Good afternoon, ladies and gentlemen, and welcome. Welcome to the Coloplast Q1 Financial Statement Conference Call. At this time, all participants are in listen-only mode until we conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, press star then zero on your telephone. Just to remind you, this conference call is being recorded. I would now like to hand over to the CEO of Coloplast, Lars Rasmussen. Please begin your meeting and I'll be standing by.
Thank you. Well, good afternoon, and welcome to this Q1 2010/11 conference call. Before I even start, I think I might need to explain why we were early with our release for the Q1. The reason was that when the board of directors were, I would say, working with the press release, and we came through it, there were actually very few questions that we need to clarify afterwards. In that sense, we were ready early, and then the rules that we are working under simply states that we need to issue the press release for the result as soon as the board have approved it.
In that sense, I just guess that it's easier to work with good news than anything else. Today, I'm joined by CFO, Lene Skole, and the investor relations team. As usual, we have scheduled about an hour for the call. Lene and I will start by giving a short presentation and then open up for questions. Now please turn to slide number 3. We realized a 6% growth organically and 11% in Danish kroner, which is within our guidance to the market. The growth was driven by satisfactory performance within Ostomy and Continence Care, whereas growth is still to come from our Wound Care business area.
We continue to drive improvements on gross margins compared to last year, so we can report an EBIT margin of 24% for the first quarter of 2010/2011. Our guidance for 2010/2011 remains unchanged, currency changes have prompted an upwards adjustment on our guidance in Danish kroner for reported growth. We expect an organic growth rate of 6%-8%, and now an 8%-10% growth in Danish kroner. The EBIT margin guidance remains in the range of 23%-25%. As usual, Lene will provide more detailed comments on the full guidance for 2010/2011 later in this presentation. Please turn to slide number 4. In Danish kroner, revenues were up by 11% to DKK 2.5 billion , and the organic growth was 6%, just within our guidance.
Within Ostomy Care, we saw a satisfactory organic sales growth of 6%. The biggest growth driver in this business segment continues to be SenSura, the SenSura product line, but this quarter also saw very good growth within our older MCPC ostomy bag assortment, directed against emerging markets. 5th of February, we will start the pre-launch of our new SenSura product, the SenSura Mio, which is the first in a series of new launches of ostomy bags that are being created with a particular focus on better body fits. It is also the first tangible result of our new and more structured innovation method. I will update you further as the pre-launch activities unfolds. In Urology and Continence Care, organic growth was 9%. Growth was again, driven by intermittent catheters, especially SpeediCath in Europe and Self-Cath in the U.S.
Even though market growth rates for intermittent catheters in the U.S. are slowly returning to normal after the impact of the improved reimbursement. Our Conveen bags and UriSheath, as well as Peristeen, performed well during the quarter. SpeediCath Compact Male was launched in January in seven European markets. Perception of the product has been great. We expect the product to contribute significantly to growth next year. The U.S. and European urology business both continue their good performance. Our men's health business continues to take market share, whereas our women's health business remains negatively impacted by the move towards mini-sling technology. We have successfully integrated Mpathy Medical D evices during this quarter, which will strengthen our women's health franchise. Our Wound and Skin Care saw a negative sales growth of 2% this quarter.
Restructurings in our Wound Care business are now fully implemented, and we remain committed to returning this business to market growth rates towards the end of this financial year. Greece impacted growth negatively by the Greek government's tougher budget restrictions on public procurement, and also Skin Care saw a negative growth in this quarter from very strong hand cleanser sales last year. If we turn to the geographies, sales in Europe ended at 4% organic growth. Growth was impacted by the performance and situation in Greece, as well as by negative growth in Germany, due to a particularly high comparison quarter. Organic revenue in the Americas improved by 12%. Underneath the 12%, we saw lower sales growth in the US, partly impacted by the now almost full effect of the reimbursement change in 2008.
This development was more than offset by strong growth in Argentina and Brazil. Finally, revenues in the rest of the world improved by 19% organically. The positive trend continues with China and Japan leading the way. That concludes my part of the presentation, and Lene will now provide more details on the financials. Please turn to slide number 5.
