Q3 19/20

Aug 18, 2020

Good afternoon, and welcome to our third quarter 2019/2020 conference call. I am Kristian Villumsen, CEO of Coloplast, and I am joined by CFO Anders Lønning-Skovgaard and our investor relations team. We will start with a short presentation by Anders and myself, and then open up for questions. I would like to start by thanking all of our employees at Coloplast who serve users and our clinician partners every day during these challenging times of a global pandemic. As a company, our priorities during COVID have remained clear, to keep our people safe, continue to serve our customers, and maintain business operations. We have done this throughout the COVID-19 pandemic, and I am very pleased with that. Please turn to slide number 3. Before I dive into today's results, I would like to zoom out and talk about the next 5 years for a minute. We are currently in the process of finalizing our 2025 strategy, which will be launched at our Capital Markets Day at the end of September. At the core of the new strategy are two important themes, innovation and growth. To set ourselves up to deliver our 2025 strategy, we are expanding our Executive Leadership Team from 4 to 6 members. First, we are creating a new Executive Vice President of Innovation position with responsibility for our commercial offering. The new innovation function will combine global marketing, global R&D, payers and trade, and select other functions related to innovation to secure a singular and end-to-end responsibility for our innovation. Nicolai Buhl Andersen will step into this role as EVP Innovation. Since joining Coloplast in 2005, Nicolai has held various senior management roles in our company, including Head of Ostomy Care and Head of Sales in the Nordic region. For the last 10 years, Nicolai has been the Senior Vice President of our global Wound & Skin Care organization. He is a respected people leader with strong followership. Nicolai is a commercial leader with an ability to focus and simplify, which is crucial in defining, building, and delivering our commercial offering. With this change, I am elevating a fundamental organizing principle of our company, which is that innovation must be commercially defined, led, and delivered. Rasmus Hannemann will take over the role as Senior Vice President of the Wound & Skin Care business and report to Paul Marcun. Rasmus has been with the company for 15 years and is currently SVP Global Marketing for Chronic Care. The second change we are making is to create a new Executive Vice President of Growth, which combines the Chronic Care sales organization and the Wound & Skin Care business unit. The growth function will be led by Paul Marcun, who is a recognized sales leader, both energetic and passionate executive who can lead and empower our organization to take our frontline work to the next level. The third change we are making is to rename HR to People & Culture and elevate this function to the Executive Leadership Team. Camilla G. Møhl is appointed Senior Vice President, People & Culture, and a member of the Executive Leadership Team. Since joining Coloplast in 2016, Camilla has been Vice President of Global HR for our commercial organization. In 2019, she was promoted to Vice President of Global HR. Prior to joining Coloplast, Camilla worked more than 15 years within HR at large international companies such as Carlsberg and Mars. Camilla is a recognized HR leader who challenges the status quo, and she's built strong followership and made a significant impact since joining our company four years ago. Finally, a few words on interventional urology. As communicated last year, we firmly believe that interventional urology belongs with Coloplast, and as part of our 2025 strategy, we will be investing to grow our interventional urology business to help more people in this space. We believe the best organizational setup for interventional urology is to maintain the current dedicated structure led by Steve Blum, who will continue to report to me. I'm excited to launch our 2025 strategy at the end of September with a strong focus on innovation and growth. Our new executive leadership team and organizational setup is the first step. Structure must follow strategy. I'm looking forward to sharing our plan with you on September 29th and for you to meet the new executive leadership team either virtually or here in person at headquarters in Humlebæk. Now, with that, let's take a look at today's results. Please turn to slide number 4. Q3 was a quarter that posed significant challenges due to the COVID-19 outbreak, as we'd expected, but there were also positives. We delivered negative 2% organic growth in the quarter due to a significant decline in interventional urology revenues, the reversal of stock building in Europe, which took place in the second quarter, as well as weaker growth in our wound and skin care business due to a decline in overall hospital activity. Starting with interventional urology, I'm encouraged by the rate at which elective procedures resumed across the U.S. and most European markets during the third quarter. More specifically, April was down 70%, May was down 45%, and June saw a big improvement and was down only 3%. In July and so far in August, trends are stable, and IU for August is going to come back to growth. Despite the surge in COVID-19 cases in a number of key revenue states, we've seen a faster-than-expected recovery in our men's and women's health business in the U.S. that now rules out the worst-case scenario that we envisaged when we revised guidance in March. Importantly, with the consistent monthly improvement in sales trends in interventional urology, we have reinitiated commercial investments into the business that were temporarily postponed. Moving to our chronic businesses, both ostomy and continence care delivered 4% organic growth in the quarter. Let me remind you that these businesses delivered abnormally high growth rates in Q2 due to the stock building by primarily end users in Europe. The magnitude of the stock build in Q2 was around 150 million DKK, and the majority reversed in Q3 and is now expected to be fully reversed in Q4. The underlying growth in the two businesses remains resilient, and I'm particularly pleased that the U.S. delivered solid double-digit growth and that the Chinese ostomy business returned to growth in May, and emerging markets also