Welcome to the Coloplast Full Year Financial Results 2020/2021 Conference Call. Throughout the call, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Today, I am pleased to present Kristian Villumsen, President and CEO, and Anders Lonning-Skovgaard, Executive Vice President and CFO. Please begin your meeting. Thank you, operator, and welcome, everybody. Good afternoon and welcome to our full year 2021 conference call. I'm Kristian Villumsen, CEO of Coloplast, and I'm joined by our CFO, Anders Lonning-Skovgaard, and our Investor Relations team. We're going to start with a short presentation by Anders and myself and then open up for questions, like we usually do. Please turn to slide number three. I'm very satisfied with this year's result. We delivered 7% organic growth, a 33% EBIT margin before special items, and a return on invested capital of 45% after tax and before special items. Broadly across all markets, we continue to take market share. In Q4, we delivered 10% organic growth and a 32% EBIT margin. These are solid numbers in a year where our growth within Chronic Care has been challenged by the pandemic. At Coloplast, we are united around a strong purpose to make life easier for people with intimate healthcare needs, and I am particularly proud that this year we helped make life easier for more than 2 million people. To start off, I'd like to go through a few highlights from our full year results. We saw an improvement in the underlying growth in the Chronic Care business as the year progressed, driven by an increase in growth in new patients, in particular in Europe. Growth in new patients in Ostomy Care is back to pre-COVID levels, and Continence Care is approaching pre-COVID levels. Emerging Markets delivered a solid 15% organic growth. The growth was broad-based and driven by Ostomy Care and solid performance in both China and Latin America. Interventional Urology delivered 19% organic growth driven by the resumption of elective procedures led by Men's Health in the U.S. and impacted by a low baseline. Wound Care delivered 11% organic growth driven by Europe, China. Today, we provided organic growth guidance for 2021- 2022 of around 7% and a reported EBIT margin of around 32%. Anders will take us through the details later. Overall, we're encouraged by the continued recovery across all our business areas. We expect stronger growth in Europe next year. Our Wound Care and interventional urology businesses are expected to deliver in line with our Strive25 ambitions. We're still challenged in our U.S. Continence business, where the growth in new patients has not yet fully normalized. Similar to what we saw in Europe, intermittent catheterization treatment and bowel management treatment has been deprioritized as these treatments can be postponed and there are alternatives. The accumulated impact of the lower level of growth in new patients over the last year will impact our growth this year. We also continue to see some weakness in China related to the COVID-19 flare-ups and economic uncertainty, which is impacting consumer sentiment. Growth in new patients in China is currently back at pre-COVID levels. We believe that the dynamics in U.S. Continence Care in China are transitory, and we continue to focus on commercial initiatives and investments that will drive our growth beyond the pandemic. Our operating environment is not yet back to normal, but hospital activity and hospital access continues to improve across all markets as vaccines are rolled out and the pandemic wanes. We continue to keep a close eye on the developments surrounding the Delta variant, in particular in the U.S. and China. Before we dive into our results in more detail, I'd like to spend some time talking about strategy. Please turn to slide number four. One year into our new strategy, I am happy to conclude that we've made good progress on our strategic priorities. Our Strive25 strategy is based on four key pillars: innovation, growth, operational efficiency, and sustainability. Let me just mention a few highlights from the past year and start with innovation. We aim to set and raise the standard of care in the categories we compete in. A few words on Chronic Care. With user needs at the center, we've made good progress on our Clinical Performance Program in Chronic Care. The program marks the start of an important transition to outcome-based innovation, which forces us to think differently. We need to demonstrate value to wider sets of stakeholders, including consumers, clinicians, and not least payers. Clinical evidence and data will be critical, and I'm certain we're going to discuss this in our Q&A session later in some more detail. In Wound Care, we've strengthened our product portfolio with the launch of Biatain Fiber now in nine markets. In Interventional Urology, we've taken steps to build new growth options into the pipeline through the acquisition of Nine Continents Medical, an early-stage technology company within the overactive bladder market. The pivotal trial, clinical protocol has now received approval from the FDA, and we expect to begin enrolling patients in late calendar 2021 and anticipate momentum in the trial beginning in 2022. As you can hear, this year will be an important year for pivotal studies, both within the Clinical Performance Program and for Nine Continents Medical. Let me now move to growth. It's been a tough year for healthcare systems. Despite challenging market conditions, I think we've made good progress on our commercial growth agenda. In Chronic Care, we seek to continue to drive growth above the market with a strong contribution from our U.S. and Emerging Market regions. We're working on a number of initiatives across different time horizons. In the U.S., we achieved a key milestone by securing access to the largest Ostomy GPO. In China, we