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

Good morning, everybody. Welcome. It's David Adlington again from the JPMorgan med tech team in Europe. It's my pleasure to introduce CEO of Coloplast, Kristian Villumsen, for this latest session. [Operator Instructions] Kristian, thanks for joining us today, and over to you for the presentation.

Thank you very much, David. Can I just check that you hear me loud and clear?

Yes. Perfect.

Very good. So I'll speak for about 20 minutes for the benefit of the people participating who may not know the company so well. And we have supplied a presentation. As a reminder to everybody, our company is right now in silent period. So I am not going to comment on current trading. But of course, all questions that fall outside of that, I'll be happy to do my best to answer. Could I ask that we turn to Page 3? At the high level, Coloplast has 4 business areas, all global. This is predominantly a business characterized by what we call chronic care, which is ostomy care and continence care. It's a little short of 80% of the company. And 2 smaller business areas in interventional urology and wound skin care. We are predominantly a European company. So about 60% of the footprint is here in Europe and good growth opportunities but also a smaller footprint now in emerging markets and other developed markets. I'll talk later on about how we look at those positions by the different businesses. If you turn to Page 4, we call the businesses that were in, intimate health care. These are segments that are characterized by stable industry trends driven by demographics, driven by higher standards of care in emerging markets. Also limiters related to surgical and medical trends and the occasional health care reform. We have had a base assumption for many years in the company of up to 1% of negative price pressure per year, and that is still our base assumption. Underlying growth when all of this is considered is 4% to 5%. If you turn to Page 5, what we show here is a breakdown of the position we have by business area. And for ostomy and continence and chronic care, you'll see very clearly that Coloplast has strong market-leading positions in Europe. And you'll also see equally clearly that there's a lot to go for in what we call developed markets, which is mostly the U.S. and North America, really. So both ostomy and chronic care -- both ostomy care and continence care has a lot of growth potential still in the U.S. We have good positions in emerging markets for the chronic care business and a share from both of these areas that for ostomy sits around 35% to 4% (sic) [ 40% ] globally and for continence, 40-plus percent. For the 2 smaller business areas, interventional urology and wound and skin care, our positions are very different. Urology, for us, interventional urology is a very focused business in men's and women's health. I'll talk more about that a bit later in the presentation. We have good positions but also smaller shares. Lots of growth potential. The main competitors in these segments are Boston Scientific and Ethicon to name a couple. On the wound and skin care side, we have a position of #5 in that market, relatively low share in the 5% to 10% range. Quite different regional footprint from a strong position in China, good community business in Europe and largely a skin care business in the U.S. And the main competitors in this environment are, I'll say, the usual suspects from the wound care industry. We run a particular model in our company. We have tried to lay that out in Page 6. Without walking through the macro trends that characterize health care, our belief is that the health care company of the future also needs to directly address consumers. It needs to be a company that builds innovative products, a company that knows how to partner with clinicians. A company that can make sure that the products once they reach consumers, consumers will know how to use them and will know how to get good results with them and, of course, can do this in a way where the payers who pay for this get, if you will, a bang for their buck. That's the company that we have and have focused on building over the past decade. We have forward integrated businesses in our largest markets in Europe, U.S. and China, which basically means that consumers that use our products have the ability -- or have the opportunity, I should say, to work directly and order directly the products from us. Our core consumer offering is a program that we call CARE. It's a patient support program that essentially helps people transition from the acute setting into community in a way where we help patients get on a good routine and get on with their life. The CARE program is in more than 30 markets around the world and is a core stable of our consumer model. Our new strategy is called Strive25 and lays out our core priorities for the strategic period. The guidance for the period is continued high single-digit growth of 7% to 9% and margins above 30%. With this guidance, we have a good flexibility to continue to invest in the business. And I will walk through the different business areas in subsequent charts and on this page, focus partly on the tag line that you see here and a couple of the themes below. The tag line of the strategy is sustainable growth leadership. Sustainability is now, for the first time, an enterprise theme in the company. And I'll show some of the work that we are doing on that front. But we are definitely emphasizing the E in ESG in this period. We're doing quite a bit of work on the leadership front as we evolve the company. We also do work on evolving the way that we lead and sustain the culture that we have in the company. This is a purpose-driven company and has been for 6 decades, and we continue to focus on that. Growth is really the emphasis and as a component of that innovation. Before we talk about innovation, we have had a proud tradition of working with efficiency. Over the past decade, we've expanded margins significantly from around 12% to 13% about a decade ago to this year, where we expect to deliver between 31% and 32% margin. And the work has revolved around this theme of unparalleled efficiency. The main initiative in this strategic period is automation. And a large portfolio of projects to basically automate our -- a significant portion of what we do principally in our sites in Hungary