continue to hold up well. In the U.K., due to the extended lockdown and measures put in place by the NHS to handle the COVID-19 crisis, there's been a significant decline in screening referrals and operations. We've seen a decline in new patients across all our markets due to COVID-19, but it's been more pronounced in the U.K., both ostomy and continence care. In April and May, new patients discharge was around 60% of pre-COVID levels. June and July improved, but were still well below normal levels. This had a negative impact on our growth in the U.K. in Q3 that will also be visible in Q4 and into next year. The wound and skin care business delivered negative 6% growth. China had another tough quarter as expected, due to a significant decline in wound care procedures and hospital sales following the COVID-19 outbreak. We also saw headwinds in our European hospital business, in particular in France. Our skincare business in the U.S. detracted from growth in the quarter due to a decline in demand, which was correlated with a decline in hospital admissions in the U.S. On a positive note, momentum in the European wound care business and the U.S. skin has improved in Q4. We've also moved ahead with the launch of our new wound care dressing, Biatain Fiber, in six markets, and the feedback from healthcare professionals and users is very positive. As we navigate the crisis, we're adapting our business and commercial activities. In many of our markets, our sales force are still working from home, and as a result, we're accelerating our digital investments. We continue to build stronger capabilities in virtual education, remote support, and digital sales. In our direct businesses, we can see that consumers are shifting to online faster than before, and we are investing to support that. Adapting also requires prudent cost management, and today's results reflect strict cost measures that have been put in place. Our aspiration is to emerge stronger from this crisis and continue to focus on our strategic objectives. We're therefore moving ahead with the clear majority of our investments into innovation and commercial activities and initiatives. On March 18, we issued revised financial guidance because of the COVID-19 outbreak, and today, we've narrowed our guidance to the lower end of organic growth and the upper end of margin guidance. Anders will go through the financial outlook and our assumptions in more detail later on. Now, let's have a closer look at the results by business area and geography. Please turn to slide number 5. In ostomy care, organic growth was 8% for the first nine months, and growth in Danish krone was 7%. In Q3, organic growth was 4%, and growth in Danish krone was 2%. From a product perspective, growth continues to be driven by our SenSura Mio and Brava supporting products in larger markets like the U.K., U.S., and Germany. SenSura Mio Convex continues to be the main contributor to growth, driven by Europe and the U.S. Our SenSura and Assura portfolio growth was driven by solid performance in markets like Brazil and Argentina, as well as tender deliveries in Russia. Overall, emerging markets delivered solid growth for the first nine months, and China contributed to growth despite being adversely impacted by the COVID-19 outbreak in the second quarter. From a regional perspective, the U.S. had a solid quarter, and even with our sales force still grounded, we're beginning to secure accounts within the Premier GPO. The first conversions are happening, and we've built a strong pipeline of opportunities. Revenue growth in China normalized in Q3 as expected. Q3 saw a large negative impact from destocking, as I explained earlier. Growth in France was negatively impacted by the French price reform introduced in July last year. In continence care, organic growth was 7% for the first nine months. Growth in DKK was likewise 7%. In Q3, organic growth was 4%. Growth in DKK was 2%. From a product perspective, the SpeediCath ready-to-use intermittent catheters continue to drive growth. SpeediCath Flex contributed positively to growth, especially in the U.S. and across the European markets. SpeediCath Compact catheters continue to drive growth in countries like the U.K. and France. Sales growth for Peristeen products remains satisfactory, driven by France, the U.S., and the U.K. From a regional perspective, the U.S. was the main contributor to growth in Q3. Tender deliveries in Saudi Arabia also contributed to growth. As mentioned earlier, destocking in Europe had a significant negative impact on growth in the quarter. France was negatively impacted by the price reform introduced in July last year. We have seen a decline in new patients in ostomy and continence care as a result of the COVID-19 outbreak. Broadly speaking, across markets, surgeries and procedures have picked up again. In our key markets, new patient levels are normalizing. You can also see this in our care enrollments. Given that the decline in new patients is expected to be temporary, and given that new patients account for around 10% of revenues in ostomy care and around 5% in continence care, we do not expect this to significantly impact growth rates going forward. In the U.K., however, as explained earlier, the decline in new patients has been more pronounced, leading to a negative impact on growth in Q3. Q4 will also be impacted. In interventional urology, organic growth was negative 10% for the first nine months. Growth in DKK was down 8%. In Q3, organic growth was negative 40%. Growth in DKK was down 39%. The negative growth was mainly due to the decline in sales of Titan penile implants and Altis single incision slings due to the cancellation of elective surgeries in the U.S. within men's and women's health. Elective procedures in the European business were also negatively impacted, resulting in lower sales of disposable surgical products. As outlined earlier, elective procedures restarted across the quarter at an encouraging pace. In wound and skin care, organic growth for the first nine months was 2%. Growth in DKK was likewise 2%. Organic growth for wound care in isolation was negative 1%. In Q3, wound and skin care delivered negative 6% organic growth. Wound care in isolation delivered negative 7% organic growth. The negative growth was driven by a significant decline in wound care procedures and hospital sales in China, in Q2 and Q3 due to the