Coloplast As Sp/Adr

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Coloplast Interim Financial Statements for H1 2023-24 Conference Call. Throughout today's recorded presentation, all participants will be in the listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Christian Williamson, President and CEO. Please go ahead.

Thank you very much, operator. Good morning, everybody, and welcome to our half-year 23-24 conference call. My name is Christian Williamson. I'm the CEO of Cold Plus, and I'm joined by our CFO, Anas Loningskoglu, and our investor relations team. We'll start like we usually do with a short presentation by Anders and myself, and then we will open up for questions. Please turn to slide number three. We delivered 8 percent organic growth and a reported EBIT margin before special items of 27 percent in the second quarter. Return on invested capital after tax and before special items was 15 percent, reflecting impact from the acquisition of Kerasys. I'm satisfied with our performance. We continue to broad the outlook of the market, and more importantly, we continue to help more people who live with intimate healthcare needs. At the same time, we also continue with our year of launches. Today, we announced four new launches in our chronic care businesses. One of the new products that we're launching is Halo. This is the world's first digital ostomy leakage notification system, and it has now received national reimbursement in the U.K. as of the 1st of July. And while this is a launch in only one market for now, it confirms the need for innovative and clinically relevant solutions in our category. This is how we continue to lead our categories, by raising the bar and bringing differentiated technologies to the market. Before going into our usual half-year strategic update and the details of today's results, I'd like to provide our thoughts on the proposed local coverage determination policy for skin substitute grafts that was published on the 25th of April and is relevant for the newest member of the Cold Blast Group, Kerasys. Please turn to slide number four. Let me start with the facts. On the 25th of April, seven medical administrative contractors brought forward a draft local coverage determination policy in which two coverage qualifications for skin substitute grafts were introduced. The first qualification relates to a technical requirement which Kerasys meets. The second qualification relates to a clinical requirement which, based on the assessment, Kerasys does not meet and therefore Kerasys is not included in the draft coverage policy. The draft policy covers the Medicare portion of outpatient sales, which includes both physician offices and hospital outpatient departments, and it affects around 20% of Kerasys revenue. The majority of the remaining 80% of sales are related to in-hospital sales, covered by DRG codes where the reimbursement environment is stable. The process from here is the following. Until the 8th of June, there's a consultation period in which affected parties can provide their comments to the draft policy as is the norm. After the consultation period, there will be a final policy typically published at least 45 days before implementation date. The implementation date has not been announced. We expect that it will be up to half a year after the consultation period ending with the final decision to be published and implemented. My perspective on this draft policy is that this is a quality document. It sets out a sensible set of objectives for the category that are founded in good clinical practice. It explicitly reviews the clinical evidence for every single product in the category as a basis for recommendation to either include or exclude the product from the covered list. The decision to exclude Kerasys from the covered list is rational on the basis of the clinical evidence that is reviewed in the draft policy. Now, and this is important, the clinical evidence on Kerasys which was reviewed in the draft policy does not include a randomized control clinical study from 2023 by Lantus. We strongly believe that this study fully satisfied the LCD requirement for quality evidence that demonstrates the product's safety effectiveness, and positive clinical outcomes in the function as a graft for diabetic foot ulcers. The 2023 Lancet study on chronic diabetic foot ulcers is a randomized control clinical trial with a sample size of 102 patients, and it provides high-quality evidence with a low risk of bias, demonstrating the safety, effectiveness, and positive clinical outcomes of the Kerasys fish skin graft compared to standard of care in the treatment of chronic diabetic foot ulcers. The study found significantly higher rates of complete wound closure at 12 weeks with Kerasys compared to standard of care. The study also found a greater mean percent wound area reduction at 12 weeks with Kerasys compared to standard of care. The average number of applications used to achieve closure was 5.9, and the study also had up to one year follow-up period. Since its publication, this study has been used to obtain commercial coverage from almost 50 payers, which has resulted in more than 100 million added lives in the US. Following the announcement of the draft policy, we have conducted a review of the studies behind products that were included on the covered list. And we found that our 2023 study from Lantus is not only on par, but in many cases also superior to the clinical evidence that substantiates coverage in the draft policy. The process that I described earlier is designed to rectify potential errors. This is why there's a consultation period during which we will submit our 2023 clinical study, which has been omitted from the review. If things happen, we will submit evidence to rectify this. Of course, we cannot exclude some level of short-term disruption in the market as a result of the draft policy, but given the feedback that we received during last week from our customers and our field force, We feel