Thank you for standing by, and welcome to the Coloplast Q3 2012/2013 financial statement. At this time, all participants are in 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'll need to press star 1 on your telephone. I must advise you that this conference is being recorded today, Tuesday, the 13 August, 2013, at 3:00 P.M. CET. I will now hand the conference over to our speaker today, Lars Rasmussen. Please go ahead, sir.
Thank you. Good afternoon, and welcome to this Q3 2012/2013 conference call. I'm Lars Rasmussen, CEO of Coloplast. I'm 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. I am very pleased with the results that we have reported today. Our strong set of Q3 numbers supports the fact that our strategy of investing for growth, while at the same time improving our profitability, is working. Our European business continues to perform well, and we see increasing growth rates both in the U.S. and in emerging markets. Our chronic care business had a good quarter, with solid growth in Ostomy Care, whereas our Continence Care business, as expected, slowed down a bit.
I'm especially satisfied with our performance in wound care and urology care this quarter. Wound care continues its good performance from last quarter, and urology care takes market share in a very difficult market. Our organic sales growth for the group was 6% year to date and in line with our overall expectations, as was the EBIT margin of 31%. Today, we have approved an expansion of our Nærum production facility. This will increase our global volume manufacturing capacity by around 25%. We expect to invest a total of approximately DKK 130 million-DKK 150 million over the next two fiscal years in this expansion. For 2013, we continue to expect a revenue growth of 6%-7% organically and 5%-6% in Danish kroner.
We also continue to expect an EBIT margin between 31% and 32%, both in local currencies and in Danish kroner. Please turn to slide number four. Revenues were up by 6% organically and in Danish kroner and amounted to DKK 8.7 billion. In Ostomy Care, organic growth was 7% year to date and 8% for the quarter. The growth was driven by continued good performance from our SenSura portfolio, as well as a strong and increasing uptake in the market of our Brava accessories. We also continue to see a strong sales performance of Assura in markets like China and Brazil. In Continence Care, organic growth was 6% year to date and 5% in Q3. Growth was driven primarily by our SpeediCath product range. Our collecting device business, especially in Europe, and our U.S. Self-Cath business, continue to face increasing competition.
Growth in sales of Peristeen products, of our Peristeen product for bowel management remains satisfactory. The 5% growth in the quarter should be seen against very high sales in Q3 last year, where we had the effect of the distributor consolidation in the U.K. In urology care, organic growth was 9% year to date and 10% for the quarter, which is very satisfactory. Sales of penile implants continued the strong performance, and so did Restorelle, our lightweight mesh for pelvic floor repair. We are very satisfied with the launch of our single-incision mini sling, Altis, which meant that we, in Q3, broke the declining growth trends within slings. With regards to the mesh cases in the U.S., the number of claims has increased significantly, as expected, up to the expiration of the statute of limitations in July 2013.
The processing and progress under the MDL and tolling agreements are as expected. Based on the current information available to Coloplast, we still do not expect this to have a significant impact on the financial position of the group. In wound and skin care, organic growth was 4% year to date and 5% for the quarter. Growth for wound care in isolation was 2% for the first nine months and 5% for the quarter. We are very pleased with this development, which is in line with our strategy for the business. Growth was driven by our Biatain product range, and the market has responded very positively to our new Biatain Silicone. The growth is derived mainly from emerging markets, where China and Brazil continue their good performance.
We also saw strong growth rates in the U.S., where we continue to deliver on a large contract won earlier this year. Our European wound care business is still declining, at a slightly slower pace than in the first half of the year. Our U.S. skincare and contract manufacturing business contributed with satisfactory performance also in Q3. Turning to our geographical segments, we continue to see stable organic growth in our European markets of 4% year to date and in Q3. The performance continues to be driven by stable performance in major markets, especially in the U.K., our Nordic region, Germany, and France, whereas the Spanish and Dutch markets remain challenged by tough local market conditions.
Looking at the strong Q3 performance in isolation, then, in addition to what I just mentioned. The Continence Care business was impacted by distributor consolidation in the UK last year, which was partly offset by good performance in our European urology business. Organic revenue growth in other developed markets was 8% year-to-date, and 10% in Q3. Overall, our US business delivered strong growth rates, backed by strong product uptake in the market. Our continence business saw a slowing performance impacted by the competitive pressure in the uncoated market. Conversion to SpeediCath continues as planned, and the launch of SpeediCath Compact Set in the US is off to a good start. We therefore expect stronger performance within Continence Care in the US over the next 12 to 24 months.
The U.S. Wound Care and Urology business both delivered very strong performance in Q3, whereas the remaining part of this sales region saw improving growth rates compared with performance earlier this year. Revenue in the emerging markets grew organically by 15% year-to-date and 17% in Q3. Emerging markets have seen a significant pickup during the year, and performance remains very satisfactory in markets like China, Brazil, and Argentina. This was further backed by strong sales in Greece. Our Russian business saw a challenging quarter as tenders continue to be at a very low level. I will now hand over to Lene, please turn to slide number five.