COVID-19 outbreak. In Q3, growth was also negatively impacted by a decline in activity in the hospital channel in Europe, and in particular, in France. From a country perspective, the U.S. and Germany contributed positively to growth in the first nine months. China, France, and the U.S. skincare business detracted meaningfully from growth in Q3 due to COVID-19, as previously explained. The Compeed contract manufacturing business continued to contribute to growth in the first nine months but was impacted by lower demand in Q3 due to COVID-19. Turning to our geographical segments, we saw organic growth of 3% for the first nine months in our European markets. The organic growth in Q3 was negative 4%. As described earlier, stock building in Europe had a significant positive impact on growth in Q2, but the positive impact was largely reversed in Q3. The interventional urology business in Europe was negatively impacted by the cancellation of elective procedures. During the quarter, elective procedure resumed across a number of European markets. The wound care business posted negative growth in the quarter due to a decline in hospital procedures, which was most evident in France. Organic revenue growth in other developed markets was 5% for the first nine months. In Q3, the organic growth was negative 6%. As outlined earlier, the interventional urology business had a very tough quarter, but we're encouraged by the improved momentum across the quarter. The skincare business also detracted from growth in the quarter, but momentum is improving in Q4. On a positive note, the chronic care business in the U.S. delivered solid double-digit growth in the quarter, and Japan and Australia also contributed to growth. Revenue in emerging markets grew organically by 11% for the first nine months, and in Q3, organic growth came in at 9%. China posted growth in ostomy care again after a tough Q2 due to COVID-19. The Chinese wound care business continued to weigh on growth in Q3. Outside of China, emerging markets continues to deliver solid growth driven by all regions and in particular, Latin America. Growth in Q3 was negatively impacted by a tough baseline in Russia due to strong tender activity last year. With this, I'll now hand over to Anders, who will take you through the financials and outlook in more detail. May I ask you to turn to slide seven. Thank you, Kristian, and good afternoon, everyone. Reported revenue for the first nine months increased by 5% compared to the same period last year. Most of the growth was driven by organic growth, which contributed 5% to reported revenue. The net effect from exchange rate developments was neutral. A positive effect from a favorable development in the US dollar and British pound against the Danish kroner was offset by a significant decrease in the value of the Argentinian peso and Brazilian real against the Danish kroner. Please turn to slide seven. Gross profit was up by 5% to around DKK 9.5 billion. This equals a gross margin of 68%, against 67% last year. The gross margin was positively impacted by operating leverage driven by revenue growth, as well as savings from the GOP4 program, including the closure of the Thisted factory in Denmark in 2019. The gross margin was also positively impacted by restructuring costs of 43 million DKK in the comparison period last year. The gross margin was negatively impacted by product mix due to the decline in the U.S. sales in interventional urology. Increasing costs in Hungary due to salary inflation and labor shortages also weighed on the gross margin. There was a further negative impact on the gross margin from extraordinary costs related to the COVID-19 outbreak. The gross margin includes a positive impact from currencies of around 50 basis points. The distribution to sales ratio for the first nine months came in at 29% on par with last year. The 3% increase reflects increased investments in sales and marketing activities across multiple markets and business areas. For example, in China, the U.S., and the U.K. The impact from these investments was offset by lower travel and sales and marketing expenses due to the COVID-19 situation. In Q3, distribution costs decreased by 8% compared to last year, reflecting strong cost control as well as sustained investments. The admin to sales ratio for the first nine months came in at 4% of sales, on par with last year. In Q3, admin expenses increased by 12% due to phasing of expenditures. The R&D to sales ratio came in at 4% of sales, in line with last year. Overall, this resulted in an increase in operating profit of 7% for the first nine months, corresponding to an EBIT margin of 31%, on par with last year. The EBIT margin contains a positive impact from currencies of 40 basis points. The EBIT margin was positively impacted by cost-saving initiatives and lower spending following the COVID-19 outbreak. Please turn to slide eight. Operating cash flow for the first nine months amounted to around 3.1 billion DKK, compared with around 2.6 billion DKK last year, and includes a positive impact of 144 million DKK related to a reclassification of lease payments following the adoption of IFRS 16. The positive development in cash flows was mainly due to an increase in operating profit of 305 million DKK. Cash flow from investing activities was impacted by investments in automation, IT, and the new factory in Costa Rica. CapEx investments amounted to 690 million DKK for the first nine months, up 276 million DKK compared to last year. As a result, CapEx accounted for 5% of revenues compared to 3% last year. As a result, the free cash flow for the first nine months was an inflow of 2.4 billion DKK against 2.2 billion DKK last year. Adjusted for the 144 million DKK positive impact from the IFRS 16, the free cash flow was up 3%. Our cash conversion in Q3, calculated as 12-month trailing average, was 96%. Due to the COVID-19 outbreak, I continue to monitor trade receivables closely. We also continue to pay smaller suppliers earlier. In Q2, a new share buyback program was launched, totaling 500 million DKK and is expected to be completed shortly. Please turn to slide number nine. On March 18, Coloplast issued revised guidance for the financial year 2019/2020 due to the COVID-19 situation. With one quarter left of the financial year, Coloplast guidance is now narrowed. For 2019/2020, we expect organic growth of around 4% from