confident that there won't be significant impact on our sales in the second half of the financial year, and therefore, we also maintain our financial assumptions on Kerasys. In summary, we welcome this introduction of clinical qualification for obtaining coverage. We perceive this as a positive development which will benefit patients, and we also believe in the process outlined by the authorities. It's both fair and reasonable. And we strongly believe that we have the right clinical evidence to prove the strength of Kerasys' fish skin and to get us back on the covered list. With that, let's turn to our half-year strategic update. Please turn to slide number five. First, on growth. With our STRIVE25 strategy, we set out to actively pursue M&A opportunities to build growth and value creation options for the mid- and long-term. The two most significant investments we made, Atos Medical and Kerasys, are both performing in line with our expectations with a strong future outlook. Atos Medical has performed consistently in line with our guidance of 8% to 10% growth and an EBITDA margin in the mid-30s level since becoming part of the Cold Plus Group, now almost two years ago. Integration is also tracking well, and we expect to deliver the up to 100 million kroner in operational synergies. In both categories in which ATOS Medical is present, on injectomy and tracheostomy, we see significant white space. This, coupled with a strong commercial model and a strong team, gives us confidence that ATOS Medical will continue to be a good growth contributor and value creator in the long term. The performance of Kerasys in the first six months is in line with our business case. The strategic fit has been confirmed. And despite the short-term noise which the draft local coverage determination policy has created, we remain convinced about the strength and clinical differentiation of the fish skin technology. With the strong commercial execution from the Kerasys team, we're confident that the business will continue a strong double-digit growth trajectory and become the category leader in biologics over time. Next, let's turn to innovation. This is a big year for us with several significant launches that will support our growth during STRIVE25, but also beyond the strategic period. With LUJA, our new intermittent catheter with a micro-hole zone technology, we're setting a new standard in intermittent catheterization with a technology that enables full bladder emptying in one free flow, and it addresses key risk factors related to urinary tract infections. LUJA is now available to male users in 13 key markets, and here in May, We've initiated the launch of Luja for Women with Denmark and Italy as first launch markets and other key markets will follow over the next 12 months as we obtain reimbursement. In Austin, McCarrick, we're very pleased with the news on Halo, which, as I mentioned earlier, has been granted national reimbursement in the UK as of the 1st of July at the expected reimbursement level. Work to obtain reimbursement in the second focus market, Germany, is ongoing, and we expect to receive a decision from the authorities in the coming months. In May, we've also initiated two launches that strengthen our biggest brand in ostomy care, Sensura Meal. The first launch represents a significant expansion of the Sensura Meal portfolio with black bag variants, which will provide more choice for people with a stoma. And the second launch is a variant of the Sensura Mule Convex, which strengthens our position in the two-piece and convex segments of the off-duty care market. On sustainability, we continue to make good progress across all our initiatives. I'd like to call out the latest results of our employee engagement survey, where we maintain a solid score of 8.1, ahead of the industry benchmark of 7.8, which I'm pleased with. Finally, we're off to a good start with our Global Operations Plan 6, The process to establish a new manufacturing site in Portugal, which will be the largest site for Cold Plus to date, is on track, and the site is expected to be operational in 2026. In addition, the procurement program we launched as part of the Global Operations Plan 6 is also making good progress and is expected to deliver savings that will support our long-term EBIT margin guidance of more than 30%. Now, let's take a closer look at today's result. Please turn to slide number 6. In ostomy care, organic growth was 7% for the first six months and growth in Danish Kona was 4%. In Q2, organic growth was 7% with growth in Danish Kona of 4%. Our Sensora Mio portfolio continues to be the main growth driver, followed by the Brava supporting products, and our Sensora and our Sura Alterna portfolios continue to post solid growth in emerging markets. From a geographical perspective, growth in the quarter was driven by Brava-based growth in emerging markets, led by China and LATAM. Europe also made a good contribution to growth, driven by the U.K. and Germany. The U.S. had a soft quarter with continued impact from water phasing, and the underlying demand in the U.S. ostomy care market continues to be strong, and we now expect growth in U.S. ostomy care business to be second-half weighted. In continence care, organic growth was 8% for the first six months, and growth in Danish kroner was 5%. In Q2, organic growth was 8%, and growth in Danish kroner was 5%. Growth in the quarter was driven by solid momentum in intermittent catheters across the SpeedyCath portfolio, with good contribution from compact, standard, and flexible catheters. Luja, a new male intermittent catheter, also contributed to growth in Q2. Our bowel care business also made a solid contribution to growth driven by Peristin Plus in Europe. From a geographical perspective, growth was broad-based across regions led by Europe, in particular the UK and France. Markets where reimbursement has been recently established or improved, such as Poland, continued to perform well and grew double-digit. Boys in respiratory care posted 