have initiated a large project with hundreds of Ostomy clinicians across the country aimed at raising standards of care for Ostomy users. A good example of one of the market development initiatives we've supported to raise standard of care is in Poland, where reimbursement for hydrophilic catheters has been significantly improved for adults and children with neurogenic bladder and is now on par with the European standard of care. In Interventional Urology, our focus has been on enhanced commercial activities within Men's Health, focusing on patient awareness and education programs. Next, a few words on operational efficiency. We continue to strive for unparalleled efficiency and industry-leading margins. Our ambitious three-year Global Operations Plan 5 is off to a solid start, 75% by 2025. Reducing emissions is another priority for Coloplast. The latest report from the Intergovernmental Panel on Climate Change underlined the need for action to fight climate change and limit the global temperature increase to one and a half degrees, as listed in the Paris Agreement. Our ambition is to become net zero in Scope 1 and 2 and use 100% renewable energy by 2025. By 2030, our ambition is to reduce Scope 3 emissions per product by 50%. Our targets have been submitted to the Science Based Targets initiative for validation. Coloplast is committed to running an ethical, transparent and responsible business. This is tied to our company values of respect and responsibility. This year, we increased our tax transparency by implementing country-by-country tax reporting for EU countries. Before we take a closer look at today's results, I'd like to say thank you to all the employees in Coloplast for your continued commitment to build our company and deliver on our mission. In our most recent engagement survey last month, the score was 8.2, which continues to be above the healthcare industry benchmark and in the top 25th percentile. This, I believe, is a great result. Thank you to all of our 12,500 employees who persevered through a difficult year. I'd also like to thank our users, clinician partners and investors for your confidence in our company. Now please turn to slide four. Sorry, that's slide five. In Ostomy Care, organic growth was 6% for the full year and growth in Danish krone was 4%. In Q4, organic growth was 10% and growth in Danish krone was 12%. Growth continues to be driven by our SenSura Mio and Brava supporting products. Our SenSura and Assura/ Alterna portfolios continue to post solid growth in Emerging Markets. At the product level, SenSura Mio Convex was the main contributor to growth. From a geographical perspective, Emerging Markets was the key contributor to growth, followed by Europe. Growth in Q4 was driven by Europe, led by the U.K. and Germany as a result of an increase in growth in new patients in a lower baseline. Growth in Emerging Markets was lifted by tender phasing between Q3 and Q4 in Russia and the Middle East. China saw some impact in the quarter from lower growth in new patients due to the Delta variant, as well as some impact on the average value per patient due to the economic uncertainty. In Continence Care, organic growth was 5% for the full year and growth in Danish krone was 3%. In Q4, organic growth was 8% and growth in Danish krone was 9%. 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 mainly driven by Europe, led by the U.K. and France as a result of an increase in growth in new patients and a low baseline. In Q4, growth was driven by Europe, in particular France and the U.K., driven by an increase in growth in new patients, as well as a low baseline. In Interventional Urology, organic growth was 19% for the full year, and growth in Danish krone was 14%. Compared to 2018-2019, the full year growth was double-digit. In Q4, organic growth was 10% and reported growth increased by 9%. During the year, elective procedures resumed across regions and business areas. Men's Health and the Endourology business returned to pre-COVID growth levels during the year. Women's Health is recovering at a slower pace, but the trend was positive in the second half of the year. In Q4, the outbreak of the Delta variant in the southern U.S. states resulted in some cancellation of elective procedures. Towards the end of the quarter, the level of elective procedures largely normalized again. In Wound and Skin Care, organic growth for the full year was 8% and reported growth in Danish krone was 6%. The Wound Care business in isolation delivered 11% organic growth for the full year and 12% organic growth in Q4. The Biatain Silicone and Biatain Fiber portfolios were the main contributors to growth, driven by France, Germany, and Spain. China posted solid growth for the year, also helped by a low baseline. With this, I will now hand over to Anders, who will take you through the financials and outlook in more detail. Please turn to slide number six. Thank you, Kristian, and good afternoon, everyone. I'm very proud of the strong results that we announced today. Thank you to all employees for your dedication and commitment. Our reported revenue for the full year increased by DKK 882 million, or 5% compared to last year. Organic growth contributed around 1.3 billion or 7% to reported revenue. Foreign exchange rate had a significant negative impact of DKK 450 million or around 2% on reported revenue, as expected, due to the depreciation of the U.S. dollar and several emerging markets currencies against the Danish krone. In particular, the Argentinian peso, Brazilian real, and Russian ruble. The depreciation in the U.S. dollar accounted for approximately 60% of the negative currency impact. Please turn to slide seven. Gross profit for the full year amounted to around DKK 13.3 billion, corresponding to a gross margin of 69% compared to 68% last year. The