previously 4%-6%, due to a weaker outlook for the wound and skin care business and the U.K. chronic care business. Due to the depreciation of the U.S. dollar, Brazilian real, and the Argentinian peso against the Danish kroner, reported growth in Danish kroner is expected to be 3%-4% from previously 4%-6%. The currency impact is based on spot rates as of August 14. The organic growth guidance is based on four key assumptions. The first assumption is that after a significant negative impact in Q3, the situation in interventional urology is expected to gradually normalize in Q4. The situation improved throughout Q3 at a pace that implies that our worst-case scenario is now out of scope. The second assumption is that Q4 will see lower growth in the U.K. chronic care business, driven by a decline in new patients due to COVID-19. Due to the COVID-19 and the extended lockdown in the U.K., there has been a significant decline in screening, referrals, and operations. This has resulted in a decline in PDs in both ostomy and continence care. The third assumption is that our wound and skin care business, including our contract manufacturing business in Europe and the U.S., will post weaker growth in the second half of the year than previously anticipated due to a decline in hospital procedures. The situation in China in wound care is still expected to normalize by the end of Q4. The final assumption is a stable supply and distribution of our products across the company. Our guidance also assumes an annual price pressure of up to minus one percentage point. Price pressure will be closer to the full one percentage point for 2019/2020 due to the French price reform within ostomy care and continence care, which was implemented in July 2019. The full year impact of the French price reform was around DKK 100 million. We are also seeing price pressure from smaller reforms in Switzerland and Holland. With respect to the phasing of tenders in emerging markets, the first six months saw a good contribution to growth from tender deliveries in Russia. Last year, the Russian tenders fell in the second half of the year, which means that we will have a tougher comparison period in the second half of this year due to Russia. Overall, in terms of phasing of growth in Q3 and Q4, the impact of COVID-19 on sales was the most severe in the third quarter due to the interventional urology, and we expect improving momentum into the fourth quarter. For 2019/2020, we expect an EBIT margin of around 31% in constant currencies from previously 30%-31%. More specifically, we expect to be in the upper end of around 31%. The reported margin in Danish kroner is expected to be around 31% from previously 30%-31%. The reported margin in Danish kroner is positively impacted by the Hungarian forint, but this is offset by the depreciation of the U.S. dollar, Brazilian real, and the Argentinian peso against the Danish krone. As a result of the COVID-19 outbreak, we have exercised strong cost control, and we have also seen a natural reduction in costs due to lower travel costs and sales and marketing spend. To ensure that we emerge strongly from the crisis, we continue to invest for growth and invest up to 2% of sales in incremental investments into innovation and sales and marketing initiatives. Overall for the year, I still expect SG&A costs and R&D expenditures to increase by low single-digit percentages. Year to date, the increase was 3%. The gross margin will be positively impacted by operating leverage and the global operations plan four, which is on track to deliver 100 basis points EBIT margin improvement in 2019/2020. The positive impact is expected to be partly offset by product mix due to the decline in U.S. sales in urology and cost pressure in Hungary from wage inflation and labor shortages. Additional costs due to the COVID-19 outbreak will also weigh on the margin. We will not incur any restructuring costs in 2019/2020 compared to DKK 43 million in 2018/2019. Overall, the expectation is still that the gross margin for 2019/2020 will be in line with 2018/2019, factoring in a positive impact from currency. We now expect our net finances to end the financial year 2019/2020 at minus DKK 350 million from previously minus DKK 200 million. This is primarily due to further losses on balance sheet items denominated in a number of foreign currencies, including the Brazilian real and the Argentinian peso, that have depreciated significantly. In addition, we expect hedging losses on the US dollar and British pound against Danish krone as a result of the appreciation of both currencies against the Danish krone. CapEx guidance for 2019/2020 is still expected to be around DKK 950 million and is driven by investments in more capacity for new and existing products, as well as the factory expansion in Costa Rica, automatization initiatives, and IT investments into digitalization. Finally, our effective tax rate is expected to be around 23%. Thank you very much. Operator, we are now ready to take questions. Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 to cancel. Our first question comes from the line of Martin Parkhøi of Danske Bank. Please go ahead. Your line is open. Thank you very much, and as said, it's Martin Parkhøi, Danske Bank. A couple of questions. Firstly, on the U.K. chronic business, where you see this negative impact in the fourth quarter, how do you think that the waiting list will be coped in U.K. and when can we see a normalization? Do you expect this to have a similar impact on both in your chronic care base in the U.K. going into the first and second quarter of next financial year? Just on the distribution cost in the third quarter, which was somewhat lower than last year, how much is driven by natural cost savings from COVID-19, like less traveling and less promotion, and how much is actually from prudent cost measures, which also could have an impact going into next year? Finally, just on Argentina, where there was, again, a significant impact in the third quarter. Just for once, could you let me know how much has emerging markets growth of 9% in the third quarter been boosted by this hyperinflation's impact on organic growth in Argentina? Thank you, Martin. This is Kristian. Good questions. I'll start with U.K., Anders will talk to distribution costs and exotic currencies. At the high level, like we said, if we look at the new patient momentum in