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Decent quarter, driven by Ostomy and Urology, but challenges ahead

  • 05 Sep 16

Coloplast reported a mixed bag for Q3 16 with sales slightly below while net profit marginally ahead of our as well as consensus expectations. Revenue was up by 4% to DKK3.7bn with organic growth of 8%, limited by a negative currency impact of 4% on account of currency depreciation (particularly that of the GBP, ARS and USD against the DKK). At the segment level, Ostomy Care and Urology Care lead the pack, recording organic growth of +11% and +8%, respectively. However, contrary to the previous quarter, Continence Care picked up momentum (+6% vs. +3% in Q2 16) while Wound & Skin Care slowed down significantly (+4% vs. +9% in Q2 16). The adjusted operating profit rose c.3% to DKK1.2bn (adjusted margin down 40bp to 32.7%) while a net financial income of DKK69m compared to a net financial expense of DKK140m and a lower effective tax rate of 23% vs. 24% for Q3 15, accentuated the net profit (+38% to DKK978m, margin up 650bp to 26.5%). On the flipside, higher than anticipated currency headwinds (the latest being the post-Brexit fall in the GBP) resulted in a third successive guidance downgrade during the year, with management lowering its reported sales growth expectations to 6% from the previous 6-7% for FY 16 while maintaining other previous expectations (organic sales growth of 7-8%, organic EBIT margin of 33-34% and reported EBIT margin at 33%). Separately, in its Capital Markets Day (CMD) held in June 2016, the company shared its updated corporate strategy, LEAD20, along with its revised long-term guidance. The key focus in the next five years is on the company’s Direct-to-Consumer programme, Wound care and the US markets while growing market shares across the remaining businesses and geographies (the company plans to invest DKK2bn in these targeted growth drivers). However, with the company unable to shrug-off the continued emerging markets weakness, management lowered the long-term sales growth projections to 7-9% from the earlier guidance of 7-10% while keeping its expectations of an EBIT margin improvement of 50-100bp annually.

UK Charter business recovers as currency benefit dissipates

  • 18 Feb 16

*Mixed Q1 16* Coloplast released mixed numbers for Q1 16 (ahead of our expectation on the top-line but falling short on the bottom-line). Sales were up 7% (all sales growth numbers in organic terms, unless specified otherwise) to DKK3,656m, against our expectation of DKK3,566m. Forex tailwinds, primarily on account of the strengthening of USD and GBP against the DKK, contributed 4ppts to the top-line, which was up 11% on a reported basis. All segments reported good performances, led by Wound & Skin care (+10%; Q4 15: +9%) and followed by Ostomy Care (+8%; Q4 15: +7%) and Urology Care (+7%; Q4 15: +5%). As expected, Continence Care reported a sequential decline (+6%; Q4 15: +10%, which had benefited from stocking by a major distributor in the US). On the other hand, profitability was relatively weaker - the EBIT margin, at 32.7%, was slightly below our estimate of 33.1% - which management attributed to the ongoing manufacturing shift to Hungary as well as higher costs in emerging markets. The real miss came in terms of the bottom-line, which was negatively impacted by losses on foreign exchange contracts (the reported net margin was 22.6% vs our expectation of 25%). *Guidance downgrade in DKK terms* Although the organic growth guidance (sales growth of 7-8% and EBIT margin of 33-34%) was maintained, waning forex benefits prompted the company to downgrade DKK numbers - sales growth is now guided to be 7% (8-9% earlier) while the EBIT margin is expected to be 33% (earlier 33-34%). Management has also announced a DKK1bn share buy-back programme, which will commence in Q2 16 and will run until the end of FY 17. The company will have a capital markets day on 22 June 2016.

Another downgrade; this time on mesh litigation

  • 02 Oct 15

Troubles continue to pile up for Coloplast, with the company announcing its third successive guidance downgrade this year (previous downgrades in January and June 2015, respectively). The current downgrade was brought on by the company recognising an additional DKK3bn provision (DKK2.3bn post tax) related to the transvaginal mesh implants litigation (this is in addition to the DKK1.5bn provision recognised in May 2014, taking the total provision to DKK4.5bn). The move was triggered by US court orders to Coloplast to commence discovery proceedings in 200 cases (the company had historically chosen settlement over court proceedings, which are typically less expensive). The associated impact on profitability also saw the company slashing its FY15 EBIT margin guidance from 32% to c.10% in constant currency (c.11% reported). The guidance for the effective tax rate also goes up from 24% to 28%. However, underlying growth guidance has been maintained at 7% organic, 12% reported growth (remember though that this is the revised guidance, pruned from the earlier 8–9% organic, 13–14% reported). Management has also indicated that this will not impact the dividend levels with any shortfalls to be bridged using additional debt financing (this should not be a concern as the company is currently cash positive). The announcement came a month after the company’s Q3 15 results which came in broadly in line with ‘revised’ guidance – revenue up 13% yoy to DKK3,540m (against our DKK3,527m estimate), driven by underlying growth of 7% (8% in Q3 14 and Q2 15 each) and further supported by a 6% currency benefit. New product launches supported growth across segments— Continence Care up 11.5%, Urology Care up 17%, Ostomy Care up 11% and Wound & Skin Care up 18%. However, ongoing operating and regulatory issues dampened the bottom line and the company recognised DKK100m of provisions (inventory write-down and provision for bad debt and US litigation), resulting in the EBITDA and operating margins falling by c.300bps to 33.8% and 30.3%, respectively (although at the adjusted level, margins remained mostly stable).