Good afternoon, and welcome to our Q1 2014-2015 conference call. I'm Lars Rasmussen, CEO of Coloplast. As usual, I'm joined by our CFO, Anders Lønning-Skovgaard, and our Investor Relations team. Anders and I will begin with a short presentation. Then we'll open up for questions. Please turn to slide number three. Q1 2014-2015 was a disappointing quarter. Despite very good performance in many parts of our company, we find it appropriate to adjust our expectations downward on our top line. We delivered 6% organic growth, which was less than we expected in the beginning of the fiscal year. Let me jump straight to the underlying reasons behind the revised guidance. Entering the fiscal year, we expected our Q1 growth rate around 2 percentage points lower than the full- year guidance due to strong comparison numbers in Q1 last year.
This was also flagged during the last conference call, but our U.K. home care company, Charter Healthcare, brought an unpleasant surprise, as the company's prescription handling processes had been inadequate, resulting in depressed sales. We also experienced a much larger drop in tender values in Russia than we expected earlier. For 2014-2015, we now expect an organic revenue growth of 8%-9%, but we still expect an EBIT margin of around 34% in fixed currencies. Please turn to slide number 4. Revenues were up by 6% organically and 8% in DKK, and amounted to around DKK 3.3 billion. In Ostomy Care, organic growth was 5%, and growth in DKK was 6%.
We saw satisfactory growth in many countries like Germany, China and Argentina, which was offset by negative growth rates in U.S., Russia, Brazil, and the U.K. Our SenSura portfolio grow growth with solid performance, especially in Germany, France, and Italy. Our Assura portfolio had growth driven by China, Argentina, and Spain. Growth in our bra and accessories range, especially in Europe and the U.S., was challenged by high comparables last year and a lower campaign activity in the U.S. during the quarter. SenSura Mio was launched in Sweden and Poland in Q1, making a grand total of 14 markets so far. In Continence Care, organic growth was 8%, and growth in DKK was 10%. The SpeediCath ready-to-use in Sweden catheters continue to drive growth, and especially the compact versions perform well.
During Q1, we delivered our first large tender win in Saudi Arabia, which contributed nicely to growth. Looking at the negative contributors in the quarter, especially the economic situation in Russia, has significantly lower tender values. The challenges in Charter Healthcare and a generally high Q1 last year in the U.K. affected performance negatively. Performance in our Conveen connecting device portfolio was negatively impacted by low sales in the Netherlands, Russia, and U.K. Finally, the Peristeen sales growth remains satisfactory, especially in France, Germany, and Italy. SpeediCath Compact Eve has now been launched in 10 markets, and feedback remains very positive. In Urology Care, organic growth was 8%, and growth in Danish kroner was 11%. Sales of the Titan range of inflatable penile implant devices continued to drive a strong performance.
We saw low growth within female pelvic health in the quarter, driven by lower sales of our older Aris sling. Finally, but not least, our Endourology business continues its very satisfying performance. In Wound & Skin Care, organic growth was 4%, and growth in DKK was 7%. Organic growth for wound care in isolation was 9%. The growth was driven by our Biatain sales, in particular, Biatain Silicone, silicone in Europe. The tender in Saudi Arabia also impacted our wound care business positively. The skin care business was negatively affected by stock building by a large distributor ahead of an announced price increase last year. Finally, our contract manufacturing of Compeed contributed negatively to the quarter.
I would also like to mention that we have launched Biatain Silicone in 12 countries so far, and we are very happy with this. Turning to our geographical segments, we saw organic growth of 4% for Q1 2014-2015 in our European markets. The growth was very satisfactory in France, Germany, and the Southern European region, whereas the Netherlands and the U.K. contributed negatively to the growth rate. As we have mentioned before, we see high performance, or we see high market volatility in the Netherlands due to reform pressure. The performance in the U.K., I have already talked about. Finally, our contract manufacturing business of Compeed impacted growth negatively in the quarter. Organic revenue growth in other developed markets was 1% in Q1. Distributor buying patterns within one of our largest U.S. customers impacted growth dramatically in the quarter.
This impacted both the U.S. Ostomy Care and Continence Care businesses. We expect full recovery from this in Q2. The growth was also slightly hampered by high comparison numbers within our Japanese business, where a price reform last year led to a stock building at distributor level in Japan in Q1 2013-2014. We have recently signed an agreement to divest our Japanese home care activities. The Japanese home care company was largely just a box mover, and we could see better business opportunities in being an independent manufacturer in the Japanese market. We are now able to focus on our core business, and with no general conflicts, we can better utilize our direct-to-consumer capabilities. Finally, our revenue in emerging markets grew organically by 23% in Q1 2014-2015.