Thank you, Lars. We are now on slide number 5. First, a few words on the currency impact we are seeing this quarter. The growth rates are positively impacted by 5 percentage points. This is caused mainly by appreciation of the US dollar and the British pound sterling against the Danish kroner of 9% and 5% respectively. Other currencies, such as the Australian dollar and the Japanese yen, appreciated with approximately 18% against Danish kroner when comparing the average rate for the first three months against the same period last year. Now to gross profit. Gross profit amounted to DKK 1.6 billion, equal to a gross margin of 63%. This is an improvement of 4 percentage points compared to the same period last year.
Increased efficiency in the production economy from transfer of production continues to drive the positive gross margin development. The gross profit includes redundancy costs of DKK 10 million related to the transfer of production to Hungary and China. On a like-for-like basis, the gross margin is at the same level as Q4 last year. The SG&A sales ratio was unchanged at 35%. The SG&A included close to DKK 20 million, increased investment in sales activities in Wound Care, as well as in China. The R&D to sales came in at 4% in line with previous spend. This results in a reported EBIT margin of 24%. Net of currency impact, the EBIT margin was 23%, and our EBIT margin is in line with the underlying EBIT margin in Q4 last year.
Free cash flow was negative by DKK 233 million, compared with positive DKK 174 million last year, due to higher tax payments, dividend payment, and finally, the acquisition of Mpathy Medical Devices. Net interest-bearing debt to EBITDA ended at 0.7, slightly higher than at the end of 2009/2010. Our net debt to EBITDA target remains suspended. CapEx amounted to DKK 71 million, corresponding to a CapEx sales ratio of only 3% and reflects continued discipline in this matter. Now, please turn to slide 6. For 2010/2011, we expect an organic growth of 6%-8% and 8%-10% in Danish kroner. Especially developments in the US dollar and the British pound sterling have prompted this change.
Mpathy is expected to contribute 40 basis points to the reported growth and is included in the 8%-10% growth guidance. We are in the process of finalizing the plan for SKU reductions in the company. We are currently targeting up to 50% of the existing approximately 7,500 SKUs. In revenue terms, this corresponds to approximately 2% of our revenue. We will, to the extent possible, convert users to other Coloplast products. A potential negative impact on revenue of up to DKK 50 million is included in our growth guidance for the year. Over time, this project will contribute positively to the fulfillment of our long-term aspirations. For 2010/2011, we continue to expect an EBIT margin in the range of 23%-25% in fixed currency as well as in Danish kroner.
The positive change compared to last year is driven by improvements from transfer of production to low-cost countries. As mentioned previously, we still expect to complete the transfer in March 2011. Our CapEx guidance for 2010/2011 remains between DKK 300 million and DKK 400 million. It's almost in line with last year. Finally, our effective tax rate is expected to remain around 26%. This concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Yes, thank you. Ladies and gentlemen, if you have a question at this time, please press star followed by one on your telephone keypad. To cancel your question, please press the hash or pound key. Just to remind you that star one to register your question and the hash or pound key to cancel. First question comes from the line of Stefan Gatzke from Jefferies in London. Please go ahead with your question.
Hello, thank you very much for taking my question. I was wondering if you have seen anything more than what you see in the Greek market when it comes to product mix curation, if you have seen more of that as well in other countries, especially in Southern Europe. I was wondering if you could give us an update on the price cut situation in Spain, and if you have more clarity on how much of the price cut you are actually bearing yourself. Thank you very much.
It's actually an unchanged situation compared to what we reported last quarter. The downward pressure on the budget is still in force in Greece, and we expect that to be there for quite some years. That means that the spendings, especially in hospitals, are impacting our sales of products because they either use nothing or they downgrade to a product that we don't that we don't carry. With regards to the Spanish situation, there's no change either in the situation, so I can't fill you in with any new numbers on that one. Apart from that, we don't see anything else than what we already previously reported to you, and we haven't seen any development in the prices.
We have no further negative to report, and the positive one that we can talk about is that we had a price increase in the U.K. at the first of January, to the tune of 1.5%. That's basically the picture.
Great. Thank you very much.
Next question comes from the line of Charles Bradshaw from Morgan Stanley. Please go ahead with your question.
