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

[Presentation] Welcome to this breakout session for sustainability, which is part of Coloplast's new strategy, Strive25. My name is Camilla Pagh, and I'm heading up Global Quality and Regulatory Affairs. I've been in Coloplast for 24 years in different responsibilities in the organization and, for the last 10 years, working with Quality, Regulatory Affairs and also Environmental, Health and Safety. I will go through the presentation. And after the presentation, there will be a Q&A session, where 3 other colleagues will be joining me, and we will do a presentation then at that time. Next slide, please. The video we just saw with Stina is a very good example of the mission of Coloplast. We want to make life easier for people with intimate health care needs. We want to ensure that our users can have the life that they want, to be active and take part of society. While we have our ongoing commitments to responsible operations, we have in this strategy focused and prioritized our resources within 2 main areas: reducing emissions, but also improving our products and packaging. And let me explain you what we're going to do by beginning with the start of this process. Next slide, please. We have a very good starting point in Coloplast, but we still have room to improve. When you talk about both sustainability and responsibilities, there's always places where you can improve. So we have been through a rigorous process to access and assess our sustainability performance, a process that I headed off together with a cross-functional group in Coloplast, where we used 5 months to evaluate our performance for sustainability. We assessed 23 different parameters throughout the company. We have involved many different stakeholders. We have engaged our employees, customers, end users, societies and also investors. We have also worked closely with an external consultancy company in the process, both to verify our conclusions and the assessment, but also to get access for special knowledge within plastics and emissions. We have engaged and empowered our employees through an idea campaign, where we have received more than 500 ideas that has been brought into our final assessment of our current performance, but also the priorities going forward. Supported by our materiality assessment, we have based our priorities where we have the most impact. And the overall conclusion is listed here. The first one is governance, where we do well. We have a very strong governance within our ethical business performance. We have a very strong governance within our tax management. And we also have a very strong process when it comes to risk management, but also risk reporting. For our people, we also do well. We have a very structured process around hiring new employees [indiscernible] and diversity and also KPIs, and we have an overall good level of our employment terms. When we go to the next category, which is our suppliers, there are room for improvements. We have a very strong control and measurements of our direct suppliers, suppliers who are supplying raw materials for our productions and products. But we have less control in monitoring of our indirect suppliers. We also know that our suppliers is a big player in our total emissions. It contributes to more or less 60% of our emissions. So we can definitely do more with our suppliers to improve our emissions. Then we have our products, and we are a company who produces single-use products that cannot be recycled. So we know for sure that we can do more within this area, and I will talk much more about that. And then the last category is emissions. While we have done a lot of lower-hanging fruits, harvested those over the years, it is now time for us to invest even more in order to reduce our emissions. Let's take the next slide because I would like to start by talking about plastics. We are aware that plastic is the main material that we use in our products. Plastic is a great material. It can be used for many things. Plastic can help us produce the products and is actually right now the best solution for us with the products that we make. Plastic is easy to form. You can weld it. You can form it. You can make it work in high temperatures. You can mold it together with other materials. It is also very clean to produce with plastic. It can also help you increase the quality levels, and it's also relatively easy and safe to produce with. Using plastic is actually not the problem when we talk about plastic. It is what happens with plastic once you have used it and need to throw it away. That is the global challenge. And we know we are part of that responsibilities, and we have created clear priorities for how do we want to work with this. So first of all, product safety and clinical performance cannot be compromised. We are in a very heavy regulated business within medical device, and we don't want to compromise safety and clinical performance of our products. Quality and safety is high on the agenda, and plastic is right now the best material we can use to obtain this. There's also very rigorous rules about how to show that you have compliance to both clinical and safety, which plastic is the best solution for. Single-use products are the easiest and the safest option for our users. Our users have a very private and personal conditions, and they shouldn't be considering what type of products and complications about products they use. It should be easy to use and ready to use. It's also the safest options. As the products are contaminated during use, either with feces, urine or wound exudate, then single-use are the one ensuring we have less infections both for users, but also for our health care professionals. Number three is sustainability should be easy for our users. They have a medical condition they haven't chosen. They shouldn't be concerned about environmental impact of the products that they use. They need to rely that Coloplast is taking all the precautions we have for environmental performance. We integrated in the way that we innovate our products, but also how we produce our products. They should not be concerned about that. We are incorporating that once we're producing. But yes, we can do more, particular for our packaging, where our products are relying on the performances and qualities of plastics, then we can definitely do more within our packaging area. Number four is we need to identify new materials and support development of new technologies. We are not in Coloplast going to innovate new types of plastics. That's not our core competencies. We will engage with our suppliers and are already in dialogue with some of those about trying out new materials where we can find alternatives to the current plastics, which is the fossil-based virgin material. We will look into bio-based and renewable materials that have the right properties and can live up to the standards for safety and clinical performance. And lastly is that we want to engage across the industry. We are not the only players, and we cannot change the world alone. So we will definitely partner up with other partners in the industry. This is Coloplast's position on plastics. And today, we have actually published that on our home page, so you can go in there and see more details around our positions on plastics. If we take the next slide. So what are we doing? We