gross margin was positively impacted by leverage on production costs and savings from the Global Operations Plans 4 and 5. The gross margin was negatively impacted by increasing costs in Hungary due to salary inflation and labor shortages, as well as extraordinary costs related to COVID-19 outbreak and ramp-up costs at our new volume site in Costa Rica. The optimization program, which is a key component of the Global Operations Plan 5, is on track and contributing to maintaining a flat level of blue-collar workers while ramping up the volume site in Costa Rica. The gross margin includes a negative impact from currencies of around 40 basis points. The gross margin in Q4 was 69% and benefited from leverage and efficiency gains from Global Operations Plan 4 and 5. The distribution to sales ratio for the full year came in at 28%, compared to 29% last year. Distribution costs increased by DKK 168 million, or 3% compared to last year, which reflects cost savings from lower travel and sales and marketing costs due to COVID-19, which were partly offset by growth investments. In Q4, the distribution cost increased by 10%, which reflect the continued growth investments as well as resumption of sales and marketing activities as the impact of COVID-19 receded. The admin to sales and R&D to sales ratio for the full year came in at 4% of sales on par with last year. Overall, this resulted in an increase in operating profit before special items of 9% for the full year, corresponding to an EBIT margin before special items of 33% compared to 32% last year. The EBIT margin contains a negative impact from currencies of 50 basis points, mainly related to the depreciation of the U.S. dollar against the Danish krone. Net profit before special items increased by 19% compared to last year. Please turn to slide eight. Operating cash flow for the full year amounted to around DKK 5.3 billion, compared with around DKK 4.8 billion last year. The positive development in cash flows was mainly due to an increase in operating profit before special items of DKK 501 million and a positive financial items, which was partly offset by a one-off tax payment of approximately DKK 400 million related to the acquisition of Nine Continents Medical last year. Cash flow from investing activities was impacted by increased investments in optimization, IT, and the new factory in Costa Rica. CapEx investments amounted to DKK 1,016 million for the financial year, or 5% of revenues, which is on par with last year. As a result, the free cash flow for the full year was an inflow of DKK 3.3 billion against an inflow of around DKK 3.9 billion last year. Adjusted for the acquisition of Nine Continents Medical, the free cash flow was an inflow of DKK 4.5 billion, up by 18%. Our trailing 12-month cash conversion for the full year, excluding the Nine Continents Medical acquisition, was 93%. Net working capital for the full year amounted to 24% of sales. Prior to COVID-19, we increased our inventory on strategic raw materials and products. Inventories are now around 12% of sales, and this is the level we expect to remain at going forward. Please turn to slide nine. For 2021- 2022, we expect revenues to grow around 7% organically and around 8% in Danish krone. The guidance assumes a continued resumption of hospital activity across our business areas. For the Chronic Care business, the assumptions by region are as follows. For Europe, we expect continued improvement in growth now that the growth in new patients has largely returned to pre-COVID levels. In the U.S., our guidance assumes a continued improvement in growth driven by a gradual normalization of growth in new patients back to pre-COVID levels, especially in the Continence Care, which has been more severely impacted. In Emerging Markets, our guidance assumes broad-based double-digit growth. China is expected to remain impacted by COVID-19 and economic uncertainty, which has impacted consumer spending. Our smaller business areas, Interventional Urology and Wound and Skin Care, are expected to deliver in line with our Strive25 ambitions. We have no current knowledge of significant healthcare reforms that will impact 2021- 2022. In terms of phasing, I expect a slower start to the year in Q1 due to tough baseline in our European and U.S. businesses. Growth is expected to accelerate in the following quarters. Due to the appreciation of mainly the U.S. dollar and the British pound, and a number of Emerging Markets currencies against Danish krone, the reported growth in Danish krone is expected to be around 28%. The currency impact is based on spot rates as of October 29. For 2021- 2022, we expect a reported EBIT margin in Danish krone of around 32%. The gross margin is expected to be positively impacted by operating leverage and efficiency gains through the Global Operations Plan 5. The gross margin will be negatively impacted by cost inflation, including a low single-digit increase in raw material costs and double-digit wage inflation in Hungary. On raw materials, the key pressure on prices is coming from plastics and paper. The EBIT margin guidance also reflects an increase in operating costs related to the resumption of business activities as the impact of COVID-19 recedes, as well as some pressure on freight costs. The EBIT margin guidance also reflects additional incremental investments of up to 2% of revenue for innovation as well as sales and marketing purposes. As the impact of COVID-19 is lessening across the world, we are able to execute on our investment cases. Next year, we are investing incrementally in all business areas and regions, which is a key focus on the U.S., Europe, Emerging Markets and digital initiatives. We expect our net financials to end the financial year 2021-2022 at around DKK -150 million. CapEx guidance for 2021, 2022 is around DKK 1.2 billion, and our effective tax rate is expected to be between 22%-23% due to the increased deductibility of R&D costs in Denmark. Thank you very much, operator. We are now ready to take questions. Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Patrick Wood at Bank of America. Please go ahead. Your line is open. Perfect. Thank you very much. I'll keep it at two, please. First question, please, on China. I'm just curious what you guys mean about the weakening sort of consumer landscape. Is that about consumers mix shifting down in terms of whether it's catheters or Ostomy bags, so mix shifting to lower ASP systems, or is it something else that's going on there? That's the first question, China. And then maybe on the second question, I'm just curious, you mentioned obviously some details on the fewer patient starts in 2021 and the impact on 2022. I guess two parts to it. One is within catheters, and apologies I should know this, but how do you end up with fewer patient starts? Like, what are the conditions that are delayable in order to keep people on something else, presumably that a trauma or spina bifida or something, you know, you still need to be catheterized. So what are the delayable conditions? You know, how do we think about that within as we move through 2022? Is there a catch-up effect from those patients who are left behind as we go through the year? Awesome. Thanks. Thanks, Patrick. Two good questions. I'll take a stab at answering them and Anders, please supplement if you have anything to add. On China, really, what we're seeing, Patrick, when we talk about consumer sentiment, it's not consumers trending down. They're buying less products. They're maybe postponing purchases a bit. They're bargain hunting, and maybe most importantly, the part of the Ostomy package that's been important for you in terms of accessories, you're willing to use a little less accessories. So all told, you know, at the end of this quarter that we just closed, we saw the absolute volume of patients looking like pre-COVID levels. If I look at the average order size, it is just down, depending on channel, anywhere from 5% to a little more than 10%. They are buying a little less. We've seen it before, when the economic situation in the country becomes a little more uncertain that we can see it reflected in the consumer channel relatively quickly. On the Continence Care side, we are certainly not talking about spinal cord injury and spina bifida. You're absolutely right, Patrick. Those are in patient volume terms the smallest segments. Of course, v ery important customers, but we really are seeing procedures that are related to or initiations that are related to, for example, multiple sclerosis, benign prostatic hyperplasia. You'll see people not be put on treatment or simply postponed or put on alternatives. You will also for the part of the business that relates to bowel management, the sad truth is that patients' way through the care continuum is very long, arduous. For somebody who's been years underway, getting yourself postponed another half a full year, that's just what happens. We're not forecasting any, you know, catch-up effect when it comes to patient recovery. We are forecasting a gradual recovery throughout the year, and that's also what's borne out in current trading. Very clear. Thanks for taking the questions. Thank you. Our next question comes from the line of Lisa Clive at Bernstein. Please go ahead. Your line is open. Hi. Just a comment or question on the guidance. It's once again at the bottom of the range that you just set a year ago. Is this primarily due to the lingering effects from the COVID-19 pandemic? I suppose what is required to reach the middle or the high end of that growth range versus what you are doing today? Second question is, what would the growth have been in the quarter had the tenders not shifted from Q3 into Q4? I'm just trying to get a sense of the underlying performance. Thank you. It's true that the headwinds that we're facing now, which you can also see in our guidance, is mostly attributable to COVID-19 effects. It is mostly pronounced in U.S. Continence. We have also, as we've talked about throughout all the past years, seen it in the gradual recovery in Europe. It has affected the Chronic Care franchise. I just commented on Patrick's question on China. Certainly COVID's had its impact. I'll just remind you that prior to the pandemic, we had 13 quarters of 8% growth. We continue to believe that the long-term growth or the long-term guidance is solid. There's nothing in our mind when we look at the underlying markets, the underlying incidence rates of treatment or the types of procedures that get done that would fundamentally shift. To get to the high end of guidance, you know, we'd like to get past COVID and get back to full access and normal patient inflow. Then, of course, we need to see all of our regions pull through and our Clinical Performance Program and innovation to deliver its contribution to growth. No change in view on long-term guidance. You have to repeat the second question for me. What was that about? Uh, the- Can you repeat that? Yeah. Yeah. Please, uh, I can- Okay. I can take that question. Great. The question was around facing Q3, Q4. Yeah. In relation to Emerging Markets. As we announced when we had our Q3 announcement, we also said that there was some you can say tender delay from Q3 to Q4. As I recall it was around DKK 40 million. Our Emerging Markets growth in Q4 ended around 21%, so actually a very strong quarter and just in line with our expectations. If I remove those around DKK 40 million, then we're getting to around 15%-ish. Okay, thanks. One quick follow-up question. How far along are you on access to hospitals in the U.S.? Obviously that's very important given the GPO contract wins. Is this