Hi, thanks for taking my questions. I have two. Firstly, on the Ostomy, if you were sort of adjust for a weaker or stronger comps from the previous year, then clearly there was a slight decline in Q1 versus Q4. Could you've talked about some weakness in Germany, was there any weakness in the US market? Could you also give us an update on how you're going in terms of winning GPO contracts? The second question relates to the Wound and skincare division. Clearly, there's a lot of moving parts within this quarter, but could you give us a sense of what the underlying growth is in your sort of restructured business for Germany, France, and the UK, and how that compared to the fourth quarter? Thank you very much.
As for the Ostomy Care business, what we first and foremost do on that one, because it is really a chronic business and the nature of it is, it's something which is moving like in a way with I would say in a very slow way. For us, the most important thing is to stay on top of what is happening on a new patient discharge part. We take stock of that, and I guess that you all know that we don't reveal these numbers. If you take the overall picture, it is very positive, and it's many quarters now that it has been positive.
If you're looking at the growth rate that we see in Ostomy, and you just take a 24 month horizon, which I think is fair to do when you are looking at a business with this nature, you actually see that we are now growing almost, if you take a moving annual total, we are growing almost twice as fast as we did. It's definitely moving in the right direction, and since it's only one quarter we talk about, we should be very careful with, you know, the numbers, because certainly a million means a lot. We feel very confident that we are on the right track with what we do in Ostomy, and I can say the same for the development that we see in the U.S. a lot.
We don't have any GPO contracts on Ostomy in the U.S., to be very direct on your question with that. When it comes to Wound Care, I would not like to break the habit that we have had, that we don't comment specifically on development in one country for one business area. What I can say about the development in the Wound Care area is that the performance that we show in our first quarter is not a surprise to us. Things are working according to the plans that we have put in force. We have taken out the costs that we embarked on taking out, we have put the pressure in the market that we wanted to put in the market.
We see that the number of calls, sales calls that we are doing is significantly over what we did 12 months ago. Also the number of sales calls that we do this quarter is over what we did last quarter. That's also why we are confident enough to say in the presentation that we expect to go back to market growth rates at the end of this year.
Just to follow up, would you say that the growth trend in from Q4 to Q1 is positive in those sort of key regions?
I would say that we are spot on when it comes to the forecast that we have put out for those regions. We are following the plan. But it's, you know, you don't sell just because you make one sales calls. We also do know that you need a number of calls before you see the uptick coming, because people have to write the name of your product on when they send people out of their office, I mean, the GPs. In that sense, we have not in any way expected that we would see an uptick from the first call that we have. Things are working the way that.
The plans that we are implementing are to the, almost to the letter of what we expected.
Okay, that's great. Thank you very much.
Michael Duff from SEB Enskilda , please go ahead with your question.
Yeah, hello. Thanks for taking my questions. I have a couple of questions. First of all, again, regarding this Greece situation you have mentioned in your report. How large amount of the receivables is related to Greece? I suppose that it's a larger relationship compared to, say, your sales in the country. Do you somehow have these receivables from Greece insured so that you know you'll receive them sooner or later? That's the first question. I have a question regarding these SKU reductions that you're supposed to start bringing down in the following years here. How is this affecting the different divisions? I mean, should we expect more effect in one division than another? That's my two questions, thanks.
It's the, if we will start with your last question first, because it's not something that we have been very vocal about early on. It's a very strange business that we are in, because we do have products on the market that we invented back in the seventies, and they are still selling quite well. So in that sense, we have many different versions of the, of a product on the market. Because we don't market directly and are not able to, in many countries, to market directly to the end user. Once people are satisfied, they just keep buying the product.
That is how we ended up in a situation where we have a very long tail of old products, which is complicating our business and making it more expensive to run than it need be. That's why we have been courageous enough to start talking about it, because it is actually a small amount of our sales that we are touching, but it's a very big amount of the stock keeping units, or the SKUs that we are touching. In that sense, we think it's the right thing to do, and it is slightly more a thing we do in Continence Care than we do in Ostomy, because we have a longer tail in Continence Care.
