Thank you for standing by, and welcome to the H1 2012-2013 Financial Statements Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, the 30th of April, 2013, at 2:00 P.M. U.K. time. I would now like to hand the conference over to your speaker today, the CEO, Lars Rasmussen. Please go ahead, sir.
Thank you. Good afternoon, welcome to this Q2 2012-2013 Conference Call. I am 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 the results we have announced today. We continue to see stable European business, a U.S. market performing in line with expectations, and, as expected, an increased growth momentum in emerging markets. We are also very pleased with the performance in wound care this quarter, which showed the best growth performance in many years. Growth.
Our organic sales growth for the group of 6% for the first half of the year was in line with our overall expectations, as was the EBIT margin of 31%. We continue to generate high cash flow. Our liquidity situation allows us to use the mandate for extraordinary dividends in 2013, as per the decision adopted by the AGM in December 2012. We are therefore returning DKK 634 million in extraordinary dividends to the shareholders, corresponding to DKK 3 per share. For 2013, we continue to expect a revenue growth of 6%-7% organically and 5%-6% in DKK. We also continue to expect an EBIT margin between 31% and 32%, both in local currencies and in DKK. Please turn to slide number four.
Revenues were up by 6% organically and 7% in DKK and amounted to DKK 5.7 billion. In Ostomy Care, organic growth was 6% in the first half of 2013 and 7% for the quarter. The growth in the first half of the year was driven by continued good performance in the U.K., U.S., and the Nordic region. Emerging markets also contributed to the growth, not least in Q2, where we saw increased growth momentum in China and Brazil. It continues to be the SenSura portfolio, which drives growth, backed increasingly by strong Brava accessories uptake in the market. In Continence Care, organic growth was 6%, both in the first half of 2013 and in Q2.
Growth in the first half of the year was driven primarily by our SpeediCath product range, whereas collecting devices continue to face increasing competition. Growth in sales of our Peristeen products for bowel management remains satisfactory. The slightly lower growth in Continence Care compared with recent trends stems primarily from the fact that our self-care business in the U.S. continues to face tough price competition. We have, for some time, been working to mitigate that situation by upgrading the market to our hydrophilic catheters, now backed by the launch of SpeediCath Compact Set. We see very satisfactory growth in our hydrophilic catheters in the U.S. and are thus confident with these measures, but are also aware of the time it takes to implement. In Urology Care, organic growth was 9% in the first half of 2013 and 7% for the quarter.
Growth in the first half -year was very satisfactory, and we saw growth in all product areas except from slings for treatment of stress urinary incontinence. Sales of penile implants continued the strong performance, and so did Restorelle, our synthetic lightweight mesh for pelvic floor repair. We are very satisfied with our launch of Altis, and we have already passed 1,000 sling implantations globally, which is in line with our own expectations. Over the past month, we have seen increasing interest and speculation from the financial markets in the media in the build-up of potential mass litigation cases in the U.S.
Since 2011, Coloplast have been named as a defendant in individual lawsuits in various U.S. federal states, federal and state courts, alleging injury resulting from the use of transvaginal surgical mesh products designed to treat pelvic organ prolapse and stress incontinence. No trial dates have been scheduled so far involving Coloplast products. The so-called MDL, Multidistrict Litigation, continues in the Southern District of West Virginia. We cannot predict the timing or outcome of any such litigation or whether any additional litigation will be brought against the company or its subsidiaries. Based on the current information available to Coloplast, however, we do not expect this to have a significant impact on the financial position of the group. In wound and skin care, organic growth was 3% for the first half of 2012, 2013, and 7% for the quarter.
Growth for wound care in isolation was 1% for the first 6 months this year, and 6% for Q2. We are very pleased about this development. Although we see some very encouraging pickup in growth momentum, it is too early to say with confidence that our wound care business has turned the corner into more sustainable, positive growth. The growth is derived mainly from emerging markets, where Brazil now contributes significantly to growth, along with China. We saw strong growth rates in the U.S., where we started to deliver on a large contract won earlier this year. Finally, we welcomed a slight improvement in Europe. All in all, a very satisfactory quarter for our wound care business. Our U.S. skincare and contract manufacturing business contributed with very satisfactory growth also in Q2.
I'm also very pleased to announce that starting June 2013, we will be included in the wound and skincare offerings by the U.S. GPO Premier. We expect this to lift the U.S. wound care performance going forward. Turning to our geographical segments, we continue to see stable organic growth in our European markets of 4% in the first half of 2012, 2013, and 5% for Q2 in isolation. The performance continues to be driven by stable trends in our chronic care business, especially in the U.K., our Nordic region, Germany and France. The Spanish market remains challenged by the macroeconomic downturn in the region.