The growth was especially impacted by Saudi Arabia, China, and Argentina, which all grew satisfactorily, whereas both Russia and Brazil had a tough quarter. Both markets were impacted by political situations, which led to changes in sales activities. Within the smaller markets, Turkey, South Korea, and Mexico saw a quite good growth rates. I will now hand over to Anders, and 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 8% to DKK 2.3 billion. This equals a gross margin of 69%, and improvement of 1 percentage point compared with last year. The improvement continued to be driven by higher production efficiency and product mix of existing products. We saw an expected negative impact from the launch of new products, where the production economy is not yet fully optimized and costs associated with the expansion of our Nyírbátor facility. The distribution to sales ratio came in at 29%, 1 percentage point higher than last year. The quarter is impacted by incremental sales investments in China, emerging markets, and the U.K. of around DKK 50 million. We continue our sales investment program according to plan.
The admin to sales ratio came in at 4% of sales, on par with last year. This continues to be driven by improved scale effects from top line growth and generally improved efficiency, mainly through our business center in Poland. The R&D to sales ratio came in at 3% of sales, on par with last year's average. We have staffed up in our R&D department, and we are running at a high activity level, which is also reflected in the higher spend in the quarter compared with the same period last year. All in all, this results in an EBIT margin of 33%, in line with the same period last year. Just a few comments on the mesh litigation. We still expect around 7,000 claims, and we still expect that the current provision of DKK 1.5 billion provides sufficient coverage for this.
Operating cash flow amounted to DKK 646 million, which was in line with last year. The cash flow was impacted by on-account taxes paid earlier, which lowered this quarter's payment. In Q1, we received the remaining DKK 150 million from insurance companies in connection with the mesh litigation. The insurance has now been paid in full to Coloplast. We also continued to deposit on escrows used for settlements in all the cases where we have reached an agreement in principle. Cash flow from investing activities was impacted by movements in connection with short-term positioning of our liquidity. Finally, our CapEx increased to DKK 147 million, up 34% compared with last year, due to increased investments in capacity for recently launched products and due to site expansion in Nyírbátor in Hungary. Please turn to slide 6.
For 2014-2015, we expect revenues to grow between 8% and 9% organically, and 12%-13% in DKK. In guiding for 9% growth in 2014-2015, we had anticipated a Q1 of around 7%, impacted by a strong comparison base in Q1 last year. As Lars already explained, we saw a growth contraction in Q1 equivalent to around 1 percentage point lower than anticipated. At this point, we are already deeply involved in solving the issues in the U.K., but the precise timing of this has led us to revise our growth expectations to 8%-9%. In Russia, we have seen a drop of up to 50% in tender values in Q1. This was bigger than anticipated last year.
We should mention that we continue to expect negative price pressure of around 1 percentage point on our top line. This is reflected in our guidance. It is especially driven by Holland, where prices on ostomy products are coming down. For 14-15, we still expect an EBIT margin of around 34% in both fixed currencies and Danish kroner. The main contributors to this guidance are a 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. We currently expect our net financials to end the fiscal year at -DKK 275 million, impacted primarily by cash flow hedge losses on especially British pounds and the US dollar.
The guidance continues to include investments in sales-enhancing initiatives, which is expected to be in the range of DKK 150 million-DKK 200 million. 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 planned expansion of our Nyírbátor site.
... We expect to open this site in April 2015. 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.
Certainly. Thank you. If you would like to ask a question, please press star and one on your telephone keypad. That's star and one to ask a question. Your first question comes from the line of Alex Kleban of Barclays. Your line is now open.
Yeah, hi. Thanks for taking the question. I guess I'll ask them one at a time, if that's okay. First one is just maybe you could go in a bit more depth on Charter and just explain to us, you know, how much of this is really a process issue, and how much is a risk of maybe some market share that's been lost that might not be able to be recovered?
First of all, the UK business is a quite large business for us. It's a couple of DKK billion all in all. The UK business is actually in a sense 2 parallel businesses. We have a business which is the one that we have in all of our subsidiaries, where we sell our products directly to distributors and also pharmacies. We have a direct-to-patient business which is quite sizable, and that is the business where we are selling both our own products but also our competitors' products directly to the end users.
As more and more prescriptions are being changed from paper prescriptions to digital prescriptions, we faced some process issues in the way that we are handling these prescriptions, because we need to have the prescriptions on board before we can send the products directly to the end users. That leads to longer lead times to deliver products. That means that those customers who have not been satisfied with that, they have changed to other pharmacies or to other independent DACs, as they're called, or distribution companies, where they then buy our products through them instead. You can go and buy your products in many different places.
