Good afternoon, ladies and gentlemen, and welcome to the Coloplast Nine Months, 2011/2012 Financial Statement Call. The presentation will be followed by a Q&A session from the telephone. Telephone participants may ask a question by pressing star one on their telephone keypads when prompted, and if you require operator assistance at any point, please press star followed by zero on your telephone keypad. Just to remind you, this conference call is being recorded today, the 15th of August, at 3:00 P.M. C.T. time. I'd now like to hand over to the chairperson, Mr. Lars Rasmussen. Please begin the meeting and I'll be standing by.
Thank you very much. Good afternoon, and welcome to this Q3 2011/2012 conference call. I'm Lars Rasmussen, CEO of Coloplast, and I'm joined by CFO Lene Skole and our investor relations team. As usual, Lene and I will start with a short presentation, then we open up for questions. Please turn to slide number three. In Q3, we delivered a quarter in line with guidance and our own expectations. We delivered 5% organic growth for the quarter and 6% year to date. Consolidation of distributors in the U.K added more than 1%, percentage points to growth in the third quarter, while lower sales from contract manufacturing of Compeed reduced our top line growth with more than half a percentage point. Adjusted, the growth in the quarter was 4%.
We report a solid EBIT margin of 29% for the nine months of 2011/2012, and 32% for Q3 in isolation, which I am very satisfied with. For the full year, we continue to expect around 6% organic growth, and we expect around 8% reported growth based on current exchange rates. For the EBIT margin, we now expect to deliver around 29% in local currencies and around 30% in Danish kroner, also based on current exchange rates. Lene will provide more details on the guidance at the end of this presentation. Please turn to slide number four. Revenues were up by 6% organically and 8% in Danish kroner and amounted to almost DKK 8.2 billion. Ostomy Care organic growth was satisfactory at 6%, both in the quarter and for the first nine months of 2011/2012.
The growth was driven by good performance in most European markets, especially in the U.K. In Continence Care, organic growth was 9% in the first nine months of 2011/2012, also 9% for the quarter. We continue to be satisfied with our performance in Continence Care, where both our intermittent catheter line and our collecting device products perform very well. In total, our Chronic Care businesses grew 7% for the first nine months and 7% for Q3 2011/2012. In Urology Care , organic growth was 5% for the first nine months of 2011/2012, 4% for Q3 in isolation. Sales of female slings continued to decline, while sales of mesh for pelvic floor repair remained satisfactory in Q3. Sales growth of penile implants continued its satisfying performance during the quarter.
European Urology business saw a slightly weaker quarter, with no particular or identifiable reason behind it. Our Wound & Skin Care saw organic growth of -2% in the first nine months of 2011/2012, and -5% in Q3 2011/2012. Year to date, our wound care business declined 4%, as it continues to be impacted by strong competition and adverse market conditions in the main European markets. In Q3, however, the decline slowed to 2%. Our U.S. skincare business saw very satisfying growth in Q3, whereas our contract manufacturing saw a sharp decline in growth rates during the quarter and was the main reason for the lower growth in Q3. Turning to our reported geographical segments, we saw satisfying organic growth in Europe of 5% in the first nine months of 2011/2012, and also 5% for Q3.
Consolidation of our sales through third-party distributors to now only two distributors in the U.K. led to stock filling, which increased growth by more than 1 percentage points, as mentioned earlier. Organic revenue growth in the Americas was 8% year to date and 4% for the quarter. Despite a low quarter impacted by distributor order patterns, our U.S. business sees satisfying growth in both Ostomy Care and Continence Care, and the U.S. management continues to execute on the plans laid out last year. We continue to see declining growth rates in Brazil. Organizational changes last year led to a change in focus from NPD towards tender, and we are paying for that now. The situation has been solved in Brazil, and we are now seeing uplift in our NPD numbers.
Revenue in the rest of the world grew 6% organically in the first nine months of 2011/2012, and the quarterly organic growth was 5%. The region was especially impacted by declining sales of contract manufacturing during Q3. China continues to grow in line with our expectations, whereas growth in Japan and Australia improves more slowly than expected. I will now hand over to Lene.
Thank you, Lars. We are now on slide number five.