are investing up to DKK 250 million over the next 5 years in incremental value. This is to support the direction that we have set. Approximately DKK 100 million of those are CapEx, investment in equipment, and DKK 150 million is in OpEx, primarily related to additional resources to work with this. Within emissions, we have 4 main KPIs that we are going to improve over the next 5 years. We want to reduce our Scope 1 and 2 emissions from 7% to 0%. The main activities is to eliminate our natural gas systems out on our factory sites, and that's on several of our sites, into heat pumps and electricity. That means we will have an emission of 0%. That also impacts the next KPI for renewable energy, where we today have a base of 67%, which we will increase to 100%, while we have changed our natural gas. We will also change from renewable energy certificates to power purchasing agreements over the next 5 years. Then for company cars, we will transition to electrical cars. We will change from our baseline today of 2% to 50% within '25, and we also have a target for 2030 of 100%. We will do this transition in relation to the maturity of the markets, what kind of cars is available, but also what is the infrastructure in the different countries. And we have approximately 1,800 company cars on a global scale. Number four is reduce our business travel, and the target here is created based on our baseline for traveling in '18/'19, a reduction of 10% in that actual number and then freeze that level for the next 5 years. So going into 2025, it is the level from '18/'19, minus 10%. This means we have to accommodate for the company growth within those numbers. If we didn't do these initiatives, it would have been a growth of 40% within this emission area. And yes, we are aware that in this financial year we're going into, the numbers would probably be lower due into corona. But once we are over the pandemic, we would probably see that we are going back to a normal way of traveling again and growing as a company. Then we also have our suppliers, which I mentioned before. Suppliers accommodate to approximately 60% of our emissions. And we will, during this financial year, define a target for what we can deliver together with our suppliers. So right now, there's not a specific target for our suppliers in Scope 3, but that will be developed over the next year, while we are assessing our suppliers. If we move on to products and packaging. The first target is related to packaging. And packaging is defined as all materials that is not the actual product. Again, most of our materials in the product is plastic, which I've just touched upon, we don't have any alternatives at the moment. For packaging, we want to increase our level of renewable materials. We have [indiscernible] our retail boxes, shipper boxes, labels, et cetera, and we will increase that to 80% over the next 5 years. These activities is related to different trades and index in our packaging. The final part of 200% is actually also plastic materials that's linked to our sterile barrier of our products. And again, we don't want to compromise our clinical performance and safety for our users. The second KPI for products and packaging is our waste, how much waste we recycle. Today, we are at a level of 32% from '18/'19. We want to grow that to 50%. The challenge within waste is that we have a mixed materials in our waste, so it's difficult to recycle. We also have a long and very high ambitious target for 2030 of 90%. And in order to get to that level, we will need to be able to recycle our plastics, mixed plastics. And we do hope that together with other partners in the industry that there will be opportunities when we look more than 5 years ahead. And then number three KPI is making packaging recyclable. So we want to make sure that our users can recycle their packaging material end-of-life once they have used their products. So we will change materials that make it easier for our users to take the choice of recycling. This will, of course, be depending on the local waste management systems that are on a global scale. So these are the main KPIs. We will definitely look into other opportunities over the next 5 years, but these are the one driving the priorities. If we take the next slide. Then I also want to talk about our commitment to responsible operations. We also here have some key sustainability targets that I would talk about, and there is much more in our new sustainability report that will be public in the beginning of November. The first one is related to how many of our white-collars that are trained in code of conduct. This is to ensure that we continue with the high integrity in the company, continue to have a business with high integrity. We say what we do, and we also do what we say. The next one is related to safety for our employees. We have, over the last many years, worked on reducing our lost-time injury rate, and we are at a current level of 3. And we have also set a very ambitious target for 2025 of 2. So a lot of activities related to -- with that as well. Then we have 2 KPIs related to inclusion and diversity. Inclusion and diversity is very important for Coloplast. We believe that with inclusion and diversity, we create better innovation, that we have better decision and that we overall get a better company performance. The first KPI is related to our female representation of VP and above. The target for 2025 is 30%. We are currently at a level of 24%. And we started to measure on this back in 2016, where the level was 15%. So we have already progressed a lot, but also see forward to a lot of activities within the next 5 years. Inclusion and diversity is not only about gender, so we also want to look at the diversity in the teams. And here, we have defined a KPI that also looks at nationality and generation. We want to ensure that 75% within our teams are living up to our gender measurements and then either generation or nationality, and we are currently at a level of 51%. And if we take the next slide. We have also strengthened our governance. So we have created a sustainability unit that consist of existing FTEs at the company that are already working with sustainability and also adding more into those groups. This group are responsible for leading the strategic initiatives and also ensure that sustainability is embedded throughout Coloplast. We want to make sure that sustainability is discussed whenever we take a decision in the company. And therefore, we have decided to have this unit within Global Quality and Regulatory Affairs, who are already part of all these decision processes throughout a full product life cycle, starting from picking a new material to selecting a new supplier, to defining quality and safety for the users, but also following out on products that are on the market. We have also decided that the steering group for this group should be the executive leadership team. So the sustainability unit will report to the executive leadership team for priorities, but also when we need to have specifically principal discussions around how to move forward to become a sustainable company. And then there will also be an update for the Board of Directors 2 times a year to show progress on this strategy. This concluded the presentations for today. And while we are just preparing for the Q&A session, there will be a short video. [Presentation]

