Earnings Transcript for CLPBY - Q2 Fiscal Year 2022

Kristian Villumsen: Thank you, operator. Good afternoon and welcome to our half year 2021/2022 conference call. My name is Kristian Villumsen, CEO of Coloplast. I'm joined by our CFO, Anders Lonning-Skovgaard and our Investor Relations team. We will start with a short presentation by Anders and myself and then open up for all of the questions that you may have. Please turn to Slide number three. In Q2, we delivered 7% organic growth and an EBIT margin before special items of 31%. We delivered a respectable return on invested capital of 25% after tax and before special items, which is naturally impacted by the recent acquisition of Atos Medical. Reported growth in Danish kroner was 16% and Atos Medical contributed six percentage points to the reported growth and delivered high single-digit underlying growth completely in line with expectations. I'm satisfied with the company's performance and most importantly and we continue to help more and more people living with intimate health care needs globally. All businesses and regions delivered according to expectations with the exception China. China continues to be impacted by COVID-19 and has seen renewed lockdowns again in March and we'll get back to that later I'm sure. In Ukraine and Russia, we continue to focus on keeping our people safe and ensuring that our around 100,000 users have access to products to manage their chronic conditions. Before we move on to guidance, I'd like to mention a few highlights from our second quarter. Our Chronic Care business posted 7% organic growth driven by Europe and broad-based double-digit growth in emerging markets excluding China. The US Ostomy business delivered solid double-digit growth and the growth in new patients in the US Continence business normalized to pre-COVID levels towards the end of the quarter. Our Interventional Urology business delivered 9% organic growth driven by a strong recovery in elective procedures in the US towards the end of the quarter. And with that I'll move on to guidance. Organic revenue growth is now expected at 6% to 7% from previously around 7% due to the impact of COVID-19 in China. The recent lockdowns in China have resulted in reduced hospital access and the decline in procedural volumes towards the end of the second quarter. A significant share of our sales force is also under lockdown and unable to leave their home, let alone visit hospitals and drive sales. The impact has been more pronounced in our Wound Care business which is mostly a hospital business, but we've also seen an impact on growth in new patients in Ostomy Care. Given the current zero tolerance policy in China, we expect that the negative impact we've seen in March and April will persist throughout the calendar year. Outside of China, our outlook across business areas and geographies is unchanged. Anders will take us through all the details later, but I'm pleased to say that growth in new patients in the Chronic Care business is now largely back to pre-COVID levels across all regions apart from China. Hospital access also improved across most geographies during the quarter and in Interventional Urology elective procedures rebounded towards the end of Q2. Guidance on reported growth in Danish kroner is unchanged at around 15%, Atos Medical's full year contribution to reported growth is unchanged and expected to be around six percentage points. The EBIT margin guidance before special items is still expected to be around 31%. The EBIT margin after special items is now expected at 28% to 29% from previously around 30% impacted by special items of around DKK 450 million of which DKK 300 million related to an increase in the mesh provision and DKK 150 million related to the Atos Medical acquisition. Anders will provide more details on the provision later, but essentially, it's taking longer to settle outstanding cases which has led to an increase in legal costs. We continue to make settlement progress and have now settled 99% of the MDL cases. The Coloplast MDL was closed in December 2020 and we are seeing a very low inflow of new cases. We remain committed to the women's health market and believe our mesh products improve lives and are safe and are valuable options for surgeons who treat women with pelvic organ prolapse and stress urinary incontinence. Before going into the details of today's results, I'd like to provide an update on some of our strategic priorities within the Strive25 strategy. Please turn to Slide number 4. First, the acquisition of Atos Medical which was completed on January 31 adds a new long-term growth compounder to Coloplast in a category with significant untapped market potential. Atos Medical has become a fifth business area for Coloplast under the name of Voice & Respiratory Care. The business is expected to grow 8% to 10% organically with an EBITDA margin in the mid-30s and contribute to Coloplast Strive25 financial guidance of 7% to 9% organic growth and a plus 30% EBIT margin. I'm very pleased to say that the integration of Atos Medical is progressing according to plan and the performance of the business is strong. Second, Ostomy Care in the US access to hospital has improved and we're making good progress on contract wins on the back of improved GPO access in our recent sales force expansion. Recent key contract wins include AscenDrive, Allied Health Solutions and NYU Langone Health. Third, we're making progress on the clinical performance program in both Ostomy Care and Continence Care. I'm