Gross profit amounted to DKK 5.4 billion, equal to a gross margin of 66%. This is an improvement of 2 percentage points compared to the same period last year. In line with previous quarters, continued efficiency in the production economy and higher absolute sales were key drivers in this positive gross margin development. The reported gross margin for the quarter was 68% and positively impacted by currency fluctuations, especially the U.S. dollar, British pound sterling, and the Hungarian forint. In fixed currencies, the gross margin was 67%. The SGA to sales ratio was 34%, down from 35% in full year 2010, 2011. We have, in the third quarter of 2011/2012, increased our provisions for bad debt in Southern Europe by DKK 34 million, related mainly to Greece, where we now have outstanding payments overdue.
Bad debt provisions related to Southern Europe for the first nine months were DKK 66 million. Overall, receivables due more than 90 days decreased compared to March 31, 2012, as the Spanish payment plan took effect end of June. The R&D to sales came in at 3% and continued to be below previous spend. The effects from the restructuring of the R&D organization in the second half of 2010, 2011, reduced the overall spend compared to last year. All in all, this results in a reported EBIT margin of 29%, an improvement of 5 percentage points against the same period last year. The reported EBIT for the first nine months of 2011/2012, included extraordinary items of DKK 65 million related to a settlement of an arbitration case and an extra bonus payment to all employees, both incurred in the first quarter.
Net of currency impact, the EBIT margin was 28%. The reported EBIT margin was 32% for Q3 in isolation, positively impacted by more than 1 percentage point from changes in currency exchange rates. The improvement compared to the first half of 2011/2012, was due to increase in revenue, especially in our European markets. Our net profit increased by 23% to almost DKK 1.6 billion, corresponding to an earnings per share diluted of DKK 37.2, against DKK 30.1 in the same period last year. CapEx amounted to DKK 236 million, corresponding to a CapEx to sales ratio of 3%, reflecting continued low spend. Free cash flow was up 69% to DKK 1.5 billion compared with the same period last year.
The increased cash flow compared with last year, was due to increased earnings, working capital increasing less than in the same period last year, decrease in taxes paid, and the acquisition of Mpathy Medical Devices last year. The positive effects were partly offset by an increase in net loss on realized foreign exchange hedging contracts. Return on invested capital after tax was 36%, up 8 percentage point from last year. This quarter, our interest-bearing assets exceeded our interest-bearing liabilities by DKK 142 million.
Since our last healthcare reform update to the market in connection with our Capital Markets Day in June 2012, we have noted that the Ministry of Health in France has started a new dialogue with the medical device industry, with the aim of obtaining savings on medical device spendings of up to EUR 350 million over a five-year period, starting from 2013. We expect further information from the French authorities in September this year. In Italy, the Senate passed a large austerity package, where a part of it will cut healthcare spending with EUR 5 billion over the next three years. The package still needs final approval from the House.
In both cases, we do not have sufficient detail at this time to make a full assessment as to the impact on Coloplast. Hence, we make no changes to our current estimate of a 1% annual price decline. We will keep you informed as we receive further information. Please turn to slide number six. For 2011/2012, we still expect to grow around 6% organically and around 8% in Danish kroner at the current currency exchange rates. In particular, the strengthening of the U.S. dollar and the British pound sterling impact our guidance in Danish kroner. As expected, we realized a growth in Q3 that was lower than the first half of this year. We expect that our Q4 will be at least in line with Q3, especially as the comparable quarter last year was low.
Order patterns should also impact positively, whereas we expect growth rates in the U.K. will decline compared with Q3. We are keeping our 6% organic growth guidance for 2011/2012. Despite increasing provisions throughout the year, we've continued to make significant improvements to our margins. This has also been the case for this quarter, where earnings have been impacted positively, especially by a stable cost base and positive leverage effect from good European growth rates. We expect those effects to continue into Q4, and therefore we have a slight upward adjustment to our expectations. For 2011/2012, we have upward adjusted our EBIT margin guidance in constant currencies to around 29% from previously around 28%. At the same time, we raised the guidance in Danish kroner to around 30% from previously around 29%.
Our CapEx guidance for 11-12 is unchanged at around DKK 300 million, corresponding to 3% of sales. Finally, our effective tax rate is also unchanged at 25%-26%. Now, this concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Thank you. Ladies and gentlemen, if you do wish to register your question at this time, please press star one on your telephone keypads. Once again, that's star one to register your question or comment and the hash or pound key to cancel. Our first question comes from the line of Veronika Dubajova. Please go ahead with your question, announce your company's name.
