Thank you for standing by, and welcome to the Coloplast Q1 2013-2014 conference call presentation. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Wednesday, the 29th of January, 2014, at 2:00 P.M. UK time. I would now like to hand the conference over to your speaker today, Lars Rasmussen, CEO of Coloplast. Please go ahead, sir.
Thank you very much, good afternoon, and welcome to this Q1 2013/14 conference call. I'm Lars Rasmussen, CEO of Coloplast, and I am joined by CFO Lene Skole and our investor relations team. As usual, Lene and I will start with a short presentation, and then we will open up for questions. Please turn to slide number three. We are very satisfied with our results today. We deliver stronger than expected growth in all business areas. Despite last year's low comparison base in Q1 and the usual inventory swing at distributors in Q1, we can see a solid underlying performance across the board. This means that we were able to deliver a solid 11% organic sales growth for the group in the quarter.
Our EBIT margin came in at 33%, in line with our guidance to the market, and we delivered a record return on invested capital after tax of 47%. The board has today approved a new share buyback program of DKK 1 billion over the next two years. The program will be initiated soon and demonstrates our commitment to returning cash to shareholders, as we presently see no attractive alternatives. For 2013/14, we now expect an organic revenue growth of around 8% and continue to expect an EBIT margin of around 33%. We changed our guidance on the back of a stronger than anticipated Q1, and because we expect the strong underlying performance to continue. The margin guidance remains unchanged, as we expect to increase our investments in sales and enhancing initiatives in all business areas. Please turn to slide number four.
Revenues were up by 11% organically and 7% in Danish kroner and amounted to DKK 3.1 billion. The growth rate was impacted by 2-3 percentage points from lower comparison numbers and distributor stock filling in Q1. In Ostomy Care, organic growth was 10%, and growth in Danish kroner, that was 5%. The growth was driven by continued good performance of SenSura, of our SenSura portfolio in Europe and the U.S., as well as strong and increasing uptake in the market for Brava accessories. In addition, we continue to see strong sales performance of Assura in markets like China and Brazil. All regions saw very satisfactory growth rates, and the Southern European markets report a strong sales growth as a consequence of last year's low base in Q1.
Today, Coloplast has started the pre-launch of a completely new generation of ostomy products under the existing brand name SenSura Mio. The pre-launch marks the beginning of a full portfolio update covering all ostomy types. The new portfolio has taken four years to develop, involving more than 300 Coloplast employees. The launch is supported by a number of clinical studies and end user surveys, and more than 700 end users have tested the whole or parts of the new product portfolio. The official launch will take place in April 2014, however, global pre-launch activities have commenced today. In Continence Care, organic growth was 10%, and growth in Danish kroner was 7%.
Growth was driven primarily by our SpeediCath product range, whereas both Self-Cath and EasiCath continues to experience stagnant growth due to low-cost competition in the U.S., where we ourselves fuel this development by upgrading users to the more advanced SpeediCath products. Our collecting device business had a very strong quarter, partly driven by a low comparison base in Q1 last year and partly driven by good underlying growth momentum. The strong growth in the quarter is, to a certain extent, explained by increasing inventories of our products, especially in the U.K., and better performance in markets like Germany and Greece. Our Continence Care franchise in the U.S. saw declining growth in Q1 due to a revised rebate structure towards one of our large customers, but underlying growth continues to be strong. In Urology Care, organic growth was 11%, and growth in Danish kroner was 8%.
Sales of penile implants continued to drive the strong performance, and our market share continues to increase. This was also the case within female pelvic health, where Restorelle, our lightweight mesh for pelvic floor repair, and our single-incision mini sling, Altis, maintained their strong performance despite difficult market conditions. In Wound & Skin Care, organic growth was 17%, and growth in Danish kroner was 13%. Organic growth for wound care in isolation was 15%. The growth was driven by our Biatain and Comfeel range of products. We saw very satisfying performance in markets like China, Brazil, and Greece, but many European markets also fared well in the quarter. We are, however, quite satisfied with the underlying performance in our wound care business. Many markets saw movements on a distributor level or low comparison numbers in Q1 last year, partly explaining the realized quarterly growth rates.
During the quarter, we pre-launched our negative pressure wound therapy solution in Brazil at a large wound care conference. We still have a lot of work ahead of us, but we received encouraging feedback at the conference. Our skin care and contract manufacturing business contributed with very satisfactory performance in Q1, but growth in both areas must be considered unusually high compared with the growth trends for the business. Turning to our geographical segments, we saw high organic growth of 9% for the quarter in our European markets. We saw very satisfying performance in all European markets, but especially in the UK and Germany. Especially the UK and Germany saw high growth rates due to stock movements at distributor level. Markets like Spain and Italy saw their strong performance lifted by a low comparison base in Q1 last year.
Organic revenue growth in other developed markets was 10% in Q1 and in line with growth in Q4 last year. We continued to see strong performance in our U.S. Ostomy Care business, also our Wound Care and Urology Care business in the U.S. showed very satisfactory performance. We did not see growth in our U.S. Continence Care business, which is explained by continued price pressure and on the Self-Cath portfolio, combined with a change in rebate structure towards a very large distributor. Both Canada and Japan saw very satisfactory performance, partly driven by our Japanese distributors, increasing inventory prior to an announced price increase, primarily within Ostomy Care. Revenue in emerging markets grew organically by 28% in Q1.
