Coloplast A/S (COLOB) Earnings Call Transcript & Summary

Good morning or afternoon, everybody. Thank you for joining us today at the UBS Virtual Healthcare Conference. My name is Sebastian Walker. I run the European medtech team here in London. But more importantly, we've got Ellen Bjurgert, the Head of Investor Relations at Coloplast, who's joining us today for a presentation. Thanks very much for joining us. So just for the format for everybody on the line. So Ellen is going to give an overview of the company and kind of key discussions for the first 30 minutes. So that will leave us some time for Q&A at the end of the presentation. So if you do have any questions that you'd like to ask, you should have access to a Q&A link in the schedule. But if you don't or if you prefer me to ask on your behalf, then feel free to send an e-mail to [email protected], and I can do that for you. But with that, I'll hand it over to Ellen.

Thank you very much, Sebastian, and good morning or good afternoon, everyone. It's nice to be here today presenting at this virtual conference here at the Coloplast headquarters. I've been back at the office for 3 or 4 weeks, and around 50% of all the employees are back here. So things are slowly normalizing here in Denmark. What I wanted to do today was take you through an introduction to the company, provide an update on the -- on our recent Q2 results, and then provide also an update on how Coloplast is navigating the COVID-19 pandemic. So -- but let's start on Page 3 with an overview of the company. So Coloplast is a global medtech company active within 4 business areas. Our 2 largest business areas, Ostomy Care and Continence Care, represent around 80% of our revenues. And in both of these business areas, we have a global #1 market position. Then we have the 2 smaller business areas, Wound & Skin Care and Interventional Urology, representing around 10% of revenues each. In Wound & Skin Care, we are globally #5 and in Interventional Urology, globally #4. In terms of the geographical distribution of our revenues, we are still very much a European company with around 60% of revenues in Europe. We have 2 other regions: Other developed markets, which represent 24% of revenues. This is primarily the U.S. The U.S. represents about 20% of our global revenues. And the other markets in this region are Japan, Australia and Canada. Then we have emerging markets at 17% of sales, and the largest market in this region is China. China represents 5% of global revenues. And then, we have a number of Tier 2 markets we call them, including Russia, Brazil, Saudi Arabia, Argentina. And then we have the Tier 3 markets, which is a very long list of countries like India and all the Eastern European countries, Turkey, et cetera. If we now go to Page 4. At Coloplast, our mission is to help people who have intimate health care needs. In Ostomy Care, we make products for people who have had their intestine redirected to an opening in the abdominal wall. These people have typically had colorectal cancer or bladder cancer or suffer from diseases called diverticulitis or inflammatory bowel disease. We, in Ostomy Care, have every sort of 8 to 10 years launched a new portfolio of products for ostomy users. The latest launch is our SenSura Mio portfolio, which came to the market starting 2014. In Ostomy Care, if you have this condition, we say that people typically live for 10 years, and they use products every day. And In Europe, people would use about 40 to 50 ostomy bags a month. People who use ostomy bags also use what we call supporting products, so products to help reduce leakage or help maintain healthy skin. In Continence Care, we help people who have had, for example, a accident, doing a sport or driving and end up having a spinal cord injury, people who have multiple sclerosis or spina bifida and basically people who cannot empty their bladder themselves and would need a catheter to do so. We have, again, within Continence Care, launched many new ranges of products. Over the last sort of 20 years, we have launched products within the SpeediCath brand. And the most recent launch has been our SpeediCath Flex catheter, which is a flexible male urinary catheter. Interventional Urology. The way to think about this business area is that it is contrary to Ostomy and Continence Care. We deal here with mainly implants. So around 50% of the business is a U.S. business within men's health and women's health. For men's health, it's penile implant for men with erectile dysfunction. And within women's health, it is slings or mesh products used to treat stress urinary incontinence or pelvic organ prolapse. The other 50% of the business is located in Europe and a little bit in the emerging markets. And here, we basically sell single-use devices used by, for example, urologists when they do stone management procedures. And then finally, in the Wound Care business. Here, we are in what we call the Advanced Wound Care market. We make products for people who have wounds that are difficult to heal. Those wounds would be leg ulcers, diabetic foot ulcers, wounds that need a special kind of treatment. And the leading portfolio within this business area is what we call our Biatain Silicone portfolio, which is a foam dressing with a silicone border. If we move to Page 5. Again, here, we're touching on sort of the ostomy business and the continence business, which represents 80% of revenues. And in these 2 business areas, we talk about our chronic care model. Basically, what this means is that you have a stable flow of Chronic Care users. So people have a chronic condition and that they live with for their entire lives. Again, Ostomy people tend to live on average for 10 years and Continence Care, 22 to 30 years. And these users tend to be very loyal. So when they've been treated in the hospital, and nurses typically train them on products, and then they would tend to stick to these products for the rest of their lives. In addition, when we think about Ostomy and Continence Care, more than 90% of our revenues are reimbursed. So people don't pay for these products themselves. If you go to a market like China, that is a large out-of-pocket market, so people would pay for the products themselves. But to a great extent, people do not. So what all this basically ends up with is a model where you have an installed base of patients that need the products. And then the key to gaining market share is just to continue to win the new patients in the hospital. It also leads to an annuity type of business where you have this very stable and steady stream of revenue. If we move to Page 6. Our market is characterized by some stable industry trends. The market growth overall is 4% to 5%, driven by, in particular, demographics, so the growing elderly population; and secondly, the expanding health care coverage in emerging markets. An example of this is that when I talk about catheters and Continence Care, there are many emerging markets where this is not the treatment regime today, where there is no reimbursement for catheters. And over the last couple of years, we've had a number of breakthroughs. For example, in South Korea, a few years back, they actually introduced reimbursement for these products. On the limiters side, what are the limiters to market growth? Well, of course, any developments in terms of surgical and medical trends that would negatively impact market growth would be relevant to speak about. We have not seen anything significant here over the last many years. But I would say that, for example, on the Ostomy Care side, the incidence of what we call