Ladies and gentlemen, thank you for standing by, and welcome to the Coloplast Financial Statement 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 followed by one on your telephone keypad. I must also advise today's conference is being recorded, Tuesday, the fifth of May, two thousand and fifteen. I'd now like to pass the conference over to your speaker today, Mr. Lars Rasmussen. Please go ahead, sir.
Thank you very much. Good afternoon, and welcome to our Q2 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. Anders and I will begin with a short presentation, and then we'll open up for questions. Please turn to slide number three. Q2 2014-2015 was a very busy quarter for Coloplast. Financially, we delivered a Q2 in accordance with our own expectations, with 8% organic growth and a 33% EBIT margin. Q2 was driven by good performance in most of our business areas and geographical segments. We saw most of the expected uptake in the U.S., and growth was again double digits. We are also executing on our plans in the UK, where we have made considerable efforts to fix the situation in Coloplast Charter.
Today, we are back to normal on our service levels and delivery times. We still need the remainder of this fiscal year to get the situation in Charter fully back on track. During Q2, we made significant changes to our organization, with the aim of strengthening execution within our consumer sales channel. We also reorganized our R&D to strengthen the innovation capabilities in the organization and improve ramp-up processes. Last year, we decided to expand our production capacity, and we were very happy to open up for 20,000 new square meters in Nyírbátor in mid-April, doubling the capacity at the site. Nyírbátor is now able to handle the expected transfer of production from Denmark and France in the coming quarters.
On a less positive note, I should mention that our commercial activities with Devon Medical have been terminated due to problems with product safety with the Exac products. Coloplast is still committed to negative wound pressure, but we need to take a step back and rethink our efforts within this area. Today, the board of directors approved interim dividends of four and a half Danish kroner per share, amounting to a total of almost DKK 1 billion. For 2014-2015, we continue to expect an organic revenue growth of 8-9% and an EBIT margin of around 34.4% in fixed currencies. Please turn to slide number four. Revenues were up by 7% organically and 11% in Danish kroner and amounted to around DKK 6.7 billion.
In Ostomy Care, organic growth was 6%, and growth in Danish kroner was 8%. After the low growth in Q1, the growth in Ostomy Care improved to 7% in Q2. Growth was driven by our SenSura and Brava portfolio, especially in Southern Europe, France, the Nordics, and in the U.S. SenSura Mio was launched in four new markets in the quarter, totaling launch in 18 markets, since the start a little more than one year ago. We had a very successful launch in the UK in the quarter. We continue to see price pressure in the Netherlands, and in Q2, we also saw lower growth, lower sales growth in the German home care segments. Our Assura portfolio growth was driven by China, Mexico, and Turkey, which was partly offset by low performance in Russia and Algeria.
In Continence Care, organic growth was 8%, and growth in DKK was 13%. The SpeediCath ready-to-use intermittent catheters continue to drive growth, and especially the compact versions performed well. In the compact segment, we saw strong performance in markets like France, the UK, U.S., and Germany, but also a tender win in Saudi Arabia last quarter contributed to growth. U.S. saw good performance in all Continence Care categories after the weak Q1, whereas Algeria contributed negatively to growth in the catheter segment. Performance in our Conveen collecting device portfolio rebounded in Q2, driven by France and China. Finally, the Peristeen sales growth remains satisfactory, especially in France, Germany, and Italy. In Urology Care, organic growth was 5%, and growth in DKK was 11%. Our end urology business continues its satisfying performance, especially in Europe and Saudi Arabia.
Sales of the Titan range of inflatable penile implant devices continue to drive the performance. We saw unusually low activity for these products in the U.S. in Q2. We continue to experience low growth within female pelvic health, explained by declining sales of our older Aris Sling. In Wound and Skin Care, organic growth was 9%. Growth in DKK was 15%. Organic growth for wound care in isolation was 12%. The growth was driven by our Biatain sales, in particular, Biatain Silicone in Europe. The tender in Saudi Arabia, which we won in Q1, also impacted our wound care business positively. Finally, Greece had a very good Q2. Generally, we also continue to see a strong growth contribution from our Chinese wound care business.
The skin care business also returned to growth after a weak Q1. Finally, our contract manufacturing of Compeed once again contributed positively to growth. Biatain Silicone has now been launched in all main markets. This concludes the launch of the current silicone portfolio. We continue to be very satisfied with the uptake in the market. Turning to our geographical segments, we saw organic growth of 5% for the first six months of 2014-2015 in our European markets. The growth was very satisfactory in France, the Nordics, and the Southern European region, whereas both the Netherlands and the UK continued to have unsatisfactory growth rates. The price pressure remains in the Netherlands. The performance in the UK, I have already talked about.