From Goldman Sachs. Three questions, if I can. The first one is just on the contract manufacturing and the Compeed line. Can you comment on what drove the significant drop-off that you saw in Q3, and how are you thinking about that into Q4 and then beyond? My second question relates to the hedging losses that you took in Q3. Again, Lene, I don't know if you have any guidance as to what Q4 will look like, and then given that you are continuing to see this currency benefit also into the next fiscal year, assuming that currencies hold, is it fair to assume that you will see some of that benefit disappearing in the financial expenses line, because of the hedging that you have in place? My last question relates to the R&D spend.
Yet again, we saw a quarter where it was meaningfully below trend. Do you still think that in the long term, it's fair to assume it's going to trend back towards 4%, or should we be reassessing that assumption in our models?
Thank you, Veronika. Let's start with the contract manufacturing. The reason why it's, as we understand it, because we don't have much visibility on it, because it is contract manufacturing. We understand that J&J have changed the way that they put in the orders. We would expect the next quarter to be flat. We have had a maybe a higher sales the quarter before and a lower sales this quarter, and then we expect it to be flat for this quarter. That's what we know. It might be a bit different, but that's what we expect. On the R&D spend, you should still expect it to go back.
It's, but, you know, I can see that we are spending a little bit less this quarter, but you should still expect us to keep up the spending. As we also said on the capital market day, we are actually having quite a full portfolio running, and we are very committed to bringing new products to the markets, and will do so. For your second question, I think Lene you have a comment to that.
Yeah, Veronika, on the hedging, I know it's very difficult to predict exactly what comes in, because, of course, that depends very much on when sort of, exactly when the hedging contracts are made and so on. What we do is that we, hedge on average 11 months, and we are relatively consistent with that. That means even though you might see what you would think of, you know, surprises between the quarters, then, they are more timing difference than they are in any ways, a, reflection of a change in our hedging policy. Now, for your actual question, what should we expect in Q3?
Very difficult to predict, but if we look at what we have with current exchange rates, what we have still not realized, if you see what I mean, that would be about DKK 100 million. Given that we hedge around 11 months, you should see a proportion of that coming in Q4. As I recall, the way currencies have moved, I would expect a relatively large part of that to come in Q4. That's the best I can do now, but it is, it's difficult to predict exactly.
Understood. Thank you for that.
Once again, ladies and gentlemen, it's star one to register your question and the hash or pound key to cancel. Our next question comes from the line of Klaus Madsen. Please go ahead with your question, sir, and announce your company's name.
Yes, hello, it's Klaus Madsen from Handelsbanken. My first question relates to your growth in the rest of the world. Could you break down, at least qualitatively, the growth you see in the emerging market section of that segment and in the mature markets, and comment on any change in the dynamics? Secondly, on the gross margin, which has a very impressive sequential improvement around 2 percentage points, could you break that down into the sort of underlying efficiency improvement component and the impact of, in particular, the U.K. stocking effect in the quarter?
Finally, could you provide us with an update on the, yeah, on your current performance in slings, and also the expected launch of the Altis Mini Sling?
When it comes to the rest of the world, I think the best way we can guide for you is to say that if you sort of clean out the effect of the contract manufacturing that we had this quarter, then for the rest of the businesses that are in there, they would have the same or have a performance which is in line with what we had for the first half year. It's actually been something that on the way we report the numbers, it's shown quite significantly this contract manufacturing effect.
We are quite satisfied with the performance we have in China, and if you look at the performance also in Australia and Japan in Q3, it's okay. With regards to Altis, there are no news. We still expect it to be launched at the end of 2012. You had some specific questions.
Yes.
On the gross margin.
Your question, as I recall it, Klaus, was the how much of this is actually efficiency? How much of this is the U.K. stocking? I can't answer it as specifically as that, but I can sort of that 2 percentage point increase, we can split more or less 50/50, to one being efficiency improvements, and the other one being higher sales generally, i.e., not just the U.K. I hope that helps.
Thank you. That's very helpful.
Our next question comes from the line of David Adlington. Please go ahead with your question, announce your company's name.