temporary stoma, so when you can reverse the stoma, has increased and the number of permanent stomas that you need to have for life has decreased. But given the demographic development, we still see for Ostomy Care a market growth of 4% to 5%. The key negative that we see every year is health care reforms. So over the last decade or so, each year, we've seen negative pricing pressure of up to minus 1 percentage point, typically coming from health care reforms in Europe. This year, we are navigating a large price reform in France, where they basically cut Ostomy Care and Continence Care prices by a high single-digit percentage. And the reform amounts to a negative impact at Coloplast of minus DKK 100 million. Moving to Page 7. This is a busy slide, but it provides a good overview of the 4 business areas, the size of the market, the market growth, our market share positions in the 3 different regions that I mentioned at the start, our overall market share as well as key competition. You can study this one in more detail. I'll mention some of sort of the highlights. So if we talk about Ostomy Care, we have -- yes, this is the market, DKK 18 billion to DKK 19 billion, growing 4% to 5%. Our strongest market share position is in Europe with 40% to 50% market share. In the U.S., we have 15% market share, where we are the third-largest player. So this is an outlier market for Coloplast. And then in emerging markets, we have 40% to 50% market share. The key competitors are Hollister and ConvaTec. Hollister is a privately owned American company. And ConvaTec, I'm sure many of you are familiar with, is a listed U.K. company. Hollister has their largest market share position in the U.S., and ConvaTec are #2 in the U.S. In emerging markets, we beat ConvaTec. But Hollister, their focus is primarily on the U.S. and Europe. In Continence Care, we, again -- here, we have a very dominant market position in Europe with 45% to 50% market share -- 55%, sorry. In the U.S., we have 30% market share. We are market leaders in the U.S. together with Bard. And then in emerging markets, which is a small market today, as I mentioned earlier, we have 30% to 40% market share. Our largest competitor in Europe is Wellspect, which is owned by Dentsply. In the U.S., we compete mainly with Bard. And Hollister, we compete within -- in Europe and the U.S. I would say in both Ostomy and Continence Care, the competitive environment has been relatively stable. What we've seen on the product side over the last sort of year is that in terms of new product introductions, there have been few more introductions in Continence Care and in particular, in the female compact segment by our competitors. And in Urology Care, here, we are looking at a global 15% market share, where in the U.S., we have a key position in men's health, where we're the #2 player after Boston Scientific. And in women's health in the U.S., we are the third player after Boston Scientific and Johnson & Johnson. In Europe, we have a #2 market position in the single-use device business that I mentioned earlier. And in Wound Care, we have the global #5 market position, up against some of the bigger players, including Smith & Nephew, ConvaTec, Mölnlycke, and where Coloplast has a strong presence is, in particular, in Europe. And we also have a sizable Wound Care business in China. Moving to Page 8. We are currently in the final year of our LEAD20 strategy, and we have seen a -- in this strategic period, we've continued to focus on the introduction of new products. We have launched the important SenSura Mio portfolio, the SpeediCath Flex project -- product, as I mentioned earlier. We've also had a key focus on what we call our unique user-focused market approach, but this basically means that we have moved even closer to our end consumer through our support program called Coloplast Care through our direct-to-consumer initiatives online. We now have a database of more than 1.5 million people in Ostomy and Continence Care that we are in touch with. We have also made a few acquisitions in the direct distribution space. We have also continued the theme of unparalleled efficiency with our Global Operations Plan #4. Overall, I would say that in terms of growth in margin, we've been very satisfied with the development in this strategic period. In November 2018, we changed our long-term guidance to invest more into growth. So we used to have a margin target of 50 to 100 basis points EBIT margin improvement each year. In November '18, we changed that to an EBIT margin of more than 30%, and we began investing more into the business. So we used to invest around 1% of the top line into R&D and commercial investments. Now we invest up to 2%. And as a result of that, we've seen growth move from around 7% to 8% organic growth for '17-'18, '18-'19. This year, we're guiding 4% to 6% due to the impact from COVID-19. If we move to Page 9, I would like to give a little bit of an update on the COVID-19 situation for Coloplast. We have had 3 key priorities throughout this crisis. Our first priority has been to keep our people safe; second, we are focusing on serving our customers; and third, maintaining business operations. So we have implemented a number of global guidelines, safety measures and contingency plans to keep our people safe, and the overall result of this so far looks very good. On our sort of delivery and supply situation, we've been able to, throughout the crisis, supply and distribute products. And in particular, in the last weeks of March, we saw a significant stocking impact in -- sorry, in Europe in our ostomy and continence businesses. And even through this, we were able to supply. We have been as best as possible in trying to support our consumers with, of course, products but also services through our consumer care program as well as the high-touch model that we've built. But we interact with users through the phone -- on the phone, through e-mail and web. We also have a number of direct distribution businesses that have been providing us a strong service. We have also, as best as possible, tried to support our health care professionals through the crisis. In the absence of face-to-face meetings, we've been engaging with them through e-mail, webinars, individual outreach. And what has been key throughout this crisis is, of course, the priorities that I mentioned as well as the fact that we continue to have a firm commitment to investments, innovation and our commercial agenda. So apart from the investments into Interventional Urology, which has been significantly impacted by the situation, we continue to invest and to move ahead with our strategic priorities. We have had to postpone our Capital Markets Day. And at a later point in the autumn, we will present the new strategy for the company. And rest assured that the strategy work and the interaction with the Board continues. There have been a number of, I would say, positive and negative drivers related to COVID-19. I think I'll speak a little bit more about this on some of the other slides. But overall, what we've seen is, in Q2, a large positive impact from stock building in Europe as our users build safety stock. We have seen a negative impact in Ostomy Care and Wound Care in China, and we have seen already a negative impact in our Interventional Urology business. But this negative impact is expected to be even more significant in the second half of the year. So overall, we are maintaining the financial guidance that we issued on March 18 when we had to revise the expectations for the financial year. Moving to Page 10. On the -- a little more on the Q2 