What happens when that is going on, is that we are actually losing the dispensing fee that we get in connection to an order which we are handling. That is why we feel it directly. In a sense, this is very different from the rest of our businesses, because here it's more like a normal consumer business, that if you have too long lead times, people can buy your product in a different place, which is what happened here. This business is still growing. What we feel immediately is the impact from the loss of the fees, because somebody else is handling the order.
Because it's hard for us to gauge exactly when the customers are coming back and using our service, that's actually the background why we are adjusting our top line growth this year. Because this is a situation which we had no experience with before, and we didn't know it when we entered the year. To be cautious, we simply said, we take it down from 9% growth to 8% or 9% top line growth. That's the prime reason.
Okay, maybe a quick follow-up on that, you have been investing, I think, pretty heavily in the U.K., if I'm not mistaken. Is that a market where you've had maybe more reps going in than what you would have had in other markets in Europe over the past year? How does that help to offset some of this?
Yeah. We have taken, we have invested in the U.K. to visit more nurses, and that is to sell our new products. That pressure, of course, continues because it's in a sense, a completely different situation than what we're talking about here. This is all about us being able to handle direct patient contacts, both for our own and competitive products. It's not about the assignment to get more new patient discharge in the U.K. We have launched a new view in the U.K. as Spain, we have also more salespeople, or i.e., a bigger share of voice in the U.K., at this point in time compared to last year.
Do you have anything in numbers for that share of voice giving you a return this year?
Say that again, please?
In terms of in your budget or in the guidance, do you have kind of an expectation of that additional share of voice you mentioned? Is that expected to yield a return or yield some additional growth that's in numbers or not? Is it not in guidance?
What is in our guidance is that we expect the U.K to grow less for the full- year than what we had in our original guidance. The reason for that is that as I think it's, you can sort of derive from what I talked about in the beginning, the revenue that we have lost in the first quarter due to the loss of the fees, it's gone. It doesn't come back. We can't recover that later on. That's the reason for that. Everything that we do know, both about this situation and Russia and so on, is included in the guidance.
Okay. That's fair enough. Thanks. Sorry, sorry if I did too many follow-ups there. Just then a quick one on gross margin, then I'll go back in the queue. On oil price drop, in the past, you'd said there was something like a $10, there's a per $10 drop, there was a DKK 10 million uplift on EBIT. I think that was a few years ago. Just wondering what that means now. Also, you talked about some impact from the new launches and, some maybe what looks like one-off costs in Hungary on the gross margin this quarter. Just wondering if you could quantify all those things together.
... maybe, Anders, you would like to give a few words on that?
In our EBIT guidance, we have reflected a small upside on the oil price. In terms of the new product launches that we see this year, as we have said also last year, that we have higher unit costs for some of the new products, the new Mio and the Biatain Silicone, and that is also impacting our gross margin. It is reflecting in our EBIT guidance.
We are starting to move out manufacturing of the new Mio products this spring to Hungary. It's as we planned.
Do we get to see some benefit then from, you know, from April, from the new launch in Hungary in terms of, like the H2 gross margin sequentially improving then?
It's definitely in the guidance that we give.
Okay, very good. Thanks. I'll get back into you. Thank you again.
Sure.
Thank you. Your next question comes from the line of Ian Douglas-Pennant of UBS. Your line is now open.
Thanks very much. It's Ian Douglas-Pennant at UBS. Just a quick one on your US Ostomy business. You talk about the impact of stocking there. I just wanna work out, is it all stocking the disappointment, or are you seeing some fallout from Convatec's more aggressive pricing strategy, and they claim to be gaining market share there? Also, maybe you could just explain the dynamics of the skincare stocking patterns. I'm not sure I see the link between a price shift Q1 14 and your impact on this year's numbers. Thanks.
Yes. In the U.S. part of the rebate that we grant the distributors is because they are then obliged to tell us their sell-off data. We know quite well what our sales in the market is. That is actually as we expected. That means that what we are looking at when we have very low growth in the first quarter for both Ostomy Care and Continence Care is an adjustment of stocks. That is, you know, that is something that we actually that market does have facts on. That's also why we are quite firm that we expect to recover for the remaining part of the year.
I don't know if that answers your question, but that's basically what we have. We have facts on the table for this specific one. For the Skincare business, it is a pretty small business, and it is very, actually very volatile in the sense that it depends what was bought in the quarter that we compare it against. We had a higher base in Q1 last year, and that was driven by, followed by Cardinal Health, because we ran some price increases that were effective off the first of January 2014. That's basically it.
I'm actually happy to say that our Skincare business, once you look into the numbers, is actually doing really well. We also expect the Skincare business to catch up big time this year.