During the quarter, in particular, markets like China, Brazil, and Greece delivered very satisfactory performance, but also Russia, Argentina, and the Middle East delivered good growth. It should be mentioned that Greece was heavily impacted by inventory adjustments at distributor level, while markets like Brazil and China had easy comparisons from low sales in Q1 last year. Last week, Ed LaFrance took over the role as President of our Chronic Care business in the US and Canada, as our current President, Claus Bjerre, is leaving Coloplast at the end of January. Ed and Claus joined Coloplast US at the same time back in 2011, and have worked on our back to basics strategy together. Ed has been a key part of the US management team and responsible for marketing and most recently, sales in the US.
I believe he is the right person to keep us focused in the U.S. and to make sure we continue our great momentum in North America. The responsibility of Japan and Australia will transfer to Senior Vice President, Kristian Villumsen. In November 2013, we also changed country manager in China. As Juan He was leaving Coloplast, it was the right time to rethink the organizational set up in the region. Howard Tsui is taking on a new position as VP Asia, heading China, but also assuming responsibility for Korea and our increasing efforts in the Southeast Asian distributor markets. Howard is American Chinese and has a strong professional background from companies such as Merck, Serono, and Novo Nordisk.
Last week, Howard and his team reported back with a new commercial agenda, which will lead to changes in the country set up in China to further strengthen the growth momentum. I will now hand over to Lene. Please turn to slide number five.
Thank you, Lars. Gross profit was up by 8% to DKK 2.1 billion. This equals a gross margin of 68%, an improvement of 1 percentage point compared with Q1 last year. The improvement continues to be driven by higher production efficiency. The SGA to sales ratio came in at 32%, against 33% in Q1 last year. In the quarter, we have invested DKK 48 million in sales enhancing initiatives, over and above what we invested in Q1 last year. The investments in sales initiatives were mainly in emerging markets and the U.S. The admin to sales ratio came in 1 percentage point lower than in the same period last year. This reduction was primarily related to fewer projects. R&D expenses increased by 2% to DKK 94 million.
The ratio to sale was 3% and in line with Q1 last year. All in all, this results in a reported EBIT margin of 33%, compared with 31% in Q1 last year, and slightly up from Q4 last year. Net of currency impact, the EBIT margin was also 33%. Net financial expenses amounted to DKK 27 million, against a loss of DKK 65 million in Q1 last year. The change was mainly due to foreign exchange adjustments, where we, this quarter, realized an income of DKK 44 million on cash flow hedge contracts, compared with a loss of DKK 18 million in Q1 last year.
Our net profit for the period increased by 26% to DKK 780 million, corresponding to diluted earnings per share of DKK 3.63, also an increase of 26% compared with Q1 last year. CapEx amounted to DKK 114 million, corresponding to a CapEx to sales ratio of 4%. The increase in CapEx compared to Q1 last year, was due to an increase in investments in production equipment, mainly for the new SenSura Mio. Free cash flow amounted to DKK 490 million, compared with DKK 385 million in Q1 last year. The 27% increase was due to increased earnings, net gains from realized foreign exchange hedging contracts against a net loss in Q1 last year, countered by an increase in CapEx, as well as higher taxes paid.
Return on invested capital after tax was 47%, up 6 percentage point from Q1 last year as we continue to increase earnings on a stable asset base. The board has approved a share buyback program of DKK 1 billion to be completed by the end of fiscal year 2014-2015. The first half of the program is expected to be launched during Q2. Please turn to slide 6. For 2013-2014, we now expect revenues to grow by around 8% organically and by around 6% in Danish kroner. The currency impact is based on spot rates as of twenty-third of January 2014, and the negative impact is mainly a result of the depreciation of the US dollar and Japanese yen against the Danish kroner.
Our organic growth guidance is based on continuous, stable, and positive development in our main markets. We continue to expect slightly increasing price pressure compared with 2012-2013 level. On the back of the strong performance in Q1, we have, as I just mentioned, increased our growth expectations for the full year by 1 percentage point. We do, however, expect Q2 to come in lower than the full year guidance on both growth and consequently also EBIT margin, due to the expected lower absolute sales in Q2, combined with the yearly salary increases coming through in January. For 2013-2014, we continue to expect an EBIT margin of around 33%, both in fixed currencies and in Danish kroner.
Higher absolute sales in the second half of the year, together with efficiency gains in production, are expected to drive the margin expansion necessary to deliver on our margin guidance. The increased growth guidance does not result in a corresponding increase in our EBIT margin guidance, as incremental investment in sales enhancing initiative is now expected to be in the range of DKK 200 million-DKK 250 million, an increase of DKK 50 million-DKK 100 million, compared with our expectations at the beginning of the financial year. The increase is mainly related to an increase in the scope of investments in China, the U.S., and a number of smaller business cases. Our CapEx guidance for 2013-2014 is around DKK 500 million, and includes investments in the planned expansion of our Nyborg site.
Our effective tax rate is expected to be around 25%. This concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from Michael Jüngling from Morgan Stanley. Please ask your question.