and China that are the 2 largest manufacturing sites for the group. The aim is basically to avoid hiring more than 1,000 people over the period. So efficiency continues to be an important theme for the group. So does innovation. If you turn to Page 8, I'll say just a few things on innovation. We have a long tradition of innovation. And if you want to understand the success that the company has had, you really have to understand the track record that we have on building good products. We started something that we call the clinical performance program a few years back, which is a new generation of products in our 2 core franchises, ostomy care and continence care. And the previous strategic period was really focused on getting that program off the ground, identifying the technology needed, building core capabilities in preclinical and clinical and on the market access side. And this strategic period of Strive25 will be very much focused on delivering this generation of products to the market. We've done a lot of homework before we initiated this program on understanding what you might call the clinical headroom for the segments and the willingness to pay on the payer side. And we have a strong conviction that there are still very meaningful clinical issues to solve. And based on work that we've done in our top 6 markets directly with payers to understand willingness to pay, we also have strong conviction that if we can build the products and deliver the clinical performance, there is an opportunity to also get paid a premium. We don't do that program alone. There's also a lot of life cycle management and more incremental innovation. The resourcing is about 50-50 between the clinical performance program and the rest. And then finally, a big theme for the strategic period is building more options into the pipeline. Historically, we've been very focused on, if you will, the product paradigms that we know. And rather than having somebody from the outside disrupt the product paradigms that we know, we want to get ahead of that and also have a take on what does the solution look like post ostomy bag and the urinary catheter, for example. All told, we spend about 4% of revenue on innovation. If we look at the different business areas, all of the business areas are growth businesses. Growth on the chronic care side is really driven part by innovation that I just talked about. We have 2 core geographies. One in China, where we really compete from a market-leading position. We are driving the standard of care on the chronic care side. And expanding that position over the period is one of the core geographical themes. U.S. has, as I showed earlier, a lot of opportunity in basically taking share. And I hope we're going to get some questions that we can talk to some of the specifics that are required both on the ostomy side and the continence side. But my feeling is definitely that we have a good outset for challenging the leader on ostomy and continuing the good ride that we've had on the continence side. And then there's actually -- even though we've been active in these 2 categories for decades, there's good opportunity to continue to work on developing the markets for better standards of care. On the wound care side, very focused agenda, very much focused on our silicon platform and the 3DFit technology. We have added a new fiber -- a gelling fiber product to the portfolio that is also doing very well. And again, here, U.S. and China are core focus areas, along with a drive on margin that we think will provide good opportunity to drive profitability in this franchise. And then finally, interventional urology, where we have changed gears. We are investing in innovation. We're doing a number of things to expand the business geographically. And we've also begun investing in adjacencies or technologies that will move us into adjacencies. We've made a couple of investments over the last year, one in Francis Medical for a technology that's relevant for prostate cancer. And the other one, we bought a company called Nine Continents that allows us potential entry into the overactive bladder market. If you move to the next page, briefly on ESG, like I alluded to earlier, E is the big focus on ESG. We aspire to have the company become 0 emissions from scope 1 and 2 over this period and 100% on renewable energy. We're doing a lot of things on the products and packaging side and have built a serious investment portfolio to get that work done. There's a lot of what I'll call ongoing commitment to running a responsible company that we've worked on for years and that we will continue to do. We really want the company to continue to be a growth company. And Page 11 sets out how we think about this. We, at any given point in time, would like to have a portfolio of growth opportunities that speak to a short, medium and longer term. That speaks to the different businesses that we're in and also the different geographies that we have. We expect to invest up to 2% of revenue. And you can see here on the right-hand side the types of opportunities that we are pursuing. Innovation will continue to be an investment area. And lots of opportunity in both chronic care, interventional urology and a number of areas also outside of the developed markets in emerging markets for growth. We are privileged to have more growth opportunities than we can pursue. M&A, we expect that in this strategic period, we will be more active than we've been historically. We've begun -- we have done a systematic screening of different opportunities for both early-stage companies, technologies and channel opportunities. We allow ourselves to be, if you will, opportunistic if there is a chance to do a larger play. So far, the most significant thing that we've done was the acquisition of Nine Continents. But you should expect that the company will be doing more over the period, probably with a bias towards early-stage technology and portfolio expansion. It is less likely, I think, just for obvious reasons that the large plays would emerge. Finally, on cash returns, we are continuing the policy that we've had so far of paying out 80% to 100%. We pay a dividend twice a year. And also this year, we've been able to increase dividend and as we have a good track record of doing. David, I think I'll hold it there and pass the baton to you to facilitate whatever questions the audience might have.

