speaking to you, that they started to speak to the dealers? Like, how much of a lag there, that there has been?
I can't guide you on that, and I don't even know if, 'cause they have completely different scale of business than what we have, many of them, so I wouldn't know how, what's the process and so on. Yeah.
The bottom line is you don't need to change much of what.
No.
planning.
That's right.
It's just a timing thing that we could start to see these activities resume again.
Yeah.
Thank you.
Yeah.
All right, perfect. Thank you.
Thank you very much. Your next question comes from the line of Oliver Metzger from Commerzbank. Please ask your question.
Yeah, thank you. There's only one question left. It's, do you think that beneath the lower marketing activities in the U.S., there are also a factor of a more aggressive pricing of a competitor in Ostomy bags, which had potentially a negative impact on your guidance on the U.S. market?
Oh, I don't think so. We are also having Mio in the U.S. market now. We actually see that the interest is very high. We are winning several hospitals with this new assortment. No, I have to say no to that.
Okay, great. Thank you.
I think we open up for the last question.
Your last question comes from the line of Scott Bardo from Berenberg. Please ask your question.
Thanks very much for taking my question, Lars. Quite encouraged to hear that you feel that you can continue with your direct-to-consumer initiatives in the North American market, obviously contingent on the master dealers also sort of concurring with your vision. What I'm interested to understand is, do you see heightened compliance costs or an increased level of regulation? Can you discount the fact that you enter into some deferred prosecution agreement or some sort of Corporate Integrity Agreement, that which might, if you like, limit or regulate some of the activities in North America? That would be one question, please.
Just to follow up, do you think any of this activity limits the company's ability to secure GPO contracts in ostomy or dense the strategy of value upgrading, SpeediCath into the U.S. at a time of sort of patent expiry 2017? Thank you.
I have to say that we are quite advanced in these negotiations. I don't see that we will have any extra burden of either cost or processes in order to conduct our business in the US. I think we fully understand where we are and so over and I don't think that we have anything over and above the constant pressure which you always have on a business for to make sure that when you run a global business that you are compliant with both local regulation and your own code of conduct.
That is issues that we're always working on to make sure that we are compliant. Apart from that, no, I don't think that this is going to have any impact.
You'd extend those comments to your potential to get on GPO contracts and your sort of value upgrade strategy for, SpeediCath. You don't think that these things are connected at all, or you shouldn't be impacted by these developments?
I think it's a very good question. It's hard for me to say, yes or no to this, because I wouldn't expect it to, but it's not, of course, an area where I have complete insight. Yeah, I don't expect that, Scott.
All right. Thanks very much, Lars. Appreciate it.
Okay. Thank you very much for the interest, and this is the conclusion of the meeting.
Thank you very much. That does conclude the conference call for today. Thank you all for participating. You may now disconnect. Speakers, please-