That's how you should view it, but I think that for you, the most important thing to know is that it might have an effect on our top line, and that's also what Lene was talking about before. The longer term, it is, it's likely important part that we that we sort of clean up, so it's as simple as possible to run our business, because that's how you create transparency, and that's also how you create a foundation for further margin improvements. When it comes to the Greece situation, maybe you could comment on that, Lene?
l'd like to take it just a little bit broader perspective, because when you look at the numbers, you can see that our working capital relative sales has deteriorated slightly. And apart from the fact that the currencies obviously also hit us there, then the receivable is the part that has deteriorated, if you compare to what it has been. And it is not actually Greece that is making that difference, because in Greece, we work with one distributor where we have, and only one distributor, where we have a set contract for how we do payment. So that is working according to contracts as such, there is no change in Greece when it comes to receivables
Where we see, the slight deterioration is actually in Spain and Italy. Some of you may recall that I previously mentioned that we had a project running a couple of years ago, where we actually managed to reduce significantly our outstandings in Spain and Italy. I'm actually today very, very pleased that we did, because even though we are now seeing an increase, and we will work, of course, towards getting that back to more normal levels, then we are still better off than we were before we started that project a few years ago.
Okay, thanks.
Next question comes from the line of Claus Madsen from Handelsbanken. Please go ahead with your question.
Yes, hello, thanks for taking my questions. My first question relates to your launch of SenSura Mio. Could you comment on when you expect to roll this out in the volume launch? What kind of indications you have from reimbursement authorities on pricing? How we should see this product contribute to growth, I assume given the slow dynamics of business, it will take quite a few quarters before it becomes a growth accelerator.
It's gonna be launched in April. It is a big launch that we do. It's being pre-launched as we speak, which means that many nurses will have it in their hands and will try it on patients before it's launched in a, what you call a volume launch. It is something which starts already now. You are right when you are pointing towards the sort of the steadiness of the business, because this is what we do to get better new patient discharge. This is not something which we are at first introducing to all, you know, current patients in the market.
This is a way for us to make sure that the nurses have the best possible product to work with, and it's an ultra-flexible product that we have, and therefore, we know it's something which is requested, and we have, I would say, quite positive feedback on it. In that sense, we expect it to have a nice impact on the NPD. It takes a while before you see the impact on the sales growth. It is, it's for us, the most important thing is that as long as we are heading to our NPD, we also know that we, in the future, are increasing our growth rates. That's the whole idea about the number of launches that we have.
We have this, but it's also safe for me to say that we have a very, very nice pipeline of new products that will be following this, and that will be sort of holding. This is not a standalone thing. This is the first of product in the series.
On pricing, do you have any confirmed or preliminary indications on how would this will be priced to previous generations of SenSura?
No, this is a product which fits into the current categories. It is not a product where we expect to be able to raise the prices built on it.
Right. On your product pruning, if I understood you correctly, you anticipate potentially a DKK 50 billion negative revenue impact for fiscal 2010, 2011. Would this pruning also in 2010, 2011, or going forward, imply the risk of maybe write-downs on obsolete products?
Yes, definitely, and that is also included in the guidance. Because, of course, we are in a situation when you have a very small product and old product, you have very few vendors that you have contracts with. To get just a reasonable price for when you buy the quantities that you need for these small products, then you have to buy in quite large volumes compared to the consumption that we have. In that sense, there might be a risk that we will have to write off some raw materials. There might be a risk that we will also have to write off some finished goods, which we have on stock.
There is no risk that we'll have to write off, equipment and machinery, because it's not something that we have had CapEx in for many, many years. It is, it is part of the guidance that we have given to you.
Could you disclose the total risk on inventories, both finished goods and raw materials, and what you have made in terms of reservations for fiscal 2010, 2011?
I know it might sound very strange, we can't, we even cannot make those numbers completely because we don't. You know, with what we are telling you, that 50% of our total SKU base is only 2% of our of our sales. We also explained to you that we don't have any previous history for taking out volumes like this, therefore, we are not able to do the math completely on it. This is also a bit where we just know that by simplifying our business, we will be much better at executing on a number of the things that we need to execute on to be even more efficient.
Right. Could you indicate what you see in terms of time horizon for the complete reduction process?
Yeah.
Are we talking about several years?
No, it's something that it is done within the next 24 months.
Okay, right. Thank you very much.
Next question comes from the line of David Adlington from JPMorgan. Please go ahead with your question.
Hi, guys. Thanks for taking the question. A couple of questions. Firstly, I think you mentioned the capital markets that you added around 100 reps in the last quarter. I just wondered if they've managed to make any contribution in terms of sales in this quarter, when you might expect those, the sales sort of contribution of those reps to increase going forward?