Sure. Great. So I'll maybe just open up here. I mean historically, you've been a strong growth business for only in the last 10 years, 10 years-plus, growing that sort of 7% to 8% growth rate. Maybe you could just sort of remind us of what's been a key driver of that over the last 5 to 10 years? And does that -- do the drivers of that change over the next 5 -- or the next forecast period?

Great question. So prior to COVID, just as a reminder, we delivered 13 quarters of 8% growth. And really, growth has been broad-based. All our regions have been growing. I'd say that if you look at the growth footprint, it has reflected our strategy. U.S. has been a growth driver. Emerging markets has been a growth driver. China has been a very important growth driver in that mix. We've continued to grow between 4% and 5% in Europe. We still have opportunity to grow in Europe. There's quite a lot that we believe that we can still do with that business. So I am expecting that we're going to continue to have a broad-based -- if you will, from a geographical point of view, a broad-based growth footprint. We've also, in the previous period, seen our interventional business grow strongly, low single-digit, high -- sorry, high single-digit, low double-digit type growth. I am expecting that to continue now on the back of, if you will, a more offensive strategy that we have for that business. And then we've had, I think it's fair to say, a bit more bumpy ride on the wound care side. Our ambition is to outgrow the market. I think we've got all the -- if you will, all the components in place to do that. And for the coming strategic period, we're also going to get some nice additions to the portfolio that will allow us to be much more serious about the U.S. that we've been able to be up until now. So I also think from, if you will, a segment view that we're going to continue to see broad-based growth also across the segments. So to your question, do I think that we -- that the components will fundamentally change? No, I don't.

Perfect. And then so as we went through -- so at this time last year, as we started to go into this -- the storm of the pandemic, certainly, I think most people would have looked to Coloplast. And it's been historically a very defensive growth profile. Not much has impacted the path of growth. But last year, we did see probably a bit more than most people were expecting, a bit of a slowdown. Maybe this is worth touching on where you saw those headwinds? And do you expect -- how are you expecting to bounce back, I suppose?

Yes. Good question. So we changed guidance last year back in March. And it was really triggered by the outlook for the surgical urology business or the interventional urology business. As we saw cancellations of procedures go up, we saw that business take a dramatic dive in April and then basically in the subsequent months, gradually come back to growth. And as we exited the year, the business was back in growth. We had clearly the largest headwind from that area last year. But we were able to stay within the guidance. We saw a bit more headwind on the wound care side in China than we had expected. It took a longer time to rebound. There's probably a host of reasons for that. But part of the reason certainly was that consumers were reluctant to come back to hospitals. We've seen that also gradually change for the better. And then I'll point out the impact -- COVID impact on the chronic care business, particularly U.K. in Europe, where we saw the U.K. be harder hit and taking longer to rebound. We're still confident about the assumptions that we've been communicating for this year's guidance that they're still robust. But we also said as we exited the year that we expected U.K. to be lower than normal for at least the first couple of quarters, and that's also what we're seeing. I am expecting the impact on new patients to be passing. But of course, to the extent that surgeries don't happen, it -- and screening programs don't happen, it will have somewhat of a negative effect on the business. But all told, I would -- I expect those to come back to normal as we transition out of the pandemic.

Yes. Perfect. And then if you think about that 7% to 9% sort of growth profile, I mean you hit the 8% pretty consistently but never really quite got to the 9%. Did you sort of maintain that? What do you need to get to that top end?

I need all regions to pull our weight. And so it is a portfolio, David. And from time to time, you run into different types of issues along the way that have precluded us from getting to the high end. We still have the 9 in there in the guidance because we're convinced that it's possible. But we need Europe in the 4 to 5 range, double-digit U.S., strong growth in EM, in particular, China, and then continued good performance from both the interventional business and the wound care business. So we've had some headwinds, different headwinds depending on the year that you look at. But we've been able to sustain 8. We aspire, of course, to get to the 9.