Looking at Q2 in isolation, growth was impacted by the above-mentioned dynamics, Germany and Italy balanced growth very satisfactory, with very satisfactory quarters, especially in Ostomy Care. Organic revenue growth in other developed markets increased to 4% for the first half of the fiscal year. As we expected, the distributor buying patterns within one of our largest U.S. customers normalized in Q2 and improved the growth rate in the U.S. We did expect full recovery in Q2, but it looks as if we will see a positive effect in Q3 as well. Our growth rates in Canada, Japan, and Australia were all satisfactory. The biggest setback in the region was the situation in urology in the U.S., which I mentioned earlier. Revenue in emerging markets grew organically by 20% in the first six months of 2014-2015.
The growth was driven by China, Saudi Arabia, Argentina and Greece, whereas Russia and Algeria impacted the growth rates negatively. We continue to see high growth rates in China, and our investments in expanding the commercial organization are developing according to plan. Both Saudi Arabia and Argentina are delivering on tender wins from Q1, whereas the situation in Russia remains depressed. Last year, we decided to change distributor in Algeria, which led to a DKK 20 million stock building with that distributor. This quarter, we had a further minor negative impact as the remaining stock from the previous distributor was returned to Coloplast. Please turn to slide five, and I will now hand you over to Anders.
Thank you, Lars. Good afternoon, everybody. Let's take a look at the remaining financials. Gross profit was up by 11% to DKK 4.6 billion. This equals a gross margin of 69% on par with last year. The improvement continues to be driven by higher production efficiency at our volume sites, and 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. Finally, we saw implementation costs in relation to the expansion of our Nyírbátor facility. The distribution to sales ratio came in at 29%, which is at the same level as last year. The ratio continued to be impacted by incremental sales investments in China, emerging markets, U.S., and the UK of around DKK 100 million.
In Q2, we also increased our expenses for the ongoing Section 522 post-market surveillance studies, which we are conducting on parts of our female pelvic health product portfolio. The admin to sales ratio came in at 4% of sales, up DKK 29 million compared with last year. In Q2 last year, we reversed a provision of DKK 20 million, mainly related to bad debt in Spain. Q2 this year, we saw higher legal costs, partly due to the Department of Justice subpoena investigation in the U.S., which has been ongoing for some time. For the subpoena, we expect to hear from Department of Justice before summer regarding their findings. The R&D to sales ratio came in at 3% of sales, on par with last year's average.
The absolute increase in the R&D spend is related to higher general activity levels compared to the same period last year. All in all, this results in an EBIT margin of 33%, in line with the same period last year. Operating cash flow amounted to DKK 863 million, which is slightly lower than the same period last year. We did see a positive impact from higher absolute earnings and the remaining insurance payment of DKK 150 million, but this could not offset a higher voluntary on-account tax payment and cash settlements on currency hedging activities. We continue to deposit on the escrows used for missed settlements and have started 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 in Nyírbátor in Hungary. CapEx increased to DKK 325 million, up 48% compared to last year. Please turn to slide number six. For 2014-2015, we continued to expect revenues to grow between 8% and 9% organically, but now we expect 13-14% in Danish kroner due to the changes in US dollar and British pound exchange rates against Danish kroner. As mentioned in Q1, we expect to absorb the low Q1 last year throughout the traditionally higher growth in the second half of the financial year.
which is also backed by gradually higher growth contribution from new product launches and impact from sales investments. We also expect the situation in Coloplast Charter to contribute with performance improvements as measures taken are starting to take effect. We continue to expect negative price pressure of up to 1 percentage point on our top line. 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 34% in both fixed currencies and in Danish kroner. The main contributions to the guidance are continuation of last year's efficiency gains in global operations and scale benefits in our administration. This is offset by higher unit costs associated with higher sales from capacity ramp-up of new products and higher depreciations.
The guidance continues to include investments in sales enhancing initiatives, which are expected to be in the range of DKK 150 million-DKK 200 million. The guidance on the EBIT margin does not include any effect from the Department of Justice subpoena or any impact from the termination of the commercial agreement with Devon Medical. We currently expect our net financials to end the fiscal year at around minus DKK 300 million, impacted primarily by cash flow hedge losses on especially British pounds and US dollar. Our CapEx guidance for 2014-2015 remains unchanged at around DKK 650 million, and includes investments in more capacity for new products like SenSura Mio, Biatain Silicone, Compact Eve, and investments in the expansion of our Nyírbátor site. 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, participant. As a reminder, if you do wish to ask a question, please press star followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Once again, participants, that will be star followed by one for a question. Your first question today comes from the line of Alex Kleban from Barclays. Your line is open.