Looking at Q2 performance in isolation, then in addition to what I have just mentioned, the European wound care business improved significantly in the quarter, which was the main reason for the improved European growth rate in Q2. Organic revenue growth in other developed markets was 7% for the first six months of 2012, 2013, and 6% in Q2. Overall, our U.S. business delivers in line with expectations, and we continue to see strong growth in our U.S. ostomy business, supported by strong Brava uptake. Our Continence Care business saw a somewhat weaker quarter. As mentioned earlier, we still experience pressure on the uncoded, uncoated market, where we sell our self-care catheters, and we mitigate this development with value upgrading to our hydrophilic high-end catheters and the launch of SpeediCath Compact Sets. Two important events in Q2 impacted performance significantly, though.
One was that we saw stock reduction in the U.S. on the back of a merger between ISG and AssuraMed. The other important event was that our wound care business saw a significant uplift in sales as we started to deliver on a large contract in the market. The remaining parts of the sales region saw weaker growth in the quarter, especially in Japan, where performance was negatively affected by a delay in issuance of reimbursement for issuers. Revenue in emerging markets grew organically by 14% in the first half of 2012, 2013, and 18% for the quarter. Emerging markets have seen a significant pickup compared with Q1. We saw very satisfying performance in China and a significant pickup in Brazil. Russia picked up as we started to deliver on a postponed tender from Q1.
Finally, growth was impacted by comparison numbers in Greece, which had a very low Q1 last year, where our Greek distributor reduced stock levels. Within the recently established region, IMEA, India, Middle East, and Africa, we are now investing for growth in India. India is currently a small and underdeveloped market where we have a low growth, a low market share. We are, however, seeing a high double-digit growth rate within the Ostomy Care and the advanced wound care markets, which underline the significant long-term growth potential in India. Specifically, we have decided to create an organizational set up with the purpose of increasing our Indian business significantly over the next years. I will now hand over to Lene, please turn to slide number five.
Thank you, Lars. We are now on slide number five. Gross profit amounted to DKK 3.8 billion, equal to a gross margin of 67%. This is an improvement of 1 percentage point compared with first half last year. The improvements continue to be driven by efficiency gains in our production economy and higher absolute sales. The gross margin in fixed currencies was also 67%. The SG&A -to -sales ratio came in at 33% and was down from 35% compared with the same period of last year. When adjusting last year for non-recurring items of around DKK 90 million, the ratio was in line. During her first half of 2012, 2013, we invested a total of DKK 60 million in sales initiatives, of which half were in the emerging markets and the other half in established markets.
This we did without diluting our SG&A- to- sales ratio in the period. The main investments so far this year have been establishing a sales region in the Middle East, continued investment in sales force expansion in China, and continued investments in a dedicated commercial setup for wound care and chronic care in Brazil. The R&D -to -sales was in line with the full year 2011-2012, at 3%. All in all, this results in a reported EBIT margin of 31%, compared with 37% in the same period of last year. Net of currency impact, the EBIT margin was also 31%. Looking at our Q2, our EBIT margin was 30% and thus one percentage point lower than Q1.
Around half of the decrease in the EBIT margin is due to weakening of currencies against Danish kroner, and the other half is caused by restructuring costs in our R&D organization, as well as annual sales adjustments around 2%. Net financial expenses were DKK 68 million, a decrease of DKK 55 million compared with first half of last year. The change was mainly due to foreign exchange adjustments, where we realized losses of DKK 50 million on cash flow hedge contracts last year, compared with a gain of DKK 2 million in the first half of 2012-2013. Our net profit for the period increased by 25% to DKK 1,252 million, corresponding to a diluted earnings per share of DKK 5.83, also an increase of 27% compared with the same period of last year.
CapEx amounted to DKK 183 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. Free cash flow amounted to DKK 872 million, compared with DKK 668 million last year. This is due to increased earnings, lower net loss from realized foreign exchange hedging contracts, countered by higher taxes paid. Return on invested capital after tax was 40%, up seven percentage points from last year, as we continued to increase earnings on a stable asset base. I will please ask you to turn to slide number six. It has been a while since we last commented on healthcare reforms relevant to Coloplast. I would like to update you on the key developments.
The overall reform environment is largely unchanged, but there are a couple of noteworthy developments. In 2012, the French government announced planned savings of EUR 350 million total, implemented over five years. Two weeks ago, the French authorities proposed that reimbursement prices for ostomy and continence products could be lowered by as much as 5%, with implementation from September 2013. It's too early to conclude or provide a specific estimate as to the financial impact on Coloplast, and we will revert with more information when final. We also see that French healthcare authorities are increasingly reluctant to provide specific reimbursement for wound care products containing silver. In the Netherlands, we see efforts by the government and health insurers to seek cost savings through new reimbursement models that they expect to implement in 2014. We do not know the structure or the impact of the new models.