Perfect. And then when I look across my universe, I mean companies or certainly historically, maybe not in the last couple of years, but historically, companies growing in the sort of pace that you're growing at, we would expect to see some natural operating leverage. And so that's what we saw historically, obviously strong operating leverage at Coloplast when I first started looking at you guys. I first started looking when your margins were at 15%. And so they've gone a long way. But you kind of stepped away from that probably about 2, 3 years ago, when the last strategy period started. Maybe just talk to a higher level of investment, different levels of investment and where you're looking to spend and how we should be thinking about that balance between growth and margins?

Good question. I think always a fundamental discussion. We -- when you run a company at the margin levels that we're privileged to have, the key priority really is growth. And so first priority for me is to run an innovative growth company and maintaining a portfolio of growth options that we can convince ourselves, our Board of Directors and knew that we can sustain growth over time. If growth starts to slip, it will be a very different company. So we are basically guiding the way we are, David, to allow us the flexibility that we can allocate capital to these growth opportunities. You also know that on a yearly basis, we may also go higher. You could see this year, we're guiding 31% to 32% margin. That then, of course, also implies something about how much we are investing this particular year, right? But it is a -- it is to allow ourselves some flexibility. And then, of course, in the given year, depending on the mix of opportunities, margin levels may be somewhat higher, somewhat lower.

Okay. Fair enough. And in terms of the allocation of that investment in -- between R&D and sales and marketing, how should we be thinking about that split? I mean it feels to me like R&D is probably going to be growing at a good double-digit pace. But within that -- within the R&D, how do you think about the styles of innovation you're bringing on completely new high -- I suppose higher risks, higher returns to innovation towards versus kind of more iterative but low-risk innovation?

Yes. So we have -- the portfolio split right now in the pipeline is roughly 50-50. We are, and we've been, I think, explicit about this with the clinical performance program, we are taking more risk, right? It is harder to do. And the path to value creation is more challenging, right, because we both rely on being able to actually build the product that performs, you have to prove it and then also having to get paid for some of the innovations. They are completely new to market. We'll also require that we successfully establish new categories. So inherently, that has a different risk profile. I would hesitate just putting a ratio on what exactly that's going -- what exactly that's going to look like. Going forward, that certainly depends on what we see which is also why I would like to reserve the right to have some flexibility. But if we see the right type of opportunity or an idea from the innovation organization that we want to pursue, we have the capacity to pursue it, which I think is probably the most important thing.

And I presume that innovation is pretty important to kind of maintaining the competitive mode. And on that front, obviously, one of your competitors, in particular, has been should we say in a penalty box for the last few years and been changing management. But are you seeing any real changes at ConvaTec yet in terms of competitive environment?

We follow ConvaTec and Hollister and all our other competitors. We take them all seriously. We, of course, noted that ConvaTec is changing strategy and trying to get more focus into what they do and they're recommitting innovation. I feel good about our level of competitiveness, David. Competing in these segments is a long haul. It's going to require a sustained investment. There's no silver bullet line around that you can pick up and completely change the dynamics. I would say building products alone is not enough. So it also needs to go hand-in-hand with the partnership with clinicians. And of course, our belief is also it needs to go hand-in-hand with an offering and -- to consumers in a consumer channel. We spent the better part of a decade building the latter. So game on.

Perfect. And then you mentioned in your presentations how you got onto the GPO contract with Premier. I think the Vizient contract is coming up reasonably shortly. It took probably a bit longer to get on to the first of those than you originally anticipated. So maybe you can just talk to the hurdles to getting onboard. I know it's a slight chicken-and-egg situation, but now you are onboard. And hopefully, you will get the Vizient contract as well. How important is that to the business in the short term? But I think it's pretty -- a lot more important in the longer term.

Yes. So to the short term -- this is a long-term play. And really what we're after is a level playing field. And you're right, it's not been just a bit of a chicken-and-egg situation. It's been very much a chicken-and-egg situation historically. And so we've had to fight house to house, to get enough share that we could get on GPO and not least get the right type of share, the right clinical backing. We've gotten to that place and we feel that playing field is now starting to level. We want to get on Vizient. We're putting our best foot forward. Everybody who plays a role in our offering, from CEO down to product manager in the U.S., we've been deeply involved in that to try and put our best foot forward. No guarantees, but we will pursue it until we get it. But it's a long-term play, David. It's a long play.