results. So we posted 9% organic growth for the quarter. Again, the quarter was inflated by this DKK 150 million positive impact from stocking in Europe in Ostomy and Continence Care. We saw a negative impact in China in the Ostomy business. Because in China, people basically go to the hospital to pick up products. And throughout the crisis, the hospitals were more or less closed, and people made do with the products that they had at home and some people ordered online. We also saw a significant negative impact on our Wound Care business due to the situation in China. Outside of China, when we think about the Chronic business, we continue to serve an installed base of patients with products. And we haven't seen any significant disruption to the underlying business. I mentioned that Interventional Urology will see a significant negative impact from COVID-19. And again, this is due to the fact that we have 50% of revenues in that business area in the U.S., and the products are related to elective procedures that have been canceled. The quarter saw an EBIT margin of 32%, which was positively impacted by the cost-saving initiatives. But again, importantly, we continue to invest into R&D and commercial investments. We issued a half year dividend of DKK 5 per share, and I'll come back to our financial guidance for the year. So if we move to Page 11. This is basically just an overview of the growth rates of the business areas in the regions. What you can see is, again, Ostomy and Continence Care at 10% and 12% organic growth, lifted by stock building; interventional Urology at 3%, negatively impacted by the cancellation of elective procedures in primarily the U.S.; and the Wound and Skin Care business at 4%, again, negatively impacted by China. But actually, our Skin Care business, which represents around 25% of that business area, did well as a result of the COVID-19 situation. Moving to Page 12. Just briefly, the growth in the quarter, primarily driven by organic growth of 9%. Foreign exchange rates had a positive impact of around 1% on reported revenue due to the appreciation of the dollar and the pound against the Danish kroner. Moving to Page 13. Here, we're just going into a bit more detail on the EBIT margin. Overall, a strong development in EBIT of 15%, driven by the underlying operating leverage, also helped by lower commercial spending due to the outbreak. So a lot of costs, for example, travel costs, sales and marketing initiatives, were much lower in the quarter due to the situation. On the gross margin, I would say there are a number of moving parts, but operating leverage being the most significant positive impact. We also closed one of our factories in Denmark last year, which is giving us a positive benefit this year. We are, however, seeing some pressure on the gross margin from product mix because the products that we sell within Interventional Urology, in particular, men's health, are high gross margin products. We're also seeing some headwinds from salary inflation and labor shortages in Hungary, where we produce around 80% of our global volumes. Again, I think I've already mentioned that we continue to invest, and I think that's it for this slide. So if we move to Page 14. A strong development in cash flow in the quarter. We have a cash conversion rate of 96%. A brief comment, I would say, on net working capital, 24%, which is on par with last year. We are, of course, given the situation, closely monitoring receivables, in particular, in our emerging markets region. CapEx-to-sales of 5% versus 3% last year. We have a number of investments this year sort of linked to new machines for new and existing products as well as automation and IT investments at the factories. Moving to Page 15. So we continue to provide attractive cash returns. We have a dividend policy to pay out all excess cash. We have a targeted payout ratio of 82% to 100%. We also run a small share buyback program each year of around DKK 500 million. And basically, the shares that we buy back are used for the share option program for senior management. If we move to Page 16. So I mentioned that there are a number of moving parts in this year's guidance related to COVID-19. We issued the revised guidance in March 18. We reiterated that guidance in connection with our Q2 results earlier this month. There are basically 4 key assumptions in the guidance. The most significant moving part in terms of impact on growth is the Interventional Urology business. We assume that for each month that the elective procedures are canceled, we would see a negative impact of DKK 100 million. Our guidance assumes that the situation normalizes during the second half of the year. Our guidance also assumes that the situation that I described earlier in China in Ostomy Care and also Wound Care, we assume that, that gradually normalizes in the second half of the year. We are seeing, on a positive note, that the situation in Ostomy Care in China is normalizing. The surgery levels are not back at 100%, but they are -- have improved significantly. And we also see the dynamic of patients visiting hospitals to pick up products. People are more happy to go back to the hospitals and pick up those products. So that normalization is expected now to take place in Ostomy Care in Q3. Wound Care is taking a bit longer, and we expect that to normalize in Q4. The third assumption in the guidance is that the stock building impact that I talked about in Europe. We expect that to partially reverse in the second half of the year. How much of that reverses, we don't know that at this point in time. It's very much related to human psychology, so how much of a safety stock do you as an ostomate or a catheter user wish to have in this uncertain situation. The guidance also assumes that we continue to have a stable supply and distribution of products. In the guidance, we also have a negative pricing pressure of up to minus 1 percentage point, coming in particular from the price reform that I mentioned in France. On the EBIT margin, I think, again, here, the key moving part is that we are seeing a saving of 100 basis points from the Global Operations Plan 4. That is partly being offset by wage inflation and labor shortages in Hungary. But we continue to invest up to 2% of revenue in investment cases in China, U.S., U.K. And then just a comment on CapEx. We've increased our CapEx guidance from DKK 850 million to DKK 950 million. This -- the increase is basically related to more machines to produce existing products but also to produce the new products that we are working on within the clinical performance program. Moving quickly to Page 17. Just in sum, I would like to say that we believe that Coloplast can continue to deliver stable shareholder returns. And a couple of sort of the key points include stable market trends in our Chronic Care business. We continue to focus a lot on the Coloplast Care program as well as our direct-to-consumer initiatives as well as the direct-to-consumer -- or sorry, the direct distribution businesses. We continue to focus a lot on the growth outside of Europe. So the U.S. market as well as China and a number of other emerging markets continue to be a priority in terms of future growth. We care a lot about growth. That's key, but we care about profitable growth. So I mentioned the Global Operations Plan 4. There will also be a Global Operations Plan 5 to continue to drive efficiency. And the leverage that the effect that the top line generates, we will continue to reinvest that to drive future growth. And with that, I'd like to hand back to Sebastian for any questions.