Welcome back. Before we start on the actual questions, I would just like my colleagues to introduce themselves. We'll start with you, Ellen.

Hello, everyone. My name is Ellen Bjurgert, and I head up the Investor Relations department at Coloplast.

Camilla?

Hi. I'm Camilla Møhl. I'm the Senior Vice President of People & Culture, and I gave the presentation at the Capital Markets Day on September 29. I'm ready now to take questions around the People & Culture agenda, so looking forward to that.

And Christoffer?

Hello, everyone. My name is Christoffer. I am Senior Sustainability Manager here at Coloplast, being here for 6 years and also seeing our reporting and part of the strategy process behind the new sustainability ambitions.

And Ellen?

Operator, we are ready to take the first question.

[Operator Instructions] And our first question comes from the line of Veronika Dubajova of Goldman Sachs.

I have 2, please, if that's okay. My first one is just a broader cultural question. As you think about broadening the diversity of your employee base, I guess, what implications will that have on things like hiring costs and overall salaries? And if you can talk to, from a financial perspective, I guess, where you think you rank as an attractive employer in the region -- in the regions that you operate in, that would be great. And then I have a follow-up to that, but maybe I'd ask them afterwards.

Yes. Thank you, Veronika. I'm going to take a stab at that question. Great question, and I do think it's a question that we try to address in all our existing processes. We do think of diversity as a necessity. It is something that we think of as something that drives better results, like Camilla said in the beginning of the introduction to the inclusion and diversity piece. I don't think necessarily that will come with an additional cost. It is going to be done through natural turnover. Like we also talked about at the Capital Markets Day, we don't wish to force this change. We want it to be an integral part of the culture and the DNA of the company, and we want leaders to drive that change. In terms of cost and financials, I mean, we have to get the right candidates, and we have to do it at a pace that is the right one at the right cost. I don't think there's going to be additional costs in that equation.

Yes. What I was really thinking about is, clearly, I mean, some of the markets that you are [indiscernible] very competitive. And so I was thinking about what sort of, I guess, wage inflation -- is your expectation that wage inflation accelerates as a result of some of these efforts? Or is it more that you will continue to see that wage inflation, that it will be unchanged?

Yes. I will say that all of the markets are different in that way. They're both -- also in terms of your question around attractiveness in terms of our employer brand, it's very different from market to market how well-known we are. What we do know is that when candidates meet us, they often tend to find us very attractive because they hear about the company and our mission, and that's at the center of being able to attract great talent. In terms of attracting internationally, for example, to meet our ambition in terms of nationalities and global teams, that, of course, comes with a mobility premium that we have already counted into our books.