Great. Good afternoon. Thank you for taking my question. I have three. Firstly, on the EBIT margin upside, is it fair to say, based on your comments sort of today, that the majority of the EBIT margin upside from here would be reinvested in sales force expansion into the emerging markets, meaning that the margin perhaps should stay at these levels for the foreseeable future? Secondly, on the capacity utilization of your factories, can you give us a sense of where you are in Q1 currently? Some sort of ratio, I think, would be useful. Finally, on staff retention, are you seeing stability in terms of key management positions and also salesforce positions?
If I look at the performance of some of your competitors, I think they would love to have some of your people. Some sort of comment on that would be very useful. Thank you.
Okay. Well, maybe I can start, Michael, on the EBIT margin. You're, of course, absolutely right, that this time we have chosen, because we could see we had some good investment proposals, that we would rather add to the investments than we would add to the bottom line. That is, however, not the same thing as saying that that is going to be the case in the foreseeable future. That is the case right now, and that's why we are maintaining our EBIT margin guidance at the 33%. That really depends very much on the investment case that we see.
On the capacity side, we are running close to full capacity at this point in time on the factories, and that is why we are now expanding one of our facilities in Hungary. When we have done that, we will then have a utilization of approximately 75%. Then, of course, with the growth that we have, then we will fill it up, and we will need a new one at some point in time. That's where we are now. To the stability, actually, first of all, I think it's fair to say that we are here commenting on two persons. We are commenting on Klaus, who is a part of our direct management team.
Klaus, he is leaving because his expatriation contract is coming to an end in the U.S. We knew that, he was very keen to go on to a CEO position, he left for that. He is the first one who have left we could say our direct management team for the last five years. Vagn, he wanted to be retired. He said that, quite some time ago, we had time to find his replacement. I think that's quite natural. There is no doubt that we are running a company where we put high demands.
It attracts a lot of talents. It also puts pressure on people who are on board because we're not running an average company. We are running one of the best med-metric companies in the world, and we do put pressure. So far, the organization is coping nicely with that, and we expect that to continue with that, but it's not a walk in the park.
Can I just briefly ask a question about the capacity gain? The incremental capacity that's coming on stream, have you had to expense that in cost of goods sold, or do you capitalize the production until you are ready to utilize the capacity? Effectively, have we seen the cost of the incremental capacity already in the P&L, or is that yet to come?
We, you know, this is, you know, when we build a new factory, this is CapEx.
Mm-hmm.
Therefore, you will see that we depreciate it over time.
Yes.
You'll also see that we, of course, get some aids from EU and Hungary to help this expansion. Overall, you will see it in the guidance that we do on the CapEx side.
Generally, you can say that the investment in the factory, you see that immediately as we do it, and most of the aid or the subsidies that we are getting is something that we will be getting down the line. That's coming in over the a number of years after we finalize the factory. Did that answer your question? 'Cause I'm not 100% sure that it did.
Well, not quite.
Okay
... the depreciation of the new capacity, is that already filtering through the current, the current P&L, or are you still?
Not yet.
Not yet?
Not yet.
That comes off, I guess it comes through the P&L, what, in the coming quarters?
It will come over the. It will come in about 12 months' time. We need to finalize it first. Remember, it's not a huge investment as such. It's not something that actually changes depreciation dramatically.
It's approximately 1%.
Yeah
... of sales. It's DKK 100 million, that, you know, which is the cost for a new factory. It's not that much.
Okay. Thank you very much. Very helpful.
Your next question comes from Justin Morris from Bank of America. Please ask your question.
Yes. Hi, Lars, Lena. Thanks for taking my questions. The first question was on the emerging market growth, clearly very strong at 28%. I was wondering in terms of if you could give some color around how much of that was driven by tender activity, which we might not see in the next few quarters. Can you quantify at all the Greek inventory change? You said that had a significant effect. That's my first question.
It's true that we had a very different momentum in emerging markets, this quarter than we've had for quite some time. The main explanation, why we are getting back in nice growth numbers is that Russia is back on track. We had a situation last, you know, if you go two years back with Russia, we had an extraordinary high sales. Last year, we had very low sales in the same quarter, and now we're back to normal, you could say. Because Russia is important to us, that is the single biggest reason why we see this correction. We had strong performance in China. We also expected that.
Greek, the Greek performance is also on the back of, you could say, a low Q1 last year. We're not going to give you numbers per market, of course. It is both Russia and to a certain extent, also Greece, which we consider to be back on track.
Russia, is that something you expect to be repeated again later in the year, or would this be kind of the majority for this year?
You know, if you... It's hard to answer because Russia is purely a tender market. If we look at Russia, if you take a, as, you know, a multi-year look at it, you will see that year-over-year, we have an increase in our sales to Russia. We have a very, very nice position there. We win the majority of the tenders that come out. There was an election year a couple of years back, and it was as if there were more tenders, and each of the tenders had a higher value. Last year, that was corrected, and now we are back to a normal year, you could say. If you see it on a longer-term horizon.
Mm-hmm
... you see a steady positive development in Russia. To give you a guidance on the quarters and quarters ahead, it's impossible for us. We simply don't know.