pleased to share that the pivotal study on the new ostomy platform which aims to reduce skin complications has been concluded and the targeted endpoints have been met. This marks a key step towards the launch of the new Ostomy platform, which is still expected in the second half of the Strive25 strategy. The pivotal study in the new catheter platform is currently in progress and we expect to launch the new portfolio before the end of 2023. During the quarter, we also launched a new product within Continence Care, SpeediCath Flex Set. SpeediCath Flex, a soft hydrophilic catheter for men with a dry sleeve and a flexible tip has been a key driver of growth market share gains. With the launch of SpeediCath Flex Set, we're now expanding our flexible catheters portfolio with a set solution that combines a catheter with a new integrated sterile bag to cover the entire catheterization process. I’m excited to launch the product across all key markets during 2022 and 2023. On our sustainability initiatives, we now recycle around 70% of our production waste due to successful recycling partnership in Hungary. And during the quarter, we've also replaced the use of natural gas for heating purposes at our Nyirbatar site in Hungary we've replaced it with electric heating pumps. As a result Scope 1 and 2 emissions decreased by 10% in the first half of 2021, 2022 compared to the same period last year. Finally, we look forward to opening our second volume factory in Costa Rica at the end of May. Now let's take a closer look at today's results. Please turn to slide number 5. In Ostomy Care, organic growth for the first six months was 6% and growth in Danish kroner was 9%. In Q2, organic growth was 7% and growth in Danish kroner was 9%. Growth continues to be driven by our SenSura Mio and Brava supporting products and our SenSura and Assura alternate portfolios continue to post solid growth in emerging markets. From a geographical perspective, all regions contributed to growth led by Europe and especially the UK where our manufacturer business and charter home delivery business are both delivering solid growth. The US also posted solid growth. Growth in emerging markets, excluding China was double-digit and broad-based led by Latin America. China contributed to growth but was held back by COVID-19 as I explained earlier. In Continence Care, organic growth was 6% for the first six months and growth in Danish kroner was 9%. In Q2, organic growth was 7% and growth in Danish kroner was 9%. The growth continues to be driven by the SpeediCath ready-to-use intermittent catheters with a good contribution from the SpeediCath Flex portfolio as well as our SpeediCath Compact and standard catheters. From a geographical perspective, sales growth was driven by Europe, led by the UK. Emerging markets driven by LATAM also made a solid contribution to growth. And the US contributed to growth but continued to be negatively impacted by lower growth in new patients but on a positive note, growth in new patients in the US normalized at pre-COVID levels towards the end of the quarter. In Interventional Urology, organic growth was 7% for the first six months and growth in Danish kroner was 10%. In Q2, organic growth was 9% and reported growth was 13%. Growth in the quarter was positively impacted by a rebound in elective procedures in the US towards the end of the quarter after a softer start to the quarter due to the spread of the Omicron variant. Elective procedure volumes are now fully normalized. The US Men's Health business and our European business were the main growth contributors in the quarter. In Wound & Skin Care, organic growth was 9% for the first six months and growth in Danish kroner was 12%. In Q2, organic growth was 6% and growth in Danish kroner was 9%. Contract manufacturing was the key driver of growth in the second quarter. The Wound Care business grew 2% organically in the quarter and 9% for the first six months. Growth in the quarter was impacted by a high baseline in Europe in Q2 last year as well as some quarterly phasing between Q1 and Q2 in key European markets. The underlying growth in Europe continues to be solid and driven by the Biatain Silicone and Biatain Fiber portfolios. Emerging markets was the main growth contributor in the quarter both in China was positive but impacted by the ongoing lockdowns and the limited hospital access in the affected areas. Voice and Respiratory Care contributed three percentage points to reported growth in the first six months and six percentage points in the second quarter, reflecting two months of revenue impact. The underlying growth for Voice and Respiratory Care was high single digit in line with expectations. The laryngectomy business delivered solid double-digit underlying growth and growth in laryngectomy was 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 Life portfolio. All regions contributed to growth led by Europe. The Tracheostomy and ENT business also contributed to growth and grew mid-single digit in line with expectations. Two noteworthy developments at Atos Medical during the quarter, the first clinical study on Provox Life was concluded and it demonstrated a significant positive effect on patients' pulmonary health from the use of higher performance heat and moisture exchanges. And second, in China the Food and Drug Administration approved the registration of Provox heat and moisture exchanges, which marks a first important step towards market entry into China. 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 6.