Overall, we believe that reimbursement and reform trends continue broadly to be in line with our overall long-term guidance of -1% pricing pressure per year. For 2012-2013, however, we expect very limited price pressure, and we continue to expect revenues to grow 6%-7% organically and 5%-6% in Danish kroner. The growth guidance continues to be based on stable growth in the European business, whereas we expect the U.S. market to exceed last year's growth. We expect our emerging markets to go at least in line with last year. Growth in U.S. and emerging markets, however, remain volatile due to difficult-to-forecast distributor uptake between quarters. When forecasting the second half of the year, it's important to keep the distributor consolidation in the U.K. last year in mind, as this impacted the growth numbers in both Q3 and Q4 last year.
This means that on an all other things equal basis, we will see a relatively low growth in Q3, followed by a relatively high growth in Q4. The effect between the quarters is estimated around DKK 40 million. For 2013, we continue to expect an EBIT margin between 31% and 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%-7% organic growth. We expect gross margin improvements within the half to one percentage point range, and we continue to see cost discipline in the organization. Our CapEx guidance for 2013 is around DKK 400 million, and our effective tax rate is expected between 25% and 26%, consistent with last financial year.
We continue to generate high cash flow. Our liquidity situation allows us to use the mandate for extraordinary dividend in 2012-2013, provided by the AGM in December 2012. We are therefore returning DKK 634 million in extraordinary dividends, corresponding to DKK 3 per share. We have also spent a total of DKK 94 million on our second part of our share buyback program, with DKK 500 million available for repurchase of shares. 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 the line of Alex Kleban from Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking the questions. Just, so for Wound Care, first off, congratulations on the good quarter. Could you just give a sense, though, of how much for Europe is a result of the strategic changes implemented a while back, or how much maybe we have some kind of more one-off effect happening in the quarter? Second question was on the litigation. We have the West Virginia case, also, the Georgia MDL is out there as well, just wanted to know if you can confirm whether or not there could be any impact on you from that one? Just last question is, just for the U.S., for the distributor inventory reduction, just to get a sense of if and when you see that kind of reversing out or normalizing later on in the year. Thanks.
Could you please re-repeat the last question?
Just the distributor inventories in the U.S. You talked about the merger.
Yeah.
-to understand how that normalizes or if that normalizes in, Q3 and Q4.
Yeah. Let's take that one first. The distributor inventories are not going to normalize as we see it. Actually, what happened was that first, AssuraMed, they bought ISD, just a few weeks later, actually, Cardinal bought the new AssuraMed. Those were three of our significant customers in the U.S. that then became one customer. They, of course, need a lower stock than when they were three individual customers. We see this as a one-off. Of course, that is impacting the U.S. numbers this quarter, they will not come back because we think that going forward, they will have a lower stock compared to what they had when they were three individual companies.
That's basically just a one-off. Then your wound care question was, you know, how much in Europe? What we can say is that Europe is, you know, have stabilized compared to what we had in the past. We see that Germany is doing better, we see that U.K. is doing better, but we are still having, you could say, headwind in France, even though it's less than what it used to be. Spain is a market which is really, really difficult to work in for the time being.
But I would say that on balance it's what we see now is an impact from the strategy that we have pursued for quite a long time, namely to invest in emerging markets and go for stabilization in Europe. Then to top it off, we then started to deliver on a big contract in the U.S. The U.S. is actually stronger than also what we dared hope for at the beginning of the quarter. Regarding the litigations, you know, in general terms, it's really, indeed, it is really early days for us with the litigations that we have in the U.S.
It is customary that when you have these cases against the industry, whether it's our industry or other industries, that it is quite lengthy processes. We have been told that it is up to six years when you have an MDL. Everything is, I would say, quite new to us, and we are looking at every individual case and sorting that out so that we know what we have in front of us, and we haven't concluded on that work yet.
Thanks a lot.
The next question comes from the line of Michael Jüngling from Morgan Stanley. Please go ahead.
Hi there. This is actually Patrick Wood on behalf of Michael. Just a quick one on the mesh litigation. You obviously highlight you don't expect there to be a significant impact, but just wondering, what would it take for you to revise that view? Would your viewpoint change if there were more verdicts along the lines of the J&J case? That's it. Thanks.
We have the stated as we had that with the knowledge that we have today, we don't expect it to have a significant impact. As Lars mentioned, we are in very close contact and following this very closely, and obviously, if we do see something that makes us think that this is very different than we believe today, then we will obviously need to revise. We can only use the information at hand, when looking at that, then our best estimate is that it will not have a significant impact on Coloplast.