Okay. great. My second question was quite similar, really, on the, on the wound care business. Obviously, a fantastic quarter there. Obviously, a reasonably easy comp. Again, it was that lumpy tender and also the impact of the US distributor stocking you mentioned in the, in the, in the release.
The U.S. distributor movement, which I don't know if you're referring to, are you talking only Wound Care here, or are you talking the U.S. business as per se?
I think it mentioned skincare. There was a big U.S. distributor stocking effect.
We, you could say for the distributors, we have some big distributors in the U.S. that can impact quarterly results a lot. And they have done that in different terms. I think that the most important thing to take on here is that our growth momentum in the U.S. for all of our business areas is up compared to last year. When we look at the overall momentum or the underlying momentum, we had some swings here, some positives and some negatives, for example, in Continence Care, but that is due to, you know, changes of contracts and so on. If we look at the overall performance in the U.S., it's on an increase.
That is very important to keep in mind here, that we are extremely satisfied with the performance that we see in the U.S.
Okay. Would you say the same for the wound market? Are you seeing a general market pickup?
transcript of a speech given by a CEO. "Good morning, everyone. Today, I want to talk about the future of our company, Coloplast. We've just completed a fantastic quarter, with strong growth across all our business areas. Our Ostomy Care division, in particular, has seen remarkable success, driven by the continued adoption of our SenSura Mio products. We're also making significant strides in Continence Care, with SpeediCath maintaining its position as a market leader. Looking ahead, we're investing heavily in research and development. Our CapEx for the next fiscal year is projected to be around DKK 1.5 billion, a substantial increase that reflects our commitment to innovation. We have several exciting NPD projects in the pipeline, particularly within Wound & Skin Care, where we see immense potential for new solutions.
Our global expansion continues to be a key focus. North America remains a critical market, and we're strengthening our presence there. We're also seeing promising developments in Asia, led by Howard Tsui and his team. Our strategic partnerships, like the one with McKesson, are proving invaluable in reaching more patients. Of course, we face challenges. Currency fluctuations, especially with the USD and JPY, have presented some headwinds. However, our robust business model and efficient operations, overseen by Klaus Abel, allow us to navigate these complexities effectively. I want to thank our dedicated employees worldwide. Your hard work and commitment are the foundation of Coloplast's success. We are more than just a medical device company; we are
Okay, thanks. My last question was around admin costs, and it looks as if most of the strength in the margin was because admin expenses went down 11% year-over-year. Obviously, they've been going down double-digit year-over-year for quite a while now. Should we expect them to continue to decline at that rate going forward? I mean, you mentioned fewer project activities, so any color on whether fewer project activities will change going forward would be great.
We always try to optimize on our admin cost. We will do that continuously. At the same time, I would still, sort of say that you should expect somewhere around 4%-5% of on the admin side.
A decrease for the year or as a percentage of sales? Sorry for-
Oh, sorry, as a % of sales, and this is not trying to say that they will go up, but that is saying that we will continue to try to become more efficient. You know, then sometimes there will be more projects, and sometimes there will be other things that you will need to do.
Okay, that's very clear. Thank you. I'll go back in the queue.
Your next question comes from Niels Ladefoged from SEB. Please ask your question.
Good afternoon. My first question would be around your on your Wound Care division. Could you talk about the growth acceleration and to what extent that acceleration was driven by your new silicone product? Is that product now launched in all of your markets? Secondly, also on products, could you talk a little bit more about your new SenSura Mio product, and just explain to us the technological improvements in this product compared to your current SenSura Mio product? Thank you.
On the wound care side, the growth acceleration is also due to the silicone product. It's been extremely well received. We are running at maximum capacity for the time being and waiting for new capacity to kick in. It's not launched in all markets yet. There are still some markets that we need to get it out in, and they will come in the second wave once we have installed more capacity over the summer. It's off to a good start. On SenSura Mio, I have to say that we are pre-launching.
That means that we are, you know, letting more and more details of this product getting to the public knowledge over the coming over the coming periods. What I can say is that it is moving the limits for what an ostomy product looks like and also how it functions vis-a-vis the body and the other functions that you have in a product like this. At this point in time, unfortunately, we cannot give you the product, but we will be able to do that very soon. This is a major launch for us. This is not a launch where we need one machine.
It's a launch where we need a factory. It's all installed, it's all in place, and we are so eager to get out there and sell.
Could you talk about the pricing of the product?
Time's are up here.
Sorry, say that again.
Could you talk about the pricing of your new product?
Mm-hmm.
Yeah. We are holding it back in a couple of markets to get better prices. There are a number of markets, of course, that are not getting it at all because they would never be able to get the prices. In a number of markets, we will sell it at, in the same category and more or less the same price as the current products are sold at.
For those markets where you do expect a price premium, how much are we talking about? The usual 5%, 10%?
Well, I would definitely say that if we felt that we were used to 5%-10%, I would feel lucky. If we are able to get approximately 10% on top, that would be fantastic, and that's what we're aiming for. Or at least what we're aiming for, because, you know, if you only hold it back for a couple of percentage points, then there is a very, it's very limited for how long time you can hold it back because you simply lose sales month by month while you're waiting.