Hey, guys. Thanks for taking the questions. David Adlington, J.P. Morgan. Just one really follow-up, following the initial questions. Your provisions on bad debts. You've been making some provisions, I think, in Southern Europe and Spain specifically, not this quarter, but in previous quarters. Given the cash coming in from Spain, I'm a little bit surprised you've not kind of written back some of those Spanish provisions at least. Just wondered if you could comment on that. Thank you.
Sure, David. We can do that, and thank you for that question. You're obviously right. It's great that they've paid, and I feel much more comfortable with the money being in our pockets than before. However, we do not see as such, a general improvement in the situation in Southern Europe. Of course, we keep selling, and what they've paid is the public debt older than 2012. As such, there's not an actual underlying improvement, but money has been paid, and that's why we haven't written it back. You could ask: Why haven't we then actually made more provisions? That is because, we have, until this quarter, had a situation in Greece where we didn't have any overdues. We were paid on time.
Now our Greek distributor has told us that at least for the next few months, he will need some extra time to pay. That's why we have increased our provisions.
Okay, great. Thank you.
Our next question comes from the line of Ed Ridley-Day. Please go ahead with your question, announce your company's name.
Hi, thank you. Yes, Ed Ridley-Day from Bank of America. Just a quick follow-up, first of all, on the receivables question, and then a question on the wound business. Is it possible to sort of give us some breakdown of the provisioning between Spain and Greece that you have just made, firstly? Secondly, in terms of an update on the sort of the total provisioning that you've now set aside for the Spanish market? That'll be my first question.
Right. I can't give it specifically to as you have asked. I can say that the reason for the provision we made in this quarter was, to a large extent, Greece. I can say that out of the almost DKK 1.9 billion we have in outstanding, then a little bit more than half a billion DKK relates to Southern Europe, and that's both due and non-due, and overdue. Our total provisions are now in excess of DKK 150 million. That gives you at least some idea.
No, that's very helpful. Thanks. On the wound business, I mean, not as you say, it has partially improved quarter-on-quarter, the last couple of quarters.
Mm.
The core business. Ultimately, you are still lagging the market. I just wondered if you could give us a little bit more color about, A, where you have seen improvements, and, B, really, whether you still believe, as you said, you know, a year ago, that the investment in additional marketing and so forth, that you have made can support an underlying improvement in the growth in your wound business?
Yeah. Thank you. That's really a good question. It's, I think that it's fair to say that we are seeing slight improvements in our wound care business. When we take the countries, and we look at them country by country, we do see more green than red dots on them now. It's a slight improvement, and we are not there yet, so don't take this, that we are satisfied with the performance we have in wound care on the growth side. Yet, we are not. We see that things are moving in the right direction. That is quite comforting for us, because also in the year that have just passed, we are doing some investments to further strengthen the growth there.
We do believe that we are moving towards more healthy numbers in wound care. I also recognize that we have said this before, and it is a slow movement.
Just a quick follow-up. In terms of the, as you say, the green dots, I mean, is it particularly sales investment that's got that back to green in terms of the top line? Or do you think it is more on the product side?
Yeah, it is sales investments, but it is sales investments that we did some time back. We do actually see that some of the biggest things we invested in, if you go 1.5, two years back, we see them starting to kick in now.
Okay, thank you.
Our next question comes from the line of Christoph Gretler. Please go ahead with your question, sir, and also your company's name.
Yes. Hi, Christoph Gretler, Credit Suisse. I have a few questions. Now, maybe first, you know, starting off, you know, with new product, and I was just wondering, you know, you could give us an update on, you know, the performance of this ostomy accessory product line you know you've been launching, how satisfied you are, and you know, what's been, you know, the reception there. Overall, you know, what kind of product announcement we should expect? You know, I mean, if I remember right, you know, an important pillar of your strategy has been, is building on, new products. Secondly, now with respect to the U.S., I was just wondering, is this growing, you know, high single digit or something?
You know, is this strategy in Continence Care really now working as you have expected, also as of very late? That would be my second question. Just quickly on Compeed, actually, I can't remember, but you know, is this an exclusive supply group manufacturing agreement that you have here? If not, you know, what kind of % of, you know, the overall product actually you will supply or you usually supply? That would be all.