To add to it, we, you know, this is a Multidistrict Litigation. That means that every single case is treated as a unique case. This is not a class action, where you can take one case and when, and then, multiply it by, with, you know, the number of cases that are present. Every single case will be handled as a unique case. That is also why it takes a while to sort it out, because we have to look into every single case in order to understand what we have in front of us.
Yes, I mean, absolutely understood. I mean, from our point of view, it was really just a question of is there any individual event that could happen that would make you raise a provision or substantially revise your view?
That's very...
What would it take?
That's very difficult to answer.
Understood.
I mean, we can only look at what we know today, and of course, if that changes, then we will act upon that appropriately, but we can only talk about what we know today.
Brilliant. Thank you very much.
Your next question comes from the line of Veronika Dubajova from Goldman Sachs. Please go ahead.
Good afternoon, it's Veronika Dubajova here from Goldman Sachs, and I have three questions, if I can. My first one is on Brazil. Lars, you mentioned you've seen some good improvements in the growth rate there. I'm just wondering how sustainable that is, and is this your initiative starting to pay off, or, is it too early to tell yet? My second question is on the US Ostomy business, and this is sort of two part. One, just wondering if you can give us a sense of where you think you are now, you know, what your share of new patient discharges is, and how it's trended over the past couple quarters. I know you won't give us the precise numbers, but qualitatively give us an understanding of how much progress you're making on that. That would be very helpful.
Related to that, have you seen any impact from having been taken off one of the GPO lists, and is there an update that we might see from you on the GPO side here? My last question is for Lene, and that's on tax. Given the changes that we've seen in Denmark, to the corporate tax code, what might that mean for your tax outlook, not just for this year, but over the next 3-4 years? That would be really helpful. Thank you.
Okay. Regarding Brazil, well, in a sense, yes, it is paying off that we are investing in Brazil, we have actually invested, quite thoroughly in Brazil. It's, I think that we have made no secret out of the fact that we were not satisfied with the way that we were executing on our, on our business in Brazil last year, we had some changes to our organization. They have now, you could say, been implemented, we have the team in place both for ostomy and for wound care, they are both these teams are working, I would say, at least to the level that we had expected. We are very, very satisfied with that.
We don't see this as a blip or a, as a, you know, as a one-off. We see this as a continuation of a very long history of investing in Brazil, and where we today have an organization which is now divided into an ostomy organization and a wound care organization that are separated, and that are running with each their separate goals and targets, and we see a very strong performance there, which we expect to continue. Quite frankly, on the U.S. ostomy business, well, we definitely have done quite a bit to improve on our NPD numbers in the U.S., but that have not been the prime target, though.
The prime target for us or the prime goal for us in the U.S. have been to strengthen the collaboration with the dealers because in the U.S., we have a higher new patient discharge market share than community market share. What you see in the U.S. is that the patients that are coming out from the hospital with an ostomy bag from Coloplast on the stomach, they're actually being converted downstream. The most efficient thing for us to do was to say, you know, well, build on the NPD we have now, but put more efforts into making sure that people who are actually leaving hospitals with an ostomy bag from Coloplast on the stomach, that they at least also stay on that.
We have done a lot to invest in the relationship with the dealers in the U.S., and that has paid off tremendously, and that is why you see this take off in the U.S. That is also what have paved the way for making sure that as we are winning hospital market shares or NPDs going forward, we are also getting the full effect from it. We had the impact from the GPO, and I would say it's simply too early days. It's, it takes time to implement GPO contracts, and as I also said, you know, we are implementing full speed, but we are putting even more effort on making sure that the relationship with the dealers is top tuned.
Okay, you have the last question about tax, Veronika. It is correct that the Danish government has proposed that the corporate tax, in tax rate in Denmark is lowered from presently 25% to 22%, they expect to do that gradually, 1 percentage point per year. That will be fully implemented, sorry, in 2016. It is not approved by parliament yet. I have to say that's also why I didn't mention it. There is, of course, that hopefully small risk. That will have an impact on us, as historically we have approximately 80% of our profit that's taxed in Denmark. We will get a good effect of that. I hope that answers your question.
That's great. Thank you, Lene. If I just can one quick follow-up on the extraordinary dividend, and congratulations.
Mm-hmm.
on announcing that. Just wondering-
Thank you.
-why you still believe that you need to maintain DKK 1 billion in net cash, as you think about, you know, what the right capital structure is for the business going forward?