... Finally, just a quick question on your emerging markets exposure. As far as I remember, it's just about 12% of your revenue that goes to what you define as emerging markets.
28% is. Oh, sorry. Go ahead.
Share revenue.
Share revenue. Sorry, yes. Okay.
Yeah. As far as I understood, your guidance was based on currencies as they looked like a week ago. Was that correctly understood? You have not included the most recent FX declines?
Yeah.
Yeah.
Okay.
Yeah.
Thank you.
It was the twenty-third.
Thank you.
23rd, yeah, that's almost 1 week. That's correct.
Your next question comes from Jonathan Beake from Citi. Please ask your question.
Oh, hi there. Thanks very much for taking my question. I just wanted to ask about the Continence Care business in the US, and if you were to sort of take away the change in the rebate structure with one of your distributors, would you have seen growth in that division? Also, should we expect to see the impact of that change in the structure in the remaining quarters of the year as well?
Yeah. Yes, the answer is yes. We would have seen growth in the quarter if it wasn't for this rebate structure. The thing is that we had a rebate structure which was not which was not appropriate in a sense for the business we're running. It was urging the distributors to buy actually at the end of the calendar year. Therefore, last, you know, last year, they bought to get to live up to the contract. We changed that because it's not in our interest.
This year, it's much more stable, the quarterly sales that we have, and that is the only thing. That also means that we had a low growth in the first quarter and will have a high growth in the coming quarters in the U.S.
Okay. Thank you.
Your next question comes from Martin Laye from UBS. Please ask your question.
You alluded to slight increasing pricing pressure this year. I'm just wondering where you're seeing that specifically now, and has that changed in the last quarter?
Well, if nothing else, well, we can see it in France, for instance, where there was a price reduction. We also know, as we've also talked to you about earlier, that the business in the Netherlands, they're also trying to get the prices down. There are, you know, two relatively big areas that we know of. You know, yes, increasing price pressure, but still below the 1% that we see as average.
Coming back to the U.S., is there any way you could quantify the growth you were seeing in Continence Care if you stripped out the distributor change? I fear I didn't catch quite when that washes out of the numbers, I then no longer see a drag on that business.
It becomes almost as if we try to then guide on specific product areas in specific countries. We think it's probably not the way that we should guide on the company. We would refrain from doing that.
Hello?
Are there any more questions?
Your next question comes from Veronika Dubajova from Goldman Sachs. Please ask your question.
Good afternoon. Thank you for taking my questions. I have three, actually. The first one is, I was wondering, Lars, if you can comment what you're seeing in terms of the competitive situation in the Ostomy market. In particular, I'm curious about the U.S., given the push that you've been making and some of the competitive response that you've seen from Hollister and ConvaTec to date. The second question I want to sort of touch upon is, and it really has two parts, is one is, I think, given the growth rate that you have seen, year-to-date, and the fact that there was some non-recurring nature to it, kind of what gives you the confidence then you can achieve at 8%?
As you look beyond 2014, do you think that, you know, 8% is the new run rate for the business, or is there something special about 2014, that makes it a standout year? What implications might that have on your ability to see some operating leverage across the PNL? The last question, hopefully, is very simple. D&A, there was depreciation and amortization. There was quite a big tick down in the quarter. Just wondering if you have any guidance for the full year. That's it for me.
The competitive situation on Ostomy in the U.S. is intense, and it's always, I would say, it's always been intense. We have a very different momentum in our Ostomy performance in the U.S. today than we have had, say, for many years. We feel that we are extremely competitive. We are winning many of the new patients, and our Coloplast Care program is working really well in the U.S. We do feel that our competitors are seeing us, and they are also reacting to us. It has not in any way hampered the growth that we do see in the U.S.
We are launching the new product that we just talked about, also in the U.S., and that means that we are certain that we will be even more competitive than we are right now, as we have talked about before. What have driven our growth so far is that we have gotten a much better, a much better relationship with key dealers. We are bringing them a large number of new patients due to our Coloplast Care program, and that's, of course, helping our overall business in the U.S. I think that the competitive situation has strengthened. We have also employed a number of new people in our staff there.
I would say that we are more or less on par with ConvaTec when it comes to to share our voice in the US. It's you could say that the game has been stepped up. You know, was that what you were looking for on that comment on the competitive situation in the US, or?
Yes. No, no, that's very helpful. I'm just wondering, ConvaTec, I think some of the recent reports have been a bit weaker in Ostomy. Is this something that you can corroborate? Are you seeing them struggle a bit more in the U.S. market?
I think it's not correct of me to comment too much on our competitors. What I can say is that we have definitely improved our position significantly in the U.S. When it comes to the growth rate for this year and whether that is going to be also going on for the next coming years, I would not like to give you a long-term guidance. I did say, however, in the beginning, that our Moving Annual Total is on an upward trend. Month by month, we see improvements, and we have seen that for the last 24 months. It's not, it's not just a one-off.
It is a very strong quarter, but it's founded on a long-term, steady uptick in our business. We fuel that with strong sales processes and strong sales training and also great products. Of course, we've built to have that, but we have competition. We have politicians that are looking at this market, so we can never, ever guide for a long term. We guide for a year at a time, right? I can't remember the D&A question.