Anders Lonning-Skovgaard: Thank you, Kristian and good afternoon, everyone. Reported revenue for the first six months increased by DKK 1.2 billion or 12% compared to last year. Organic growth contributed DKK 613 million or 6% to reported revenue. Acquired revenue, for the first six months contributed DKK 314 million to reported revenue, of which DKK 298 million were related to the Atos Medical acquisition. Acquired revenue contributed three percentage points to reported growth in the first six months. Foreign exchange rates had a positive impact of DKK 250 million, or around three percentage points on reported revenue, due to the appreciation of mainly the British pound the US dollar and the Chinese Yuan against the Danish kroner. Please turn to Slide 7. Gross profit for the first six months, amounted to around DKK 7.3 billion, corresponding to a gross margin of 69% against 68% last year. The gross margin was positively impacted by leverage on production costs and savings from the Global Operations Plan 5. The inclusion of Atos Medical, and price increases also had a positive impact on the gross margin. On the other hand, the gross margin was negatively impacted by double-digit wage inflation in Hungary, increasing raw materials energy and transportation prices as well as ramp-up costs at our new volume site in Costa Rica. The gross margin includes a positive impact from currencies of around 20 basis points. Operating expenses for the first six months, amounted to around DKK 4 billion, a DKK 632 million increase or 19% from last year. Atos Medical contributed with DKK 187 million to operating expenses, of which DKK 39 million was related to the PPA amortization. Excluding Atos Medical, the increase in operating expenses was DKK 445 million or 13% compared to last year. The distribution to sales ratio for the first six months came in at 29% compared to 28% last year. The distribution cost increased by DKK 477 million. or 18% compared to last year impacted by the inclusion of Atos Medical and increased sales and marketing and travel expenses, as COVID restrictions eased as well as higher logistics costs and continued commercial investments in the US Interventional Urology and consumer and digital initiatives. Distribution costs also included DKK 39 million, in amortization costs related to the Atos Medical acquisition. The admin to sales and R&D to sales ratio for the first six months, came in at 4% of sales on par with last year. Admin expenses increased by 28% for the first six months impacted by the inclusion of Atos Medical, as well as, phasing of legal and consultancy and IT costs. R&D expenses increased by 18% for the first six months, impacted by the inclusion of Atos Medical as well as increased activity levels across all business areas. Overall this resulted in an increase in operating profit, before special items of 7% for the first six months corresponding to an EBIT margin, before special items of 31% compared to 33% last year. The EBIT margin contains a positive impact from currencies of 40 basis points mainly related to the appreciation of the US dollar and British pound, against the Danish kroner. EBIT after special items was around DKK 2.9 billion, corresponding to an EBIT margin after special items of 27%. EBIT was impacted by special items of DKK 415 million, of which DKK 115 million as expected related to transaction costs in connection with the acquisition of Atos Medical and DKK 300 million was related to a further provision for the mesh litigation as Kristian, mentioned earlier. The reason for the increase in the provision is that, it is taking longer than we previously expected to resolve outstanding cases in part due to COVID-19, which has resulted in higher legal costs. The increased provision brings the total provision to DKK 6.15 billion. Please turn to Slide 8. Operating cash flow for the first six months amounted to around DKK 1.4 billion compared with around DKK 2 billion last year. The negative development in cash flows was mainly due to an increase in inventories and other receivables due to phasing. Cash flow from investing activities was an outflow of DKK 11.1 billion, compared to an outflow of DKK 1.5 billion last year impacted by the Atos Medical acquisition this year and the Nine Continents Medical acquisition last year. Excluding acquisitions, investments amounted to around DKK 470 million or 4% of revenue. As a result, the free cash flow for the first six months was an outflow of DKK 9.7 billion compared to an inflow of DKK 446 million last year. Adjusted for the acquisitions of Atos Medical and Nine Continents Medical the free cash flow was an inflow of DKK 918 million, a decrease of DKK 536 million compared to last year, due to a phasing of inventory and prepaid cost including insurance and financing costs related to the Atos Medical acquisition. The trailing 12-month cash conversion for the first quarter was 81% impacted by phasing of inventories and receivables. Net working capital amounted to 26% of sales at 31st of March 2022, compared to 24% at the end of September 2021. And this is impacted by phasing. We still expect the net working capital to be around 24% of sales for the full year. A share buyback program of DKK 500 million was initiated in Q2, of this year and it was completed on April 21. And today the Board of Directors approved a half year interim dividend of DKK 5 per share, corresponding to a total interim dividend payout of approximately DKK 1 billion. In note nine in today's announcement, you will find a preliminary balance sheet for Atos Medical at the time of the acquisition. Please note that a provision of around DKK 500 million is included and I'll put a few words to that. As part of the due diligence process, potential billing issues related to billing processes in the US were identified. Atos Medical is now subject to an audit regarding billing compliance, which is a standard industry procedure. To be prudent, we estimate that the maximum possible exposure is around DKK 500 million and we expect feedback on the matter within the next six to nine months. Billing processes in Atos Medical will be strengthened to ensure full compliance going forward. Now please turn to slide nine. As Kristian explained earlier, we have updated our organic growth guidance to 6% to 7% from previously around 7%, due to the impact of COVID-19 in China. Besides the updated outlook for China, the other key assumptions behind our organic growth guidance are unchanged. Overall, we assume a continued resumption of hospital activities across our business areas. For the Chronic Care business the assumptions by region are as follows