Fantastic. Thanks, Ellen. I've actually had quite a few come in. So I -- so we've got 10 minutes here to just run through them. But if anybody does want to ask any further questions, I'm on [email protected]. So I'll just -- I'll take these in the order that they've come in. So the first 2 seemed to link at the COVID, and I think you touched a little bit on this at the end of your presentation. But on Interventional Urology specifically, could you comment what kind of recovery you're seeing in procedures? I'll ask the second one because it's kind of linked to COVID. So have you seen a continuation of patient stocking in Ostomy and Continence Care? Or has that died down since last quarter? And have you begun to see stocking for wound products as elective procedures start to open up?

Yes. Okay. In terms of recovery in Interventional Urology, I think that the timing of the recovery and the pace of the recovery is still unknown. We are monitoring all states in terms of when they're reopening. We're tracking all the hospitals in terms of when elective procedures are resuming. And I think that right now, it's uncertain. We expect the recovery to be quite messy on a sort of state-by-state level, hospital by hospital. And again, I would just refer to the assumptions that we've made in the guidance that we expect the situation to normalize within 2 to 5 months. Exactly what that is going to look like, we do not know right now. During the month of April, we basically saw revenues go to 0 in the U.S. And at this point in time, we hear about states opening up. But the question is when they open up and hospitals open up, where in -- along the list are the urological procedures going to be in terms of prioritization. On the stocking effect in Europe, we do not continue to see end consumers and distributor stock. We see a little bit of an unwind, but it's too early to really see how this -- to say how this will unfold in the second half of the year. We continue to expect a partial reversal of this. But how much that will end up being, it's really too early to say. In terms of Wound Care, we have not seen any significant stocking in the Wound Care business.