We're not likely to see a big impact on the P&L in the next year or 2 years, right?

So I want, of course, the U.S. business to accelerate on the back of significant GPO wins. And I'd also say, David, we are prepared. Let's -- if you imagine that the whole playing field opens up if we need to invest, we also have the capacity to invest. But it would be nothing that would, I think, on the P&L side that dramatically changes the P&L, it wouldn't be.

Got it. And I just want to dive quickly into a couple of the businesses. So obviously, interventional urology, it does look -- and is a pretty different business to the rest of the business. And you put it under strategic review a couple of years ago. And then kind of concluded that it deserves to stay in the group. Maybe just point to why that decision was made. And from here, what you need to do to kind of grow it to the sort of scale that you believe it can get through?

Yes. Yes. It's important to remember the context for us was that we had been part of mass tort litigation for, I think, the better part of 8 years. And as I transition into the role and we could see, if you will, light at the end of the tunnel on the litigation, we did a 360 review of the business. And it really became quite clear recommendation to the Board of Directors that it deserved to write in the portfolio. One, we have segments with lots of underlying need and good underlying growth. Two, we have a good position. So we have a -- it's not a regional business. We have a real presence in the U.S. and Europe, with lots of geographical expansion opportunity into emerging markets. Three, we've got a business that performs well and creates value. So it's deliberate, high single-digit, low double-digit growth, expanding margins, high returns on invested capital, relatively low CapEx levels. Four, we have a good team that's been driving that. So we also have a group of people that we feel confident that we can invest in and they'll do good work with the investment. And then finally, five, we saw a number of segments that had opportunity. But of course, the first discussion we had with the Board of Directors is what's the risk given the history. And as you dive into that risk, the counterintuitive answer is the benefit of having been involved in that whole process is that the business has been derisked. So there were a number of a large number of law firms that have been looking for plaintiffs all over the U.S. And we think they found every possible plaintiff for the companies that have been involved. And so when I look at the inflow of cases, David, it's very low. There's no pattern in the inflow in terms of brands, geography or product. So our judgment is it's already been derisked. And it is a real growth option for the group.

Great. Okay. Just a couple of questions are coming on. I think it's pretty interesting. So one here. So would you comment further on the leadership and human capital developments you think are adding value? And then sort of following on from that. And what do you think is the most underappreciated aspect of your environmental efforts?

Okay. So the first question is on -- I guess is a question to the work that we're doing on leadership and culture.

Yes.

So we take the temperature of the company with certain intervals. And one of the strengths of the company is we have a purpose-driven culture. If you look at consistently what -- how people feel about being employed with the company, there's a high degree of pride that's related to, if you will, the why of the company, of helping people with intimate health care needs live good lives. But it's clear also that the company is now in a very different place than it was 10 years ago. And so the way that we talked about in phrase, what was needed in leadership now, as you have to grow from the platform that we have today, leadership also has to evolve. So it really is a -- it's a piece of work and a process with the senior leaders in the company to talk about what we want to emphasize. And I definitely think that's worth our while, definitely. Otherwise, we wouldn't be doing it. And so we're basically tapping into that energy and trying to raise our game. On the ESG side, listen, we haven't talked a lot about that historically. So really putting this forward as an enterprise theme and providing good transparency on what we're investing in. I am hoping that you will all appreciate that this is something that we take seriously. There's, of course, a -- I mean there's one way to look at this. This is, if you will, wave 1 of the initiatives that we have. There will also be wave 2 and wave 3. That's the way that we work. But there's, of course, an inbuilt dilemma in our company that we sell medical consumables, right? And we sell medical consumables for good reasons. But we find that with the feedback that we're getting on the initiatives that we have, David, at least now early on, is quite positive that this is a great start.

Okay. Maybe just quickly to wrap up before we ended this session. Another question is just how do you see the acquisition of Nine Continents synergizing with the rest of your interventional urology business?

So remember that Nine Continents is -- it's basically a technology acquisition. It does leverage our women's health commercial platform if we succeed in getting it to market or our commercial platform broadly, I would say. But it is one of the target adjacencies that we've identified that we think we can meaningfully expand into from the footprint that we have, the customers that we cover today, and for what we know something about. So yes, good fit.

Got it. Great. Well, that takes us to the end of the session. Kristian, thanks very much for joining us today. Stay safe and speak soon.

Likewise. Take care.