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Hassan Al-Wakeel from Barclays. Please go ahead.

Hassan Al-Wakeel: Hi. Good afternoon and thank you for taking my questions. I have three please. Firstly, could you talk about the trends that you're seeing in China in March and April? Where are new patients versus index 100 on the Ostomy side? And can you detail the impact that you're seeing on the Wound Care business. It would be very helpful to know the decline in the China business in March and April and the expectation for the rest of the year in China. Secondly, also on China, could you talk about the lower average value per patient in the Ostomy business? And whether this is at all gotten worse throughout the quarter or have lockdowns mainly impacted new patient flow? And then finally on margins, could you help us reconcile the lower top line expectation with the reiteration of your margin expectation? Could you walk us through some of the puts and takes on the cost side and the heightened inflation that you've seen there and how that's all changed since you updated guidance last quarter? Thank you.

Kristian Villumsen: Thanks a lot, Hassan. Why don't I get us started with China? So really, we're basing our revision of top line on what we're seeing here in March and in April. And what you can see is, we've got a decline on the Ostomy side in the inflow of new patients. So depending on how -- what type of patients you look at, we're looking at something on the order of index 80 to 90 depending on the week. But we've basically taken the lower value of that and extrapolated that to the end of the year. The average consumer basket size is -- has not really changed that much. So this is really something that has to do with the inflow of patients. Wound Care is harder hit and remember Hassan, Wound Care for us in China is -- it's almost exclusively a hospital business. So there we are just affected by the overall decline in activity in the hospital channel. The way we're thinking about this -- the way that we're thinking about this is, we've basically taken the -- what our sales out figures look like for the rest of the year, we have assumed no improvement for the remainder of the year and here all of a calendar year. We have -- and I don't know if -- I don't know if there is any way to be hopeful about this, I don't have a better crystal ball than anyone else. We do hope that once we get to the fall and presumably Xi Jinping is reelected that we may see some changes. But for now, we have -- we don't know. Anders, you want to talk margin?

Anders Lonning-Skovgaard: Yes. So, thanks for your question, Hassan. In terms of our margin, so our reported growth remains unchanged. So around 15% as I explained earlier. And also our EBIT margin remains unchanged before special items of around 31%. But there are a number of moving parts. So rest of the year, I am expecting that the gross margin will decline compared to the first half as a result of the increasing raw material prices, energy prices, but what I also mentioned earlier, we have a number of things on the positive side as well. But we are expecting the gross margin will decline in the second half versus the first half. On the other hand, I'm also expecting that our cost increase will be at a lower level in the second half versus the first half because we -- last year, in the second half and especially in Q4 started to see that our costs became more normal versus the pre-COVID levels. So that's why we are still looking at an EBIT margin of around 31%. And please also remember, as I mentioned after our first quarter results, we are also seeing a tailwind from currencies in the level of 50 basis points for the year?

Hassan Al-Wakeel: That's very helpful. Thank you. If I could just follow up on China. I think you've achieved 10% growth in the first quarter and it sounds like most of the second quarter as well. How should we think about the run rate coming out of Q2 and into fiscal Q3, given that you're talking about low single digit for the full year? And also, can I clarify Kristian, whether you said calendar – the calendar year for the impact on China. So I'm just wondering if you expect the impact to move into fiscal 2023 as well? Thank you.

Kristian Villumsen: Yes. So if I start with you and the question, Hassan, we are right now – right now we're saying that we think this looks set to continue for the remainder of the year. So it may stretch into next year. We would be positively surprised if things fair better earlier than that. But we'll take that positive surprise. If we get it for now we're seeing a calendar year. So it will stretch into next year. We're basically – when we're saying low single-digit for China for the full year, Ostomy is going to be in low single-digit territory for the full year and we are going to see negative growth in Wound Care for the second half. So that's how the math works. But of course we – as you'll recall, normally pre-COVID this is a business that grows 15% between about 15% plus. We – when we started the year we look set to do 10% and then this has really taken us significantly downwards.

Hassan Al-Wakeel: Perfect. Thank you.

Operator: And the next question comes from the line of Patrick Wood from Bank of America. Please go ahead.