I can just comment on the depreciation here. If you compare to the Q1 last year, it's mainly the mental depreciation going down. If you compare to Q4, it's a number of various items, and I don't have them specified right here, all of them.
Lene, is the DKK 106 or kind of DKK 110, is that the right run rate for the rest of the year, you think, per quarter?
We don't really guide that specifically. No, I, I can't really say whether that would be it won't be significantly, there won't be significant swings as I see it, but we don't guide on that slide, line.
Understood. If I can just one quick follow-up, Lars, would you say that you feel more confident in the growth outlook for Coloplast today than you did six months ago?
You don't give up, do you?
No.
I don't.
No. That's good, Veronica, actually.
Okay. Thank you very much. I tried.
You're welcome.
Your next question comes from Martin Parkhøi from Danske Bank. Please ask your question.
Hello, Martin Parkhøi from Danske Bank. I'll not ask you about 2014 and 2015 then. I will ask you on your sales initiatives, now you're upgrading it to DKK 200 million-DKK 250 million. How much, you know, there must be a limit for how much extra cash you can push after this in 1 year? How long time do you actually think that this will go on? This is having a 2% negative impact, you could say, on the overall margin. When should we actually see that, you know, be materialized instead?
Second question then, for your growth for 2,000 and for the 8% for this year, can you comment a little bit about the upgrade? Which regions are this primarily coming from? Of course, all of them have performed better than 8% in the first quarter, but what's the reason for upgrade, and how should we look at on growth of each of the region to come up to the 8% or down actually now?
It's, you know, the question about how much we invest, you know, it's actually. You can look at it from different angles. How much do we dare to invest, in a sense? How much can we invest and get a good return on, could also be relevant questions here.
Mm-hmm.
The reason why we started this investment, and this is actually, we talked about this at the Capital Market Day in 2012 in London, where we had just started. The reason why we, at that point in time, we were starting was that, first of all, we were making more money, and we were approaching a situation where for us to create more value, economic profit in the company, it would be more beneficial to get a better balance than just try to expand the bottom line. If we can get top line growth with the current margin, it's actually extremely value accretive. That is the logic behind why we are investing more in top line growth at the time.
Sorry, you, at that time, you mentioned, I think it was DKK 1 billion on the net you could invest in additional sales initiatives. The DKK 50 million you make this year, are that, on top of that, is it just that you are starting faster with some of the initiatives you maybe had planned at that time? Or are you seeing an even bigger potential in total?
In a sense, we are front loading, but we are not shying away from the DKK 1 billion that we set at the capital markets day. In that sense, we are still on track, but we are probably a bit faster on investing. The reason why we are able to invest and why we were able to start investing at that point in time, is that we have worked a lot with our sales processes. I know that we have told all of you who are listening in a lot about how much we have done to train our sales force, how much we have done to get the right segmentation and targeting in place, and so on.
That is also why we now feel confident that we can invest and also get a very good and fast return on what we are investing. We can see that we have the money now, so that's why we are investing, because we have more growth investment cases on the table than what we can finance. We simply take the best of them right now, and we, you know, if we wanted to, you could say, if we felt that we would invest more, there would be more cases on the table that we could also go for. We think we have a really good balance at this point in time for delivering both on the top line and the bottom line.
The 8% this year, would you like to comment on that, Lena?
Yes, I can. I think you need to look at it the way that with the Q1 was higher than what we expected, so that was exceptionally high. If you look at it underlying and deduct maybe the 2 to 3 percentage points from the lower comparison base and the inventory swings, you get down to, you know, somewhere closer to the 9. But as it was exceptionally high, it's not a question of having just pushed revenue into Q1 that we would otherwise expect to get for the rest of the year. It is really additional revenue or and above what we expected when we went into the year.
In that sense, it's quite natural that we then sit down and say: Well, as our expectations for the remainder of the year hasn't really changed as such, but we're seeing a much higher Q1, then the logical conclusion also is to make an upward adjustment, in our, guidance for the year. That's what we have done.
Yes, I understand that.
Does that answer it, Lars?
Not completely, but I guess that is what I will get. I was, of course, looking about some growth rates for each region. Because, you know, last year you had a guidance for emerging markets saying that you expected to grow more than the year before, and you came out a little bit weak in the first quarter, and now you are very much higher than last year.
Yes.
I just wanted to see what some kind of commitment, I mean, now looking at the 20% for this year.
It's very difficult to actually guide for the for region by region, which I don't think we did last year either. I think it's no secret with that we normally say that, you know, 20% is where we start being happy. That's not the same as we're getting it, because we also know that these markets are volatile. They're so much, you know, they're less predictable than the other markets we are in. You know, they could easily be higher or lower.
Yeah.
Where, if you look at sort of where are we as a team satisfied, then it's around the 20% and upwards.
Okay, great. Thanks.
Mm-hmm.
Your next question comes from Alex Kleban from Barclays. Please ask your question.
Hi, just, I think two questions from me. Just first on Wound Care, can you update on the Devon partnership in terms of how much investment is going into, going into it for this year, and also what the launch timing is going to be for Europe? Second question, just more technical, but for the currency hedging in, how much, because we had the income this quarter, does that potentially mean we have a loss in the remaining quarters? Just to get a sense of what that would look like, assuming the rates, let's say, as of, you know, last week when you froze the FX rates.