Okay, great. It's just a comp effect. It's just that simple, and Q2, we should be back to normal. Okay. That's very helpful on both counts. Thank you very much.
Sure.
Thank you. Your next question comes from the line of Michael Jüngling of Morgan Stanley. Your line is now open.
Great, thank you for taking my questions. I have three. Firstly, in your full-year organic sales growth guidance, what growth are you expecting for other developed markets for the full- year? Secondly, on the emerging markets, you talk about a drop in tender volume in Russia and Brazil, but if you look at your growth rates, comp adjusted, it is a blowout. It's the strongest momentum number that we've seen for at least four years, and hence, I find your comments strange that it's still so strong, yet some of the end markets you talked about are very weak. Thirdly, were selling days different in the first quarter compared to the comparative period last year?
I didn't get that.
Pardon me?
Your last question, what was that?
The last question was, are the selling days, the number of selling days, the same in Q1 as they were last year?
Okay. I don't, I don't think that we have ever, sort of, drilled down to a level where we start to tell you our guidance for either quarter or full- year for the different regions that we are in. I'd like not to do that again. I think that you appreciate that. Very few of our competitors are public with their numbers. I think that we already sell an awful lot. I can't really say that. I basically understand your comment about the emerging markets. It's correct that we actually have...
I think that what you're saying is that we have strong numbers, despite the fact that we are talking about weak performance in both Russia and in Brazil. But the fact is that what we've been saying or informing you about over the last few years is that we since we started to invest in 2012, we have been investing in further growth in emerging markets and in a number of regions. And that's also why we are able to absorb in the first quarter, the fact that both Brazil and Russia are weak.
Brazil and Russia are quite meaningful to the overall performance longer term, and Brazil is recovering, and that will be, you know, they will come home on their numbers. Russia is doing worse than what we actually anticipated when we entered the year. Since it is China, Russia, and Brazil that are the biggest parts of our emerging markets, we find it quite appropriate to talk about that. Regarding the sales base, we have same number of sales base as same quarter last year.
Great. sorry, a follow-up on other developed markets. Because you don't give a precise guidance, is it fair to say that you will expect an acceleration in organic growth in the remainder of the year compared to the first quarter? That seems to be like a reasonable assumption.
Yes, that's for sure, because we have 1% growth in the first quarter, so we came to leave our guidance with 1% growth in the remaining quarters. We expect that to pick up significantly, of course.
Okay. On a financial, I think I didn't quite hear clearly, did you say net financial is DKK -230 for the full- year?
No, I said, we expect it to be DKK -275 .
Great. Sorry, I missed that. Thank you.
Thank you. Your next question comes to the line of Martin Parkhøi of Danske Bank. Your line.
Hello, it's Martin Parkhøi, actually, from the, from Danske Bank. Just a quick question, firstly, on emerging markets. Could you actually give us the growth in emerging markets if we exclude, Russia and Brazil? Also on that, Brazil, how can it be that you are so certain that the growth will pick up in Brazil? It's, because I guess that the economic situation in Brazil is not, is still, not particularly good.
A second question is that on a quarterly basis, with the rebound from the changed buying pattern, that we will see a rebound in the second quarter from U.S., should we expect to see a particular strong second quarter, also stronger than the third and the fourth quarter should be? The final question, going back to Charter Healthcare, where you see some lost sales, could you give some kind of explanation, some indication on the probability of Charter? I guess that maybe is lower than the Coloplast level due to its you're also distributing competitor products. That was all.
In a sense, Martin, there's no limit to what we could give you. We are a bit. I know that you think that we tell you too little about what we have as country performance. As I said before, we also think that we are very open, and we do know that our competitors are being filled quite well in with what happens to us, and we don't get the same kind of information backwards. In that sense, we hold back a little bit. When it comes to Brazil, how can we be so certain?
What we know about the first quarter in Brazil is that due to the election, there are a number of states in Brazil that are changing some of people in the government, and therefore, they are not able to issue tenders, and they are not able to even pay bills. We know that have impacted us. We can see that things are getting in order. We also see that the order stream is coming back. That is what we base it on. According to our knowledge, this is normal procedure in Brazil, and that's basically what we are basing this on.
We do know the number of customers, we do know that people have the urge to use products. There will be some kind of sales, and if there's less money in the system over time, I don't know if that would be the case for healthcare spendings in Brazil, then they switch to other products, but they won't stop using products. We expect a rebound in the U.S., and U.S. has a very poor growth in the first quarter, and therefore, we expect the remaining quarters to be higher. I'm not going to guide you on how high for quarter two, three, and four.