Yeah, hi. Thanks. Three questions. First off, for Wound Care, can you call out the impact on the Algeria inventory and just give a rough estimate of where Wound Care would have been without that item? Second on that, clearly, you've gained market share again in the quarter. Do you have a sense of who you're actually taking market share from? Because we saw Smith+ Nephew also taking some share in the quarter. Just to get some clarity on that, and then I'll do two more, but I'll do them one at a time, if that's okay.
I don't think that we can enlighten you further on the Algeria tender impact on Wound Care. I would say that I expect it to be rather limited. Yeah, it seems as if this is a quarter where everybody who's playing in the Wound Care field are getting a good growth. I can't tell you where we are taking market shares from, but I can tell you that we see that Brazil is back, where we talked about Brazil last quarter, that they were holding back because of the changes to government. As we also explained, we expected that to pick up this quarter. We see a picking up there.
I actually would expect that is kind of a one-off, that you see that you are coming back. Compared to last quarter, that is something that we have definitely feel. I also think that we are, you know, we have strong growth in some markets in Europe, but we have, in particular, strong growth in China. There, I think that we are building the market. I can't help you with the other guys. You have to ask them, from our point of view, it's a pretty broad-based pick up that we see across many markets.
Kind of more geographic mix driven then, than market share driven, if that makes sense. Let's say on Devon, this one, do we have any product liability risk that we need to worry about on this one? Or is this really just a situation of initial pilot, not what you expect, particularly from the safety side, and then you decided to recall it?
That's hard for me to comment on. We have had costs on running this pilot. We are quite disappointed that when we point to safety issues with the product, that the supplier do not wish to help out on that. So there's a legal side to this, which we'll have to see how that comes out.
Okay. Going forward, you said you'll reassess options, but does that mean. Do you have other partners lined up potentially in a pipeline, or do you have to internalize this going forward and maybe it takes a few more years?
We'll have to find another partner, and I think that's as much as we can comment on this at this point in time. We remain committed to this part of the wound care market, and we want to participate in that. As we speak, we don't have a contract with another supplier.
Okay, last one, I know it's kind of become five questions, but just a quick on the consumer marketing side, and I saw the personnel change there. Can you just highlight which components of that you're behind schedule on? Or just why have you felt you needed to make that change now rather than, you know, six months from now or, or maybe even earlier?
The, on the consumer side, well, I would say, I'd like to say that the first part of it is this part of our business is now sizable enough that we need it to become a separate unit. We want to be able to set targets for that unit, both on top line and on the earnings. We don't want it to hide if there's anything inside of the, you could say, the historic business, like the professional business. What we do now is that we are making two adjacent businesses. One is professional, taking care of doctors and nurses and responsible for NPD and so on. We have very clear targets for that one.
We have this parallel business, which is reaching out to consumers and where we set the specific targets on top line and bottom line for that also. We see that as as we are becoming more offensive in that in that part of the business because we see that it works.
That's an internal person who's going to lead that up, or are you going outside?
It's actually, it's Thomas Bruun, who's heading it up. He has been running this franchise since the beginning. Now he have gotten a more visible position in the organization, and he will actually be at the Capital Market Day in London later this week. You'll have a chance to meet him and talk to him about what it is that we're building here. You should see this move as a wish to commit further to running a consumer channel. You should also see it as a simplification.
What we have done historically is that we have organized around business areas, so we have organized around Ostomy Care and Continence Care in the chronic business area. What we do now is that we're organizing around customers, so our professional segment and the consumer segment.
Okay, very clear. Thanks a lot.
Your next question comes from the line of Ian Douglas-Pennant from UBS. Your line is open.
Thanks very much. Just one on urology care to start with, a big miss, at least against my numbers there. Can you talk about, you know, a little bit more about what caused that? I mean, you seem to have a new product out from what I can glean from regulatory findings. So is it related to that, people not buying now because they're going to buy later, or is there some longer term ramification we should be aware of? Then in the ostomy market, you began to touch on it, but maybe you could talk a little bit more about ConvaTec's price-related strategy here, that they still claim to be taking NPD share. At least in the community setting, are you being forced to respond with lower prices?
Can we make read through from your higher inventory and receivables number that you're maybe extending better credit terms or giving inventory on consignment or something to your distributors? Maybe you could talk about the potential impact of the DOJ investigation, and whether you've changed any of your kind of standard operating practices in light of that. Thanks very much.