Got it. Those are all very clear. So then this one came later on, but it's again linked to COVID. I'll get through all the COVID questions first. So can you describe any longer-term implications for the industry from COVID, so I guess just beyond the immediate stocking kind of consideration?

Yes. Yes. That's a great question. So what we actually have experienced through this situation is that we have a strong robust model in the company. We think that in terms of the underlying demand for these products, the conditions that we treat, I mean there's no change. There might be a bit of a dip in terms of market growth in selected areas, but we expect that to fully return. We also think that the model that we began building 7 to 8 years ago when we started talking about transforming into a consumer health care company and having a dialogue directly with our end consumers, that has proved to be very robust as well as the acquisitions that we've made in terms of direct distribution. We have now direct businesses in all of our 5 largest markets. And again, providing -- being able to provide products and a strong service in this situation has been key. We also think on the supply side, distribution, manufacturing, that the model that we have has also proven robust. I would also say that the company has run on one purpose, but it's also run on one ERP system and one CRM system, which has been a strength in this period. When we've had to send around 5,000 employees home to work from home, also in our call centers, overnight, practically, we were able to set people up from home. The area that has, of course, been challenged is our interaction with health care professionals. We're used to face-to-face meetings, and this is an aspect of the go-to-market model where we think we will see changes and where the digital agenda will become even more important. It could also be in the future that access to health care professionals and access to hospitals will become more restricted, and we need to find sort of a new way to go about that. Fortunately, we've already begun to look at that, and we do do online training and webinars. But this is something that we think will change in the future.