10% organic growth for the first six months with growth in Danish kroner of 8%. In Q2, organic growth was 13% and growth in Danish kroner was 10%. Reported revenue includes negative impact from product rationalization of 1% in the first six months of the year and 2% in Q2. Growth in lethargectomy in Q2 was double-digit and driven by an increase in the number of patients served in existing and new markets, as well as an increase in patient value, driven by the Provox Live portfolio. Growth in tracheostomy in Q2 was also double-digit and driven by continued solid demand and positive impact from forward integration. From a geographical perspective, all regions contributed to growth, led by Europe, as well as solid contribution from the U.S., In advanced wound care, organic growth was 8% for the first six months, and growth in Danish Corner was 38%. In Q2, organic growth was 8%, and growth in Danish Corner was 36%. Reported growth for the period includes impact from the acquisition of Kerasys. The advanced wound dressings business grew 8% organically in the quarter and also 8% in the first six months. A biotin silicone portfolio is the main growth contributor from a product perspective, while from a geographical perspective, growth was brought based across regions. Kerasis' revenue amounted to 461 million Danish kroner in the first six months and 232 million Danish kroner in Q2. The underlying revenue growth was around 35% in both H1 and Q2. The inpatient channel and surgical wounds were the main growth contributors. Kerasis' operating profit margin excluding PPA amortization was around 10% in both periods. In interventional urology, organic growth was 5% for the first six months, and growth in Danish Kona was 4%. In Q2, both organic growth and reported growth in Danish Kona was 5%. Growth in both periods was against the high baseline last year. The men's health business in the U.S. was the main growth contributor in the quarter, followed by the endo-urology portfolio, including solid contributions from our first laser equipment, the Thulium fiber laser drive. a women's health business detracted from growth in the quarter, impacted by competitive pressure. We expect continued softer momentum in the women's health business, and therefore we now expect growth in the interventional urology business to remain at mid-single-digit level in the second half of this year. From a geographical perspective, the U.S. was the main growth contributor in Q2. It was followed by Europe, most notably France. With this I'll now hand over to Anders, who will take you through the financials and outlook in more detail. Please turn to slide 7.

Thank you, Christian, and good morning, everyone. Reported revenue for the first six months increased by 1 billion Danish kroner, or 8%, compared to last year. Organic growth contributed 950 million Danish kroner, or around 8%, to reported revenue. Acquired revenue from Keras's acquisition contributed with 461 million Danish kroner to reported revenue in the first half of the year, reflecting six-month impact. Acquired revenue contributed around 4% to reported revenue the first six months. Foreign exchange rates had a negative impact of 341 million Danish kroner on reported revenue, or around 3%, mainly due to the depreciation of the U.S. dollar and the Argentinian peso against the Danish kroner. Please turn to slide 8. Gross profit for the first six months amounted to 9 billion Danish kroner corresponding to a gross margin of 68% against 67% last year. The gross margin was positively impacted by the inclusion of occurrences which contributed with around 100 basis points. In addition, lower freight rates and energy costs, price increases and the baseline benefit of around 40 basis points from the Italian payback reform also had a positive impact on the gross margin. The positive development in the above-mentioned factors was partly offset by raw material price increases, double-digit wage inflation in Hungary, and ramp-up costs at our manufacturing sites in Costa Rica. The gross margin also included negative impact from currencies of around 90 basis points. Operating expenses for the first six months amounted to 5.4 billion Danish kroner. The like-for-like increase in operating expenses excluding inorganic impact from carelses was 194 million Danish kroner of 4% compared to last year. The increase includes impact from company-wide salary increases as of January 1st. Carelses contributed 447 million Danish kroner to operating expenses, of which 51 million Danish kroner were related to the PPA amortization included under distribution costs. The distribution to sales ratio for the first six months was 32% compared to 31% last year, and includes impact from kerosene and related PPA amortization costs, as well as increased level of commercial activities. The admin to sales ratio for the first six months was 5% compared to 4% last year, primarily impacted by the inclusion of kerosene. The R&D to sales ratio for the first six months was 3% of sales on par with last year. Overall, this resulted in an increase in operating profit before spatial items of 5% for the first six months, corresponding to an EBIT margin before spatial items of 27% compared to 28% last year. The EBIT margin in the first six months included negative impact of around 100 basis points from the inclusion of kerosene, including PPA amortization costs. Currencies also had a negative impact on reported margin, of around 110 basis points, mostly related to the depreciation of the U.S. dollar and the Argentinian peso against the Danish kroner, as well as appreciation of the Hungarian for rent against the Danish kroner. Financial items in the first six months were a net expense of 418 million Danish kroner, compared to a net expense of 524 million Danish kroner last year. Driven mostly by interest expenses related to the financing of the Atos Medical Institute, as well as losses on balance sheet items denominated in mostly Argentinian peso. The tax expense in the first