Europe, we're seeing normalization outside of U.K. U.K., we have seen a pronounced effect. The lockdown has been both severe and prolonged. We are noting with some optimism the communication that's come out of the NHS leadership over the last few weeks with very strong communication that's followed up with significant investments to all of NHS to basically get rid of the waiting lists. We are also noting that they're allocating, at least the way we read the communication, billions of pounds, and they include a private sector capacity to get rid of this and to see improvement that That should start to get real effect by end October and a return to pre-corona levels until at least March. Of course, that will depend on how effective they are, Martin. We'll have to see that. We, of course, follow that development very closely. Patient recruitment and initiation in U.K. has been improving, but we are following the government's action on a daily basis here. Anders, you want to talk to distribution costs and currency? Yeah. Thanks, Martin, for the questions. First of all, in terms of the distribution costs, yes, we saw a significant reduction in our third quarter. It is a combination of the initiatives we basically started back in January, February, where we have been quite prudent on hiring of new employees. We have also been seeing a significant cost saving from a global travel ban, and we are not doing the same number of congresses, sales meetings as we used to. That is all in all contributing quite significantly to our distribution cost development. When that is said, we have continued a number of commercial initiatives that we actually started the year with. So we initiated a number of things in China, in EM, and also in the U.S., and we continued with that also in our third quarter. In relation to your question around Argentina. Yes, Argentina, we have a quite significant impact on the organic growth from higher prices and inflation. But we also seeing a positive impact on our volumes. For the group, it is around 30 basis points impact from Argentina. Thank you very much. Thank you. Our next question comes from the line of Annette Lykke of Handelsbanken. Please go ahead, your line is open. Yeah, thank you for taking my questions. Just to follow up on Martin Parkhøi's question, but looking at the inflow of patients within spinal surgery. This must be relating to fewer traffic accidents, or can you postpone these, and how do you see the trend? Then finally on interventional urology in Q4, do you see any pent-up demand or should we see a risk of more postponements of these elective surgery as well? Then finally, could you say a little bit about China? You mentioned some investments you're doing here. What kind of easing should we see, if any, in China and the Wound & Skin Care market there? Or the wound care market, sorry. Thank you. Thanks, Annette Lykke. I took some notes here. I'll see if I remember everything. Look, we start with spinal, so you're right to remark that if you look at spinal cord injuries, people stay at home and don't drive the car. Traffic accidents come down, you'll have fewer people who break their back. I will remind you that people also break their back when they climb a ladder in the garden doing gardening work and things like that, so it's not just in cars. But we have seen a reduction there, but we also see an inflow of patients from a number of different procedures. So people who go through surgery for enlarged prostate, urethral strictures and other things, bladder cancers, things like that. So there are other procedures that basically lead to a prescription of intermittent catheters. And we've also seen a decline on that side. So it's not just on the spinal cord side. On the interventional urology business, since the low point, we've seen improvements month-over-month. We expect to get back to growth this month. I was with the team on video last night. There's a good pipeline. It's probably too early to say whether we're seeing a lot of pent-up demand, but we are seeing broad-based pickup in North America, particularly in men's health. We're also seeing Southern Europe come back pretty strong and select emerging markets. So we follow that development closely. I think as long as the COVID-19 situation in North America remains, if you will, local outbreaks and no national lockdowns, we're going to see continued execution of surgeries. Then just to clarify your question on China, was that on wound care? Or- Exactly. Yeah. Please. On wound care where you have the-- Yes China wound care has been soft since the COVID outbreak, and we are expecting that to persist through this quarter and then gradually pick up as we move into next year. This is basically from a decline in relevant hospital procedures, and it has also been some reluctance for patients to return to the hospital. We have continued to invest in China. We have also invested this year on the digital and consumer side, and I think that answers your question. Thank you so much. Thank you. Our next question comes from the line of Niels Granholm-Leth from Carnegie. Please go ahead, your line is open. Good afternoon. My first question would be about the change in your management structure. Will this change contain a change in growth priorities between your four business areas? To what extent will this management change also come with an increased need for staff functions in your head office? My second question would be on the corona crisis and if this crisis has changed the need for your physical sales representation in various markets, and to what extent that you will be able to grow your business with fewer feet on the street. Thank you. Thank you, Niels. Two great questions. When it comes to structure, this is definitely not something that means that we're going to staff up and spend more money in HQ. If anything, this is a simplification of responsibility. I'm really trying to solve for two things. Three, to be more exact. The first one is to get a singular responsibility for innovation. You've heard us talk a lot about the clinical performance program, which requires us to not only build products with technology that's able to do more clinically, we need to tie that together with a strong clinical package, and we need to convince payers that this is also worth a premium. So you basically need to tie together a number of elements and ensure