Great. Good. So then we're on to some non-COVID questions. So that the -- just a second. So the Wound market saw some increased price pressure a year ago or so, but that seems to have eased. Have you also seen that? And if so, why? I assume -- I mean, why has that pressure eased?

Yes. So that's correct. The Wound Care market saw a significant pressure from health care reforms, in particular, in France. And although there is a price reform ongoing in France in Wound Care this year as well, it's not as significant as what we've seen in the past. But our current estimate of the market growth rate in Wound Care is 2% to 4%. And our key focus is within that market, the silicone foams market, which grows faster than the market overall.

So maybe I could -- if I could just add on to that question is why -- I remember that we also saw some pressure from, I guess, some European -- some competitors coming into the space, some value or low-cost entrants. Has anything happened to those players? Are they still around? Are they pushing less hard? What is the situation with them?

Yes. So I think, Sebastian, they've always been there. They will continue to be there. So I think that the strategy in terms of the more sort of premium players is to -- really to explain to health care professionals and the governments that if you bring more superior products to the market as opposed to just the value products, you can actually reduce the total treatment cost because a big portion of the treatment cost is nursing time. And if you have dressings that work better, that could stay on longer, then you can reduce the time spent -- the nursing time. So -- but I don't think these sort of low-cost players, they're not going away. They'll be there, and they'll be able to entertain some discussions with people that are looking for those types of products. But the area where we and the other sort of premium players need to focus, that's more on your thinking about the overall spend.

Got it. That makes sense. 2 minutes, last 2 questions to get through. So the first one, actually, I guess, linked to that is, could you provide an update on the clinical trial program? Do you have any tangible discussions with payers, whereby you've come to some kind of an agreement on end points?

Yes. Sure. So on the clinical performance program, this is something that we have been working on for many years now. It's the program for Ostomy and Continence Care. In both of those business areas, we are trying to develop products that we -- that are clinically differentiated, that will be backed by clinical trials. So we're adding technology to the product. We will be running clinical trials. And then the goal is to go to payers and prove that the products are superior in terms of performance so we should be able to get our own reimbursement category or premium prices. In terms of where we are, while these products will launch in the next strategic period, so over the next 3 to 5 years, we are further ahead with the Ostomy Care products. We've talked about, in Ostomy Care, we've developed a new adhesive, which is going to reduce skin irritation. We've also talked about adding sensor technology to the product to create a sense of security as an ostomy user so that you can get a heads-up before you experience leakage. And we are basically in the process of doing clinical trials on these technologies. And fortunately, the COVID-19 situation hasn't set us back in terms of the trials that we are currently doing. On the Continence Care side, our aim is to hopefully be able to prove a reduction in urinary tract infections, which is the key challenge for our users. There are other end points that you can prove as well. But on this aspect of the program, I would say, timing-wise, this is further out, but we have some interesting technologies that we're working with. But at the end of the day, I mean, in terms of discussions with payers, we can't have those discussions until we have the product in the clinical trials. But we've done our homework in terms of interviewing payers to understand what are they willing to pay for. So we believe we have a good idea, and we have a good idea of how we need to design the studies to be able to prove those outcomes. But it's all about do you have the technology and the product, and we're working on that.

Fantastic. Well, unfortunately, we're out of time. So add to the question I asked that last question on, I'll follow up separately with Ellen, and we can get back to you. But Ellen, thanks very much, really appreciate the time as always. And thanks, everybody, for dialing in.

Thank you, Sebastian. And thank you, everyone. Have a nice day. Bye.

Great. Thanks. Bye.