Yeah. On the urology side, in a sense, this is named, the problems are named U.S., right? It's both the female pelvic health, which is not doing that great because we do grow on the newest version of the slings, but we decline faster on the old version. Then we, if we have, we have to say that we didn't see it coming, that we have a weak sales of penile implants. The so far, what we know is that we have had fewer surgeries in the quarter that we just came out of, and which have been confirmed by the customers that are large customers with us.
We need to, you know, dive deeper into this because we don't fully understand why that is. They claim it's an overall thing for that quarter, we need to be more sharp on that. On the Ostomy Care side, I think that you may be referring to the U.S. when you talk about the questions that you have there. It's very hard for us to comment on information that ConvaTec come out with. What I can see, you can look at their growth numbers, and you can look at our growth numbers, I think that's a telling story.
that so far, we are not in the U.S. You know, if you talk about Europe, it's a very different story, but if you talk about U.S. specifically, we are in one of the GPOs with the latest products that we have due to a technicality, so that we can simply launch the products there because they're better. But we don't have full access to with all of our products on the Ostomy Care side for any of the GPOs or, well, for one of them, but for most of the GPOs in the market
In that sense, you know, for the NPD numbers really to take off in the U.S., we need access to the GPOs, and they are not up for the next 12 months. That will take a little bit of time. Regarding Department of Justice, oh, having said that, by the way, on Ostomy Care, we are growing quite well in the U.S., with a pretty nice growth and a great new launch which have been which is giving us the double-digit growth. Regarding Department of Justice, we, you know, they have finished their investigations, and we have participated fully in that.
As we said, they are coming back with an answer before summer. That's what we expect. It's hard to comment much more on that one.
Okay. Sorry, just going back to the price in the market. Can I just confirm, you are still very comfortable with kind of flat pricing or whatever you're seeing in the US? You're not being forced to respond to ConvaTec in the community setting, and also you're not altering your credit terms in any way?
No, that's not the case. No, I can confirm that what you're saying, that's how it is.
Okay, perfect. Thank you very much.
The next question comes from the line of Michael Jüngling from Morgan Stanley. Your line is open.
Thank you and good afternoon. Three questions, please. Firstly, on other developed markets, how stable would you describe the United States in the second half, post changes in buying patterns or the volatility that we saw in Q1 and Q2? In other words, was this a one-off volatility, or is this something that will be reoccurring over the next, call it two years? Question number two is on EBIT margin. The EBIT margin is flat for the first half year and year. What will drive the better margins in the second half to get to your 34%?
The third question is also on EBIT margin, and that is when you guide to about 34%, I know this is a pedantic question, but it's kind of important for a stock trading on a high multiple. Does this also include, for instance, let's say 33.5%? Or are we talking about only very small deviations from 34%? Because it seems to me you're on the back foot this time around on margins compared to the past three or four years, where the first half margins were always very strong. That's all. Thank you.
Let me start with your first question, and then I'll hand you over to Anders for the EBIT questions. On the U.S., I think that what we have seen in the first two quarters of this year, I think that we have seen that quite a number of times over the years. The reason why it became so visible in the first quarter was because we had both UK and U.S., which is our number one and two markets, having zero growth. We have a few very large customers in the U.S. who are impacting our growth rate in the U.S. when they sort of change their buying patterns.
I think it's there as long as they have an incentive structure, which is based on what they're buying. Therefore, it's something that had been there to a certain extent, and it will be there to a certain extent also. We don't see an interest in having this, because it's harder to explain it to you guys. To be quite frank, it's also very inconvenient for the planning purposes inside of the company, because this means that in some quarters, we have a low pull on our factories, and in some quarters, we actually need to work overtime in order to fill stocks.
It's, you know, in a market where the demand side is growing, yes, but it's not growing, with big swings. It's something which is unnecessary. We will have to work to sort that out, but I don't think that it's going to go away, you know, in the short term. It's something that we have to work with, because it comes down to the incentive structure. Then I'll hand you over to Anders for the EBIT part. The only thing that I'd like to say before I do that is that we are very committed to the investment that we do in top line growth.
That's that you also see on the EBIT side, of course, but Anders will explain that deeper.
We, in order to deliver the EBIT margin guidance, we expect to improve our sales in the Q3 and Q4. That will have a scale effect also on our EBIT margin. We also expect to improve our gross margin throughout the year. That will also have an impact on our EBIT margin. It is primarily the activities we are doing within sales that will drive increased sales in Q3 and Q4. That will drive scale, and that will impact our EBIT. That's the primary reasons.