Well, our capital structure as it stands right now, is, as we have explained, that we are repaying our debts, and we're almost done with that. We have very, very little left, and then we have, as we have also said, that then we want to have about DKK 1 billion in cash so that we are able to act if something of a larger scale comes along. We have also committed to taking the excess of that and repaying it to shareholders, and that's what we are doing now, and that is what we will, of course, continue to do with the capital structure we have as of today. You know, that capital structure, you know, we review that with the board basically on an annual basis, but that is the way it stands today.
That's very helpful. Thank you very much.
Your next question comes from the line of Ed Ridley from Bank of America. Please go ahead, America.
Good afternoon. Thank you. A few follow-up questions, please. First of all, on the litigation in the U.S., it seems to me there are a number of misunderstandings in the market. Could you, Lars, maybe talk to the differences between the products? Because there are, as far as I'm aware, differences between your product and the other manufactured products, and indeed, your new products and your old products. On that basis, it seems to me that the risks associated with one product are not necessarily risks associated with another product. That would be my first question.
Yeah, thank you for that question. It is correct that first, we have two different types of products. We have the mesh, which is used for pelvic organ prolapse, which is, you could say, the sort of, physically bigger products. Then you have, the slings, that are used for stress urinary incontinence. We have, historically not had, so much business within the mesh, but we have had more business we've had in the slings. That is, that is correct. I don't know what you mean about the new and the old products, because I don't think that the new products, if you talk about the new slings that we have, they are subject to this litigation, yeah.
It might be that what Ed is thinking about is our Repliform mesh.
Exactly. Exactly.
Yeah, okay.
And, uh, and they-
Yeah.
One of the lightest meshes in the market.
Yeah, of course, we have the lightest weight mesh in the market. What you normally say is that the lighter the mesh is or the product that you put into the body is the less risk that it causes any trauma afterwards. In this, you know, we also have to say, as I said before, we have not really been deep into this, so therefore, we haven't so that we don't have a full overview of what is, you know, what kind of cases there are. It's, you know, it's definitely fair to have the distinction between slings and mesh, and also a distinction between the lighter or the heavier products.
Just a follow-up on that is, since the FDA panel a couple of years ago, which you, we discussed, all discussed at the time, the FDA encouraged manufacturers to, you know, assimilate sort of safety data. Presumably, you have pretty, good data, at least over the last couple of years, on your safety record.
Yes, that's correct. We also, at this point in time, have, as you know, the only sling in the market which have been approved by FDA after they have issued the safety warning. Also, you know, it's also approved after the new and tougher clinical trial recommendations. You, as you can hear, I'm a bit hesitant to go deep into it because it is an ongoing case. Therefore, we can talk about the facts, but I won't like to speculate about any outcome.
I understand. My final question related to the litigation. Just in terms of the Mentor Corporation case in Georgia, my understanding that is a Johnson & Johnson risk because of... My understanding is that when you bought Mentor, you effectively, the deal was done on excluding Mpathy.
Yeah.
That's-
Yeah, that's correct.
That's correct. It was excluding the Mpathy, yes.
Yes.
Very good. Final question, not on litigation. I just wanted to ask, just ask about the special dividend. Obviously, good news, but could we potentially consider that you may look at adding, as it were, a full year special dividend to the interim dividend? Or do you think that's more likely to be next year now?
Well, I think you should think about this as being what we call them extraordinary dividends. That's how we think about them. We think about ordinary dividend as we have always done, and that will sort of continue along the same lines, under the same policy lines we have had previously. The extraordinary dividends will actually come up when and if we see that liquidity is at such a level that we, you know, could potentially come, you know, have much more than that around DKK 1 billion. I think you should not try to put them into a normalized picture. That's sort of the whole idea about that they are extraordinary, how we think about them. Ordinary dividends as usual, and when we have excess liquidity on above the DKK 1 billion, you should be expecting extraordinary dividends.
Very good. Thank you very much.
The next question comes from the line of Niels Granholm-Leth from Carnegie. Please go ahead.
Good afternoon, Niels Granholm-Leth from Carnegie. first question is on the gross margin. The decline you saw by almost a percentage point compared with the first quarter, is that only due to worse currency effects, or is there also some mix effects selling more in emerging markets, for example?
That is mainly due to currency effects.
Okay, thank you. Second question on, also on the mesh litigations. If I remember correctly, you have talked about some kind of insurance, that could protect you against this, previously. Could you say something more about that, and if that's, insurance that was signed when you did the Mentor acquisition, or if it's a normal product liability insurance? Thank you.
Yes, Coloplast does have insurance, and we are working closely, working cooperatively with our insurance partners. We have a policy not to comment or disclose any information about specific policies, about.
Okay, thank you.
Once again, if you have a question, please press star one on your telephone, and if you wish to cancel the request, please press the hash key. The next question comes from the line of Ian Douglas-Pennant from UBS. Please go ahead.