For the accessories line, for the ostomy business, which was what we showed at the Capital Market Day in U.K., it's called Prada. That is actually beating our internal forecast for what we expected to sell on it. We are quite satisfied with that. And it is also correct that we, at the same point in time, showed a kind of a blinded portfolio of products that we're going to launch. We are going to launch new products in October. And we will announce it when we are ready to do that. There are basically no changes to what we told you at that point in time. Expect us to launch new products every half year.
That's, that's our plan, and that is what we, what we really try to stick to. For the U.S., the Continence Care plan we talked about there, which is all about upgrading the market to also use SpeediCath products. That is actually in line with our plan. There is a very big price pressure on the normal catheters, our self-catheters, because this is a commodity market where there are many other players that try to get in there. But we are seeing that the take-up in SpeediCath is as we planned it to be. So I would say that for the U.S., it's especially the Continence Care business, which is going according to plan, and we are very satisfied with that.
When we're looking at the U.S. this quarter, we also have to remember that we have some quite big customers there. Swings in the order pattern from these big customers skew the quarterly growth rates quite a bit. Regarding Compeed was a product which was invented by Coloplast many years back, and which we tried to sell ourselves for many years through an over-the-counter channel. At the end of the day, we realized that was not our business, and therefore we sold it off to Johnson & Johnson, I think 11 years ago.
At that point in time, because we have proprietary technology there, we made an agreement to still keep producing this product. It is a product where we are sole supplier to it. They have a lot of other stuff under the Compeed brand. This specific product line is, we are the only ones that supplies that. As such, you know, we sort of live and die with this business with them.
Okay, that's very helpful. Thanks a lot.
Our next question comes from line of Ingeborg Øye. Please go ahead with your question and state your company's name.
Yes, hi, it's Ingeborg Øye at Jefferies. Two questions, please. The first one is on the margin, looking at the companies that you're benchmarking yourselves against for the long-term targets, it looks like for most of these companies, you are by far exceeding their margins. I'm just wondering how high you see these margins can go. What is the real ceiling that you're seeing? Second question is on Italy, thank you very much for keeping us updated on the developments. I was wondering if you have already seen any changes in customer behavior in Italy, because we've heard from other sectors that there have been certainly some reactions to this announcement of EUR 5 billion euro cuts. If you could provide any color on what you're seeing in the market there, that would be very helpful.
Right. Trying to start with the margin, because, of course, I like that question. You're right, it is beginning to look quite good when we compare to our peer group. We are very, very happy with that, and we'll continue to run as an efficient this business as we possibly can. I can, of course, not give you any idea of where we will go, but we will promise that we'll continue to guide you from year-to-year on this.
On the Italian case, we haven't seen any changes in customer behavior yet. Of course, this might be the case once they are back from holidays, but as it is right now, it seems to be business as usual.
Great. Thank you. Just one quick follow-up for Lene. We shouldn't expect an update to the long-term margin outlook, given that it seems a little bit outdated?
Well, I don't think it's outdated. I think having an ambition, saying that you want to outgrow the market, and you want to be among the best performing, that's a continuous and very ambitious target. It's not very many companies that manage to stay there for a long time. I think we'll continue to see that as a very ambitious target.
Okay, great. Well, you've done extremely well on it so far.
Thank you.
Our next question comes from the line of Martin Parkhøi. Please go ahead with your question, sir, and announce your company's name.
Martin Parkhøi from Danske Bank. Just two questions. First, one, a little bit of clarification, at least for me. Lene, you said during your presentation that you expect Q4 to be at least on par with Q3 on sales. Did you mean the growth rate, or do you actually meant in absolute terms? Second question, going back to with respect to the health initiatives you mentioned in Italy, France, could you just remind us of your sales exposure to these two markets? In particular with France, that you have seen some cuts on wound care already. Do you think that you could see a second round on this as well?
Thank you for that, Martin. By the way, my very first comment, happy birthday. I understand it's your birthday today.
Thank you very much.
I just use the opportunity to say that, with regards to what we expect for the fourth quarter, that's the growth rate that I was thinking about, that we expect that to be more or less the same in Q4. I'm just seeing here, we don't have a, I'm just looking at my colleague, sorry, for Italy and Spain, our exposure there. Sorry, what do we have there of information? Around EUR 1 billion in total of sales, of course.