Of course, we expect a completely different performance in the coming quarters than what we saw in the first one. We actually see orders coming in as we speak. Regarding Charter Healthcare, Martin, I'm not sure what is it that you're after?
Oh, just after, you know, the probability on the sales in Charter Healthcare. It's, of course, a big part of your U.K. business, but I was just wondering, the lost sales, how much that impact actually has on profitability. Is this
Ah.
Is profitability in your Charter Healthcare is probably lower than the group level?
It's of course, the distribution business does have.
Yes, exactly.
... lower margins than the rest of the business. The thing is that you get a dispensing fee, and that's basically to cover the cost of selling the product. In a sense, when we are losing that, you know, a patient to a competing distribution company, we lose the dispensing fee, but we don't have the cost to send the products either. In that sense, it's more top line thing than it is a bottom line.
Okay, thank you very much.
Your next question comes from the line of Veronika Dubajova of Goldman Sachs. Your line is now open.
Yes, good afternoon, gentlemen. Thank you for taking my questions. I have three, please. The first one is, can you give us a sense, I mean, I appreciate you don't want to disclose everything, but, if I look at your DM growth last year, it was in high single digits, low double digits throughout the year, pretty consistently. I just want to understand, if I stripped out the impact of the stocking and de-stocking at your distributor, or whether the growth rate would have been comparable to that. Just some commentary around that would be helpful.
You're talking about emerging markets here?
no, I'm talking about the U.S.
U.S.? Okay.
The U.S. Just thinking, I know you don't give us a U.S. growth rate consistently either. If you can just comment on the trend in the U.S., that would be helpful. The second question is just on the U.K. I'm a little surprised, and if I may say, disappointed, because obviously you've known about the changes to prescribing methods for a while. I'm just trying to understand what's gone wrong in the business, and what gives you the confidence that you can address this in the timeframe that you've communicated to us? Are there any management changes that might come about as a result of this?
My last question is just thinking about, the overall sort of M&A environment, and if you have any updates or changes in your thoughts with regards to potential wound acquisition. I'll leave it at that.
The U.S. trends, I think, the best way we can try to describe it is that we got well into the double digits growth a couple of years back. That is also what we expect to keep it at for this full- year. Therefore, our sales in the market is unaffected by the first quarter result, and actually, we expect a very satisfactory growth for the U.S. also this year.
That's very clear. Thank you.
U.K., you know, we are actually also disappointed about the situation that we have in the U.K., and it is unexpected to us that we have a guidance change and that we have this conversation right now. Otherwise, of course, we'd also have flagged that up front. It is new to us. Basically it is a process robustness issue that we have in the U.K., which, you know, the moment that you experience that the process is not strong enough, we get longer lead times. When you get longer lead times, the call frequency on your call center just goes up by factors.
You just have to solve that situation. We make sure that we have strong processes going forward. We have a completely different team on it, or we have a team of people which is much bigger than we have ever had to fix the problem now. I'm sure that we can fix it. We know what the problem is. We have a team that we are very confident in. That is basically what is on our mind right now, fix it and make sure that we can come back to the customers that we have and assure them that they can make the best service with us again.
On the M&A side, I can't add anything to that, unless you know that something has happened since last time that you can inform us about.
No, unfortunately not. I just wanted to make sure that your priorities were still the same as they have been for a while on the M&A front.
Yeah, absolutely.
That's all, but it sounds like no change.
Yes.
Lovely. Thank you very much. I'll go back into the queue.
Thank you. Your next question comes from the line of Ed Ridley-Day of Bank of America. Your line is.
Hi. Thank you. Firstly, yes, just to follow up on the U.S., could you just give us a little bit more color, if you could, just about the change in distributor and why you wanted to make that change? That'd be my first question.
I have not been clear, because we haven't changed any distributors. What we are saying is that we see less buying from a big distributor in the U.S. than what we had anticipated. When we look into the sales out data from this distributor, we can see that the sales out is unaffected, and that actually means that it's because that distributor is reducing stock. That's basically it.
Oh-
That comes from a pushback from last year, where there was some consolidation in the distributor, in with the distributors, so they simply take stock out now.
Thank you for the clarification. Just a quick follow-up, to Veronika's question.
... As she said, you have put a new team in place, but have you basically made the management changes necessary? Okay. Another clarification. Thank you for asking these questions, because we have not put a new team in place in the U.K. What we have put in place in the U.K. is a project team who is fixing this process. We haven't changed the management team in the U.K. We have strengthened the management team with a project team who are solving these process issues that we are having.
Great, thank you very much for the clarifications.
I think it's, you know, you need to...