a question for all business areas or just Chronic? I think most importantly Chronic. The truth is, it is a little bit of a mixed picture by state, but our sales teams are back in the field. If I look to the Continence Care business, the key target customers are urology clinics, where we have good access. There has been a little less access on the Ostomy side, where hospitals have been more reluctant to fully open. As you're probably well aware, there is a certification needed for access around vaccination. We've seen a more gradual resumption of access around OC, but we still have all of the team in field. We track the combination of in-person and virtual meetings. The, if you will, ratio of in-person to virtual continues to increase month-on-month. Okay, thanks. That's That's helpful. Thank you. Our next question comes from the line of Martin Parkhøi of Danske Bank. Please go ahead. Your line is open. Yeah, thank you very much. Two questions. Firstly, just back on the guidance, because you stayed in the note that the market growth, which you normally would see at 4%-5%, that you now see that in the bottom. Let's say that the midpoint would normally be 4.5%, and then you cut off half percent of the market growth. But your guidance is the midpoint of long-term guidance would be 8% and you are down at 7%. Are there any, you know, this is due to your exposure to China, that the impact on you are slightly higher than the impact on the market. Maybe, Anders, can you put a little bit more flavor on how soft you expect Q1 to be? Then second question, on raw materials, where you're now maybe seeing a slightly higher price increase than you have set before regarding 2021- 2022. Can you maybe talk a little bit more on the longer term effect? Then also just to be certain, could there be any risk of an actual shortage of raw material? Thanks, Martin. Let me talk about market growth to begin with. It's true that we are seeing that the 18 months of the pandemic has affected the market growth rates. Objectively, if we look at the volume of surgery across all regions, they have been affected. It's difficult with, if you will, with full objectivity to parse out just how much. You still have to remember the, if you will, the geographical mix of our business. If I looked at. You mentioned China. China is just 5% of the company at this stage, whereas, you know, U.S. is about 20%. When we've got headwinds in both of these markets, when they should take up a higher share of growth, it does impact the marginal growth rate that we have for the year, hence the guidance that we have for the year. Martin, thanks for your question around the first quarter. As I said earlier, we are expecting a soft Q1, and that is due to a strong baseline, especially in China, in the U.S., including our IU. My expectation is something around a mid-single digit organic growth for our first quarter, and then from the following quarters, it will improve. In relation to your third question around the raw materials, yes, we are seeing a price increase across our raw materials. We have seen that starting in our fourth quarter, and that is continuing into 2021- 2022. Our view is now it's going to be low single digit increases, especially across paper, it's across plastics, and we also see increased energy prices. So those are some of the bigger categories. Finally, you asked about the shortage. We are currently not seeing any bottlenecks as such, which means that we are not seeing any of our customers running into back orders. When that is said, we are seeing a lot of work in managing the supply chain and making sure that we can supply to the demand we have. We are on our service levels and our delivery is spot on. As I said, we are not seeing at least so far any back orders. I think that answered your questions. Yeah. Just on the long term on the price increase on the contracts you have beyond 2021- 2022. As you know, Martin, it is difficult to estimate when it's going to normalize again. What I am speaking to now is that we are expecting the price increases we have seen recently will continue throughout most of this year. That's how I see it currently. Okay. Thank you very much. Thank you. Thank you. Our next question comes from the line of Hassan Al-Wakeel of Barclays. Please go ahead. Your line is open. Thank you for taking my questions. I have three, please. Firstly, on growth guidance for next year, and particularly in U.S. Continence, where are new patient discharges here today, and when do you assume this normalizes in FY 2022? And what is your expectation for the U.S. business overall in terms of growth versus your 10% ambition? And is there any offset from GPOs ramping on the Ostomy side or in 2022, or is this a 2023 event? Secondly, following up on China, could you quantify the decline in value per patient that you're seeing in China on average? What is happening to the frequency of bag use in Ostomy amongst patients, and how is this trending in fiscal Q1? And where do you see EM growth for the full year? Finally, could you quantify the level of incremental investments, which usually up to 2% that you undertook in FY 2021? I'd really appreciate if you could be a bit more specific on what is baked in at this point for those incremental investments in FY 2022, and if you could give us a flavor for some of those. Thank you. All right, Hassan, I count that to four. Why don't I try and take a stab at the first three, and Anders will speak to investments. If we start with U.S. Continence, we're expecting a gradual recovery as we move through the year. We have seen that recovery be a little slower than we anticipated a couple quarters back. We are seeing it improve. We're sitting at around index 90. We are expecting for the U.S. business as a whole to deliver something just shy of 10% this year. We are