Maybe, Camilla, if you could put some -- sorry, operator. I was just going to ask Camilla if she could maybe touch on the U.S. because, specifically in the U.S., we are the challenger and if it's sort of difficult for us to attract talent perhaps in the U.S. market.

Yes. And there's a lot of effort going on in Minneapolis and across the U.S. in terms of attracting the right talent. I do think that we are at the center of the medtech capital in Minneapolis. And of course, the war for talent there is intense to a large degree. But again, we have an approach that we want to get as broad as possible within the possibilities that we see, but also when we meet candidates. And we do so at fairs and so on for career fairs. And we do have a great emphasis on getting out there. But we are -- in the U.S. context, of course, we do take that quite seriously because we know that we are a Scandinavian company in a large-scale American context.

Our next question comes from the line of Jannick Denholt of ABG Sundal Collier.

Jannick from ABG. Two, please. So one thing, your new strategy is innovation and growth. And not to say that you haven't been focusing on growth and innovation in the past. But are there certain things that you are going to do differently? So the way you operate, navigate internally and the culture, are you jumping around the wave of other companies who are going for more traditional project management to agile methods? So just some thoughts on how you see this journey being backed up by your organization and what it requires to support that. And then the second would be now where you're expanding your footprint in Costa Rica as well. Do you see any risks or extra things you need to take into consideration there, whether being it from an ESG perspective, wage inflation in the long run, et cetera, et cetera?

Yes. Do you want to...

Do you want me to answer the questions?

Yes, please, Camilla.

Okay. So I do think, Jannick, the first question that you have does speak to culture again. So of course, when you move into a new strategy period, you are going to do new things. Then, of course, evolving how we do it is going to be how we address going into the future. And leadership in that sense is all of us, basically. So that means, of course, looking at how do we make sure that we build the culture that moves into the direction that the company in Strive25 is setting up for us. And that is, of course, hard work and dedication, training and programs for senior leaders of the company, but also the rest of the company as we move along. So it will be a long haul in terms of developing ourselves into the future and making sure that we meet the demands that we set up for ourselves in terms of the strategy. I hope that answers the question.

That's fine.

And then I think I will give the number -- question #2 is around Costa Rica. We are, as you say, establishing 2 new facilities, 2 new entities in Costa Rica over the next planning period. We are already in Costa Rica with an incubator. And I can tell you a little bit about the process of selecting Costa Rica. So when we wanted to expand in a new geography, we looked into many different parameters and ended up with the 3 key ones, about what is the employment level, what is the working balance, what is the sustainability factors. And as you know, Costa Rica is already high on sustainability scores. So we did evaluate many different parameters when we selected Costa Rica. So we see that the Costa Rica facilities is in line with the other places that we have our factories.

And then I also think an important point is, of course, that we've seen a high wage inflation in Hungary for quite some time. And we're mitigating that by also diversifying the production and setting up production facilities in Costa Rica. But with that said, when we talk about sort of the fully loaded cost of producing in Costa Rica versus Hungary, it's pretty much the same because we need to transport goods back to Europe from Costa Rica. But the wage inflation is much lower than in Hungary.

I have just one last follow-up on that, if I may. So as we've seen in India for many years where many companies have their shared service centers, there's been a significant hunt for talent. And then people are switching companies, particularly in the IT industry, for a higher wage. Costa Rica is also turning into being quite a significant medtech hub. Is that something that you could say has been considered, taken into account? Or do you think that the employee market is adequate there enough for that not to become a risk as well for you guys there?

So I can...

You can start.

Yes. So I think we've taken that into account, of course, when deciding on where to locate the Costa Rica site. And then, of course, there's also taking into account that we think that the access to talent is at the level that we wanted to be. So we don't have any concerns at this stage.

[Operator Instructions] We have no further questions on the line at this time. I stand corrected. We now have a question from the line of Christoph Gretler of Crédit Suisse.

Yes. I appreciate the session you're hosting. And I just wanted -- I mean, it's a bit of a dedicated question, nobody kind of -- you have a major manufacturing site in Hungary. And obviously, kind of the political situation there, kind of -- if so to say kind of now disputed. And obviously, kind of in Europe, we have now a bit -- kind of values than currently kind of shown by the political class in that country. How do we see kind of such a situation kind of longer term? And what do you see the reputational risk to kind of a high-quality company like you? Does this play a role in your kind of strategic evaluation of the future?