Okay, thank you. Then with respect to the growth rate in the.
Wait, sorry. Are you, we got Ian, I'm sorry, I need to ask Ian here. Are you sure that that is correct? I think to me, it sounds a bit high. Can we just come back in a little while? I'm sorry. I'm not sure that's correct.
Of course.
Yeah.
Just to follow up on the growth rate, which you see will be at least the same in the fourth quarter. Do you expect the inventory stocking we saw in U.K. in the third quarter, should we just expect that to be reversed in the fourth quarter? We should expect to see a negative impact of at least 1 percentage point on the growth.
You should expect that to be reversed. Whether all of it will be reversed in the fourth quarter, or whether it will be reversed over the fourth quarter or, and Q1 next year, we don't know for sure. While we're looking for the numbers here, I can just repeat that our exposure in the so-called PIGS countries is 11% of our total revenue.
Okay. Thank you.
Spain and Italy is about 85% of that. We get close to the billion that we just said, actually.
Our next question comes from the line of Yin Denwan. Please go ahead with your question, announce your company's name.
Thank you very much. I have a few questions. The first question is on the R&D. Can you give us a sense of, you know, how your R&D spend would phase as the products that you've shown at your capital markets day are introduced? Whether it's, you know, more of a back-end loaded kind of investment that you have to make there, or have you made a lot of investment already? Then the second question is on the distribution and admin costs. Both of them again have come down quite a lot.
Whether, you know, we should continue to think about those two lines, more or less in line with the comments you've made previously of that being, I think, for distribution at around 28% of revenues and for GNA, about 6% of revenues. Actually, sorry, distribution, I think you previously you said it was going to be about 30, and that's running at about 28 at the moment. Then the other question I have is on the Compeed product. Can you give us a sense of, you know, what sort of trends that product is developing at?
Clearly, we do see some volatility, but on average, should we expect it to grow, at a sort of a mid-single digit rate or whatever rate you would, care to share? Thank you.
The R&D cost, it's actually pretty hard to give you a phasing of it because the fact is that we update our pipeline at least every six months because as you may recall, we are running a very strict regime. We give, you know, a very short timeframe for the products from the moment they enter what we call our Stage-Gate model on sale day in the market. Therefore, it also means that the plan that we showed you last time is already updated six months after that display. That also means that it's impossible for us to tell you about it.
What we are working on right now is a quite large portfolio of new products that comes out. Therefore, you should expect the R&D cost to be more in line with what we have guided than what we are showing you right now. With regards to the distribution and admin cost, the 30% and 6% are not a million miles away because we are, as we also said, investing more in sales. That's probably still a good guidance.
I guess, the admin is more fair to say about five to six.
Yeah, probably.
Yeah.
Yeah.
I would think, yeah.
We don't anticipate that we will do whatever we can to increase our admin cost, but,
No, exactly.
On the Compeed side, as we said early on, this is a pure contract manufacturing setup. We don't get insight into the trends which are really useful for us and that we can use for you to guide on. The only guidance we have right now is that for the next quarter, we should expect something which is all park flat.
All right, just a clarification on that. If you look back at, you know, how this business, or how much revenue this business has generated for you, has that been, you know, flat, growing or declining?
It's been slightly increasing.
Yes. Okay. Thank you.
Our next question comes from the line of Scott Bardo. Please go ahead with your question and announce your company's name.
Thank you very much. This is Scott Bardo from Berenberg Bank. Can you hear me okay? I think there's a little bit of interference on the line. Thank you.
Depends what you're asking.
Thank you very much. First of all, I just wanted to explore a little bit more whether there was any mix effect on your gross margin development, your very favorable gross margin development this quarter. Of course, you saw some stockpiling of what would otherwise be classified as quite profitable products, like intermittent catheters in the UK. Do you think that there was any potential mix benefit here that maybe inflated the gross margin at all? Any comment there would be really helpful. Also, could you give us a sense of whether there was an impact from stockpiling on your ostomy growth?
You referred to U.K. being a very strong market in ostomy, and just wondered whether, again, some stockpiling flattered that growth number or whether that was a genuine underlying growth. Last question is one of operating costs. It appears to me that your operating costs, as for the first nine months of the year, have grown only I think 1.5% year-on-year, which is very impressive given your top line growth. Not a surprise to see such meaningful leverage come through. Can I just understand that, you know, given your previous capital markets update, that your anticipation would be for operating cost growth to accelerate going forwards, given the fact that you want to invest in sales force, launch new product?