that these are integrated together with the commercial package. We're simply setting ourselves up that there is one commercial leader at the end of the table to ensure that this integration happens and we deliver a super strong package to the market. I also have a conviction that this is the type of work that's going to be required for the future. Conversely, on the other hand, we're solving for singular responsibility for sales growth, and building up and strengthening our capability on that side, ensuring discipline on the quarter and the year. The new structure basically reflects that you're going to see these themes elaborated upon extensively in our CMD, particularly on the innovation side, where we also aim to show you some of the technology and things that we are bringing to bear to drive growth. The third thing that we're solving for is more work on leadership and culture in the company. We are promoting Camilla Berg to SVP for People & Culture as part of the ELT. She'll join Nicolai Buhl Andersen as new members. Paul Marcun will run the growth function, and the rest of the lineup you know very well. To your second question, Niels, on COVID-19 and what impact it has on our, if I may call it this, our commercial model and our ability to drive demand with frontline. I think that question is very pertinent. The challenge is this differs quite significantly by market. If I look at China right now, the team is back. We're meeting customers. Productivity levels are getting close to what we saw before COVID-19. We're seeing that also broadly happening in Asia. If I look to Europe, it's a bit of a mixed bag. Our teams are back in Germany, for example, and in a couple of other European markets, whereas in the U.K., we're grounded. If I look to the U.S. chronic care business, our teams are still at home. So if anything, for now, we are investing to enable our people who are at home to engage with customers with digital tools. Of course, we're also thinking about what mix that we are going to have in terms of resources, whether if you look into the future, whether we drive demand with salespeople all on the outside, if you will, when maybe some of them will work more from the inside. But a firm conclusion of that is, I think it's still too early to form. But we are working on enabling them to be effective right now. Okay, thank you. Thank you. Our next question comes from the line of Alex Gibson at Morgan Stanley. Please go ahead, your line is open. Hi. Thank you for taking the questions. I have two. The first one is just regarding the U.K. chronic care weakness you're seeing. Given that we're now in mid-August, could you give us a bit of an impact on the organic growth development in Q4 and into 2021? Specifically, can the weakness in the U.K. alone result in the lower growth for ostomy and continence in Q4 versus Q3? Could it also result in 2021 organic growth being below your long-term run rate of 7%-9% in those two divisions because of the lag effect on new patient starts? Just some helpful guidance in the impact of the U.K. business there. My second question is on any cost savings you're making today due to changes in business practices. Can you quantify the amount of any cost savings which you believe could be sustained into the long term? With these cost savings, do you envisage that you would reinvest them? Do you believe that you could run with structurally higher margins? The cost savings I'm thinking of are like, whether it's travel, office space, sales force. You partly alluded to it, but I was hoping you could provide some more detail on the quantity of those potential cost savings. Thank you. Thank you. Good question. The dynamics are a bit tricky. You have to remember that the chronic care business, structurally, is made up mostly of demand that is already in community. Around 10% of the patient base is renewed every year on the ostomy side, and it is around 5% on the continence side. The rest is basically demand that is in community, so there is a robustness to the demand that we do not expect will change as a result of COVID-19. If I look to U.K. specifically, we are looking into a Q4 where we expect chronic care to be flattish, and the return to growth, my comment there is for U.K. The return to growth really will be dependent on, I think, the NHS's ability to basically get rid of the backlog. Now, the way we assess the situation is that the effort is serious, that real capital is being allocated to get rid of the backlog, and the NHS has also set targets for when they want to get back to something that is closer to normal, but that is going to extend into next year. Whether that is going to affect chronic care long-term growth rates, well, there are a number of moving parts for the chronic care business going into next year that it is not just U.K. and Europe. Remember we also have headwind this year in France from the French price reform. We also have China that since COVID-19, or particularly in Q2, was subdued. We are seeing effects back and forth, but we will be talking more about that as we issue guidance for next year later. I hope that that is enough. Anders, you want to talk to what we are doing on cost savings? Yes. Thanks for the question. In terms of our cost development, as I said earlier, we have been quite prudent on costs since the corona outbreak that started back in January, February. We are focusing a lot on hiring and replacing open positions. We are focusing a lot on the sales marketing cost in general, and then we have a global travel ban. In terms of whether some of these will also continue, there is no doubt, I think that we are not going to have the same level of traveling as we had before corona. We are going to see quite a significant cost reduction from that area alone. That will continue into next year. We are not going to have the same number of sales marketing events as we used to have. That will also be done digitally. We have seen it is actually working pretty okay. I think there are some opportunities here that we can reduce our spending on. Then of course, we are looking into where do we have growth opportunities, where do we have opportunities to grow. As you know, we are trying to invest into activities that will grow the business, and we are seeing those as well, including innovation. But from a cost-saving point of view, I am pretty sure that we are not going