Announcement No. 7/2007
15 May 2007
Interim financial statements, first half-year 2006/07
(1 October 2006 - 31 March 2007)
“We are very pleased that Coloplast generated 10% organic revenue growth in the
first half-year and we have achieved significant one-off income from the sale
of business areas,” said Sten Scheibye, President and CEO. “The sales
performance of our ostomy care business reflects the good reception our
customers have given to our SenSura ostomy care products, and our operating
profit was satisfactory.”
· Coloplast generated revenue of DKK 3,913m compared with DKK 3,059m for the
same period of last year, corresponding to an increase of 30% in local
currencies and 28% in Danish kroner. The breast care and brachytherapy
businesses are reported as net profit from discontinued operations, and
historical figures have been restated accordingly.
· Organic revenue growth was 10% in local currencies, the acquired urology
business contributed 20% and exchange rate changes reduced the reported growth
in Danish kroner by 2%.
· Operating profit was DKK 493m, which translates into an EBIT margin of 13%.
Economic profit was DKK 163m compared with DKK 201m for the same period of last
year.
· Expressed less costs of integrating the acquired urology business and
amortisation of intangibles from that acquisition totalling DKK 159m, operating
profit was DKK 652m, equal to an EBIT margin of almost 17%.
· DKK 1bn share buy-back programme launched on 5 March 2007. At 31 March 2007,
Coloplast had bought back shares for DKK 105m.
· The outlook for 2006/07 is unchanged. As previously announced, the revenue
target for 2012 has been changed after the divestment of the Breast Care
business unit from at least DKK 15 billion to at least DKK 14 billion.
Attached are income statement, the balance sheet, cash flow statement,
statement of changes in equity, notes to the financial statements, key figures
and ratios as well as restated quarterly income statements for 2005/06 and Q1
2006/07.
Income statement and balance sheet
The divestment of the breast care business was completed on 31 March 2007 and
the divestment of the brachytherapy business is expected to be completed by
June 2007. In addition, we have received final settlement of the divestment of
Sterling Medical Services. The three business areas are recognised in the
financial statements as net profit from discontinued operations of DKK 479m.
The amount represents the operating profits from the respective businesses for
the reporting period and gains from the sales.
Comments on the company's income statement relate to the continuing operations
only. Comparative figures were published prior to the release of this interim
report and they are included as an appendix to this report.
Revenue
Coloplast reported H1 revenue of DKK 3,913m, compared with DKK 3,059m in the
year-earlier period, a 30% improvement in local currencies and a 28%
improvement in Danish kroner. A main driver of revenue was the acquisition of
the urology business, which added 20% growth in local currencies.
Organic growth was 10% in local currencies. This is a satisfactory performance
indicating that the slowdown in revenue growth experienced in 2006 was of a
temporary nature. The ostomy care business accelerated growth in the second
quarter, whereas the sales growth in urology and continence products lost a
little momentum from a high level.
Sales of skin and wound care products improved by 7% during the reporting
period and by 8% in the second quarter. However, the growth performance still
trails projections for this business area and Coloplast no longer forecasts
double-digit growth rates in sales of wound and skin care products in the
2006//07 financial year.
The forecasts of FY 06/07 revenue growth of about 22% in local currencies and
9% organic growth are unchanged.
EBIT margin
Operating profit was DKK 493m for an EBIT margin of 13% (H1 05/06: 18%). The
decline was due to effects from the acquisition of the urology business
totalling DKK 159m. Adjusted for this factor, the operating profit was DKK 652m
and the EBIT margin was almost 17%. Synergies achieved were immaterial.
Implementation of the new organisational structure led to costs totalling DKK
23m, which amount is included in the DKK 90m restructuring provisions made for
the 2006/07 financial year.
Cost of sales rose by 37% during the reporting period to DKK 1,565m. This
amount includes amortisation of intangible assets of the acquired urology
business of DKK 64m as well as integration costs of DKK 17m. Adjusted for this
factor and for the relatively high cost of sales of the Mentor products, cost
of sales rose by 27%. Selling and distribution costs were up by 36% to DKK
1,279m, including DKK 56m in integration costs. Adjusted for these items, the
increase was 30%. Administrative expenses rose by 40% to DKK 469m including
costs of relocation in the USA and DKK 45m in restructuring costs. Adjusted for
these items, the increase was 27%. R&D costs were up by 31% to DKK 142m.
When disregarding the temporary factors mentioned above, the H1 operating
margin was just over 18% and in line with the year-earlier figure. Accordingly,
the company managed to maintain the underlying profitability, even though the
acquired urology business has a lower EBIT margin than the rest of our
businesses. The retention of the underlying profitability was facilitated by
the relocation to Hungary and the implementation of lean management principles.