Well, sorry, what market or product area are you talking about?
Wound Care.
Wound Care, okay.
Generally, I mean, how many reps you added in the quarter in general, if you wouldn't mind giving that information?
They haven't actually contributed as any, to any significant degree yet, because a lot of them are being trained, and it takes a while, first of all, to train them. Then, as Lars mentioned earlier on, that we don't normally get a sale on the very first call that they come. It takes a little while. If you could put it that way, we have, this of the increased sales pressure is, of course, a cost that we will continue to have, but, you know, in this quarter, then you can say we've had the cost without actually having the corresponding revenue.
It's, of course, we do know the number of reps that we have employed, of course, but you also know that this is a very competitive market, so it's not something that we like to broadcast. It's a significant increase in number of calls that we do, as I mentioned, compared to two months ago, and we are even increasing it.
Good. Just one follow-up on the restructuring of the product portfolio. Have you been running up stocks of products in anticipation of that restructuring?
No.
You haven't at all? Very back to growth in this quarter.
Yeah.
Okay, thank you.
The next question comes from the line of Christian Amdahl from Nordea. Please go ahead with your question.
Yes. Good afternoon, ladies and gentlemen. This is Christian Amdahl from Nordea Markets. Three questions. The first relates to your organic growth guidance. What do you perceive as the greatest risk factors for not delivering at the higher end of your guidance? Secondly, how do you view the current competitive environment? Have you experienced any changes lately? My third question is related to your M&A considerations and your priorities. Would you prioritize one larger acquisitions or would you prefer a number of smaller add-ons? Thank you.
Maybe you should start with the last one.
Yeah, I think I will just start with the M&A one first. Christian, without in any way sounding wrong here, because I think it's a very fair question that you ask, then we don't as much look for something of a specific size as we do for something where we feel it really adds value. I mean, you saw us recently acquire a very small business within urology. This is not a signal that we're trying to send, that we will only acquire the smaller businesses, that was actually what fit very well into our strategy.
As such, there is no preference as to the size, but we will look very much on, you know, which area it is and whether we feel it is something that makes a strategic sense for us.
Okay.
And-
When it comes to the guidance, Christian, I think that what you try to do with us is that you would like us to narrow down our guidance from 23 to 25, also something else. It is maybe early days after a quarter to start doing that. In that sense, we can't do much about it, but at least for once we had statement on the currencies.
Yeah.
I think they've got a lot set of guidance numbers when it comes to that part. On the competitive side, we see little changed behavior. It's very much like it used to be. We hear some rumors that it is, you know, it's a bit tough in the U.K. market because Silver products on Wound Care is now no longer really prescribed. For those who had high market share, they're suffering from it because the Silver products had a very high price compared to the normal products. That's one of the few examples where it's not just great to be the market leader.
Apart from that, everybody are fighting very hard in the big markets.
Okay, thank you.
The next question comes from the line of Scott Bardo from Berenberg Bank. Please go ahead with your question.
Thanks very much for taking the question. I've got one question for each of the divisions and just a further question on the SKU reduction. Just on the wound business. Obviously there's some ambitions to accelerate towards industry growth by the end of the year. You talked a little bit about increasing competition from some of the other players as you launch your products. I just wonder whether, given that some of the incumbents are already established, whether you started to see some price decreases for some of the key products that you've had some impact to you, and whether you could also comment on when you expect to get to industry profitability for the wound business.
For Ostomy, I noticed in the release there was a discussion that Russia was a major contributor to the Ostomy growth for the quarter. I just wondered if you could quantify that, just so we can get a better sense or you can get a better sense of how sustainable that contribution is going forwards. The last question on the division, divisions, in terms of Continence Care. Obviously you've discussed the SpeediCath Compact now will, you know, have an impact as of next year.
I wonder, given that we're getting some slowing growth rates in the U.S., from Self-Cath, whether we should start, or whether it's unrealistic to assume this current 10% growth rate, you know, throughout the remainder of the year, or we should see some sort of gradual tapering down of that growth rate until 2011. Thank you.