Maybe I should just put a few more words on it then, because when you're running a big operation like this one, which is a direct to patients set up, is a quite big setup with a very large call center to it. Once you do that, you really need, of course, to be very sharp on the processes that you're using and also the IT systems that are backing these up. In this instance, it is the process which is not strong enough. Of course, it doesn't help to automate something which is not strong.
Here we have process experts working to make sure that everything works well, and then we put it in a sense, on IT, and we have then fixed the flaws that are in there now.
Great, thank you.
Thank you. Your next question comes from the line of Martin Brunninger of Jefferies. Your line is now open.
Well, thanks for taking my question. I actually have just one question, on the U.S. Could you confirm that you have lost market share to competition, recently, which kind of underpinned with your, with your numbers that you've published today? Given the market shares are relatively sticky, can you elaborate a little bit on the strategy to win this market share back and, win more going forward? Thank you.
I think that I can't even understand the basis for your question. We grow significantly above the market in the U.S. in our business areas. We have won market shares, and we also won market shares in this quarter. Only thing that have happened is that distributors have reduced their stocks. The sell-out that we see to market is double-digit growth, and thereby at least three times above the market growth in the U.S. I can't confirm that we have lost market shares in the U.S. On the contrary, we are winning market shares.
Okay. Thank you.
Thank you. Your next question comes from the line of Oliver Metzger of Commerzbank. Your line is now open.
Yeah, hi, it's Oliver from Commerzbank. Just, two questions, please. The first on the guidance, on your guidance. You've increased the sales guidance and Danish crowns due to the higher FX tailwind. If I look on your cost base, especially the Hungarian forint, seems to be now on a comparatively stable level compared to last year. Nevertheless, you don't expect an effect on the margin. Would you describe now your margin guidance as increasingly conservative compared to the guidance given three months ago? My second question is related to the price pressure, which you mentioned, you expect close to 1%, which is also a long-term guidance you have on the price pressure.
After having a little bit more color in this, to this current fiscal year and also to the, to the Dutch market, would you describe this price pressure guidance as probably more favorable or more closer to your assumed rate of - 1%?
If I should take the EBIT guidance first, we have guided an EBIT margin in the level of 34%, and we believe that we will continue to see a positive impact from our gross margin overall, even though we will have higher costs on our new launches. In addition to that, we are also believing that we will see impact from scale, especially within our administration area. On top of that, we are continuing to invest in the level of DKK 150 million - DKK 200 million, and that will have a negative impact. Overall, we are believing to deliver an EBIT guidance of 34%.
Is it fair to assume that some potential windfall profits from foreign exchange movements will be invested? Is this a fair assumption?
We are guiding our EBIT in fixed and in Danish kroner to be in the level of 34%, and that is what we are aiming for.
Okay.
We are very careful not to mix up the two different guidances. Of course, if you look at what we're going to deliver in Danish kroner, the nominal EBIT will be much higher than what we believed before, due to what happened to the currencies. We have to make sure that we're talking the same language here.
Sure.
In terms of your second question around the price pressure, we see still the price pressure to be in the level of 50 - 100 basis points, and it is primarily Holland where we have a price pressure, and it's especially within Ostomy Care.
That is something we have seen in the Q1, and we will continue to see that throughout the year.
Thank you. Your next question comes to the line of Yi-Wen Wang of Deutsche Bank. Your line is now open.
Hey, thank you very much. I have three questions. The first question on Charter Healthcare, can you give us a sense of how far your project team has gone in resolving the problems? When do you have in your plans for them to complete their projects, and what are the chances that they don't complete on time? The second question is on the Netherlands. Can you also talk about the dynamics that's happening in that market? When do we actually see the, well, yeah, just some dynamics in the market as to how far we've got with this reimbursement change. The third question regarding the financials, if rates continue at current levels, how should we phase that DKK 275 million of costs that you've indicated?
Thank you.
I can start out with the Charter. I think that we are getting, we're getting closer to very close actually, to a normal situation in the U.K. It takes some time to make sure that the processes, we know that they're completely stable. It also takes some time to make sure that they are integrated as they should be in the IT systems. We have the team there for as long as it takes to do that. What we have said, we're cautious. We say we fix this in 2015, we have absolutely no reason to believe that we do not.
As I said earlier on, some patients now are buying their products, our products from another home care company on DAC in the UK. We don't know how fast people come back and if everybody comes back, and that's actually the primary reason why we are being cautious on the top line guidance for the year. So that's what I can say about that. In Holland, it's not a price, it's not a healthcare reform in Holland, it's the healthcare insurance companies that are simply putting pressure on the ostomy prices. They do that, they do that in a conserrted efforts, and we feel that in the market.