When it comes to the margin guidance, does 34%, for instance, also include 33.5%? Is that something which would be in the range of that 34%?
The range we're looking into when we say around 34 is between 33.5 to 34.5.
Okay. When you gave guidance beginning of this year for the full year, actually, let me rephrase. Now that you have the first half, would you say that you're more towards the low end of the range or the high end of the range with that 34?
you know, Michael, I cannot comment more on that, whether we are in the high end or in the low end. Our guidance is an EBIT margin of around 34%.
Great. Okay, thank you. It's very helpful.
Your next question comes from the line of Veronika Dubajova from Goldman Sachs. Your line is open.
Good afternoon, gentlemen. Thank you for taking my questions. I have three, please, if I can. The first one is just on the production transfer. I was hoping, Lars, maybe you can help us think about, one, the timing. When do you think you will have completed the transfer? So when might we see some impact on gross margin? I think related to that, one, you know, what are going to be the costs of that transfer? Two, once you've completed that transfer, maybe what happens to gross margin after that?
That's my question number one. My question number two is just on the R&D reorganization process, and maybe you can help us think about there, why you've undertaken those actions and what that might mean in terms of, one, your R&D output, and two, costs of R&D. My third question is just housekeeping. Was there any impact in the quarter from the divestment in Japan on the organic growth rate, and if so, how big that was? Thank you.
A good question, when the production transfer is completed, because it depends which one you're talking about. We are, at this point in time, we have new Mio, which is being manufactured in Denmark. We have Biatain Silicone, which is being manufactured in Denmark. We also have some of the new catheter products that are being manufactured here. Of course, when they have been transferred in full, that will have an impact on, a positive impact on the gross margin. By saying that, I also say that for the time being, they actually have a negative impact, on the, on the gross margin, because we are selling quite well of these products, and they are more expensive.
So it's actually very visible in the gross margin that you are seeing now. I can't give you numbers on what the cost of the transfer is, because it's inside of the guidance that we give to you. But we have a spike, you could say, in these years, because it's an extremely large program that we're rolling out when it comes to the Ostomy Care products. It's very large volumes that we are selling, and it's a number of machines that we have to transfer. And the timing of that, it takes a bit of time.
We are at least at the end of the next fiscal year before we are, as you know, to the end of the big part of the transfer. So at this point in time, that's where we are. On the R&D side, so why do we do that? We have just completed the what we call the bigger, bolder, better phase. So you know that we went from launching a lot of smaller products to a setup where we have launched fewer products, but products with much more impact for each launch. We have changed the setup that we have, where we handed over the responsibility for the pipeline to marketing.
You know, we have been working extensively with anthropologists and simply to get a much better understanding of what is, you know, what does it take to move the needle with the consumers. We feel that that part of it is really where it should be. What we are not satisfied with at this point in time then is how long time does it take for us to do the ramp up to do the moving out of the manufacturing? How long time does it take to get down the learning curve and get the final cost price that we are aiming for? That is what we are going to work with in the next phase.
What we have done is that we have kept the responsibility for the, you know, for asking for the pipeline. You know, the responsibility for the value of the pipeline is kept with the commercial organization. What we have done then is that we have transferred R&D into the operations organization, because what is left in R&D now is an organization which is executing on the pipeline specifications that come out of marketing. By doing this, we can eliminate a number of double functions. We are putting together, for example, the pilot and the ramp-up facilities and so on.
And this is also a way to simply streamline the organization and to up the speed of ramping up manufacturing and of driving down cost prices. So that's why we have done it, and in this sense, we will have what we call a demand side of the business, which is the sales side, plus the marketing side, specifying what they want from R&D. Then you have a supply side, which is on manufacturing and on the technical part of, or technical aspects of the R&D.
Your next question comes from the line of Yidan Wang from Deutsche Bank. Your line is open.
Thank you very much. I have a few questions. Just to follow up on the reorganization of the R&D, can you give us some sense of how long you expect this process to take, and when we could start to see some of the benefits of this in your financials? Secondly, on urology, can you explain why the older female slings are declining at a faster pace versus the growth of the newer ones? I would have expected that the newer ones to substitute the old ones at a similar pace, if not at a faster pace, on the assumption that you should be gaining market share. The third question is for wound care.
Can you comment on how much of the performance is coming from the back orders for Biatain Silicone when you were unable to supply demand? You know, what % of your business has actually got this product now, and how you expect that to change in the rest of the year? Just some sense of how sustainable the growth that we've seen in wound care, can be going forward. Thank you.