Financial results
Coloplast's share of H1 profit was DKK 299m before profit from discontinued
operations. This is in line with last year, when Coloplast's share of the
profit was DKK 305m. The H1 profit from discontinued operations was DKK 479m
net of the carrying amount of assets divested and transaction costs incurred.
Financial items, which include interest, exchange rate and fair value
adjustments as well as bank charges, amounted to a net expense of DKK 69m, as
compared with DKK 128m last year. A main reason for the improvement was the
fact that the fair value adjustment of previously granted options was only DKK
8m, which was DKK 46m less than in H1 05/06.
Coloplast's weighted average of invoicing currencies was almost 2 percentage
points lower than last year, resulting in a DKK 45m fall in the DKK-equivalent
value of Coloplast's revenue. On the other hand, exchange rate changes reduced
costs, resulting in a largely neutral net impact on the operating profit.
The effective tax rate was 29%, equal to a tax expense of DKK 125m, compared
with 28% last year.
Balance sheet
Total assets fell by DKK 134m to DKK 7,848m as a result of the divestment of
the breast care business unit. Non-current assets fell by DKK 295m to DKK
4,823m, while current assets rose by DKK 161m to DKK 3,025m. The equity ratio
was 41%. Trade receivables rose by DKK 28m during the first half-year.
Economic profit
Economic profit was DKK 163m, as compared with DKK 201m last year. The decline
was attributable to integration costs and an increase in average invested
capital due to acquisitions. The economic profit was lifted by one-off income
after tax of DKK 84m from divestments.
The one-off income of DKK 84m less deduction of goodwill of DKK 395m, was
previously charged against equity, but the amount is included in the invested
capital. The calculation of EP is based on a weighted average cost of capital
(WACC) of 6.8% and an average invested capital of DKK 7.9bn
Cash flow statement
Cash flows
The free cash flow was DKK 666m. Net of DKK 740m relating to the divestment of
business operations, the free cash flow was an outflow of DKK 74m. Cash flows
from operations were DKK 184m and dividend payments to shareholders in respect
of the 2005/06 financial year amounted to DKK 184m Total cash and cash
equivalents were DKK 33 million at 31 March 2007.
Investments in property, plant and equipment during the reporting period
amounted to DKK 259m, of which DKK 193m represented investment in non-current
assets under construction, mainly for the plants in Nyirbator, Hungary, and
Zhuhai, China.
Capital structure and share buy-back programme
The net debt was 1.7 times EBITDA at 31 March 2007, or below the 2.0-3.5 target
range. Coloplast's Board of Directors has initiated a share buy-back programme
involving the purchase of Coloplast shares for DKK 1bn during 2007 and part of
2008. The overall share buy-back programme consists of two programmes of DKK
500m each. The first programme runs from 5 March - 15 August 2007. At 31 March
2007, the company had acquired shares for just over DKK 105m. A maximum of
11,945 shares will be bought on any given trading day, equal to 5% of average
daily trading.
Due to the share buy-back programme, the holding of treasury shares increased
by 251,010 during the reporting period to 2,141,809 shares, equal to 4.8% of
the Class B share capital. The Board of Directors intends to propose to the
shareholders in general meeting that shares bought back under the new programme
be cancelled.
The share buy-back programme was launched within the scope of the existing
authority granted by the shareholders in general meeting for the repurchase of
up to 10% of the company's share capital.
Outlook and long-term objectives
Outlook for 2006/07
The forecast for revenue growth of around 22% in local currencies is intact.
Organic growth is expected to be around 9%, while the remaining growth will be
generated by the acquired urology business, which was included for four months
of the last financial year. The potential effects of a British healthcare
reform, which is currently being considered by the authorities, are not
included in our forecast.
The EBIT margin is expected to be 12-13%. The integration of the urology
business, restructuring initiatives and amortisation of intangible assets from
business acquired are expected to reduce the operating profit by approximately
DKK 360m and to affect the EBIT margin by some 4-5 percentage points. The
expected amortisation charges on intangible assets have been reduced from DKK
150m to DKK 130m following the acquisition of the urology business.
The EBITDA margin is expected to be 18-19%.
We still anticipate synergies of DKK 75-100m per year after the full
integration of the acquired urology business and integration costs totalling
approximately DKK 230m.
For 2006/07 gross investments in property, plant and equipment (buildings,
machinery and operating equipment) are expected to amount to approximately DKK
600m, or DKK 100m less than previously announced. Investments in the new
factories in China and Hungary are expected to account for approximately DKK
200m.
The tax rate is expected to be approximately 30%.
A bill has been tabled in the Danish parliament to change the corporate tax
rate. We estimate that in its current form, the bill would lower our effective
tax rate by about 2 percentage points. Also, our effective tax rate for the
2006/07 financial year would be reduced by a further 2 percentage points, if
the bill is passed in its current form, due to a one-off adjustment of
previously deferred tax.