That means that even though we see a, you know, the pressure on the prices, we still continue to take market shares in ostomy. The ostomy patients have a bit lower value than they had before. Still, as Anders said, we expect that we can keep the price pressure this year also within approximately 1% that we are guided. It is included in the EBIT guidance that we're giving for this year.
Okay, the part... I was gonna clarify that.
That's fine. Yeah.
Okay. I was just gonna ask that. This price pressure the insurance company is putting on ostomy products, is it a one step down, or, I mean, have you seen that effect peak already? If not, when could we see that? Could it fall into next year?
We have seen the effect in the first quarter.
Oh, right. Okay. We've seen the peak in the Q1. Okay.
Would you take the financial question, Anders?
In terms of the financial items, it's difficult to say, but it's in the level of 30%-40% in the remaining quarters.
Okay. Let me see. 275 minus consensus, which is, okay, so DKK 30 million, DKK 40 million, or sorry,
No, no. Q1, we had a minus of DKK 28 million, and then we have, the rest is in the level of DKK 250. It's difficult to evaluate, but it's in the level of one third per quarter in the remaining, 3 quarters.
Okay. Okay, great. Thank you.
Thank you. Your next question comes from the line of Scott Bardo of Berenberg. Your line is now open.
Yeah, thanks very much for taking my questions. I have a few, please. Firstly, sorry to come back to the U.K. I'm more interested in why this process of digitalization is happening rather than Coloplast sort of ability to get that process in order. Just if you could share some thoughts, I mean, is this an indication that volumes are being more closely monitored, or indeed there could be some change to the overall dispensing fee? Just some thoughts along that would be helpful. Also,
Let's take that first. Let's take them one by one.
Thanks.
The reason why this is happening is I think just a matter of getting a better handle on what is going on. You know, formerly, in the good old days, we could get a call from a patient who said that they had a prescription now, and could we please send the products to them.
Mm-hmm.
ants to have ostomy products or catheters unless they have the needs. there was very little risk on this, and we just get the prescription later on. as you know, U.K., like everybody else in the world, are tightening up on this, and they would like to make sure that we have the prescription with us before we send anything to patients. That process, if you're not digitalizing it, actually becomes very cumbersome, and it becomes too, it takes too long time. I think it's just a matter of making sure that you are that you're keeping a proper flow of your documentation and your payments in the system.
Understood. That won't affect your inventory at all, or?
No, I don't think so.
Okay, thank you. Second question, also in the U.K., or you can extend it to the broader market if you like. Have you seen any change in the dynamic for the accessory lines? You've done phenomenally well with accessories in the U.K. Now that the U.K. has slowed a bit, I wonder if that's a disproportionate impact to any particular product line?
I, we have seen a slowdown on the accessory line. It's primarily in the U.S., but also in the U.K. In the U.K., we don't, for the time being, we don't have the resources to run campaigns on this because we are fully occupied using the channel for just the Vax and Plix and switching. For the U.S., there have been lower campaign activity. To a certain extent, it is, we are not a fully- fledged direct-to-consumer company still. What we see is that we are using the capacity in our direct-to-consumer setup to launch SenSura Mio products. We can run campaigns at the same point in time.
We're not that elaborate yet.
Thanks, Lars. Actually, that leads me on to my final question, actually. You're investing very heavily for feet on the ground and also to push your consumer strategy. It seems strange to me that your campaigning has slowed down actually, and for those lines. I just wonder, I would have thought the complete opposite would have been the case, and I just wonder if you can help me, I know you mentioned about stocking patterns, but to understand why campaigning has slowed down, and that's not a reflection that we see in your growth today?
We do see that we have gotten a bigger market share in accessories. There's no doubt about that. What, you know, just to elaborate a little bit more on it, for example, in the U.S., when we are running a direct-to-consumer campaign on SenSura Mio, that we are launching, then we don't, at the same point in time, run accessory campaigns.
Mm-hmm.
You know, if we were a more mature company, we could definitely do that. But this is a new skill to us in a sense. We are three years into the investment. Right now, we are occupied with running campaigns on AU products, SenSura Mio.
Mm-hmm.
Then we don't have capacity to, at the same point in time, run a lot of campaigns, on accessories.
I see.
If you go one step further out, and you look at the, at the distributors with whom we very often are running campaigns, you also see there that due to the to the Department of Justice subpoena, which have hit the whole industry, everybody are a little bit cautious with what to do because they, it's not completely clear what this is about.
Mm-hmm. Yeah. Okay, thanks very much. Very last and quick financial question, if I, if I may. Again, parameters, please. Could you please give us a sensitivity for the oil price? I know there's been one a long time ago, but you know, aluminum and plastic resins are also very important for the group. Just to give us some sense of that, even though you've encapsulated that in your guidance. For hedging losses, do we just simply assume that into next year, they just drop off if you've not hedged into next year, or could they even be a benefit? Thank you.