expecting a strong year in Ostomy. The MPDs are back. We've won on the GPO side. We are well underway with the sales force expansion that we've talked to you about. There is a real difference between Ostomy Care and Continence Care this year in the U.S. On the whole, high single digits shy of the double-digit growth, which is our ambition. Now in China, we're still expecting a good year and the business to grow double-digit, but not as strongly as we've seen in the past. The decline in average order size or patient value differs a little bit by channel, depending on where people are buying and mix. Think of it as something in the order of around 10% ± a few percentage points, depending on channel. Really here in current trading this month, I'm not seeing a lot of change to that figure. For EM as a whole, we are expecting strong growth, strong double-digit growth in this fiscal year, broad-based. Like I said, China is still double-digit, but not as strongly double-digit as we are accustomed to. Anders, on investment. Yes, thanks, Kristian. In terms of investments, we are or have been starting up new activities and new commercial initiatives. We have talked to some of them or most of them already. We have decided to invest into the U.S. We have decided to invest into expanding our sales force in order to go for the GPO opportunities. We also decided to invest into a number of initiatives across Europe and Emerging Markets. We also continue our investment program within IU and Wound and Skin. In 2021 and 2022, we will increase our incremental investments compared to last year, also as a consequence of more normalization after you can say COVID. Hassan, it will be more than 1%, but that also includes normalization of the underlying spending within the sales and marketing. That's really helpful. Thank you. Thank you. Our next question comes from the line of Veronika Dubajova of Goldman Sachs. Please go ahead, your line is open. Excellent. Hey, guys. Good afternoon, and thanks for taking my questions. One, just want to sort of circle back on the continence discharges in the U.S. and just kind of curious, you know, ConvaTec said last week that they feel that the market's already normalized. I appreciate you might not have 100% the same exposure, but just maybe, you know, curious if you have any thoughts on why they might be seeing a more normalized picture than you are. Is this just a function of definition or exposure by channel, or is there something else going on? Related to that, I think the other thing that they flagged on the call last week was that they do see some headwinds in Emerging Markets from normalized funding following some support through COVID-19, through the past 12-18 months. I'm just curious if you share that view, and to what extent that also will play a role into your EM growth rate. That's my first question. Appreciate it has two parts. The second one, just, Anders, if I can get you to commit to what you think the gross margin might be, in fiscal 2022, or what is assumed within that 32% EBIT margin guidance, that would be very helpful for us for modeling purposes. Thanks. Thanks, Veronika. Why don't I start with continence U.S.? What we're seeing is an inflow that's sitting around in index 90, still improving, and a gradual recovery throughout the year. I can't really speculate about ConvaTec's view. I am very firm on what we're seeing though, and also we're pretty confident with current trading that we're going to see that normalize as we walk through the year. I'll just remind you, we run quite different businesses, where ConvaTec of course runs mostly a dealer business, and we run mostly a manufacturer business. On the EM side, we're not seeing the same level of headwinds. We are forecasting a double-digit growth year. We do this work very bottoms-up and look at momentum at the patient level, at the hospital level, and have a view now broad-based also on the back of the Q4 that we just delivered, that it's going to be a double-digit growth year again for EM. Veronika, on your last question regarding the gross margin. As you have seen in our results today, we delivered a strong gross margin for 2021 in the level of 68.5%. As a consequence of the headwinds I talked about earlier around the high wage inflation in Hungary and the price increases, we are expecting the gross margin will drop a bit, but we also are expecting some tailwind from efficiency gains from GOP 4 and GOP 5, and also some tailwind from the foreign exchange. I'm expecting the gross margin will drop a bit into 2021-2022. Great. Anders, just clarification, the 32% reported EBIT margin that you've guided for, what does that assume in terms of FX tailwinds or headwinds? Yeah. Thanks for that, Veronika. We are expecting some tailwind from the currencies on the EBIT margin. We are expecting some tailwind on the top line, where I said earlier, we are expecting a reported growth of around 8%, and I'm also expecting some tailwind on the margin, on the EBIT margin. Okay. Got it. Excellent. Thank you both. Thanks, Veronika. Thank you. Our next question comes from the line of Christian Ryom of Nordea Markets. Please go ahead. Your line is open. Hi. Good afternoon. I have two questions as well. The first question is to the guidance commentary that you made on both Europe and the U.S., where I understood you to suggest that you expect to see a continued improvement in growth. Can you qualify what that is, what that is relative to in terms of baseline? Is that relative to the growth rates that we saw here in Q4, or is it relative to, say, the growth rates that we've seen for the full year for the two regions? My second question is, I believe you previously talked about a signal that you would likely see operating expenses growing faster than the top line in 2022. Can you confirm that