Healthcare reforms
A new set of lower nationwide reimbursement rates implemented for continence
care products in the German market took effect on 1 January 2007. The change
has lowered the reimbursement rates for our continence care products by an
average of about 10% compared with prices before 1 January 2007. We estimate
that the new prices will reduce Coloplast's 2006/07 revenue by DKK 20-25m. Our
financial guidance allows for this reduction.
Also in Germany, new health care regulation was implemented by 1 April 2007.
The main change to previous practice is that the German sick funds have
expanded their possibility to use competitive tendering when selecting
providers of medical devices.
The changes will not impact Coloplast's results in 2006/07. Any possible future
impacts, either positive or negative, depends on the extent to which the German
sick funds choose to apply competitive tendering rather than the existing fixed
price system as well as Coloplast's ability to act under the changed market
conditions.
In 2005 and 2006, the British Department of Health issued a number of
consultation papers on the regulation of medical supplies of ostomy and
continence care products and associated services. The Department of Health is
currently reviewing reimbursement prices for ostomy and continence care
products as well as possible changes to the rates applicable for services
relating to these appliances.
The Department of Health estimates that the overall financial effect of price
reductions in the market will be approximately GBP 27m per year. By comparison,
total annual expenditure of GBP 200m.
The consultation period ended on 2 April 2007, and the British healthcare
authorities have announced that they intend to release a summary of responses
received from trade organisations, patient organisations and businesses no
later than 2 July 2007. As no other information has been given regarding the
further course of events, we are unable to say when any potential changes may
be implemented. Our expectations for 2006/07 do not reflect any potential
changes.
Long-term targets
The long-term target for Coloplast's revenue has been changed since the
financial statement for Q1 2006/07 following the divestment of Breast Care.
This was announced in stock exchange announcement no. 2/2007 of 12 February
2007. The business targets for 2012 are:
· To double economic profit at least every five years towards 2012 based on the
financial results in 2004/05
· Revenue of at least DKK 14bn (changed from at least DKK 15bn)
· An EBIT margin of at least 18%.
Major fluctuations in the exchange rates of important currencies, significant
changes in the healthcare sector or major changes in the global economy may
impact Coloplast's potential for achieving the long-term targets and for
meeting the full-year forecasts. In addition, such fluctuations may also impact
the company's financial statements.
Business areas
The Group's results are reported as a single entity. However, details are also
provided on the revenue and growth rates in local currencies for the quarterly
reporting period for Coloplast's products in each of the three business areas
as well as the category “Other”, which comprises revenue generated by the Group
from selling competitor products, bonuses, discounts, etc.
Ostomy Care
The gross revenue generated by Coloplast's ostomy care products was DKK 1,499m
compared with DKK 1,384m during the year-earlier period. This corresponds to
growth of 9% in local currencies, which was in line with expectations.
Thanks to the efforts to strengthen HSC, this company is again contributing to
consolidated growth. Changed market conditions in Germany following the
implementation of lower reimbursement prices in 2005 meant that HSC,
Coloplast's homecare company, failed to meet our growth and earnings
expectations last year. A new, competing player set up operations in the
distribution market, attracting employees from HSC and others. Following a
period of stabilising sales, the trend is now improving.
Healthy revenue growth was reported in other major ostomy care markets,
including France, the UK and the USA. SenSura has been launched on 14 markets
and sales of this product continue to outperform expectations. SenSura is
expected to be rolled out in all major markets by the end of the financial
year.
Urology and continence care
The gross revenue from Coloplast's urology and continence care products
increased by 76% measured in local currencies to DKK 1,563m, 66 percentage
points being generated by acquired business. The organic growth rate was 10%.
The most significant growth drivers were catheters and urine bags. These two
product areas account for nearly half of the sales generated in this business
area. Implant sales did not improve, as expected.
Sales in the acquired business performed well towards the end of the reporting
period, and the 2006/07 forecasts include an increase in overall sales from
business acquired relative to the 2005/06 financial year.
The integration of the urology business is progressing according to plan. The
new US head office in Minneapolis has now been established and we have
integrated the US sales systems and distribution activities, so customers can
be served from one single system. The consultation process with the works
council in France regarding the merger of sales offices continues as planned.
While relocating our US headquarters from Marietta to Minneapolis, we have
successfully retained most of our US sales force, while a number of new
employees were hired for service functions as a result of the relocation.
Management has been strengthened through the appointment of a number of new
managers with relevant industry experience.
Wound and Skin Care
Gross revenue from Coloplast's wound and skin care products increased by 7%
measured in local currencies to DKK 616m, up from DKK 587m in H1 2005/06. Sales
continued to improve, producing an 8% increase in revenue, but sales growth is
not in line with expectations.