Oh, hi. Yeah, thanks for squeezing me in. Just on, not on investigation, on the acquisition, potential going forward, I mean, how do you see that market going forward? You know, essentially, I'm trying to ask, are you gonna do a deal without actually asking that? Thanks.
Without actually?
Without actually asking the question outright, 'cause I know you won't answer that.
Okay. Okay, you wanna know whether we want to do a deal?
Now you're going to answer without really answering.
Yes, I'll answer without really answering. We have part of having the capital structure as it is, obviously, is to make sure that we are in a position where we have some firing power if something attractive should come along. That, I guess, answers a little bit about what you're saying. Of course, we are also in a situation where, yes, we would, of course, rather invest in the business than pay out to shareholders. On the other hand, we also know that there is not that much available at the moment. We are cautious about this.
Cool. Thank you very much. Thanks.
The next question comes from the line of Yi-Dan Wang from Deutsche Bank. Please go ahead.
Thank you very much. I have two questions. First of all, on the U.S. Ostomy business, do I take it from your comment that we've not really seen much benefit from the GPO contracts that you've signed so far? If that is the case, when could we start to see some of that benefit? The second question also relates to U.S. Ostomy. For the community share, can you give us a sense of, you know, how much increase that you've experienced so far? On the second topic, I'll come back after you've answered these. Thank you.
You should have a lot of points for really trying to get us to talk about market shares. The U.S. ostomy business and the GPO contracts. Of course, we're in a better position with the contracts that we have, and we can also feel that. As I said before, we have not closed the gap yet between our hospital market share and the community market share. That is the most important to us, and that is really a big part of the growth that we see in the U.S., that we are closing that gap. For every day that passes, we have a better relationship with the dealers.
We are driving a lot of business their way, and that is how you, over time, build a relationship that makes sure that we will have full benefit from the implementation of the GPOs that we are implementing on, or that we are winning on the ostomy side. This is not something that we fix from one quarter to another, this is a relationship that we are building over time. So I am, you know, personally, I'm very, very, very happy with the buildup of relationships that we are, that we're having with the dealers, and I'm also happy with the implementation of the GPO contracts. The implementation of the GPO contracts is a lengthy process.
It is not something that you do from one quarter to another. You have to go to every single hospital. You have to get your products on the shelves. You have to make sure that the staff is well trained, and that is how you start selling over time, so this is a long-term business. You will see that the business will be moving faster than just what we have on new patient discharge rate improvement because of the improved relationship with the dealers. The community market share, it's, you know, I think that what we normally say is it's around 10%, and it that have not moved significantly in the last quarter.
Okay, if you were to close that gap completely, what would your community share be?
Well, higher.
How much higher?
Somewhat higher, but, you know, you're not going to get a number.
I'll stop there then, on that one. If, so, another way to ask the question, that gap, how long do you think it will take you to close the gap at the speed that you're going at the moment?
That's a very good question. Actually, we have picked up speed maybe a bit more than what I have thought we would be able to. As I said, I'm really happy with the progress that we are making. We have made a strategy for how to win in the U.S., and it's now a bit more than two years old, and we have I would say that we are following it to the letter, and it's really working out the way that we expected it to, or maybe even hoped it to do maybe. We haven't changed much in that, and we are going to follow through on this. Whether that gives us two points more or less per year, doesn't really matter.
It's a matter of how fast we are able to implement what we have in front of us.
Okay. On the second topic, which is U.S. Continence Care market, the upgrading of the catheter market.
Yes.
My understanding is that the value is in the product being available to selective distributors. How do distributors qualify to participate in this initiative? You know, is there any collateral damage from people who don't qualify?
No, it's, you know, I won't make any secrets out of the fact that we would like to do business with as many dealers as possible. There is no doubt that there are that, you know, we have in the beginning, we had to focus in on a few dealers. Where we are now, we are quite open to do business with dealers. Of course, we are also looking at the financials. We would rather have, you know, few key accounts that are really able to move the needle than really trying to do everything with everybody, if you understand what I'm saying. We are pushing some relationships more than other relationships, of course.
Again, in terms of timing, how, you know, how fast are you moving, and when could you complete this process? How long would it take you?
Yeah, no, that's a very good question because it's also about being able to reach out and also have people wanting to use something else than what they were using in the past. I couldn't give you an answer to that. What I would say is that there's still plenty to go for. It is also important to remember that you need the dealers to buy into this, because for every patient that we are converting, the catheter sales, you know, the value of the catheter sales is lower for the dealer and higher for Coloplast. They need to be able to see the benefit of the extra business that they get with these patients coming on board. It's, you know, it's not just kind of an easy sell in every single instance.