Patrick Wood: Perfect. Thank you very much. I'll keep it to two please. I guess you obviously talked about the primary endpoints on the new Ostomy platform. And just curious if you could put any meat on the bones around what you guys are seeing there whether it's on PSC reductions or anything like that? And how confident – what kind of confidence levels that gives you that you'll get paid for the innovations. Any kind of update there would be great as the – that's the first question. And then I guess the second question would be on the pricing side of things. Any view as to – if the current environment continues further price hikes as we move through the year or is that something you plan to keep relatively stable? Thanks.

Kristian Villumsen: Thanks, Patrick. I'll start by saying that – I mean you can read up on the trial set the clinicaltrials.gov and if you want to search forward it's called a randomized control clinical investigation evaluating a flat Ostomy barrier with a novel skin protection technology. And there you'll get a complete description of it. It is a full randomized controlled comparative crossover investigation multicenter with two test periods we've got a bit more than 80 people. And if you look at the inclusion criteria, we've really taken people who are experienced users but also people I just say at the high level of people with experience of leakage so people who have had trouble and skin problems. And when you look at the type of end points that we're talking about that have been met they're really related to skin complications. So this would include itching, burning, pain in the peristomal area and then there's also a pretty good data on quality of life. At the high level, what I look at here is if you ask the people who've been in the trial where they want to use the product against the comparator yes, they do. And so you can see more online about the details of the study. But clearly to me this now validates that we have a concept that works and we have a path to market which is encouraging after the setback that we had with the first concept. I'm optimistic of course that there's also a path to get paid for it but this will be the next part of the work. And then I'll say this is also just for flat products in Ostomy. We now need to also test the concept for both Convex and Concave products but a very, very important milestone for Ostomy care.

Anders Lonning-Skovgaard: And Patrick in regards to your second question around the pricing. As we have mentioned earlier, this year – this is key focus area for us. As a consequence of the high input cost we have been focusing a lot on various pricing initiatives. And we continue to do that and we are working on a lot of different initiatives. In total it's around 70. And we actually see some impact. That is you can say impacting our business positively. And it's across all business areas and across all regions. And then in some markets and I think we also talked to that earlier this year we also get some kind of inflation adjustment to the reimbursement prices and the main market that's the UK. So we are seeing some impact to our business from the various price increases and we're also working further with this also into next year.

Patrick Wood: Very clear. Thanks so much.

Operator: The next question comes from the line of Christian Ryom from Danske Bank. Please go ahead

Christian Ryom: Yes. Good afternoon. A couple of questions from me. First one to the Chronic Care business. So as I understand that you've now seen new patient inflow recover to pre-COVID growth rates across most of Europe and the US. My question is whether you are seeing any evidence of pent-up demand so that would essentially suggest a period of above-trend growth in new patient inflow? And my second question is somewhat similar nature but goes, towards Atos. And the other question is essentially particularly for the European region, where new patient inflow currently stands relative to the pre-COVID trajectory? Thank you.

Kristian Villumsen: Yes. So Christian, two good questions, we're very encouraged to see this development on the new patient side. I'd be careful. We're certainly careful forecasting any type of pent-up demand principally because the capacity isn't there, right? So if you look at, across all health care systems, the capacity in terms of personnel and in hospitals it is what it is and so we are not forecasting Christian, any type of pent-up demand. Atos Medical, to your question a strong patient acquisition momentum a significant part of the growth that we're seeing particularly for the laryngectomy business has come through for all practical purposes. COVID impact and the acquisition momentum, is really driven by the introduction of the new Provox Life platform and the launch is related to that, on the one hand. And on the other hand also really good performance in the emerging markets business.

Christian Ryom: Okay, great. Thank you.

Operator: Next question comes from the line of Graham Doyle from UBS. Please go ahead.

Graham Doyle: Brilliant. Thanks for taking my questions. Just two for me, firstly is on, China, your assumption that the headwinds continue through the year? It seems quite bearish versus pretty much everyone who has commented so far in Q1 on China. And it does feel like the business is probably disappointed versus your expectations for about 18 months now. So is there anything in your outlook here that maybe reflects additional pressure beyond COVID? And then just a question on Atos, could you just describe a little bit more in detail what is this medical billing audits? And was it something you're aware of during the DD process? Thank you.