On the negative pressure wound therapy, it is a limited investment that we have done, but we can't go into details on that contract. You know, this is a strategic distribution agreement, so we won't go further into that.
Okay. With regards to effective, if I look at the net financial line and look for the full year, you should expect something between DKK 75 and DKK 100 for the full year.
Okay. Okay, that's good. Thanks. Maybe on just 1 last follow-up, but you're talking about the SenSura Mio pricing earlier, I was just wondering if you're going to price sort of flat or above, would that impact at some stage, maybe next year or the year after, the kind of negative 1% price guidance that we get?
As always, you know, we are commenting on the price developments in the reimbursement categories across the globe. We, of course, one of the ways that we mitigate, that is by working with our mix, in the organization. Those two things are separate.
Okay, thanks.
Your next question comes from Christoph Gretler from Credit Suisse. Please ask your question.
Hi. Afternoon, Lars, Lena. Actually, most of my questions have been answered. Now, actually, just, you know, out of, you know, given, you know, the current situation, now it is now, emerging market currency volatility, you know, for practical reasons, you know, how do you deal as a management with that, you know, and how does this affect your business, in general and your distributors, in this market?
First of all, when we look at, I mean, I guess you're also referring to Argentina and what has happened over the last couple of days. Some of these currencies, such as the Argentinian, are extremely expensive to hedge. Therefore, we don't. However, we also try, you know, to put as much pressure on our prices as at all possible, so that we get some of that back. Of course, in a situation like you had over the last couple of days, we do experience a loss that's greater than what we expected. It's a quite small market for us. That was sort of Argentina.
In general, for the emerging markets, we haven't seen anything just in right now that makes us in any way, go back on our investment strategy for the emerging markets. We believe it's a long-term strategy. It's the right strategy, and we are investing in emerging markets.
Yeah. Okay, no, I mean, I have no doubt about that. Basically, you know, in the short term, you know, I mean, we have now Argentina, Turkey, and all these markets, basically. Would we expect, you know, with a certain timeline, you know, a negative effect on the demand for these products? Would you do that, you know? Because now they basically see, you know, substantial price increases, you know, so then the distributor might get, you know, difficulties now getting local financing, et cetera, et cetera. Is this something you would expect as well or would be worried about or?
I think there are a lot of hypothesis that we can put together about, you know, what could happen in these various markets, and I think it's fair and reasonable to do it on the individual markets, that something could happen. However, when we look at the portfolio of our emerging markets, then it's not something we expect will have a significant impact, and we just have to accept that when we are in emerging markets, and we are committed to them long term, there is both, so the volatility that we talked about earlier on in revenues, but there's also always a certain risk that some of these countries will not be doing as well and not be as stable as you see in European countries. I think we just have to accept that as a way of doing business.
Okay. Good. Yeah, all the rest, you know, has been answered. Thanks a lot.
Thank you.
Your next question comes from the line of David Adlington from JP Morgan. Please ask your question.
Hi, guys. Thanks. again, most of my questions have been answered. Maybe I could just ask, there seems to have been sort of various amounts of stocking this quarter. I just wondered if there was anything in particular that was driving that.
When we see stocking, it's always because people want to save a bit of money. For example, in Japan, we are increasing prices 1st of January, and then you see that the distributors, they would be stockpiling. That's the only thing that can drive it. That is when you have some swings in prices. It's not because we have problems with delivering or anything else which would cause people to try to stockpile.
Okay. Just as a follow-up to that, the stocking we've seen, is that across the various bits of stocking you've seen in various markets, has that all been driven by anticipations of price increases?
Some of it will also be because it's their Q4, because unfortunately, we do have some contracts where people have to fulfill a full year volume in order to get the rebates, and therefore, some of them are stocking up through the Q4. It's not a good way to run the business, but that is what we have in some countries. We try to get it to a quarterly performance instead, because it's not good for anyone that you have stockpiling once a year.
Understood. Great. Thanks a lot.
It's not more this year than last year, so yeah.
Perfect. Great.
Your next question comes from Oliver Metzger from Commerzbank. Please ask your question.
Hi. Thank you for taking my question. Just a few left. First, do you see some significant tender business upcoming for the next quarter? Second question is just an update on the innovation agreement after now being a one-year access. My third question is about the number of employees you have hired in the first quarter, and to which extent they were hired outside the mature markets. Thank you.
Yeah. The innovation agreement, I think it's a bit difficult to comment on a specific contract within a specific business area. I think that there are a couple of fundamentals that need to be in place. We are definitely growing very well in the US, also on the Ostomy side. The reason for that, there are two reasons you could say. One reason is we actually already have a higher market share in hospitals than we have in community. Our NPD share is still higher in hospitals than it is in community. We have sort of a positive motor in front of our business there.
Our Coloplast Care program, our direct-to-consumer programs in the U.S., are working exceptionally well and supplying us with both new NPDs that are comes with a Coloplast product, but also new NPDs that come with competitive products. In that sense, we feel that we can drive the business that we would like to right now. Therefore, to get into more GPO contracts and have more success with GPO contracts, we of course, will be even more positive, but we are not in a situation where we cannot run our business at this point in time.