Thank you, Lars. Gross profit amounted to DKK 5.8 billion, equal to a gross margin of 67%. This is an improvement of 1 percentage point compared with the same period last year. The improvements are primarily driven by higher revenues on a stable fixed cost base. The gross margin in fixed currencies was also 67%. The gross margin in Q2 improved slightly to 68%, compared to 67% for the first six months. The SG&A to sales ratio came in at 33%, against 34% in the same period last year. When adjusting last year for non-recurring items of DKK 123 million, the ratio was in line with last year.
During the first nine months of 2012/2013, we invested a total of DKK 105 million in sales initiatives, of which half were in the emerging markets and the other half in established market. DKK 45 million of the investments were realized in Q3, as we continue our investments in growth in markets like China, Brazil, Middle East, North Africa, and India. This quarter saw no new initiatives, as focus is currently on securing satisfactory progress on existing initiatives. In total, we have committed more than DKK 700 million in sales investments since the strategy update in March 2012. The R&D to sales ratio was 3%, in line with the full year 2011/2012 level. All in all, this results in a reported EBIT margin of 31%, compared with 29% in the same period of last year.
Net of currency impact, the EBIT margin was also 31%. Adjusted for one-offs last year, the EBIT margin showed a slight improvement compared with last year. Looking at Q3, our EBIT margin was 32%, and that's higher than the year-to-date number. The increase is primarily related to higher sales in the quarter and the reversal of DKK 10 million in provisions for bad debt. Net financials were DKK 81 million, a decrease of DKK 145 million compared with the first nine months of last year. The change was mainly due to foreign exchange adjustments, where we last year realized losses of DKK 94 million in cash flow hedge contracts, compared with a gain of DKK 18 million in the first nine months of this year.
Our net profit for the period increased by 24% to DKK 1,962 million, corresponding to diluted earnings per share of DKK 9.14, an increase of 23% compared with the same period of last year. CapEx amounted to DKK 295 million, corresponding to a CapEx to sales ratio of 3%. The increased CapEx compared to last year, was due to higher investments in production equipment, mainly for new products. Over the past years, we have optimized our production capacity through site consolidation as well as production efficiencies. We are, however, reaching near full capacity utilization, and as Lars mentioned earlier on, the board has today approved an expansion of our Nyírbátor production facility. This will, when completed, increase our global volume manufacturing capacity by around 25%.
The total investment is in the range of DKK 130 million-DKK 150 million over the next two fiscal years. We have been granted up to DKK 140 million in Hungarian subsidies. The subsidies are conditional on meeting a number of milestones over the coming years. The subsidies will take the form of direct subsidies as well as tax concessions. Free cash flow amounted to DKK 1.65 billion, compared with DKK 1.407 billion last year. This is due to increased earnings, net gains from realized foreign exchange rate hedging contracts, countered by increase in CapEx and net working capital, as well as higher taxes paid. Return on invested capital after tax was 42%, up six percentage points from last year, as we continue to increase earnings on a stable asset base.
Finally, we completed the second half of our DKK 1 billion share buyback program. I'll ask you to please turn to slide six. For 2012-2013, we continue to expect revenues to grow 6%-7% organically, and 5%-6% in DKK. The growth guidance continues to be based on stable growth in the European business, whereas we expect the U.S. market and our emerging markets to exceed last year's growth. Growth in the U.S. and emerging markets, however, remain volatile due to difficult to forecast distributor uptake between quarters. From the 1 September 2013, we expect reimbursement prices to be lowered 5% in France on chronic care products. Coloplast expects to absorb 3.2% of the decline, leaving the remaining 1.8% to distribution.
This will have an estimated annualized impact in the range of DKK 30 million-DKK 40 million on the top line, and most of this will flow through to operating profit. Further, the sale to the French wound care community channel of products containing silver or ibuprofen has been stopped as of May 27, 2013, as we can no longer get reimbursement for these products. This will have an annualized impact of DKK 10 million-DKK 15 million on top line and operating profit. For 2012-2013, we continue to expect an EBIT margin between 31%-32%, both in local currencies and in Danish kroner.
There are no changes to the underlying assumption behind our EBIT margin guidance, which are that we expect 6% to 7% organic growth, gross margin improvements within the half to 1% range, and continued cost discipline in the organization. Our CapEx guidance for 2012-2013 continues to be around DKK 400 million, whereas our effective tax rate is expected around 25% due to changes to the Danish corporate tax rate and the subsequent impact from accounting changes to deferred tax balances. This concludes our presentation. Thank you very much, and operator, we're now ready to take questions.
Thank you. As a reminder, if you wish to ask a question, please press star 1 on your phone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, that's star 1 if you wish to ask a question. Your first question comes from Martin Wales from UBS. Please ask your question.
Good afternoon. Could you start by giving us a little bit more color on the impressive growth in the wound care business? Obviously, 5% in Q3 versus 2% for nine months, particularly impressive given that you said Europe is still declining. Can you give us a little bit more detail on how you're driving that growth and whether you've really have turned the corner here?