Last question on both U.S. Continence Care and Ostomy. In terms of resources that you need, do you need additional feet on the ground to complete both of these initiatives?
In the U.S.?
Yes.
Yes.
Okay. How much additional resource do you need?
Do you want a number?
No, just qualitative is fine. I'm happy with that. As long as it's a good qualitative answer there.
No, we need more resources because we don't have full coverage to the tune that we wanted yet. As you also know, this is a very competitive business, so of course, we don't want to give numbers or timing or anything on it. We have gradually upgraded our organization in the U.S., and we are more people there than a year ago, and we will also be more people next year than we are right now.
Perfect. Thank you.
You do know that we are actually investing quite a bit in sales force, both in the U.S. and also in emerging markets.
Okay. That's a very good qualitative answer. Thank you.
Mm-hmm.
Your next question comes from the line of Scott Bardo from Berenberg Bank. Please go ahead.
Thank you for taking my questions. First question, please, and just as on the surgical mesh litigation, I'm encouraged to see that you don't think there's any need to concern related to your financial statements. Can you just clarify that this is an internal assessment at the moment, and comment maybe if there's any requirement for an external audit stroke expert to assess your potential liability and whether that could impact your finances going forward? Would just appreciate some commentary there. Secondly, on the U.S., two parts to this question. Firstly, I wonder if you could help us understand why we're seeing such acute price pressure in the Self-Cath market. That's a market that you have around 50% share of, if I understand correctly.
Why are we seeing pressure there? Is that anything we should be concerned about in the future or should concern that's stabilized? Secondly, on the recent movements in the channel, I think you've flagged Cardinal buying AssuraMed, including Edgepark, the biggest ostomy distributor. Apart from obviously the near-term inventory impacts, is there anything we need to consider in terms of slightly higher pricing pressure on your products or deteriorated sort of negotiation conditions for you, given that the channel is now strengthened? Just some commentary around that would be appreciated. Thank you.
If I start with your question about the mesh and the fact that we say we don't expect this to have any significant financial impact, that is based obviously on what we see and our knowledge. On top of that, we have shared all the knowledge that we have with our external auditors at PricewaterhouseCoopers. We did that both towards the end of last year and are continuously keeping them updated on what's happening. I hope that answers your question.
Thank you.
On the pricing pressure on IC or Self-Cath in the U.S., I would say it's not new, so nothing had really changed. You could say that the IC market historically was quite limited in the U.S. When the government opened up, or Medicare opened up and made it possible for people to use a clean catheter every time they had to void, then more players came into the market. The market was completely underdeveloped, so a lot of what is being used in the U.S. are basically, you know, what we call raw catheters with a gel on them.
In a sense, you are able to sell, you are able to get a full reimbursement, Medicare reimbursement for a product which is, I would say 50 -year- old technology. As long as the market is not completely aware that they could also get the newest technology for the same price, then there is a window of opportunity for bounty hunters, and therefore, you see a lot of cheap products flowing into the market. That is why we are fighting up against that because we still sell a lot of the EasiCath, the Self-Cath products in the market. That is also why we are converting away from that, and quite successfully so.
Until the conversion is complete, you could say, then you will, of course, see that there are some that are trying to trade in products at a lower price. Quite honestly, there are little differences between the low -spec catheters. That's the reason for it. Regarding the contract negotiations with, you could say, the new distributor we now have, which is now a combination of ISG AssuraMed and Cardinal, that process have taken place, and the contract is signed. It is now, you could say, a normal business relationship.
Can you perhaps comment whether the terms of that contract were materially different from what you had previously?
I would say, it's of course, a completely classic discussion where you suddenly have a bigger customer who thinks that they deserve a better rebate. On the other hand, we have a company with what we think is the best products in the market. We're always willing to talk about the price if that is on the basis of a bigger business to us. I think it's what you could call a win-win contract.
Thank you for that. Last question, then please, just on the special dividend and pleased to see some of the capital distribution occurring. I just wonder, is it fair to say that if we do not see another extraordinary dividend in the next quarter and just a normal dividend that you see in the full year, that in the absence of any acquisitions, you won't have redistributed your capital over sort of DKK 1 billion? It seems to me that at this juncture, and given your guidance, a special dividend could have been higher than the one that you announced today. I just wonder, are you just sort of freeing yourself up a bit of capital to make an acquisition? There's some Bloomberg comments around acquisitions.
Just maybe some commentary on this capital allocation, around DKK 1 billion. Thank you.