On the Wound Care side, it's I don't think that the competition is harder than it was a year ago. I think it is a very stiff competition that we do based on the Wound Care market. There have been, I would even say, maybe less price erosion due to competition this year than we have seen previously. I don't see that that is used as the primary weapon. It was for a couple of years, but it is no longer. That sort of speaks to the fact that it might be that prices have come down to where they should be. You know, I'm not suggesting in any sense that it is worse.
I'm not putting a risk to what we already have been saying early on, that, we expect to return to something which is like market growth later on, this year. It is, it's just a fact that it is a very competitive area. It's also a fact that it's one of the areas where we are able to lose a lot and also gain a lot in a shorter period of time than what we see on Continence Care.
When it comes to the SpeediCath Compact Male and the situation in the U.K., it's still, you know, it's this, I don't know if you try to narrow us down, still in the guidance, but it's, we feel very confident about the momentum that we're seeing in the Continence Care business overall. In that sense, with the launches we're doing and also with the momentum that we see, and by the way, we also have a very good grip on what is going on an new patient discharge basis within this area. We definitely feel confident that we have a very strong momentum to build on.
For Russia, you know, it's hard to comment on Russia because it fluctuates a lot. It is not a reimbursement system like the one you know from many other markets, where it's stable, and if you have a need, you are also taken care of. If there are so to put it popular, in a popular way, if there are money, people can get their products, and if there are no money, they don't get any products. Therefore, it's sometimes Russia makes an impact on the quarter.
Mm-hmm.
The magnitude we are talking about is, it is not something which sets you in 10 points, one quarter and minus 10 another quarter. It's, it's definitely something which is manageable. I think it was mentioned among other countries that have contributed nicely to the growth.
Thanks. I mean, it was just that to the point that it was a major contributor to the growth. I wonder whether that was some indication that in Western Europe, growth is some sort of pretty benign.
No, it wasn't. I think what we saw was that we saw Germany, as you know, because we already mentioned it, where we actually didn't have good growth, because they had a very tough comparison quarter. That first quarter last year, our customers bought significantly more than they normally do because of a certain rebate structures where they filled up their stock levels. That was a negative. It was then good that we had, of course, the processes in Russia, and I think that's the way, you know, it normally goes, that there are some things that are good and some things that are bad.
I don't think you should read this as us seeing an underlying softening, of our growth, because that's not the case.
Okay, thank you.
Just like on the Continence Care, where as last commented, we're quite confident also because we have the best products, and then we have the newly launched SpeediCath Compact Male that we really feel very confident about. I think you should also remember that for us, I mean, we are now coming with a new and very good product. Since you're Mio, as last mentioned. In general, we're quite confident about the underlying growth in those things.
Thanks. From those comments, the stocking in Germany in Q4, you have said you believe is essentially wound down this quarter and should return to normalized rates going forward?
We are quite relaxed about, I think the wrong word to use, but nevertheless, there are two things you could think. You could think, is this Germany going back to being a problem, or is this just sort of a mathematical thing? It is the last part. It is that comparison. We can see that Germany is working hard and continuing to sort of underline through what they're doing. We are not less confident about Germany, we're so confident that they are improving.
Thank you. Just one clarification on SKU reduction, if I can please. So, you mentioned that you'd provisioned for, sort of DKK 60 million impact the group revenues this year, but you also discussed that the SKU reductions are about 2% of group revenues, which by my calculations, is around DKK 200 million. I just wondered whether this is phasing and the bigger impacts to come in the fiscal year 2012. Just on sort of, the potential write-downs of inventory and what have you, will this come in, other operating expense?
Maybe, you wasn't sure to the degree of this, and if it did come, yeah, sort of above the EBIT line, I wasn't sure how you could sort of factor that in with your current guidance.
First of all, with regards to the impact, the DKK 50 million, as I also mentioned, yes, it's 2% of revenue. As I also mentioned, we certainly expect that to a large extent, we can get people over to other parts.
Mm-hmm.
You can't just sort of, take that down to the, to say a 2%. That isn't then what we're going to do, because that is definitely not our expectation.
Mm-hmm.
It's a combination of saying we will expect people to use other, Coloplast products. As Lars also mentioned, we expect this to be about a 24 month process.