It's been quite a long journey, I have to say, because when we started the turnaround of the wound care business, we had to stop selling in some of the markets that were not profitable for us. On top of that, we have had quite an impact from the financial crisis on the pricing in Europe. For quite some quarters, we have been suffering with, you could say, a declining business in Europe and an uptake outside of Europe. We have, over the past years, invested quite significantly in stabilizing the situation in Europe and then investing in growth outside of Europe, and that is what you see coming through now.
That is then topped off by the fact that we have launched a new silicone product, which has been received extremely positively by the market. It is a combination of all of this. Unfortunately, we are not still growing in Europe as a total, but it's so much stabilized now, and the growth elsewhere is so strong that we now see a growth which is starting to become on par with and even stronger than the market. If you look at the trend curve over the last 12 months, it's going up. It's not one single quarter we are talking about, but it's actually simply something that a momentum that we have been building over the last quarters.
We feel quite confident about the uptake we see in wound care, and we are very pleased with that.
Do you think you're taking market share in Europe despite declining, or do you think you're going to decline less?
I, that's very hard to say. I don't know.
Okay. Just a question on your R&D spend, which having cut R&D last year, it seems to be growing ever more strongly this year. Where are you-
Yeah.
spending the money?
We have, and we also shown that on several occasions, we actually have a very strong pipeline of new products that we are going to launch in the coming quarters. The spend is primarily for that.
Okay, so no change. Thank you very much.
Your next question comes from Hassan Al-Wakeel from Barclays. Please ask your question.
Yeah, thanks for taking the questions. First off, just wondering if you could comment on the KCI and Systagenix deal. Just in the past, you talked about a sort of deadlock in the wound care asset market. I'm just wondering if you see that as kind of breaking the deadlock, and also if that's something that you were involved in or kind of, the kind of asset that you're looking at, and kind of why or why not?
Systagenix have been for sales for a very, very long time. I think that's been no secret to anyone. I think that everybody in the market who is a player like we are, have spoken to Systagenix and their owners. We, you know, it's hard for me to comment on why somebody or why they do the deal that they do. We can only say that, our strategy have been to first create a healthy business and then to then look at what are the options. Now we have a healthy business, and then we look at what the options are.
Okay, very clear. Just moving over to Ostomy. I just saw that one of your competitors recently revamped its own accessories line in the U.S., and they're doing a big focus on the online channel. Just wondering if you're hearing any feedback about that, if it's something that you're considering in terms of making a push online, or whether you just plan to continue working directly with dealers and using that channel.
First of all, we have done a lot within accessories. You also see that in the sales numbers. That is not something which is unfamiliar to us. We also, as you may know, already have direct sales to end users in a smaller number of countries. For example, in U.K., where we have a quite sizable business with the Charter Healthcare, with Shiva, in Germany and also in Japan. It's something we know a lot about, you could say. Within the U.S., as it stands right now, we are doing our trade through dealers.
We do a lot of online activities, and all the business that comes out of that is business that we direct to the dealers and to our trade partners. It's working very well for us. If you look at the growth rates in the U.S., just a couple of years back, it was single digits, and now it's a healthy double digits, so we are quite pleased with the way it goes.
Thanks very much.
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. The first one, maybe we can start with just the outlook for the full year. Congratulations, you've delivered quite an impressive acceleration in growth if I look at the nine-month period. It seems that despite that, you know, pickup in revenue growth, you're still very much trending towards the bottom line of that EBIT margin guidance. As we think about the full year, and I guess outlook beyond, I mean, when would you expect these investment efforts to start materializing, not just in upside in revenue growth, but also on the EBIT level? What are the sort of pulls and pushes that you think about as you make those investment decisions?
If we think about the EBIT margin, we're actually quite satisfied with the development in the EBIT margin. As we have mentioned, also several occasions, we believe that the business has the potential to... Sorry, I'm hearing that Can you hear what I'm saying now?
Yes, yes.
Oh, good. I'm sorry. I got a message. I couldn't hear what I was saying, so I'll just start again. Thinking about the EBIT margin, we're actually quite satisfied with the way that that's developing. We believe that we are delivering according to what we have said is the potential in the business, which is half to 1% improvement on gross margins that will then flow through to the EBIT margin. If you look at the year-to-date numbers, for instance, and you strip out one-offs last year, you will see a slight improvement in our EBIT margin to the tune of that, around half a percent. We're satisfied with that. If you look at the quarter in isolation and strip out one-off last year, it's correct that you see a slightly lower EBIT margin.
However, Q3 last year, because of the last sales we had in the U.K., was also the highest EBIT margin we've ever had. Being that we are, totally for the year in line with a slight improvement, at the same time as we've actually invested DKK 105 million in a growth initiative, we actually believe we are delivering on what we said we would, and we're quite satisfied with that, and we are also confident that we will be within the range that we're guiding, 31%-32%, for the year.
That's helpful. Maybe I can ask a question a little bit more longer term, as opposed to just what you've done year to date. As you think about investment versus margin improvement?