The, I don't think that we will publish quarterly numbers on the FTEs that we are hiring, but we are filling in a significant number of people in our sales organization. I can safely say that. We just don't want to say how many per quarter and in which region, because it is also competitive sensitive information.
Okay, probably on the potential upcoming tender businesses for the second quarter?
Yeah, you know, we have a very large number of tenders that we're handling every single month.
Yeah.
A lot of our markets are tender markets. They have, of course, they are volatile like we have seen in Russia, where you see big swings. But overall, the consumption of the type of goods that we are working inside, puts a limit to how much volatility that you can see, because there need to be these kind of tenders. Therefore, it's not as if we had an extraordinary, except from Russia, high number of tenders in Q1, if that is what you are trying.
Yeah
... to get into this. Russia was different. Russia have meant quite a bit in this quarter for emerging markets.
Yeah. That's very helpful. Thank you.
You have a follow-up question from the line of Michael Jüngling from Morgan Stanley. Please ask your question.
Great. Thank you. 3 brief questions. Firstly, on sales growth, how would you assess the probability that you could actually grow 10% organically this year? Is it a 7 out of 10? Is it a 5 out of 10? That would be useful. Secondly, on the.
Yes, it would.
It would be.
It would be very useful.
I don't think we can say that.
Well, I mean, just in general sense, is 10% something which is, let's say, a 50/50 chance? I wanna assess how strong Q1 was as a result of sort of abnormals.
We believe we'll grow 8% this year.
Yes.
Around 8%.
Yeah.
All right. Second question on capacity utilization. You mentioned before, you're pretty close to capacity. Are you actually able to grow at 10% or so, because of capacity constraints? Is that a limitation to growth?
No, it's not.
All right. Lastly, on price increases. How do price increases in January of this year compared to last year? Are you able to push a bit more price increase through as a result of perhaps the economy being slightly better, governments being less focused on austerity? Is it a bit better this year than last year?
When we talk about price increases, for example, I mentioned price increases in Japan. It's not because we get better prices with the authorities. It is a matter of how we are dealing with people in the distribution chain. In a sense, when we increase prices there, they, their margin is going down. This is more a matter of how we structure ourselves in the value chain. This is not price increases that we send to the authorities.
In terms of the price increase, is the price increase in this year similar to last year, that you're putting through?
I can't comment specifically on that because we work with our prices all the time. It's actually a discipline that you need to master as a company, how you work with pricing and how you work with your rebate structures. When we say the word pricing, it's as much the rebate structure that we work with in the different markets. It's not a picture which I can help you with here.
Okay, thank you.
I think we're in for the last question.
Your last question comes from the line of Scott Bardo from Berenberg. Please ask your question.
Thanks very much, guys. Actually, just a couple of quick questions, please. Firstly, on the new SenSura Mio range that you introduced also in North America, does that, because it's now considered one of the more innovative introductions in North America, will that be encapsulated within the existing framework of the innovation contract that you have there? If you could answer that'd be superb. Also, just a little bit of detail as to the cost of manufacture of that system. Is that product line potentially more or cheaper to manufacture than the existing ostomy products? That's the first question on the product introduction. The second question is actually just sort of a broader question, but just interested to hear your thoughts.
It appears now that McKesson has acquired one of your major distributors in, certainly in the UK, but also in Europe, Celesio. Just wondered if you could outline whether you think there was any potential opportunities or risks transatlantically as a result of that action. Thank you.
Yeah. We of course have a new competitive edge with the new product that we're launching, and we will utilize it wherever possible in any possible business relations that we have also in North America. I can't be more specific on that as we are, at this point in time, pre-launching. And the product will have a cost, which is satisfactory to the specs that we set for the product from the outset. It's not gonna be significantly different than what we have in the market today. It is offering, though, a very different value proposition than what we have in the market today.
We feel that there is a good balance between what we are sending on the market and also the cost that we have with it. On the Celesio deal, I think that we, you know, with any customer that we have, we are working extremely diligently with them in order to see how we can put more business in there, and how we can make it more interesting for them to work with us. Part of it is that we have the best offerings, and part of it is that we also have a system by which we are able to send customers their direction, if that is what is needed.
We think that we are a strong partner, so this just means that we can have an even broader relationship with them, and I think it can only be strengthened.
Thanks very much. Just very quick, one lastly, Klaus is obviously a, a great guy and instrumental in helping to shape the North American strategy with you, Lars. I guess, slightly disappointing that he's left to pursue other ventures, but I, I know you'll be pleased you've got other people in the organization. Did you Sorry, I didn't understand. Did you confirm that he's gone to be a CEO at one of your competitors, or is it a completely new industry he's moved into?
Yeah, he's moving to a company called Atos. They are working with products that help people who have had cancer in their, what is it called? In their throat. It's a small Swedish company.
Yeah.
It's not a competitor of ours.
Thanks very much indeed.
All right. Thank you very much. That means that we are at the end of the conference. We would like to thank you all for your interest and for your questions. We are looking forward to meeting a lot of you over the coming weeks. Thank you very much.
That does conclude our conference for today. Thank Thank you for participating.