If you could help me understand and quantify what would be a normalized operating cost growth rate, that would be incredibly helpful. Thank you very much.
Oh, that was a lot of questions.
Yeah. Maybe I could start off with the first one, because.
Yeah
I think that it's important to understand-
Yeah
That we have actually a very strong performance in Europe overall.
Mm-hmm.
We are very satisfied with especially the Chronic Care development in Europe. Of course, when you sell more in Europe, we probably also a little bit helped on the gross margin side. It's especially on the Chronic Care that we have had some maybe some tailwind from the consolidation that happened in the U.K. It's not to an effect where we expect that things are very different the next quarter. You can also get that out of the guidance that we do have for the rest of the year.
Yeah.
When it comes to the operating costs?
Right. If we just to finish off on the gross margin, you asked specifically about mix effect. We cannot it's not sufficient, big amount, so we can actually sort of say this much is mix effect. I think I'll go back to what I said earlier in the conference call, that there's about 1% that comes from pure efficiency improvements, and then 1% that comes from having higher sales in, as what Lars says, very profitable European markets in particular. As to our operating cost, as Lars just mentioned, admin would end up we expect that to continue at the 5%-6%.
We would, of course, like to invest more in the sales initiatives. We have a nice number of very good initiatives that we are looking at and that we are evaluating. That would give, you know, some additional cost going forward. At the same time, still the absolute main part of our nominal growth coming out from Europe, there will be a leverage effect on that. That's why we can say that on the distribution line, which is where most of this investment will go, come in, that our sort of unofficial guidance, if you can say so, of around 29% revenue probably still holds.
Very much for giving us the update on current healthcare reforms. Just two questions, please. Firstly, on the Decree Ninety-Five in Italy, it was my understanding that this sort of unilateral 5% cuts didn't really come into effect until the second half of this year, and the cap coming in more aggressively next year. Have you started to see in your fourth quarter any impacts of this cut? Of course, we haven't seen any, this was implemented after your third quarter. On France, is it your understanding that the French price cuts now outlined or the French reform act now outlined, is incremental to the ongoing pricing review in Ostomy and Continence Care? Thank you very much.
We simply don't know. We don't have enough knowledge to give a meaningful answer. We will continue to follow it. We'll continue to use our public affairs to influence it, but I can't give you a meaningful answer to that. We don't know yet.
Okay. Thanks so much indeed.
Our next question comes from the line of Niels Granholm-Leth. Please go ahead with your question, and announce your company's name.
Good afternoon, Niels Granholm-Leth from SEB Enskilda. Three questions. The first one is regarding your DKK 1 billion investment program in growth initiatives. What quarter would you expect that to be recognizable for us? Would that be early next year? Could you just talk in broad terms about what would be the first initiatives that you will bring to the table? Secondly, we have talked about healthcare reforms. We have a U.S. Healthcare reform to come up most, well, most likely. Could you just talk about how you would expect that reform to impact your tax payments in the US, and how the competitive bidding initiatives would impact your business as well?
Just a final question regarding goodwill, and given what is taking place on the U.S. mesh market, do you feel comfortable with your goodwill related to the Mpathy acquisition last year?
Right. Let's see where we start. The 1 billion DKK in investment initiatives, we are currently reviewing various initiatives, and at what point you will actually be able to recognize it, I doubt there will be a lot of additional spending because of that in Q4, because that's simply a little bit early. I think you would be able to start seeing it after that. As to the actual investments we're looking in, that we would much prefer if we can come back to you, once we are more ready with it, so that at least we can make sure that we have also talked to our organization broadly about it before we talk to you.
With regards to the healthcare reform, a specific question on tax payments, as far as my latest information is that it is not yet fully clarified how that sales tax will actually, you know, what final form it will have and how it will be booked. We don't have any news on that particular item. With regards to your question on goodwill, whether we are comfortable with what we've got for Mpathy, we review, obviously, these things on a continuous basis. Mpathy gave us the lightest mesh, or one of the lightest mesh at least in the market, and performance is such that we are comfortable with the goodwill that we have bought on the Mpathy.