that is still the case? If that's the case, does that not imply that we should expect only a fairly limited gross margin headwind if asked to still defend an EBIT margin of around 32%, so only around 70 basis points below what you delivered this year. Thank you. Christian, thank you. Good question. We are, as you know, we've seen improving momentum coming out of both Europe and the U.S. Q3 to Q4. The baseline for the commentary should be the Q4 number. We expect that to improve into next year. Okay. Just to clarify on that. The European growth of around 8% in the quarter, is that also? No, I mean underlying. Okay. Underlying growth. If you look at Europe, it's going to come back to something in the neighborhood of 4%-5% growth. Okay, great. On the OpEx growth? Yeah. On your second question, Christian, around the cost growth, we are expecting, as I said earlier, that we will see a normalized spending level. We are also expecting to invest into some of the commercial initiatives that I talked to earlier. We are expecting that the cost will increase, and it will be in the level of the growth or a bit above also because we have some tailwind from the currencies, as I mentioned earlier. Okay, great. Thank you. Thank you. Our next question comes from the line of Maja Pataki of Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Thank you very much. Two questions from my side. Kristian, part of the guidance is that there is a continuous improvement in the situation in Europe and in the U.S. Hopefully, you know, as we're looking at COVID hospitalizations, the numbers are relatively moderate. There are some voices concerned out there that the flu season this year could be particularly bad because we haven't been exposed to it, and there could be a high number of hospitalizations due to the flu season. Just to understand the dynamics, if we were to see a rapid increase in hospitalizations due to flu or respiratory symptoms in general, do you believe that this would have an impact on, you know, new patient discharge, or was it really related to COVID only and the infectiousness of the virus? The second question is, you've mentioned in your press release that you've participated in around the financing for Francis Medical, but that your share is remains at 13%. Out of curiosity, was it not possible to increase your share, or do you not have an interest at this point in time to increase your share? Thank you. Thank you, Maja. Two good questions. I mean, on Europe and the U.S. when it comes to a potential marginal impact, both of an increase in Delta COVID-related cases and, you know, God forbid, some type of accelerator from a flu, I think the answer to your question will depend on how severe it is. Of course, if it becomes severe and it takes up a lot of capacity in healthcare systems, we are not immune. Okay. We are not immune. I'll have to say I regard it as relatively unlikely. Mm-hmm. That we're going to see anything that would have an effect that will be. Comparable to what we saw with the original pandemic, but it could have an effect, right? We continue to monitor that and follow it by market. On the Francis Medical side, we chose to participate to just keep share at what it was. No, you shouldn't read too much into that. We believe in the technology, and we're excited to be part of the team, and we're following the development very closely. Thank you. Thank you. Our next question comes from the line of Niels Leth of Carnegie. Please go ahead, your line is open. Thank you. My first question would be around the wage inflation in the U.S. Some of the other medical technology companies having reported Q3 numbers have referred to an increasing wage inflation in the U.S. Is this something that you can recognize? My second question would be just a confirmation of your cost base in Hungarian forint. Given the currency sensitivity that you provide, I presume that your cost base would be DKK 1.2 billion. Thank you. Okay, Niels, let me start with the wage inflation in the U.S. Yes, we also see that, and we are currently looking into it when we do our salary adjustments from next year. But we are still looking at something in the level of low single digit. Our cost base in Hungarian forint, I have the cost base in relation to our salary in Danish krone, if that is what you're after, in order to calculate the impact from the salary. That's around 10% of the total cost of goods sold, so it's around DKK 600 million. The other one I need to look into, Niels. Okay. Is that what your question is? Yeah. I was basically just using the currency sensitivity table, which you- Uh-huh. Yeah. Where you say a 10% change is DKK 120 million. From that- Yeah I would presume that your total cost base in Hungarian forint was about DKK 1.2 billion. Yeah, that's true. Yeah. If you are using that's true. I can confirm that. Just on depreciation and amortizations, those two lines, both depreciation and amortizations, are coming down quite a bit in fiscal 2021, which seems a bit counterintuitive given that you are opening new factories, et cetera. Why is that? Yeah. Our depreciation and amortization for 2021 is more or less at a flattish level compared to it has been reduced quite significantly last year. I'm expecting in 2021- 2022, it will be also at a pretty flattish level compared to last year. There's a couple of explanations for that. One of the explanations is the Mentor amortization. That is basically more or less out. The other one is also related to the Comfort Medical amortization that is also more or less out from this financial year, 2021- 2022. That is going to have a positive impact on our depreciation amortization levels. Okay, great. Thank you. Thank you. Our next question comes from the line of Mattias Häggblom of Handelsbanken. Please go ahead. Your line is open. Thank you so much