Sales improved by more than 10% in the key markets of Great Britain, France and
the USA, where revenue growth was driven by sales of Coloplast's advanced foam
dressings. The main reasons for the relatively weak growth rates were the
restructured sales force for a larger European market and a drop in sales of
traditional hydrocolloid bandages, which account for about one-third of the
business area's sales.
Coloplast no longer forecasts double-digit growth rates in sales of wound and
skin care products for the 2006/07 financial year. The revision was made due to
the factors set out above, and that sales of Biatain - Ibu have fallen short of
expectations. The product has been well received by customers, but acceptance
of an entirely new and innovative wound care product with an active ingredient
has proven more difficult to obtain than previously expected.
Biatain - Ibu has been launched in 17 countries, including Germany, France,
Spain and Italy.
Geographical markets
The revenue generated in Europe improved by 20% in local currencies to DKK
3,127m. Growth was 9% net of the businesses acquired. The stronger growth in
Europe was mainly due to the performance of the ostomy care business.
In the Americas, revenue improved by 138% in local currencies to DKK 542m.
Growth was 16% net of the businesses acquired. Sales of ostomy care products
continued the satisfactory upward curve and Coloplast now has an estimated
market share of 6% in the USA.
Revenue generated in the rest of the world was DKK 244m, a 22% increase in
local currencies. The organic growth rate was 11%. Japan and Australia are our
largest markets in the region. Organic growth was impacted by the fact that the
Japan healthcare authorities have implemented co-payment of ostomy care
products. Japanese consumers are now required to pay 10% of the cost of their
ostomy care products, and they consequently buy fewer products at a time. This
is not expected to impact product prices or the full-year sales volumes, but it
does mean that Japanese consumers bought fewer of this type of products during
the reporting period.
Management issues
New organisational structure
On 30 March, a new function-specific global organisation replaced the three
product divisions and four regional and three national sales organisations were
formed instead of the previous six regional sales organisations.
The most important changes made are as follows:
· Three new global functions, Global Marketing, Global R&D and Commercial
Excellence, report to CCO Lars Rasmussen and have replaced the three product
divisions
· The national sales organisations in Great Britain, Germany and France report
direct to the Executive Management (CCO).
· The other European countries report to the new Region Europe
· Region North America has replaced the former Region Americas
· A new regional organisation has been set up for 'Emerging Markets'
The changes are described in further detail in announcement no. 4/2007 to the
Copenhagen Stock Exchange.
Share scheme for Coloplast's employees in Denmark
Effective from 1 January 2007, Coloplast employees in Denmark with at least
four years' seniority were given the opportunity to buy Coloplast shares for up
to DKK 21,500 per year funded through a voluntary drop in each participating
employee's gross salary. The shares will be awarded at the end of 2007 to
employees who have signed up for the scheme and who are in continuing
employment at the date of award. The shares must be held in blocked accounts
for seven years.
Almost 70% of eligible employees in Denmark have signed up to acquire shares
under the scheme. The Company incurs no material costs from the scheme.
Management statement
The Board of Directors and the Executive Management have considered and
approved the interim financial statements of Coloplast A/S for the six months
to 31 March 2007.
The financial statements, which are unaudited, have been prepared in accordance
with the requirements of the International Financial Reporting Standards and
additional Danish disclosure requirements for the interim financial statements
of listed companies.
We believe that the financial statements give a true and fair view of the
Group's assets and liabilities, financial position and profit for the period
under review.
Executive Management
Sten Scheibye
President, CEO
Lene Skole
Executive Vice President, CFO
Lars Rasmussen
Executive Vice President, CCO
Board of Directors
Michael Pram Rasmussen
Chairman
Niels Peter Louis-Hansen
Deputy Chairman
Thomas Barfod
Håkan Björklund
Mads Boritz Grøn
Per Magid
Torsten Erik Rasmussen
Ingrid Wiik
Knud Øllgaard
This announcement includes information about Management's expectations for
future developments. Being based on assumptions that embody uncertainty and
risks including, but not restricted to, changes in relevant legislation and
treatment methods as well as the financial markets, actual results may turn out
to differ from those expected.
Further information
Investors and analysts
Lene Skole
Executive Vice President, CFO
Tel. +45 4911 1665
E-mail: dklsk@coloplast.com
Jørgen Fischer Ravn
Investor Relations Manager
Tel. +45 3085 1308
E-mail: dkjfr@coloplast.com
Press and the media
Jens Tovborg Jensen
Head of Media Relations
Tel. +45 3085 1922
E-mail: dkjto@coloplast.com
This announcement is available in a Danish- and an English-language version. In
the event of any discrepancies, the Danish version shall prevail.