Mm-hmm.
I mean, is it fair to say that maybe for the next year to two years, as you invest into the business, you'll be towards the lower end of that 50-100 basis point target, and then as those investments start coming through, you'll end up being towards the higher end of that margin expansion target? I guess, you know, I'm trying to understand what the timing is and the trade-off between growth-
Yeah.
Margin.
I can understand fully what you're asking, Veronika. I just think, you know, trying to talk longer terms about something that's a movement of potentially 0.5% is just not, you know, that's not very easy, and I don't think anyone can have the ability to forecast that accurately. I think it's the way you should think about it is that we are investing in growth. We want to invest in growth. As I mentioned in the introduction to the conference call, we've already committed DKK 700 million since we updated our strategy in March last year. It's important for us to get the growth up. As Lasse has also commented on, our growth momentum is higher now than it was.
A focus on investing in growth and actually seeing that growth coming through, at the same time as continuing to see that potential to half, for half to 1%, I think is what you should be looking at also, for the next couple of years.
That's great. I completely understand that. Hopefully, just two quick questions. One, do you mean, which is distribution costs, is DKK 850 the new run rate that we should be thinking of, or were there maybe some one-off expenses in the quarter? The second one is for Lars, just on Ostomy, in the U.S. Lars, can you give us an update on actually what was the growth that you saw in the quarter, and maybe where you are in terms of market share with new patients? Thank you.
The distribution line, there were no one-offs that the pickup there reflects the additional investments in growth for the quarter of DKK 45 million that I just mentioned. We didn't have any one-offs. The only one-off that we had in this quarter was actually on the admin line, where we had a positive impact from the right back of provisions for bad debt.
Yeah, when it comes to the growth rates in the U.S., it's I don't think that we normally give a precise number for that, but it is very, very high. Many times the market growth.
I thought I'd try anyhow, and market share?
Good try.
That was good news, wasn't it?
market share with new patients?
Market share with new patients is more or less what it was, and still significantly above the community market share.
That's great. Thank you so much. I'll jump back into the queue.
Thank you.
The next question comes from Christoffer Møller from Carnegie. Please ask your question.
Thank you. I have three questions. First, to follow up on the distribution costs and how we should think about them for the Q4 relative to the Q3 , if you're planning any additional investments, and particularly given that the costs surprised negatively in the final quarter last year?
Sorry, what was the last part of your question? You said it was.
I remember last year, costing Q4 surprised negatively, both, I think what consensus had, and I guess also relative to your own expectations. Therefore I'm a bit curious, are you thinking about distribution costs now for the Q4 ?
In terms of distribution costs, we expect we will continue to invest, you know, in additional growth initiatives. We had 45 in Q3, and we would expect that we probably will have a little bit more, but not a lot more in Q4. At least the 45, maybe 45-50, that we would expect to have in Q4.
Higher costs in Q4 than in the Q1 ?
Yes, due to.
Okay.
investments in growth initiatives.
Yeah. Okay. Is there any other seasonal effects that will mitigate that?
I don't think there is. I think the only thing that we can talk about with Q4 that will also impact, if nothing else, at least the distribution relative to sales, is that as we had the negative impact from the U.K. consolidation in Q3, we will have a positive impact in Q4.
Okay. Okay. The second question on the financial net that were worse than I thought. First of all, the other financial items, minus DKK 10 million, what that is? Secondly, shouldn't there have been somewhat higher positive hedging gains this quarter?
Well, depends really where the individual contracts are, when they're running out. If we look at it for the full year, because that might help you to think about it, is for that, for the full year, we expect net financial expenses of around DKK 30 million. That means that for Q4, with the knowledge we have today, we would expect a DKK 50 million positive in Q4. That, you know, would at least give you for the year, how we think about them.
Okay. That was the total financial?
Oh, by the way, you also asked about the 10.
Yeah.
-the -10. That's related to some swaps that we unwound in connection with the repayment of loans.
Okay. The final question I have, the investment you will do now in new manufacturing capacity and the fact that you are nearing full capacity, as you said, how is that impacting the potential to continue improve the gross margin from scale effects of the half a percentage points to 1 percentage point that you have been talking about?
The half to one percentage point, as we have said, would be over the next couple of years or so, because that's related to the specific plans we've had for improvements in our production unit. What will happen after that, we can't really comment on now, because those plans are not finalized.
Do you see, you know, improvements elsewhere that will continue to compensate for the gross margin? Is it fair to assume that it will become much more difficult now for you to-
... to improve it further, but as you reach full capacity?
There is no, first of all, when you say compensate for the gross margin, I, of course, you believe whether we can continue to improve our gross margin. You know, with the new factory, of course, we have placed that and decided on that in a way that is the most cost efficient for us to do. We will continue to work on that, but I cannot, at this point in time, we cannot give you a guidance over and above what we said at our capital markets day with the half to 1% potential uplift over the next couple of years.
Okay. Thank you.