The first question around oil prices. We're not directly impacted by a decline in the oil prices, but there is a smaller positive impact in our gross margin. As I said earlier, it is reflected in our EBITDA guidance. In terms of our financial items, we are hedging our cash flow in approximately 11 months, so we are rolling this constantly. That's the way we're doing it.
Mm-hmm.
I can add a little bit more to the oil price question, because Anders have not been having that question so many times over the years as you and I have had.
Mm-hmm.
It's, you know, during the years where the oil price was climbing up, we also gave a guidance on how much we would be affected. The fact is that because most of the products that we're using are actually very refined compared to the raw oil price, then we didn't see a big pick-up in our prices on raw materials in the years where the prices on oil went up.
Mm-hmm.
We have the same kind of lacking effect now that the prices are going down. Don't expect a, you know, a large impact from the oil price on our price margin, on our EBITDA.
Thank you. Very helpful.
Thank you. Your next question comes from the line of David Adlington of JP Morgan. Your line is now-
Thanks, guys. A couple of questions, please. Just following up on what's already been asked. Just with respect to when you gave guidance initially, obviously, things deteriorated. Must have been fairly quickly, 'cause you gave guidance at the end of October, and presumably December is quite quiet in terms of sales. Just wondered, you know, what really surprised you so quickly in that November period? And second, just with respect to hedging, you're obviously getting a benefit on the top line, which looks like somewhere between DKK 125 million and DKK 250 million. It seems like you're getting kind of pretty much all that offset by the hedging. I just wondered, you know, if anything had gone wrong with the hedging strategy at all?
I can start with the first one, what surprised us? As I explained earlier in the call, the Charter Healthcare business is very different to the rest of our businesses, because the rest of the business is stable, and if it, in a sense, quite slow moving. The Charter Healthcare business is a direct-to-patient channel. It's like, it's like, it's more like a retail shop in a sense that, for example, if you can't process payments, if you, in a retail shop, if your MasterCard machine doesn't work, your sales drops off very fast.
It's the same, it's the same kind of logic that you see here, that once you get longer lead times, everybody start calling you at the same point in time, and your sales level, sales activity drops, and therefore, people just buy your products in a different shop. That's the thing that we saw, and it came very quickly, and it's not a big flaw that we have, but it's big enough that we need to fix it, and to make sure that it doesn't happen again. That's basically it. We could see that we're missing out on the sales in that respect.
Since we can't judge how fast that comes back, we had to reflect that in our guidance, and then that's what we have done. Of course, that would not have been enough to make us change the guidance from 9% to 8%-9%. The fact that also Russia is in a bit worse shape than what we saw, that's, or what we believe, that's the second point. The thing is that when you work in whether, in emerging markets, you very often need to get to the end of quarters until you can see the full effect, because they have a tendency to sort of stack up in the end of the months and in the end of the quarters.
Great, thank you. On, and on the hedging?
In terms of the hedging, due to. We have increased our guidance in the DKK to a level of 12%-13%, so we will have a higher revenue. We will have, due to the hedging of the dollar and the sterling, have a loss on our financial items this year.
Yeah, I understand that. It just means that the increase in your hedging losses is more than the gains you're getting on your revenues, so it doesn't seem like a very effective hedge.
That's not, completely what I see.
Okay, maybe we take offline later.
Yeah, I think we'll do that. All right, the last question needs to be the next question needs to be the last question also.
Thank you. Your last question comes from the line of Niels Granholm-Leth of Carnegie. Your line is now open.
Good afternoon, a couple of housekeeping questions. First one would be on your sale of the Japanese home care business. From which date should we calculate the deconsolidation of this business, and what has been the sale price that will impact your cash flow in the coming quarter? Secondly, also on your cash flow, how much impact should we expect from payments to U.S. plaintiffs in the next few quarters? I expect that the net impact would turn negative now that you have received all your insurance payments. Thank you.
The numbers.
Yes, the last one in terms of the cash -flow, it's difficult to say, but we estimate to settle more cases throughout the year, and that will impacting our cash flow. In terms of the welcome support, we are closing end of February. It's actually 27th of February, so it is something we will update you further on in the next quarterly release.
On the sale price of Welcome?
We're not disclosing that.
Okay, thank you.
All right. Well, thank you very much, everybody, for listening in, and, we'll see a lot of you in the, in the next, weeks. Bye now.
That does conclude our conference for today. Thank you for participating. You may all disconnect.