Yeah. On the on the R&D side, I think that you should be careful to see that we have a guidance to the market, which is that we want to be able to grow 7-10%, and add 50-100 basis points to our EBIT every year as one guidance. Then when we do some changes to the organization, then we need to add some extra guidance to it in order to sort of contain all of the fantastic benefits that come out of that.
I think that what you need to see that the things that we do to the organization, the products that we're launching, the reorganization that we're doing, the most bigger emphasis on consumer and so on, they are all parts of being able to deliver a growth, which is like 40- 100% higher than the market's growth is for the company. That is to be able to year-over-year, to deliver 50- 100 basis points on the bottom line. These are things that we are doing in order to fulfill both of these targets.
I think they are actually quite challenging because we are growing both the top line and the bottom line from a level where we are market leaders and also the most profitable company. I would hesitate to give you an extra guidance on, you know, on when you will see this kick in, because every year we have to grow more than the market, significantly more than the market, and every year we had to add 50- 100 basis points to our EBIT. We simply need to do stuff to the company in order to do that.
On the urology side, you know, I'm possibly the same question as you are on why would one decline faster than the other one is growing? I don't think that with the market share that we are enjoying inside of the female pelvic health area, that we have the necessary visibility to see, to know, if, you know, what's the, what's the total number of procedures performed per quarter. So therefore, it's very hard for me to sort of run these numbers for you.
I think that there is a logic that people would like to step away from older technology, and that they'd like to get into newer technology, which have been approved since, you know, by FDA recently. I guess that at some point in time, we'll see this equaling out so that the growth will be higher than the decline of the old products. I can't help you on that one, unfortunately. On the back orders of silicone, well, you know, silicone is now out in 21 countries. Well, it's been holding us back last year, but it's primarily been holding us back on the number of launches that we have pursued.
I actually, if you look at where we get the uptake from, the very last part of the uptake is from countries that are not having silicone. Silicone is primarily helping us, to grow in Europe, but the big growth numbers are coming from outside of Europe, where silicone is not launched yet.
Okay. If I could just add in one more question for Ostomy. Given the situation with the GPOs, how long can you continue to grow at the pace you're currently growing at in the U.S., before you would really need to solve that GPO problem? Make some progress there.
Yeah. Yeah, it depends on, you know, how well accepted Mio gets, and if we can get into, you know, Mio is actually having really an exceptional reception in the U.S. I guess that as we are, as it is right now, we are getting the new products in on, for example, innovation on, you know, at, on a, because of the technology, but not as a full member. I think that as we are gaining more and more market share in the market, it also becomes more and more natural that of course, we need to be on the GPO contract. I don't know.
Of course, at some point in time, we will if we're not on the GPO contracts, it will become a problem to us. It is not at this point in time due to our market shares, but it will become. Of course, you are absolutely right that at some point in time, we need the GPOs in order to drive more NPD in the market. It's not, you know, it's not within the next couple of years, but it's on the other hand, with the growth we have, you know, we'll be there. We will need that.
Okay, great. Thank you.
Your next question comes from the line of Ed Ridley-Day from Bank of America. Your line is open.
Hi, good afternoon. Thank you. First of all, just a follow-up on Devon Medical. Can you give us any color on the impact on revenue on a sort of quarterly basis or an annual basis? That would be helpful. Maybe sort of to step back and look at wound, and obviously, as you said, you need to sort of have a look at what to do in NPWT going forward. Isn't this an opportunity to perhaps think about a potentially larger move in wound, a still a very fragmented market? Where clearly a consolidator would have the benefit of scale. If you could talk to that would be helpful.
Just in terms of the working capital and cash flow, can you give us an idea of how much of the inventory build is related to, as you say, the new factory expansion and the potential transfer of production, and how much is related to just ramp ahead of new launches? Thank you.
The negative pressure area, you know, we only had two pilot markets where we tried it out. In a sense, if I'm talking to the loss of revenue, that would have to be the sort of an opportunity loss that I'm talking about, because it's very limited what kind of sales we had with these products, because we were basically, you know, investigating with them, figuring out if they were working, and how well they worked and so on.
Sure.
Therefore, it's future sales that we missed out with this one. Yes, we had some numbers on that, you know, I mean, it's not really relevant because we never talked about them before, and I don't think it makes any sense to start talking about them now. I agree with you that, you know, there are a number of options that you could consider. Of course, we're looking at whatever options that we see in order to be part of this market.
We're also known as a cautious company. I think I can't comment any more on that, but I'll hand you over to Anders for your last question.