There was a question, I think, lastly, before you won a competitive bidding-.
Yeah.
Should we have that repeated?
Yeah, could we have that again, please?
Could we have that repeated, Nils, on competitive bidding?
Yeah, I was just asking how would you expect the competitive bidding initiatives to impact your business on the U.S. market?
That's a very good question. I don't have any comments to that at this point in time.
Okay. Thank you.
We have a follow-up question coming from the line of Chris Gretler. Please go ahead, sir.
Yes. Can you hear me?
Yes.
I just one follow-up question on the ostomy business, and I noticed in, you know, the filing of your, you know, competitors that, you know, they increased pricing on ostomy products in the U.S. You know, is this something, you know, you follow? Is this, you know, a general trend, you know, and, you know, what's, you know, been, you know, your general, you know, take on, you know, such, you know, pricing strategy in that market?
That's a very interesting information. I would like to learn more about it. We have not heard about higher prices for ostomy appliances in the U.S.
Check it out, and then I'll come back to you.
Thanks.
We have another follow-up question coming from the line of Yin Denwan. Please go ahead with your question.
Thank you very much. In your press release, you commented about basically lawsuits relating to the slings and meshes, et cetera. Can you give us as much as you can, you know, what Coloplast exposure to that might be? Secondly, you might have commented on this already, but I missed the first part of your call. Why was the ostomy business in France unsatisfactory? What might get it back into, well, get it moving in the right direction? That's all. Thank you.
On the FDA safety update on mesh, the thing is that in July 2011, the U.S. Food and Drug Administration issued a safety update regarding the use of transvaginal mesh for pelvic organ prolapse. Since then, several med tech companies, including Coloplast, have become involved in a number of trial of product liability actions on the use of these mesh for pelvic organ prolapse and stress urinary incontinence. At this point in time, the number of actions potentially involving Coloplast represents a minus year of the total number of actions. Currently, we have a little more than 100 claims against Coloplast. With our current knowledge, we don't expect this to have a negative financial impact on Coloplast. We do also have a product liability insurance in the U.S.
This is basically as much as we do know and that we can say at this point in time on the mesh situation. With regards to France, well, the ostomy performance in France is actually okay. We do see, when we go back in time in this year, that we have had some swings, where we have seen that we have had low sales and then high sales. In France, we are buying market data, we call them the shares data. We do consistently see that we are selling to a tune where we at all times where we are taking are gaining market shares in the French market.
Oh, okay. Because in your press release, you say that that's not satisfactory. It doesn't... From your comment, it doesn't-
Yeah.
Sound like it's not satisfactory.
No.
It sounds like it's doing quite well.
Well, I would say that it's a lower growth than we had last quarter. Still we are gaining market shares. That's basically what we are looking at all points in time.
Okay, that's what you meant. All right. Just a bit slower, but-
Yeah. Yes, exactly.
Nothing significant to worry about.
Exactly.
Okay. Thank you.
Our next question comes from Oliver Metzger. Please go ahead with your question, and I'll say your company's name.
Hi, this is Oliver Metzger calling from Commerzbank. I have just one question. I read in your reports that you report or you will report additional income of a patent case of around 30 million DKK in Q4. My question is, does your raised EBIT guidance include this amount? It just accounts for 0.3% of sales, but would be interesting.
It does include, that amount, yes.
Yeah. Okay. Thank you.
We have a follow-up question coming from the line of Scott Bardo. Please go ahead with your question, sir.
Thank you. This is a very quick one, actually. At your Capital Markets Day, it's very helpful you provided us a breakdown of your geographic revenues in accordance with your new organizational structure, which I think separated Russia from Europe. I just wonder whether it's possible that we could see your new reporting structure aligned with that so that we actually see a Western European number disaggregated from a Russian component, so we can really tease out where the emerging market growth is in all the contribution emerging markets. Thank you.
Scott, that's a good question. This is something we are working on and considering, and that we will get back to you on whether that new structure has any impact on how we report.
Great. Thanks so much.
We appear to have no further questions, so I hand the conference back to you.
Okay. We would like to say thank you for all of your questions and your interest. Thank you very much. Bye.
Ladies and gentlemen, thank you for your participation today. This concludes today's conference. You may now disconnect.