Kristian Villumsen: Yeah. Two good questions, so I'll say, China for us, listen, it's all COVID. It's all COVID. But we've -- when we have extraordinary data, for how our business is running? And what our position looks like, we feel very confident about the position. And we are -- you can maybe say that we're pessimistic, but we're basing our assumptions on what we're seeing. Order -- I'll just reiterate that order sizes of baskets are the same, but we have seen patient inflow on the Ostomy side come down. And the Wound Care business is materially impacted. And then one thing to bear in mind that when you compare Coloplast to others is, -- just remember that, our footprint in Ostomy and Wound Care is quite different, compared to competition. We have a very large Ostomy business. And this is also globally our largest Wound Care business. And then, to the second question on the billing issue with Atos. So a billing -- the billing discussion was part of the negotiation. So this is certainly something that we've been aware of. The audit has come along. It's a standard industry audit. So this is -- if you run a DME in the U.S. you will be subject to these standard audits from time-to-time. The provision basically reflects that we haven't worked through all the claims that work is ongoing. And we are telling you with this that the worst thing that could happen is, if you have a 100% error rate for six years' worth of business, including lawyer bills and this is what it looks like. We will know a lot more in six to nine months, but -- so it's -- that's how basically you should think of the number.

Graham Doyle: Okay. That seems quite minor on the Atos side. Just on China, just a quick follow-up on the Ostomy market then in particular. What sort of growth rates, do you think now are achievable for the premium market as a whole, so not just yourselves, but just that market as a whole?

Kristian Villumsen: I'm sorry, could you repeat that, sorry?

Graham Doyle: Yes. So what sort of growth rates do you think are achievable for the premium Ostomy market in China, on a sort of four-to-five-year view? Has that changed?

Kristian Villumsen: No. So I'll say -- I think very long-term about this. I haven't changed the way I think about China, at all. We now have COVID. The Chinese are working their way through COVID differently than anyone else. It is painful. They're locking cities down, keeping people in their apartments. And it is -- it's causing a lot of chaos frankly in many sectors there. If I look at the underlying demographics of the country I look at, the clinical standards, I look at our position in the market. I am not changing my thinking at all. This will be if you think, five, 10 years ahead this is going to be one of the single biggest drivers of the Ostomy market globally.

Graham Doyle: Okay, very clear. Thanks a lot guys.

Operator: And the next question comes from the line of Oliver Metzger from ODDO. Please go ahead.

Oliver Metzger: Hi. Good afternoon. Thanks for taking my questions. Two I have. The first one is about the mentioned key account wins in Ostomy Care. So, over the years you have gained some experience with key accounts in the US like Cleveland Clinic. As you now mentioned the new wins should we assume a similar let's say ramp-up of incremental sales to these chains? Also potentially a few words where you are in these chains? Have you been presented there before or are these exclusive wins? Second question is on men's health and interventional urology. Historically, you talked about the link between economic cycle and procedures. So, basically they are fully covered, but just due to patients fear to do the job there is some dependency. Now, we see on a global level that factors like consumer confidence is deteriorating. So, have you recognized any underlying decrease in demand or potential patients are a little bit more reluctant. A few comments on that would be great. Thank you.

Kristian Villumsen: So, thanks Oliver, two good questions. So, really the momentum in the US Ostomy business is on its way up and it basically reflects the wins that we've had on the two GPOs. You can also see the three wins that we mentioned here AscenDrive is part of the Premier GPO business now. This used to be a sole source Hollister account that's now a dual source with us on there and the other two wins are also important. And I am certainly expecting that we will continue the strong momentum. We have very strong growth in the acute channel in Ostomy in the US. But as you know from following us over the years it's not enough to win the hospital. You also have to close the loop through home health continue to run strong patient support programs et cetera. But we are definitely seeing the momentum come up. So, you should expect a strong Ostomy growth going forward. This will be a good year. We're also expecting a strong year next year and this is a key focus area. On the Men's Health side, remember Oliver, this is almost exclusively a US business. There is some activity in Europe, but not that much. This is mostly a US business. And when I look at the momentum, really we're looking at the pipeline of surgical activity, it looks healthy. So, it really picked up here late in -- it's picked up in late in Q2 and so we expect that we're going to see good contribution to growth for the remainder of the year.

Oliver Metzger: Okay, that’s good to hear. Thank you very much.

Operator: And the next question comes from the line of Niels Leth from Carnegie. Please go ahead.

Niels Leth: Good afternoon. First question on raw material prices. Last quarter you mentioned that you expected mid-single-digit growth in raw material prices. Could you provide an update on this statement? And also how this would feed into your gross margin in the second half of this year? And then just for housekeeping here. So, how come you were able to chart the DKK500 million charge related to Atos Medical billing processes outside the P&L? Thank you.

Anders Lonning-Skovgaard: Yes. So, thanks for the question Niels. So, as I mentioned earlier the raw material prices for the year, we are expecting those to increase mid-single-digit and we will see an additional increase here in the second part of the year. But overall, we are expecting that the gross margin in isolation for the year will be around 68%. The second question around the billing challenge we have within Atos, it's a part of the opening balance that we have now included as part of our Q2 accounts.