Yeah. In terms of the inventories, they have increased due to a couple of factors. We had a lower Q1 sales than expected, so that's one reason. The other reason is also, as Lars mentioned earlier, we are also preparing for transferring our machine lines, both in Denmark but also in France. We are also building up inventories in order to do that. We have also increased inventories to launch the new products.
Sure.
Those are the three main reasons for the higher inventories.
That's helpful, and I think exactly what I meant, exactly. If we were to take some of the other earlier answers, looking at sort of the move in working capital year to date, can you sort of, in terms of our modeling, can you give us some guidance in terms of where you think working capital can be for year-end relative to revenue, or indeed, say, by the end of next year when you have completed the transfer?
In general, we are not guiding specifically on our working capital.
Sure.
I expect that our inventories will be on a lower level at the end of the year if our sales are picking up as we are guiding. That is my overall expectation. The same thing goes for our receivables. We have had a higher growth in the first half within emerging markets, where we have higher payment terms, and therefore, we have a negative mix effect on our DSO. Then we expect that, yeah, our DSO levels will be reduced in the remaining part of the year.
Okay. Thank you.
The next question comes from the line of Oliver Metzger from Commerzbank. Your line is open.
Yeah, hi. Thanks a lot for taking my questions. My first one is on your sales guidance in Danish crowns, which you basically have increased for the second time. Your EBIT margin guidance is still stable. Yeah, basically, it's all your question, you will have some incremental funds generated from the EBIT payment. The question is: Do you plan to invest these funds more into sales enhancing strategies? Also the background that you reiterated your guidance on these investments of DKK 150 million-DKK 200 million, can you give us more indication, where do you plan to spend this additional money? My second question is more general on the production capabilities.
As you have completed the site expansion in Nyborg right now, if you continue to grow with rates of 8% organically, when do you think when you have to expand again, your facilities, just because we are running out of capacities? Finally, one question on Coloplast Charter. Compared to the situation 3 months ago at the last reporting, would you describe the status quo as in line below or ahead of your expectations?
You can start, Anders.
Yes. In terms of our EBIT guidance, as we have mentioned, our EBIT guidance is around 34%. In our EBIT guidance, we have guided that we are continuing our investment program that we initiated three years ago. We expect still to invest in the level of DKK 150 million-DKK 200 million in additional sales activities, that is primarily going to be in China, in the U.K., in the U.S. We will continue the programs. In order to deliver our EBIT guidance, we have, after the disappointing Q1, been out and identifying some savings in other parts of the organization.
... so that's how we have been working, in order to deliver the EPIC guidance so far. Lars.
It's, your question is when we are going to come with a new one. That's a good question because, you know, now the if we're growing in the range of 7%-10% per year, then of course, that is going to be a volume driven growth. The volumes are a bit higher than the value that we see because we have the price pressure. Therefore, I would expect that, you know, every 2-3 years, we will have to consider expanding our capacity in some shape or form. Because it's actually quite a bit that we are adding to the sales every year.
That's, that's what I, what we would expect. On Coloplast Charter, as we said, it's much better than it was. We think that our service levels are back to normal. There are still a number of things that we need to implement, but there are also many things that we have improved a lot on. To give you one example, a recent example, then we have just launched a new webpage for Coloplast Charter, where you, as a patient with Coloplast Charter, can go online, and you can see the status of your, of your order. You can see whether the doctor has sent a prescription. You can see where the order or where the package is once it's shipped.
In that sense, you actually now have more visibility with us than with any other company in the market. There are a number of things that are progressing, but we are still not satisfied with where we are. We think that we need the rest of the year in order to have everything cleaned up and be where it should be. We are still not with the performance in the UK that we are satisfied with.
Just to follow up, but would you describe status quo as already in line, above or below your estimates three months ago?
It's following the plan that we laid out when we saw the problems in the UK If you ask me, you know, am I, have we at a level where we are satisfied with the performance that we have, then I'll say, "Not yet." It's, we need to have the best service in the business, and we are not there yet.
Yeah. Okay, I will leave it. Thank you.
Your next question comes from the line of Scott Bardo from Berenberg. Your line is open.
Yeah, thanks very much for taking my questions. Yeah, just firstly, on the Wound & Skin Care business, obviously some great growth coming through from that business. But I just wanted to explore a little bit further how you see that sort of sustainably trending. I know historically, one of the reasons for moving into Negative Pressure Wound Therapy was to enable you to get in some bigger tender contracts. Obviously, that's taken a bit of a setback today. Do you think that that will impact your Wound & Skin Care growth in the future? Perhaps some comments around that, and potentially what you see as the financial impact from the termination of the Devon Medical agreement. Just question one, please. Secondly, a financial housekeeping question.