Your next question comes from Scott Bardo from Berenberg. Please ask your questions.
Thank you very much for taking my questions. I have a few, please. Firstly, just on margins and just to get a better understanding of the full year guidance. I appreciate you're tracking very well with your top line forecast. Just following on from Veronica, it seems to me you need to post something like a 34% margin in the Q4 to get to the upper end of your target, which is, you know, clearly a, you know, a strong 300 basis point progression on the prior year. I'm just trying to understand whether there's any special sort of one-off items we might see in that quarter, or actually, that is, you know, a hurdle too high.
Just if you could help us understand that, please, that'd be helpful. Secondly, you know, very pleased to see the growth in North America continue at a strong pace. I think you've confirmed your anticipation to accelerate on top of last year's growth there. It seems though, that there were a few potentially negative developments in the quarter with respect to GPO contracts. The big GPO contract that I think was a press release from the company with Novation, the Ostomy. It seems now that that's been scaled back quite considerably from the initial expectations, and similarly, you weren't included on the Premier contract. I just wondered, can you help us understand, you know, whether this becomes a disappointment to you, or is that in line with your expectations?
You know, how are you responding and shaping your Ostomy strategy in the U.S. to make sure you pin down the sort of growth that you want there? They're the first two. I have a follow-up, please.
Okay, to start with the EBIT margin guidance, we guide between 31 and 32. We don't guide around 32, so we're guiding in that range. We feel comfortable with that guidance. Why should you believe that we will meet that? We do expect higher sales in Q4, and that should have a good and positive impact on the EBIT margin. Those higher sales will, of course, not least be because of sort of the or the flip side of the negative impact we had on the U.K. comparison numbers in Q3. Of course, we'll have it go the other way around in Q4.
The higher absolute sales will be or that is what makes us feel comfortable with the guide, the range we're guiding in.
When it comes to the GPO contracts in North America, let me just start by saying, we are not satisfied with the development that we have there. Maybe I should paint a little bit of a bigger picture, because the situation is that we do actually have still a higher market share in the hospitals, the NPD shares, than we do have community market share. Therefore, you could say short term, new GPO contracts are not vital for us to keep the growth up. As I said, we have an extremely healthy growth in Ostomy in the U.S..
Long term, however, if we do not get the place that we need to have in the GPOs, then we will not be able to keep a high growth in the U.S. Here we are talking more years going forward. What I'm mostly disappointed with, you could say, is that we have not been able to hold on to everything that we got into the Novation contract originally. The reason for it is that we came in off cycle, you could say, and there has been quite some activity also from our competitors to mitigate us coming in there.
You could say we are definitely visible on the radar screen in the U.S., and therefore you see a lot of activities there. We only managed to stay on board with the new products there. As you know, there are coming more new products, so let's see if we can get them in also. Us not getting into Premier, that's not what we anticipated, but that's the situation as it is, and we have to do it better from there on. It's more that we hurt on our pride than we hurt on our business result with this, because our business results are accelerating in the U.S. and continue to do so.
We, of course, need to be, have a better presence in the GPOs.
Thanks, Lars. I just wanted to follow up on that with regard to one of your competitor actions. I think we also see confirmation now that they're using the 180 Medical channel to introduce Ostomy direct to consumer.
Yeah.
Do you think this is something that, you know, you could ever contemplate? I know you've historically shied away from this, but it seems to me that the channel is getting a little bit tighter in the U.S., and I just wonder whether that's gonna-.
Yeah
... stop you developing your strategy.
first of all, we are investing in sales pressure outside of Europe, and we are also investing in further sales pressure in the U.S. We are investing to get a much higher market share in the U.S., and we go by all means, you could say, but we have no plans to go direct as, for example, with 180 Medical. We think that the right way for us to go about this is to work with the distribution partners we have today. They keep adding business to us, and at a very healthy pace, and we feel that this is the right strategy for us, where our company is today.
As you do know, we are not unfamiliar with forward integration activities. We have been, or we are forward integrated, as also mentioned before, in several geographies, also with sizable businesses. But you always have to take stock of the situation, and we think that the, that the current strategy we are pursuing in the U.S. is serving us very well, and we keep pushing that way.
One last question for me then, if it's possible. Russia has been a very important emerging market for you and a major growth driver in the past.
Yes.
I was a little bit concerned to see, some of the commentary about cancellation in tenders and uncertainty there.
Yes.
Can you sort of shed some light what's going on in Russia?
Yes.
how that's-
Yeah.
affecting your investment planning?
t's really, really strange what is going on, but what we have seen in Russia is that when there have been tenders and, you know, the companies have been delivering the prices and the bids, the terms of to go for a tender, we have lost to somebody who came with terms that were, you know, unheard of. Afterwards, it turned out that this company that had made several offers have not at all been able to follow through. They have basically not been able to deliver, and therefore, the whole tender process have been, you know, it's going over again.
It's starting from scratch, and that have postponed the sales in Russia. It's not so that we see that the market is gone. It's simply disrupted by somebody playing a very strange game in the market, but now it's known to the authorities who it is.
