“Capital allocation should be a dynamic process”

When Anders Lonning-Skovgaard looks back on the last 10 years as CFO of Coloplast, he can roughly divide the time into two equal parts: The first five years with a full focus on organic growth, the next five years with an extra layer of three large acquisitions. In addition to the finance organisation itself, he is in charge of legal, IT, compliance and investor relations and the company’s shared service centre. “Exciting, hectic and challenging,” is how he describes a job that has only become more and more complex over the years.

The story, however, begins much earlier than 10 years ago. Anders Lonning-Skovgaard joined Coloplast in 2006, first as Chief Business Controller, then as Director of Performance Management, later as CIO and finally as CFO, a position he has held since 2014. However, one theme has been present throughout all the years; long-term and stable value creation:

“When we talk about capital allocation in Coloplast, it is primarily a means of securing the long-term value creation that has characterised our company for 67 years. Stability is at the core of our family ownership. We obviously have to develop as a company, but we know our playing field. Our core business continues to grow significantly above the market,” he says.

A Danish success

Most Danes now know the story of the successful company in Humlebæk that was created by Aage and Johanne Louis-Hansen in 1957. Over the years, Coloplast has managed to grow 6-8% on average in a global market that is growing by 4-5%. At the same time, the company has delivered industry-leading EBIT margins between 28 and 33% for the last five years. The core chronic care business is still thriving after almost seven decades, but investments are needed to win market shares, Anders Lonning-Skovgaard explains:

Similarly, on the innovation side, Coloplast works with a dynamic capital allocation, Anders Lonning-Skovgaard explains:

"Besides commercial investments, innovation is clearly our most important growth driver, and I would say that we now have a best-in-class innovation team across our business. Our guidance is that we currently allocate around 4% of our revenue to innovation, but we can choose to extend that limit if someone comes up with a great idea. Here, too, we have an innovation board, which makes the final decision in close collaboration with the executive team. At the same time, innovation is an area where we do not just look internally, but also outside our company. This is especially true for urology, where we have made external investments and we are still looking for early-stage technologies and smaller additions to our portfolio.”

Introducing 'Strive 25'

A few years ago, Coloplast made a big decision: Alongside organic growth, acquisitions would become a core element of the new strategy that was dubbed ‘Strive 25’. The goal was to ensure annual growth of 7-9%, later adjusted to 8-10%, and a long-term EBIT margin of above 30%. At the same time, the management had a desire to use the capital structure more efficiently and proactively, Anders Lonning-Skovgaard explains:

“The launch pad for ‘Strive 25’ was the fact that in 2020 we were in a situation where we had a strong cash flow and no debt. This led us to say that we wanted to use our capital structure more effectively, including looking at acquisition opportunities, and that these opportunities should be within either large strategic plays, distribution, sales channel expansion or product development. We presented this vision first to the board and then to the capital markets, where we received a very positive response. It was clear that the market wanted to see us move actively into M&A”.

And active is the right description. In the autumn of 2020, Coloplast acquired Nine Continents Medical for close to 1bn DKK, which back then at an early stage was developing an implant for the treatment of overactive bladder. Two years later followed the acquisition of Swedish Atos Medical for around 16bn DKK, a global market leader in so-called laryngectomy (a surgical incision into the larynx). Finally, in 2023, Coloplast acquired the Icelandic company Kerecis for around 9bn DKK. Kerecis develops products made of fish skin for the treatment of wounds that are difficult to heal.

For Anders Lonning-Skovgaard and his colleagues, the last acquisition in particular sparked many conversations. While the purchase of Atos Medical in 2022 was financed through debt, the purchase of Kerecis in 2023 was financed through a capital increase:

“When we bought Atos Medical, we had virtually no debt and therefore a very large room for manoeuvre and the opportunity to optimise our capital costs. It was a relatively easy decision to choose the financing model, which now means that we have approximately 20 billion Danish kroner in debt. With Kerecis, on the other hand, we had to look more broadly at the possibilities, which gave rise to many good discussions. In the end, we chose a capital increase in cooperation with our owner family, partly because we wanted to be consistent in our dividend policy, and partly because the interest rate had risen significantly in the meantime. It proved to be a popular decision, as it ended up being oversubscribed multiple times with strong backing from existing long-term shareholders. It was very satisfying to see that the capital markets showed such a great interest in joining this growth journey.”

After having now spent approximately 25 billion Danish kroner over the past five years, Anders Lonning-Skovgaard admits that the room to manoeuvre at Coloplast has become significantly smaller:

“After the takeover of Atos Medical and Kerecis, we have of course used a large part of our financial headroom, which also means that we are now pausing the very large acquisitions. We are still looking for new technologies, for example in urology, but these are of much smaller size. The main focus right now is on getting our large acquisitions integrated and reducing our debt, while we of course still prioritise innovation and commercial investments in our core business.”

Onwards and upwards

The passing of time also means that ‘Strive 25’ is now coming to an end, and Anders Lonning-Skovgaard and his team are entering the next strategy period: From organic growth to large acquisitions and now, in the coming years, with a strong focus on integration:

Finally, Anders Lonning-Skovgaard is committed to maintaining the stability that is still at the core of Coloplast:

“My opinion on capital allocation is that it is a strong signal to the market that we are a company that is stable, transparent and consistent – run by people with great insight and experience. I have been with the company for nearly 18 years. Our executive leadership team and board also have strong tenure, and it is the same story for our senior leadership group as a whole. Effective capital allocation requires many things, but one of them is knowledgeable people who know each other and how to work together. I think that’s one of our strengths across the company. We trust each other, we have a great collaboration, and we know our market very well.”

What are your three best pieces of advice for CFOs who want to get a better handle on capital allocation within their company?

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