You mentioned, you're investing some DKK 150 million-DKK 200 million in sales enhancing initiatives. Do those investments also include some of the mandatory post-surveillance studies that you're having to conduct, as well as some of the compliance and legal costs that you're implementing across the organization? Or are those costs over and above those DKK 150 million-DKK 200 million? If so, could you please quantify? They're the first two, please. I have one follow-up.
Okay. On the wound care side, what is sustainability in your book? Are we talking months or years?
Maybe the next few years.
I don't know, I don't know how much I'm promising if I say that we, I think that we have a solid foundation for our growth in Wound Care. You know, we are guiding for the total company for one year at a time. I would be very, you know... I wouldn't like very much to give you a long-term guidance on Wound Care. We are building a very solid platform. I can give you the components as I see them. We are out of the financial crisis, Europe, apart from Greece, of course.
That means that we are no longer seeing, you know, negative growth in Europe, which we had for a very long time during the recession, from 2008 and onwards. There we have a very different picture. Over the last few years, we have built a very solid base, which we keep investing in China, and in Brazil, and we get a lot of benefit out of that, but we also invest to have it. In that sense, we believe that that is sustainable, and we have, especially in China, very, very important market position, I would say.
So that gives me the belief that we are building a machine which is a growth machine. You are absolutely right that if we also were holding the Negative Pressure portfolio, we would have access to more tenders. There are a lot of tenders inside of home care. That's, that's the whole idea why we wanted to get into Negative Pressure. I'm very sorry that we are not in a situation where we could make this cooperation work, but patient safety have to come first. On the, on the Devon legal side, well, it's very hard for me to say.
I'm very disappointed that the moment we point to patient safety issues and things, you know, which are not big things, but things that definitely need to be fixed, that they're backing out. Patient safety come first. Maybe you would like to answer the other question on?
In terms of the financial consequences of the termination, it's still too early to say. We know when the whole dispute will be settled, what kind of financial consequences it will have for us. In connection with the other question around the Section 522 studies, the cost for those studies are included in the DKK 150 million to DKK 200 million, but not the legal costs and the other things you mentioned.
Thank you. Sorry, is it possible just to give us a feeling or flavor for how much of this investment that you make? Are these mandatory studies, is it a smaller or a significant part of that, or?
In the first half, it's in the level of $1 million.
Okay. It's relatively small. Okay, great. Just the last follow-up, please. Just a discussion on seeing a little bit of softness in urology that you mentioned for the first time in quite a long time, and coinciding around the time that AMS has been acquired by Boston. I think you also reflected in your release today, that your German SIEWA home care operations have seen some slowing in ostomy, arguably at the time that private equity have acquired another competing home care company. Can you perhaps talk a little bit around whether you see some sort of indirect competitive impacts here, or whether you think it's just company or product specific? Thanks.
Yeah. Oh, I would love to have that clarity myself, to be quite honest. We are digging deeper into it to understand the dynamics in the UK or in the U.S., and it's, well, so in that sense, what we have done is that we have reached out to our larger customers to understand the number of surgeries that they are performing overall, and comparing that to last year. There is a good correlation between the drop in number of surgeries that they have done, compared to what they did in the same period last year.
We still need to understand why that is, because it doesn't really make a lot of sense to me that's the case, that's what the numbers say. That's where we are. Unfortunately, I can't fill you in further on this.
Thank you. If I can be cheeky, maybe just one last question that's popped up in my mind. Depreciation amortization has started to trend up. I think it sort of reached a relative low of around 3% or so in fiscal 2014, compared to the maybe 6% ratio that we saw in 2008, 2009. Can you give us a flavor for where you see that ratio trending up, given your capital investments, and whether that's enough to trigger you revising your guidance more towards EBITDA rather than EBIT? Thank you.
You're correct that the depreciations are increasing, as our CapEx level have been increasing over the last couple of years, as we have invested into more capacity for new products and also capacity for existing products, and also our investments into the new factory in Hungary. We will continue to see an increase in our depreciation also going forward. We are guiding our profitability in EBIT terms, and I don't expect to change that over time.
Okay. Thanks, guys.
There are no further questions at this time. Speaker, please continue.
Okay. I'd like to say thank you very much for participating. We expect to see many of you in London on Thursday for our 2015 capital market event. Until then.
That does conclude the conference for today. Thank you for participating. You may now disconnect.