for taking my questions. I have two, please. Firstly, on the initiative to make more of your products digitally viable, can you talk about what portion of revenues by 2024-2025 at the end of your Strive25 strategy that will have a digital element to it and link to this? If you could expand on the payer pilot studies on the Digital Ostomy Tool in Germany and U.K. that were initiated in Q4 2021 and what they're trying to accomplish here. Secondly, regarding capital allocation. I know the policy is to hand out the excess liquidity as a dividend or buyback. This year you made a meaningful acquisition in Nine Continents Medical, which consumed roughly 25% of your free cash flow. Assuming you hadn't done the acquisition, would you have been more likely to hand out more as a dividend then? I'm asking 'cause I'm trying to understand what to expect in terms of capital allocation going forward. Thanks so much. Thank you, Mattias. I'm assuming your first question is really about the pilots that we're running around the Digital Ostomy appliance. Is that correct? Yeah. I mean, you're making an emphasis around the digitalization as part of your Strive25 strategies. I'm trying to what extent, you know, how far can you go in terms of product development and to what extent is it other tools you're trying to enable? I'll answer that at two different levels. When it comes to digitalized products, where the product itself is involved in generating data, this will not be a very high share of revenue by 2024- 2025. The pilots that we are running now, albeit they're off to an early promising start, they have to be concluded. There's about a year's worth of work in the U.K. and Germany. The first data point which is important for us to follow is, you know, what the consumers say about working with that product. Will they use the product? Do they see value in the product in day-to-day use? So far so good. We've got very positive feedback that replicates what we've seen in the development phase. Of course, we have to scale up, right? We have to see that this is also true now once we start rolling on many hundreds of patients onto the product. Then the impact will largely depend on what it is that we find. We don't know that yet. We don't know what type of impact this is going to have on readmission levels. We don't know what impact it's going to have on the types of complications people have with skin, and a bunch of other KPIs. We don't know that yet. The outbrief from the end of the pilot and the level of evidence that we can produce there will be directly correlated to the type of premium or pricing that we can command, right? We know that we are unique in the category, and that if there is a path to value, that of course it will be important for us. We also know that it's going to be relevant for most ostomates out there, so not just people who use Coloplast products. In terms of taking up a large share of our revenue by 2024- 2025, it will not, right? It will not. I certainly want to make sure that we conduct a thorough piece of work on building the category first. From a digitalization of products point of view, when you think about how much of our products are sold through digital channels and e-com, that percentage is just going to increase through the period. We're also investing significantly in digital tools, both for healthcare professionals and for consumers, for training purposes and for people to manage their condition. A relatively high amount of digital initiatives that are involved in, if you will, it just giving people a good standard of care, but not something where you have direct revenue, you will have an indirect revenue impact. Second question, you wanna take a stab at that, Anders? Yes, thanks. The second question was around the capital allocation. As you probably are aware that our policy is to pay out excess cash through dividends and share buyback. Our targeted payout is in the level of 80%-100%. In a year where we are doing acquisitions as we did in 2021, then the payout is a bit smaller. That's how you should see it. Thank you very much. Thank you. Our next question comes from the line of Yiwei Zhou of SEB. Please go ahead, your line is open. Thank you for taking my question. I have two here. A follow-up question on China, but on the supply side. So we have seen some restrictions on the production on some regional provinces due to the energy crisis. This seems to be a issue we're also running into the winter season. Any impacts do you expect on your production? My second question is back on the gross margin. You previously guided 6%-8% gross margin in the current strategy period. Is this guidance still valid, considering the cost inflation? Thank you. Thank you. Let me just answer quickly the first one. Really, we have seen authorities intervene, like you've seen, really not materially impact on us. We've scaled back the number of active days. Right now we don't produce Sunday nights, for example. We think being in medical devices is an advantage. We do not anticipate a material disruption from that front. Anders? Yeah. Again, a question around the gross margin. As I said earlier, we will in 2021- 2022 see that our gross margin will come down as a consequence of some of the headwinds from raw material price increases and the higher salary inflation in Hungary. But the soft guidance I gave when we announced our financial outlook for the whole strategic period of gross margin of around 68% still holds. That's still our expectation throughout the Strive25 period. Great. Thank you. All right. I wanna thank everybody for today. I think there are more people waiting to ask questions, so please do not hesitate to reach out to us with any follow-ups that you have. Otherwise, we hope to see you in some of the follow-up meetings that we have in the coming days.