Thanks so much, for taking the questions.
I just have one thing here, which is actually to Christoffer. I've just been reminded that on your very direct question as to whether the plant expansion was gonna do anything to our gross margin, I got so carried away with talking about our gross margin, I didn't actually answer you specifically on that. The answer is that we don't expect any significant impact on the gross margin solely due to the expansion of our site in Hungary. Just so we get that clear.
Thank you.
Sorry, sorry about that, Christoffer Møller.
Your next question comes from Hans Mähler, from Handelsbanken. Please ask your question.
Thank you. I have two questions. First, when it comes to the reimbursement cuts in France, what was the key reason that you took more than half of the hit here, but nothing when it happened in Spain? Second question on the same subject is, when it comes to the reimbursement cuts in France, will you be able to offset that already in the next fiscal, or what do you plan to do to offset that impact, given it's such a large market for you? Thank you.
I think it's a new negotiation in every country that you are in, it's also a story about how the distribution of profit already is in the current value chain. This was the result in France, as you do know, this is something which is also negotiated year-over-year, so it's just very visible what the result is, right when you come out with a healthcare spend cut, as we see here, contracts are actually constantly renegotiated.
The total amount that we talk about here is part of the guidance that we have about the approximately 1 percentage points downward price pressure per year, and it is to be contained in that. It doesn't change our guidance to the market about us being able to deliver 50 to 100 basis points year-over-year in improvements.
Okay. Also in the beginning of this fiscal, you said that the underlying market will go growing at a pace of, I think, 4%-5%. Given the uptake for wound care and the rather solid performance you have seen elsewhere, should we regard that as somewhat conservative at this stage, or do you have any comments on that?
No. No, I don't really have any comments on that. You know, it's always negative to have a price cut like we had here. It goes from the top line, it goes directly from the bottom line. We have a strong organization in France, and we have good progress in many places with the business, so we'll be able to mitigate this.
Okay. Thank you very much.
Next question comes from Oliver Retter from Commerzbank. Please ask your question.
Hi, two questions, if I may. First is also regarding your price expectation. For this year, you mentioned that you expect a lower price pressure than 1%, which is your long-term guidance. Going forward for next year.
... The reimbursement change in France, which was, answered in the question before. More generally, do you have any indication to be a little bit more optimistic, on your long-term price guidance for next year? The second question, do you see some significant tender businesses in the next quarters? More general question, if yes, would these tenders be included in your organic growth guidance, mainly for next year?
Okay, maybe for the price expectation or the price expectation for price pressure, we stick to the 50-100, up to 100 basis points on price pressure. Specifically of how we account for tenders, I mean, yes, they are part of our organic growth. That's the way we have always accounted for tenders.
Yeah. Do you see any larger tenders in the next quarters?
Not something out of the ordinary.
Yeah. Okay, thank you.
Your next question comes from Ingeborg Østgård from Jefferies. Please ask your question.
Hi, good afternoon. Thank you for taking my questions. A couple of quick ones, then one a bit longer one. First, on the tax expectation going forward, will the additional tax breaks that you're getting in Hungary impact the mid to long-term tax rate? Secondly, on FX going into next year, what share part of your exposure have you already hedged, and what could we expect in particular, given the FX moves in Australia and Japan? My final question is on competition, and you've touched a bit on it, but it seems like there's a bit more talk about competition, both in continents and in Ostomy. Could you talk about what you see as the best response to competition, maybe waking up a bit?
Maybe we can do the tax rate, because that's relatively quick. No, we don't actually expect any tax concessions in Hungary to impact our tax rates. Remember that we actually repatriate approximately 80% of our profits to Denmark, so the vast part of what we make is actually taxed in Denmark. Any changes, you know, small changes in a country is not going to impact our tax rate. And we have hedged on average around 11 months, so not quite next full year.
When it comes to competition, maybe a good place to start with competition is that we, at this point in time, are growing significantly stronger organically than we did a year ago. That is, of course, due to the fact that we are more competitive. We have more new products in the markets. We are also significantly more salespeople than we were a year ago. When we talk about more competition, it's very much linked to the catheter situation, the intermittent catheter situation in the U.S.
Because as you probably do know, then the intermittent catheters in the U.S. are primarily low technology catheters, and we are upgrading that market to become a, you know, you could say, a high-spec market. We also take a higher price for the products that come in there. That means that the distribution have a lower margin on the products that they sell for us. We have the highest price in the low-spec segment, therefore we are bleeding in that segment, or meaning that we're not growing as fast as the market in that segment. We are mitigating that by the uptake that we have from the SpeediCath conversion of the market.
In that sense, the downward trend that we see on the SelfCath business is, in a sense, due to more competition, and it is a competition we can only counter by launching higher technology, higher priced products in the market. That is what we talk about. You could say that if you sort of take the Continence Care numbers that are a bit weak and strip out the effect from the high sales in U.K. last year due to the wholesaler consolidation, you are more or less back to par with where we used to be. We are growing significantly more than the market, also in Continence Care.