Niels Leth: So, had it been discovered when you owned the asset, it would have been taken over the P&L?

Anders Lonning-Skovgaard: Yes. So, it's something we have -- as I mentioned earlier and as Kristian mentioned, is something we identified as part of the due diligence. So, that's the reason.

Niels Leth: Great. So, just to understand your gross margin, guiding for 68%, you would essentially need to see a gross margin decline in the second half of this year. So, is this correctly understood?

Anders Lonning-Skovgaard: Yes. And that's also what I mentioned earlier. We are expecting the gross margin to be declining in the second half of the year because we will see additional effects raw material prices energy prices as I mentioned earlier Niels.

Niels Leth: Okay, great. Thank you so much.

Operator: The next question comes from the line of Craig Mcdowell from JPMorgan. Please go ahead.

Craig Mcdowell: Hi, good afternoon guys. Thanks for taking my question. Just on Atos on the Chinese approval of the heat moisture exchanger, congratulations on getting that approved. But given your assumption on the underlying market, how are you feeling about commercial launch time line? And what implications could that have to the Atos financial guidance. Linked to that, how's the build-out of the Atos sales force in China going in light of lockdowns there? Thanks.

Kristian Villumsen: Thanks Craig. So, we're pleased with getting the HME registered. Please remember this is only part of the portfolio that we need to go to market with. We need to register the voice prosthesis portfolio also. This is a higher regulatory class product. So this is taking a longer time. But really the trigger for commercial investment will be the voice prosthesis. We are in the process of preparing, if you will, the go-to-market investment case. So, you should expect that when we start, it will be with a strong focus on probably the two or three largest cities in the country and then we work from there. That's also how we worked through Ostomy Care originally. But really the trigger will be the voice prosthesis registration, and I'm sure the follow-up will be when is that. And the honest answer is we don't know. We don't know. It's still early days in the ownership but we are full on with the process. And once that triggers this is, of course, something that will be probably one of the key investment cases in the Atos business.

Craig McDowell: Superb, thanks very much.

Operator: The next question comes from the line of Yiwei Zhou from SEB. Please go ahead.

Yiwei Zhou: Hi, it's Yiwei from SEB. Thank you for taking my question. I have three questions here. And I'll do one at a time. Firstly, it's on the Interventional Urology. And I realized that in the quarter, on the margin level, which you could calculate from the segment reporting, actually declined. Could you elaborate a bit here?

Anders Lonning-Skovgaard: Yeah. So, thanks for that question, Yiwei. It's because the costs are increasing. So we are spending more in the quarter versus last year. And one of the things that we are spending more on is R&D. So we are ramping up our R&D within interventional urology as a consequence of the Nine Continents acquisition a bit more than a year ago. So, the costs are increasing, and that's having an impact on the margin in the quarter.

Yiwei Zhou: Great, thanks. And then, my next question is on the new catheter launch. So, could you maybe comment a bit on the pricing and also the reimbursement for this new product?

Kristian Villumsen: Yes. So, we're excited about the concept. The pivotal trial work is ongoing. The trial work is ongoing and we --sorry, was the question related to Flex?

Yiwei Zhou: Yes. The Flex Set version.

Kristian Villumsen: I thought you were asking about the new catheter platform. Sorry, about that. So Flex Set that basically lands into established pricing points in all major markets.

Yiwei Zhou: Is it fair to assume, there will be a premium to the flex version or it will be the same?

Kristian Villumsen: So this depends on market. So the reimbursement, for example, in the US, this is significantly higher reimbursement, because it's a category known as 53. In general, Sets are typically higher reimbursement products, because the products are more expensive to manufacture but the volumes are also lower, because the -- if you will, the relevant patient population is also smaller.

Yiwei Zhou: Okay, great. And lastly, a follow-up question on the margin. So you have mentioned a few moving parts already on and I appreciate that. But maybe you forgot to mentioned that the DKK 50 million less amortization relating to Atos Medical. I mean if you do the math it will give you more than 50 bps support on the margin. And this in combined with, I mean the FX tailwind, it actually sort of support you to deliver the margin in the full year guidance. But on the other hand, you're now still keeping the margin unchanged. Is there anything else you haven't mentioned over the last two or three months since Q1, which has sort of put more pressure on you?

Anders Lonning-Skovgaard: Yes. So, thanks for that question or comment, Yiwei. So, in relation to your first comment around our amortization cost, so now we have been working through our amortization cost. And our conclusion is that it's going to be around DKK 19 million per month. And yes, it is a bit lower than I thought earlier, but it's not DKK 50 million in total. But it is a bit lower than I earlier thought and that is also included in our margin guidance of around 31% for the year.