back to the levels we have seen before, especially on travel and to a large extent also on sales and marketing events. Okay, thanks. That is very helpful. On that last point, in terms of thinking about the drop-through, would you reinvest any of those savings that you are making on the less sales and marketing events, travel costs, or do you think that they would go straight back into doubling up efforts on clinical trials and growth opportunities? Just to understand if there is actually margin upside here or not. Now we have a new strategy that will come up. We will present the new strategy end of September, and here we will also talk to, as Kristian Villumsen mentioned earlier, growth and innovation, but also how we see opportunities to grow into the next 2025 strategic period. How we are going to allocate our funds, that is something we will be talking further to when we have the strategy update end of September. Okay. Thank you. Thank you. Our next question comes from the line of Kit Lee at Jefferies. Please go ahead, your line's open. Thank you. Two, please. The first question is just on your new product and clinical trials as part of the new strategy. Appreciate that you will be giving the update later on, but just do you expect the launches to be more back-end loaded because of COVID-19, or is that not the case? My second question is on the wound care performance in 3Q. Just wondering what was the trend in the more chronic segment, i.e., in the wound care clinics. Was that also pretty negative as well, or was that better than the hospital sales? Thank you for those questions. Let me start with the question on new products and clinical trials. The reality is that COVID-19 has materially impacted our ability to recruit and conduct a trial on the continence side. So we have seen some delay on that front. It is probably too early to say whether this is going to be something that will materially also delay the project. This is right now not on critical path for launch. But if the situation persists, then we have that risk on the continence side. On the ostomy side, we have things running now under a, if you will, a COVID-19 virtual protocol. We will see whether we are able to fully conclude that and whether that works effectively. But the COVID-19 has definitely increased that uncertainty, unfortunately. On wound care, was the question for Europe only? That is how I heard it. We have definitely seen- Yeah, exactly. We've definitely seen demand to be more resilient in community than it is in acute. As you heard from the commentary, we have more of an acute business in France, so therefore, we've also seen more of a slowdown in France than elsewhere in Europe. We have seen a level of slowdown also in community, but between the two, clearly acute has been the hardest hit. That's great. Thank you. Thank you. Our next question comes from the line of Veronika Dubajova of Goldman Sachs. Please go ahead. Your line is open. Excellent. Good afternoon, and thank you, gentlemen, for taking my questions. I have three, please. One, I just want to follow up a little bit on the previous question that Kit had asked around the wound care and trying to understand what it is that has changed versus where we were a quarter ago. I appreciate China has been slow to recover, but I think you've talked about that pretty extensively. Is it that the magnitude of the headwind in the acute setting is greater? Is it that you think the recovery will take longer? Exactly what is it that's driving you to the lower end of the guidance? It would just be helpful to get a little bit more precision. I guess related to that, how do you think about that lasting beyond the end of the fiscal year as far as wound care is concerned? I had a quick follow-up on the U.K. and just your degree of confidence that the softness you're seeing is broader market-driven as opposed to anything that would be Coloplast specific. If you have an update on the competitive environment here, given some of the historical issues in this business, that would be helpful. Thank you. I counted that as two questions, Veronika. I thought you said you had three. So that's one on wound care and one on U.K.? The wound really had two parts, right? What's changed and how do you think- Okay. Let me just see if I cover all the bases, and then you ask a follow-up if I don't. On wound care, I think we can say the headwind on acute was maybe a bit stronger than we had anticipated. We definitely also had headwind on skin in the U.S. We're seeing that come back. And the consumer business, which is the contract manufacturing business, has of course also been affected. These three in combination is basically what leads us to where we are. On the positive side, we got our new fiber product launched, and it's been very positively received, and our teams are upping their forecast based on customer feedback. So we'll see how this plays into next year. On U.K., this is overwhelmingly environment. So this has been a super tricky operating environment. It is, of course, also a very competitive market. We've had over the past 12 months product launches also from some of the local players. So it's definitely also a competitive environment, but the slowdown is overwhelmingly the environment. Christian, your thoughts on wound for 2021? The reason I'm asking is your competitors in this space, I think, have been somewhat more cautious on the pace of recovery here. Yeah. I'm kind of curious how you're thinking about it. When does the wound care business normalize, not just in China but on a global basis? Right. The way we are looking at things for U.S. now, things are improving. We are expecting that improving trend to continue into next year. I will say there is also going to be a positive effect from Biatain Fiber, particularly in Europe. We are seeing the wound care trend in Europe looking significantly better. And we are expecting to come back to growth here in Q4. Then to me, the big question mark is how pronounced things are going to be on China. We have got it all along that Q4, we would see, if you will, the end of the trough, and we are still expecting that. But China being China, I also want to see how Q1 picks up. So with us, it is a bit of a geographically mixed bag. But what I am saying to the team, Veronika, is they have a great baseline to work with. Okay. Understood. Thanks so much. Thank you. Our