Yes. I think so for the Hungarian factory and then the setup in Hungary, it has actually been a large advantage to Coloplast, always. We have 2 very large facilities there. We've always had a very positive dialogue with the authorities. So actually, Costa Rica -- or sorry, Hungary has been a very, very successful setup for Coloplast through many, many years. And I would say that sort of the key decision now to diversify the production is more sort of related to the fact that we don't want to become too concentrated in one country as opposed to anything sort of developing politically or otherwise in Hungary that is pushing us away from manufacturing there. So -- and again, as Camilla spoke about, a lot of key sort of reasons for why Costa Rica is an attractive place to have manufacturing and maybe also an interesting fact how Costa Rica is that they don't have a military. So they've actually spent that money on educating the workforce. So there's actually a good access to strong talent in Costa Rica.

Okay. The second question relates to -- you mentioned that 60% of your emissions actually are with your supplier. How do you -- and you mentioned that you're about to look into this. How can you actually now credibly ensure that these suppliers will follow your priorities and your views about sustainability?

Thank you for that question. We haven't decided...

General problem, I guess.

Yes. It is a general problem or a challenge when you want to reduce the emissions. We are planning to engage with our suppliers. We would like to do an assessment and then have the dialogue with them about how can we improve. It is luckily showed that a lot of our suppliers are already working with sustainability, and we are not the only customers who is asking for improving within this area. So right now, we are not planning to have a strategy where we force our suppliers to improve with a certain level. We are actually moving towards in a dialogue with our suppliers. So we look forward to be able to tell you more about that once we have done the assessment and have set up targets throughout this year.

Our next question comes from the line of Veronika Dubajova of Goldman Sachs.

Yes. I actually had a follow-up on a slightly different tact. But just curious how much work you guys are doing on exploring alternative materials not just for packaging, but more importantly, for manufacturing, for production. And is this something that you're actively working on from an R&D perspective? Or is it just so challenging given the usage of the products that it's not a priority or a project at this stage?

Thank you for that question, Veronika. We always have a dialogue with our suppliers about new innovations that they are creating. We have some suppliers that have already reached out to us to ask if we can test some of their new materials. We are also looking out for new technologies on the market. But again, we are not the one developing the new innovations, of course. So I would say for plastics, it is focusing in on bio-based and renewable, if possible, again, to keep our regulations. Therefore, the packaging -- there are much more opportunities than there are within the core plastics that we use for our products. So there is definitely opportunities out there that we are looking into to explore now with our strength and focus on products and packaging.

And we have no further questions on the line at this time.

I think one more has popped up, operator.

Yes. We do now have another question, and that is from the line of Jannick Denholt of ABG Sundal Collier.

Again, just one follow-up for me, please. So in other health care sectors or parts of it, we are seeing people offering more so-called affordability options, particularly to navigate in the U.S. marketplace, which is squeezed on health care, but also, you can say, to expand options around the world. I acknowledge that it's also part of the classical product life cycle management that you get -- you have newer products on board, and the older ones can be offered at a more attractive price. But more dedicated affordability options, is that something you guys are looking into, have considered?

So for many years, we've worked with also raising the standards of care by increasing access to health care through a dedicated partnership program, where we primarily have sought to raise awareness because, in many cases, the users that we help, they are underserved in the sense that they live with taboo medical conditions. So that's been our primary focus. And in terms of affordability, we have also upgraded some of our older generation products that come at a lower price with new technologies. So that's been our approach.

And then just to add to that, Christoffer, we've also quite recently launched the SpeediCath Navi product, which we've launched in a number of emerging markets and lower-priced markets. So this is, again, Coloplast introducing more innovation that is tailored to specific price points in specific markets. And this is something that when we launched Navi, we mentioned we would also be doing more going forward.

There are no further questions on the line at this time. Please go ahead.

All right. Well, I think that concludes the session. Thank you, everyone, for participating. Thank you for asking great questions. And to those of you that have followed the entire CMD, thank you for joining. And on behalf of the Investor Relations department, thank you, and thank you to my colleagues here today for taking the time to join us. Have a good day.