I'm not 100% certain what the real question is here, I can give you just the thinking behind the extraordinary dividend. It's quite straightforward in that we have looked at our liquidity position, and as you can see, if you look only at what we have available liquidity towards the end of the quarter, you could say, "Why didn't we pay out more?" We also, in April here, have paid out quite a lot of the remaining debt. That's what you can see under short-term debt in our balance sheet. When we look at our liquidity, we actually stick to what we have that we don't want to go above in any significant way, in any DKK 1 billion as we have as a buffer.
If you do that calculation and take into account that we actually repay quite a lot of loans in April, and we also have a share buyback program, then the DKK 3 is something that fulfills what we have said that we're going to do, i.e., pay out anything or when above the DKK 1 billion as a buffer.
Thanks very much, Lene. Just to understand, there is potential for another special dividend in the third quarter?
I won't say that, because, obviously, first of all, it's up to, you know, how much we actually make, and it's up to the board, how often they want to do that. I don't feel certain that this is something that they want to do every quarter.
Great. Thanks for taking my questions, guys.
You're welcome.
The next question comes from the line of Niels Leth from SEB. Please go ahead.
Yes, good afternoon. Two questions, if I may, and probably most relevant for you, Lene, to answer those questions. You talked about in your presentation about the that you have established sales representations in Middle East, Brazil and India, I believe it was. Could you just provide a little bit more color to your buildup of sales representation in those three countries? Meaning, what is the size of these sales offices, and how much of your sales would they all together represent of your group sales today?
...We don't want to give sort of specifics as to how much we are actually investing in each individual of our sales initiatives, nor specifically how many feet we are putting on the ground. I think what's very important, and which I mentioned, is that we actually invested in the first half, a total of DKK 60 million in the initiatives. I think that actually is quite a significant amount as most of that is recurring. It gives you an idea at least, that we are actually investing along the lines that we said that we will do. A s to, again, I can't give you sort of specific details into what we're, how much or how much these markets are. If we look at the BRIC countries, then they are approximately 50% of our emerging market sales. That at least gives you some idea without me answering specifically.
Okay, thank you. Finally, just a housekeeping question. Looking at your depreciation and amortizations for the second quarter, specifically, it seems like that line has increased by DKK 10 million-DKK 12 million. Have you made any write-downs in the second quarter?
We have not made any specific write- downs, or above the smaller things that one always does, and I'm just looking here to make sure if there's anything else, but there hasn't been any specific write -downs.
Okay, thank you.
Yeah, there is a bit of currency impact in this as well.
Okay, the DKK 134 for the second quarter should be the run rate going forward?
Pretty much. Yeah, there's nothing specific, at least in that quarter.
Okay, thank you.
The next question comes from the line of Oliver Metzger from Commerzbank. Please go ahead.
Hi. Thanks a lot for taking my questions. First is regarding agreement with Novation. Probably you can give us an update in general, and do you regard the development of this contract as significant right now after that was implemented? Yeah, a little bit more than 1 year ago. Second question is, you told in one of our previous questions about the consolidation of the distributors in the U.S. and also about the negotiations. Do you think that this trend in general could continue, and so that further consolidations might happen with a stronger negative price impact long -term? Finally, on the improvement of wound care business. There's also the skin care and wound care. If you compare both businesses, which has performed better, or have you seen a general recovery of the whole wound care business? Thank you.
I can't put much more flavor on innovation, thing that what I already said, because it, you know, the thing is, it's fantastic that we have gotten into these contracts both for Novation on the Ostomy side. The most important thing for us and priority number one still is to make sure that we that we are closing the gap between our ending the NPD rate, and our co, community market share. Dealers, relationship with the dealers is priority number one, implementation of Novation is, of course, also important, that will impact our growth rate positively longer term. That is not a short-term thing.
The consolidation of the trades, I think that's a natural tendency. That is what you see in the business. That means that you will have entities that have a stronger negotiation power. You also have to remember that we, you know, we are not completely just victim to that because the whole idea behind the way that Coloplast is innovating products, the whole way that we are designing our products is to create to make sure that we are creating a pool in the market, making sure that people know about it, and they ask for it, because then they are entitled to have it.
There are also upsides to us, because when you have strong dealers, especially in the U.S., they can push your business. When you come up with new and better products, they also get more customers into their business, and in that sense, it goes hand in hand. It's a kind of, you could say, a power balance, but I think that's the game and that is how it is. There's no doubt that skin care for Coloplast have been working quite well over the last couple of years, and now wound care is picking up, so you get consolidated wound and skin care business, which is stronger than it was before.
I actually think that we are over time now. I would also like to say that that would be the last answers from us. I know that we are going to meet quite a few of you on our roadshows, looking forward to that. Thank you for that, for participating in today's meeting.
That does conclude our conference for today. Thank you for participating. You may all disconnect your line. Thank you.