Mm-hmm.
obviously, there is, there's also some that builds into next year. With regards to the write-downs, we will have that above the EBIT line. It's part of our EBIT guidance, and it will be above our EBIT line. You are absolutely right that there's no, you know, as we just said, it's difficult to estimate exactly how much. But again, to reiterate, we didn't have any write down of machinery at risk. We have some stock levels, and obviously they are at the production cost is what they are booked at. In reality, it's not that huge an amount.
It's a clear upside though.
Mm-hmm.
Which you haven't spoken about.
huh.
That is that we have a number of machines sitting in our factories that are only running maybe, 2 times per month or 1 time per month. As we take those out, it also means that we get more space for new products. It also means that when we are cutting down on number of SKUs, we will have fewer machine changes, and we can run bigger series. In that sense, you know, it's not all just downsides, but it's hard for us to quantify the upside. Of course, it means that it will take a lot longer before we need to expand our factories for several than what we believe today.
Then I think the real upside also is the reduction of complexity throughout the organization. That probably will not, or that will not be seen from day one, but that as we grow, will actually have an impact and help us achieve our targeted goals, or our ambitions. There is definitely a lot more upside than downside. That's obviously also why we're doing it.
Just a small commercial from Ian. We have a Capital Markets Day in Hungary. Ian, I think he will promise to put a yellow tag on the machines that will be redundant as part of this product pruning. You might come and see for yourself how much extra space we get.
I'll certainly be there. Thanks for details on this.
Thank you.
Thanks.
The next question comes from the line of Yi-Dan Wang from Deutsche Bank. Please go ahead with your question.
Thank you very much. Just a quick one on the SKUs. Hopefully, we'll finish that subject. Well, basically, have you actually started that?
Yes.
Okay. When did you start? Should we expect you know, the negative impact, certainly on the revenue side, to be more front-end loaded or back-loaded during, you know, over that 24 month period?
I think we have been working on this for the last year.
You started a year ago? Right.
Yeah.
What actually started to.
We started working on it, we started out in Wound Care first. Just to make sure that we are not misled here, it is not the product pruning on the product SKU side that has had a negative impact. It has been much more what we have been doing in terms of not putting sales pressure on the markets. Don't expect to see that we are going to lose all of our sales. That's very important for me to stress. We have been working on this, but the big chunk is ahead of us.
I think what we can say, and we mentioned that, I think, at the capital market dinner, is that the SKU reduction is something that we are will be part of improved, the improvements going forward, and it's something we feel comfortable about because we have done a specific project on SKU reduction already in Wound Care, which was really part of starting the restructuring of the Wound Care. That's why we say, "Yes, we've done it, and we're in the planning stages still," because it's Wound Care and then the rest of the business.
Okay, I mean, over the next 24 months, should we expect majority of that to occur in the first 12 months?
It's really hard to say. We don't have the plans detailed to that level because, well, you know, the fact is that the faster you can do it, the better, because it's not really a positive thing to work with in the state such. Therefore, once we find the way to do this in sort of the most value-creating way, you know, then we'll speed up as much as possible, because we don't want to spend time on talking about the old parts. We want to spend time talking about the new parts.
You said that it's quite difficult for you to estimate the benefits because there are so many areas that you could actually benefit from given this initiative. Can you at least give us, you know, what the benefits would be to your growth margin? Clearly, that's much more measurable compared to maybe some of the other benefits. Is that possible at this stage?
It's not possible. You do know that we have stated we want to be among the very best medical device companies in the world. To go from where we are now, to be in that league, we have to do a number of things on our growth rates and on the total cost base of the company. We're working in many areas, but this is one of the areas and we think that is the right and logical next step after the move out of manufacturing, because we did not have a room for that complexity in the whole mix of activities that we were running when we were doing the move out.
Now we have the ability after the move out have finished to also do this physical change of number of SKUs. We think that's a very important element of us reaching higher gross margins and higher efficiency.
Okay, great. The other question I had was on your male and female health portfolio. Can you just give us a sense of how complete they are? Are you missing any, you know, significant products that we could see coming to market over the next year or two, that we should be aware of?
Well, it's primarily the new technology that we need to bring to market to be more competitive. That is being, as you know, we have, we do have a request to the FDA to also get it into the U.S. markets. Right now it is just running in the Canadian markets, but that is, that's really what we need to get on board.
Okay, great. Thank you.
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