Just one more, Ingeborg, because I believe you actually also asked about what gains you could expect the results on financials from the hedges we've done, that would come in next year, and that would be for those that are already in place, and of course, we haven't covered all of next year. You should expect about DKK 50 for next year as it looks now.
Great.
That's what we're-
That's very helpful. Thank you.
Our next question comes from Niels Granholm-Leth from SEB. Please ask your question.
Yes, my first question would be a kind of a household question regarding your depreciation and amortization, which in the quarter fell with something like DKK 15 million-DKK 20 million compared to the previous quarters. Is that due to the completion of amortizations related to the Mentor Urology acquisition back in 2006? That's my first question.
My second question would be a question regarding the gross margin development. As you mentioned, you talked about 50-100 basis point gross margin improvement on your Capital Market Day for the next couple of years. Does it mean that for this fiscal year and in the next fiscal year, you would still be expecting gross margin expansions, and after that, we should expect more like a flattish development? Thank you.
I can do it actually very quickly. Depreciation, you are absolutely right, so that's a yes. The gross margin, yes, that includes the also next year. What will happen after that, we can't really guide on now.
Okay, thank you.
Your next question comes from David Adlington from J.P. Morgan. Please ask your question.
I think all my questions have been asked. Just maybe one on the bad debt side. I just wondered if you would be reassessing any further bad debts in the Q4 and whether we could see any further write backs in that quarter. Thanks.
At the moment, we don't expect any further write backs. I mean, the write back that we have done is due to a positive development in Greece, because, you know, we do these in specific customers. Whereas last year we saw, and I think we also talked about that in conference call, a slight prolongation in how long it took our Greek distributor to pay. We have now actually seen him come back on normal payment terms, and that's the key reason for the write back of bad debt. We don't sort of have anything up the sleeve.
Okay, thank you.
Your next question comes from Christoph Gretler from Credit Suisse. Please ask your question.
Yes. Hi, good afternoon. Actually, most of my questions have been answered. Maybe just one, you know, on the decision to expand, you know, the Nyírbátor facility. If I remember right, you know, that was mainly a Continence Care facility. It's basically the strategy, you know, with respect to, you know, capacity expansion, is this, you know, mainly for, you know, Continence Care? Would you basically be looking at, you know, applying new technologies, production technologies, or is it just basically a replication of, you know, of lines you have already in place?
It's, you know, this means that most of the expansion that we will do on continence care will be in the facility because there are a lot of basic technology stuff that you need to have in place in order to be able to manufacture such products. Therefore it's more cost effective just to keep doing more of catheters, for example, where you already do catheters. The basic, the basic principle of the way that we do manufacturing is that we choose one place where we tend to do all manufacturing of one type of products because it makes more sense.
Therefore, you know, because we already do continence there, we'll do more continence, but it doesn't mean that it will only be continence, it might also be other products.
Basically, you know, you can use this facility easily now to expand, you know, in Ostomy, for example.
Yes, we could do that, because when it comes to ostomy, they are more standalone machines where, for example, continence care, they are more part of a process line. You need much more backup technology to be able to perform that type of manufacturing.
you know, in terms of cost, you know, did you look at, you know, other facilities to expand as well? you know, is it just basically, was it a no-brainer to use, you know, this specifically anywhere?
No, I don't think I don't think that expanding manufacturing footprint is by any sense, a no-brainer. We are quite elaborate in the way that we are conducting the service on where to take, to sort of put the next big part of our manufacturing that we do. At this point in time, it turned out that Nyírbátor was the right place for us.
That's interesting. Then maybe, you know, just on the Urology business, you know, mentioned, I think at the beginning, though, there was no relatively, you know, difficult market conditions. Was this primarily referring to, you know, the, the sling business or in general?
I think in general, the business is doing really well. The female pelvic health is picking up, but also men's health is doing well, and the business, which is more the, you could say things that are not implantables, they have also had a very nice quarter. It's all business areas within urology care that are doing well.
That is reflect because you mentioned, I think, you know, or maybe I have not heard it badly. No, it was no referring to, difficult environment, but, you know, it basically means now you are gaining share here. Now, that would be your assessment?
Yes, we are growing significantly more than the market in this business for the time being. There's no doubt about that.
Okay, good. Yeah. Thanks. That's all for the moment.
Thanks.
As a reminder, if you wish to ask a question, please press star one on your phone and wait for your name to be announced. We have another question from Scott Bardo from Berenberg. Please go ahead.
Thank you. Just a quick follow-up, please. Yeah, just in terms of your product launch schedule, I just wondered if you could confirm, are we likely to see any new significant product launches before the end of your fiscal year? Or is this something we should expect into 2014? Thank you.
We are not commenting on that, but you have seen the plan, and we are basically following the plan.
I understand correctly, according to the plan, that there's a launch slot for Ostomy and wound care, for the second half of 2013, which we haven't seen yet. That would probably mean two more product launches before November?