next question comes from the line of Kate Kalashnikova of Citi. Please go ahead, your line is open. Hello. Hi, Kristian, Anders. It is Kate Kalashnikova from Citi. I have got three questions, please. First, on interventional urology, could you give us a bit more color on year-on-year procedural trends in July and August so far? I think you earlier said that you aim to get back to growth this month. Could you also comment on your expectations for next year? Secondly, on chronic care, could you quantify how much of the DKK 150 million positive impact the benefit of Q2 has already reversed into three? Is it reasonable to assume roughly equally for ostomy and continence? Kate, I am not hearing your second question. Could you repeat your second question, please? Sure. The second one is on chronic care. Yes. Could you quantify how much the 150 million DKK from Q2 Yes has already reversed in Q3? And is it roughly Yes roughly equal split between ostomy and continence? My final one is for Anders on margin. Full year margin guidance of 31% feels quite conservative given 31.4% margin year to date, even with lower top-line outlook. Could you just clarify if 31% is a margin floor given the guidance upgrade for margin? Perhaps the guidance of around 31% could technically mean flat margin to 50 basis point margin expansion for the year, or if I should read it as 31% flat. Thanks. Thank you very much, Kate. On IU, I'm reluctant to start forecasting the business into next year. We are, I think, through the worst on that, knock on wood, with what we've seen this year. You saw the month-on-month numbers in print on the interim financial report. Like I said, we expect August to come back to growth and of course this year to the last two months to be growth months and as a trend moving into next year. We are going to be talking a lot about baseline next year given just the composition of sales this year. There's a good pipeline of procedures lined up particularly in North America. We're also seeing a strong pickup in demand, particularly in Southern Europe and in select places in emerging markets. On chronic care, on the stocking effect of the 150 million, the vast majority was reversed here in Q3, is our assessment. If I were to put a number to that, I'd say around 130 here in Q3 and the rest in Q4 with the uncertainties that have, but just as illustration that the vast majority has already been reversed. To your question of how this is split, this is roughly 50-50 ostomy in the continence. Anders, margin? Yeah. In terms of your margin question, Kate, as I mentioned earlier, I'm expecting that the margin guidance for the year will be in the upper end of the 31%. That's due to the fact that the gross margin, I still expect that the gross margin will be for the year flattish compared to last year. In terms of our cost development into our fourth quarter, we are going to increase our cost run rate from Q3 into Q4 because we have initiated a number of investments. We have started to close open positions, especially in urology. But net-net, we are expecting for the year the EBIT margin to be in the upper end of the around 31% EBIT margin guidance I gave earlier. Okay. So 31% is the floor? As I said earlier, we are guiding around 31% EBIT margin guidance, and I expect to be in the upper end of that. So above the 31.0. Understood. Thank you so much. Thank you. Our next question comes from the line of Henrik Ingman of ABG. Please go ahead, your line is open. It might be Jan again of ABG. Thanks. Hi, thanks for taking my questions here towards the end. Just quick ones. Can you say a little more about the feedback you have had from the Premier GPO, the accounts you are saying you have started to convert some wins despite not being able to see people physically? Secondly, have you seen any relief of pressure on the wage inflation and in general on, you can say, the external need for workforce down in Hungary now as the COVID-19 situation is stable? Thanks. Thank you. The first question on Premier, we started working with accounts that we already had lined up before the final contract, and I am very happy to say that we have also seen the first conversions. The way we work with the front line is basically as a pipeline of commercial opportunities. The discussion that we have with the U.S. team is what is the shape of the pipeline from initial discovery all the way through contract finalization to pull through. The pipeline looks healthy, and we have managed to find a way to do virtual in-servicing and have gotten started. I do not want to provide an impression that this is as good as having people back in the field full time. It is not, but things are happening, which is encouraging. When it comes to Hungary wage inflation, we are moderately optimistic that with the current environment, the wage inflation numbers will come down. We will see how things pan out over the coming quarters. We are moderately optimistic that the top of the pressure is going to be taken off. You still have the same amount of Ukrainians working for you down there right now? Yes, more or less. Okay, thanks. Thank you. Our next question comes from the line. Oh, sorry, go on. I want to say we have time for one more question, and then we will have to terminate the call. We are moving on to our next meeting. Okay, then our final question comes from the line of David Adlington at J.P. Morgan. Please go ahead. Your line is open. Hey, guys. Thanks for the question. Most have been answered, but just maybe one final one on pricing. We have seen some companies start to talk about potential increased pricing pressure as we come through the other side of COVID. Just wondered if you are seeing any early indications of that, either by geography or by business line. Thanks. Yeah. Thanks for that question, David. As you know, this year we have been quite significantly impacted by the healthcare reform in France and also a little bit in some other European markets. With the knowledge we have today, we do not see any big reforms coming up into next financial year. At least that is going to have a positive impact compared to 2019/2020 with the knowledge we have today. Perfect. Clear. Thank you very much. With that, ladies and gentlemen, we are concluding today's call. Thank you for participating. We look forward to seeing many of you either live or on video calls over the coming weeks. Take care.