Yiwei Zhou: Okay. And you have talked about the development on the raw material costs. And could you maybe also comment a bit on the freight cost and other input costs, have you seen any change in the – or maybe your expectation has changed a little bit since Q1?

Anders Lonning-Skovgaard: Yeah. So in terms of the energy cost in Hungary, so we are largely hedged throughout the year. So we have hedged earlier this year for Q3 and also to a large extent for Q4. So I know, or we know the energy cost and that is of course also billed in. And in terms of the freight cost that is part of our distribution line, yes, we have seen increases as I mentioned earlier and that is also reflected in our second quarter results. And I expect the levels we have seen will stay at the current levels.

Yiwei Zhou: Okay. Thanks.

Operator: Next question comes from the line of Kate Kalashnikova from Citi. Please go ahead.

Kate Kalashnikova: Hi, Kristian. Hi, Anders. It's Kate Kalashnikova from Citigroup. I've got a couple of questions. Firstly, can you comment on the exit rate in the quarter for Interventional Urology procedures in the US? How this compares to pre-COVID level? Are you seeing good momentum in US Men's Health continue in April? And if so could there be an upside risk to high single digit growth outlook in interventional urology for the full year? And what's actually implied for women's health growth in this guidance? Is low single-digit growth for Women's Health a reasonable assumption? And then secondly, on emerging markets, excluding China, emerging markets have been strong this year. How confident are you that this will continue into next year? Do you expect more favorable pricing that we see more recently to continue in the next year?

Kristian Villumsen: So Kate to your first question on Interventional Urology, we're seeing growth contribution from both Men's and Women's Health. But we look at the surgery levels, I think what we've seen now at the end of the quarter and also moving in here to April, we are seeing levels that are normalized. We are not projecting, we are not projecting any upside to the – if you will our current talk track on the business. So you should expect high single-digit for the total business. If anything Women's Health is probably around mid-single. I'm sorry, I now completely missed out on the second question, what was that on?

Kate Kalashnikova: Yes, emerging markets, excluding China, should we expect strong growth to continue and more favorable pricing to continue like we seen in the last year or two – in the next year?

Kristian Villumsen: Yeah. We are – we have a very good momentum in the emerging markets business ex-China. It's broad-based. The – a number of the key geographies that are doing very, very well. A number of the – if you will Tier 2 markets are also doing very well. So we are projecting that EM will continue to grow strongly.

Kate Kalashnikova: And any comment on pricing given your discussions?

Kristian Villumsen: So Kate, I think like we've talked about pricing with you guys before. The company does a lot of work on this. You heard Anders talk about, I mean, the entire pricing project portfolio at the moment stands at around 70 separate efforts, across the portfolio of geographies and businesses. So there's quite a lot going on. You should expect the similar activity level continue into next year. And of course, whether we're going to be as successful next year as we were this year we certainly hope so. But you should expect us to continue to work the pricing lever year in and year out.

Kate Kalashnikova: Understood. Thank you.

Operator: The next question comes from the line of Sam England from Berenberg. Please go ahead.

Sam England: Hello, guys. Thanks for taking the questions. Just two quick ones for me. So in manufacturing, you've already seen a double-digit wage inflation in Hungary. But I was wondering, whether there's any additional pressure to raise wages either there or elsewhere in the business as you move into the second half of the year given the inflationary environment? And if so can you talk a bit about your ability to offset that elsewhere on the cost side? And then second question, linked to cost is that. you said the automation program is proceeding according to plan. Can you give us a sense for where you are now in that program, and when we might see some of the cost reduction benefits from automation begin to flow through? Thanks.

Anders Lonning-Skovgaard: Yeah. So thanks a lot Sam for those two questions. In terms of the salary levels in our Hungarian sites as we have talked to quite a bit. We increased the salary levels with the high-teens from October 1, and that is built into our financials and the outlook for the year. We are continuing to see pressure on salary levels. So that is something we are evaluating. But for now, we believe this is what we will do for this financial year, but it is something we are evaluating. In terms of your second question around the automation program, it is a very important program that we initiated in our top five. So that's almost two years back. And the program is running as planned, and we are also starting to see impact in our financials. The program will continue into next year and that's also where I would expect that, we would see the full impact of the program. Please remember, the program is around automization. So we are expecting to reduce additional hiring in Hungary of around 1,000 employees, or when the program is fully implemented.

Sam England: Great. Thanks very much.

Kristian Villumsen: All right. And then, I want to thank everybody for being with us today. This concludes our conference call. We look forward to talking to many of you on the road. Have a good day.