We are launching one to two new products per year, and that is also what we expect to do this year. One of them have been launched, and that's the new Biatain Silicone product.
Sorry, Lars, just remind me. I remember the Biatain Silicone was launched in 2011. Is this sort of an adaptation on that Biatain Silicone?
Yeah, you're wrong on that one. The new Biatain Silicone was launched just a couple of months back.
Perfect.
You haven't seen that?
Missed that.
Oh, that's a magnificent product. You should see it.
How does it differ?
it's the best silicone product in the market, of course.
I'll do my work on that. Thanks.
Your next question comes on the line of Veronika Dubajova from Goldman Sachs. Please ask your question.
Thank you for letting me back into the queue. Just one quick follow-up on continence. Lars, you mentioned that you would expect growth in the U.S. continence business to accelerate over the next 18-24 months. Can you comment on kind of what you see as the key drivers and the size of the SpeediCath opportunity on a two to three year view? Thank you.
I then I think you have misunderstood me. What I meant to say is that we are seeing that we have an increasing growth rate in our business in the U.S., and that goes for the business in its entirety. I'm not commenting on any of the specific business areas. But having said that, what we are doing now is that we are operating the market in the U.S. to higher value products seen from the manufacturer's point of view. Over time, of course, that is going to be very positive for us. Right now we have this balance where we are losing a bit out on the self-care, and we are winning on SpeediCath, and that is a very delicate balance to throw.
longer term, that's of course, going to come in very handy for us.
Understood. Thank you for clarifying.
I think we're in for the last question.
The next question comes from Yi-Dan Wang from Deutsche Bank. Please go ahead.
Thank you for taking my question. I've got a few questions. The first one is on the US Ostomy. Can you give us a sense of, you know, how that growth rate, or how much of the pickup in growth rate is actually coming from accessories versus the bag part of the business? Just, you know, qualitatively would be fine. How would you think about that going forward, meaning, you know, how long would the accessories benefit be there for?
Sorry, Yudan, it's really hard to hear you. Your voice is breaking up.
I really think, my reception's bad. I'll get back to you.
You know, the part that I did understand of your question is, you asked about the U.S. Ostomy, and if you could quantify it a bit more. I don't know when you entered the call, Yi-Dan, but what I have said earlier in the call is that we are growing very, very satisfying growth rates and several times faster than the market. We do not disclose, you know, what it means or how much of this will be from one piece or two piece, or urostomy or from accessories. It's, we have growth on all of our business lines within the Ostomy.
Can you hear me a bit better now?
Yes.
Better. Okay, great. I was just asking, you know, if we look at the growth rate, I can understand you don't want to disclose, you know, exactly how much, the accessories benefit, is that more of a short-term benefit versus a, you know, a longer-term benefit? Another way to ask it would be, you know, if you look at the opportunities that you have in accessories, maybe not just in the U.S., but generally, is that more of a three to five year kind of benefit, or should we think about it like your traditional ostomy bag business, more of a much longer time is required for you to, you know, get the full benefit out of that portfolio?
If you talk about, you know, with a limited understanding we have at this point in time, because we have not been that long time in the accessories market. I'd just like to remind you about that. It's still a new venture for us. What we see in the nature of it is that we are, you know, reselling these products. It means that the sales that we obtain is here to stay, most of it. But I don't know about the growth rates for it of course, you know, how much further we can penetrate the market.
At this point in time, it's very, very early days for us, so we have a limited market share there.
I would expect that this will give us growth, for a very long time. Still, we have just begun.
Okay. The second question is on the U.S. ostomy bag part of the business. Are you able to confirm that, you know, your share in the community care channel part of the market is growing or has been growing sequentially quarter after quarter? And that your new patient discharge share is also growing at the same time. Maybe the growth in the community share part is faster than the new patient discharge part, given your earlier comments about the GPO contract.
It depends how many quarters you go back.
... or as many as you can remember?
I can say that with the current management's tenure in the U.S., we have basically seen growth, quarter after quarter, month after month. We have not seen that all the time that Coloplast have been in the U.S., but I think that we have a very strong management team in place now, and they are doing a fantastic job. With regards to the market share, you still know that we are at 5%-10% in community, it is, we are growing from a low base.
Would you tell us once you've reached that 10% at some point?
I think that, Ian, he will think about that.
All right. Okay. I was gonna ask, when do you think you can reach that 10% point?
Yeah, that's a good question.
At every move.
We do our best every single day, but I can't give you any answers to that.
the last-
Having said that, we are very pleased with the growth rates and the uptake of growth rate that we see in the U.S.
Right. The last question is on the upgrading of the US capital market. If we say that the whole opportunity is out of 100, where along that line do you think you are at the moment?
I think that we have more to cover than we have already covered, that's for sure. We are not 50% into this yet, but I can't give you a more precise answer to that, to that.
Okay. Thank you, that's all.
Thank you. I think that concluded the presentation from our side. Thank you very much for participating, and we are looking forward to seeing a lot of you over the next weeks.
That does conclude our conference for today. Thank you for participating. You may all disconnect.