six months was 697 million Danish kroner with a tax rate of 22% compared to a tax rate of 21% last year. As a result, net profit before special items for the first half of the year increased by 8% compared to last year. Diluted earnings per share before special items increased by 2% to 11.08 Danish kroner and include impact from the equity raise in August 23. Please turn to slide 9. Operating cash flow for the first six months was an outflow of 772 million Danish kroner compared to an inflow of 1.2 billion Danish kroner last year. The development in cash flows was driven by high income tax paid in the second quarter related to the access medical intellectual property transfer with a negative impact of 2.5 billion Danish kroner. The tax payment will be offset by reduced tax payments in the following years starting from 2023-2024. The tax payment was only partly offset by improvement in changes in working capital and an increase in operating profit of 5%. Cash flow from investing activities with an outflow of 554 million Danish kroner compared to an outflow of 381 million Danish kroner last year. CapEx in the first six months amounted to 4% of sales compared to 5% of sales in the same period last year. As a result, the free cash flow for the first six months was an outflow of 1.3 billion Danish kroner compared to an inflow of 795 million Danish kroner last year. Excluding impact from the extraordinary tax payment of 2.5 billion Danish kroner, the adjusted free cash flow in the first six months of 2023-2024 was an inflow of 1.2 billion Danish kroner. The trailing 12-month cash conversion was 87%. Networking capital amounted to around 26% of sales on par with last year. We continue to expect networking capital to be around 25% in 2023-2024, and return to our long-term expectations of around 24% at the end of the strategic period. Lastly, the Board of Directors approved a half-year interim dividend of 5 Danish kroner per share corresponding to a total interim dividend payout of approximately 1.1 billion Danish kroner. Before we move to the financial guidance, I want to provide an update on the earn-out for Kerasys. The earn-out level for Kerasys has been adjusted to 20% of the total earn-out potential. The adjustment has been set off against goodwill. I would like to note, as we did at the time of the acquisition, that the earn-out was based on a very aggressive management growth case. The business is delivering in line with expectations to the Cotoplast case, which is included in our financial guidance, and we are satisfied with the progress made so far. Now let's look at the financial guidance for the year. Please turn to slide 10. The financial guidance on organic growth and EBIT margin for 2023-2024 are largely unchanged and most assumptions laid out in November still hold. We continue to expect organic revenue growth of around 8% for the full year with the following assumptions. Continued good momentum during the year in chronic care for our European and emerging market businesses. China chronic care is still expected to grow at a mid-single-digit level. Growth in the U.S. chronic care business is now expected to be second-half weighted due to order purchasing patterns impacting the U.S. ostomy care business in the first half. Advanced wound care is still expected to deliver growth above the market. Voice and respiratory care is still expected to grow at a level of 8 to 10 percent. Finally, one change since our guidance in February is our interventional rheology business. where we now expect growth in the mid-single-digit level from previously high single-digit level impacted by softer momentum in our women's health business. We are adjusting our reported revenue growth in Danish kroner to 10% to 11% from previously around 11% impacted by currencies. Currency is still expected to contribute around 4 percentage points to reported revenue growth. We continue to expect a reported EBIT margin before special items of 27% to 28%, which assumes a gross margin of around 68%, prudent management of operating expenses, negative impact from currencies of around 100 basis points, including around 100 million Danish kroner in amortization charges, and finally, negative impact from currencies of around 50 basis points. For 2023-2024, I still expect around 50 million Danish kroner in special items related to the ongoing integration of ADSOS Medical. The net financial expenses for 2023-2024 are still expected to be around minus 750 million Danish kroner, mostly related to interest expenses related to the ADSOS Medical financing. I would also like to share that we have secured the refinancing of the two-year bond related to the financing of ADSOS Medical acquisition expiring 19th of May. The impact of the refinancing is included in the net financial expenses mentioned earlier. No changes to our assumptions on effective tax rate and capex. It's expected to be around 22% and 1.4 billion Danish kroner respectively. We are off to a good start. We are significantly outgrowing the market in chronic care and in our advanced wound dressings businesses. Our newest members of the family, as is medical and carers, are both delivering double-digit growth. We are continuing our year of launches with the introduction of new products in chronic care, which will support our long-term growth. And we are looking at inflationary pressure across cost categories coming down. Overall, we are on track to deliver another solid year with organic growth of around 8% and an EBIT margin of 27% to 28%. And I feel confident about our long-term financial guidance with growth of 8% to 10% and returning to an EBIT margin of 30% by the end of this strategic period, excluding carers, and an EBIT margin of more than 30% long-term. Finally, before we move to Q&A, I would like to remind you that we will host and meet the management event here in Denmark on June 6th this year. We look forward to seeing many of you in person in June. Thank you very much, operator. We are now ready to take questions.