LEI: 213800LS272L4FIDOH92

4 August 2022

Convatec Group Plc

Interim Results for the six months ended 30 June 2022

                                 Strong revenue growth, stable adjusted operating profit                   

and continued strategic progress

·    Good financial performance in H1 2022 notwithstanding the challenging inflationary backdrop and continued investment in Innovation, Sales & Marketing

·    Continued execution of FISBE (Focus, Innovate, Simplify, Build, Execute) strategy in H1, notably:

o  Entry into Wound Biologics¹ segment; exit from non-core hospital care and related industrial sales activities

o  Further progress with our new product pipeline; launch of GentleCath Air Male in France and InnovaMatrix in US; acquired a minority stake in BlueWind Medical

o  Simplification and efficiency initiatives supporting reduction in adjusted G&A to 9.7% of sales (H1 2021: 11.1%)

o  Positive pricing performance and new Convatec masterbrand launched

o  Progress embedding 'Convatec Cares', our new Environmental, Social & Governance (ESG) framework

·    On track to deliver full year guidance - further demonstration Convatec is pivoting to sustainable and profitable growth

Key financial highlights

·    Strong revenue growth: Reported +3.6% although significant FX headwind. +8.0% on a constant currency⁴ basis and +6.4% on an organic⁴ basis with positive performances across all divisions

·    Reported operating profit 35.7% lower primarily reflecting hospital care exit costs   

·    Stable adjusted² operating profit: +0.0% and +1.1% on a constant currency³ basis despite significant COGS inflation of c.7% and investments in Sales & Marketing and R&D operating expense of 15% on a constant currency basis

·    Adjusted² operating profit margin was 19.6% (H1 2021: 20.3%) with price/mix, productivity improvement, G&A reduction and FX tailwind more than offset by inflation and the operating expense investments.  Operating costs will be more evenly phased across the year in 2022 than in 2021.

·    Reported diluted EPS down 43.9% principally owing to the hospital care exit cost.  Adjusted² diluted EPS down 10.0% primarily owing to treatment of US deferred tax; excluding the recognition of deferred tax assets post the acquisitions, the adjusted EPS would have been down 2.7%  

·    Net debt² increased by $196 million largely owing to strategic M&A investments: leverage of 2.3x net debt²/adjusted EBITDA² (FY 2021: 1.9x)

·    Interim dividend of 1.717 cents declared (H1 2021: 1.717)

2022 outlook confirmed

Convatec is on track to deliver organic⁴ revenue growth of 4.0-5.5% and constant currency adjusted operating profit³ margin of at least 18%, as indicated in March 2022, notwithstanding the current inflationary backdrop.

Karim Bitar, Chief Executive Officer, commented:

"This performance demonstrates that Convatec is continuing to pivot to sustainable and profitable growth. Our competitive position and financial performance are strengthening as we successfully execute our FISBE strategy. Convatec has achieved strong sales growth and, despite the significant inflationary back drop, a robust profit performance.  We are confirming our guidance for the full year."

"We remain focused on executing our strategy and are confident in Convatec's ability to grow in line or faster than its markets and to improve its operating margin to mid-20% over time."

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(1) Wound Biologics segment as defined by SmartTRAK.  Includes skin substitutes, active collagen dressings and topical drug delivery. 

(2) Certain financial measures in this document, including adjusted results above, are not prepared in accordance with International Financial Reporting Standards ("IFRS"). All adjusted measures are reconciled to the most directly comparable measure prepared in accordance with IFRS in the Non-IFRS Financial Information below (pages 36 to 42).

(3) Constant currency growth is calculated by applying the applicable prior period average exchange rates to the Group's actual performance in the respective period.

(4) Organic growth presents period over period growth at constant currency, adjusted for: Triad Life Sciences (Mar'22), Cure Medical (Mar'21) and Patient Care Medical (Dec'21) acquisitions; Incontinence divestment (Dec'21) and, from 31^st May, the discontinuation of Hospital care and related industrial sales and the  reconfigured business in Russia. 

Contacts

Investor and analyst presentation

The results presentation will be held in person at UBS, 5 Broadgate Circle, London, EC2M 2QS at 9am (UK time).  The event will be simultaneously webcast and the link can be found here.

If you would like to ask a question please use the following dial-in details:

United Kingdom - 0330 165 4012
United States - 800-289-0720
Access code: 9879873

The full text of this announcement and the presentation for the analyst and investors meeting can be found on the 'Results, Reports & Presentations' page of the Convatec website www.convatecgroup.com/investors/reports.

Forthcoming Events

As highlighted in FY results in order to more evenly space the cadence of financial communication and better represent management's focus on long-term sustainable growth, the Group have replaced quarterly reporting with trading updates. 

About Convatec

Pioneering trusted medical solutions to improve the lives we touch: Convatec is a FTSE 250 global medical products and technologies company, focused on solutions for the management of chronic conditions, with leading positions in advanced wound care, ostomy care, continence and critical care, and infusion care. Group revenues in 2021 were over $2 billion. With around 10,000 colleagues, we provide our products and services in over 100 countries, united by a promise to be forever caring. Our products provide a range of benefits, from infection prevention and protection of at-risk skin, to improved patient outcomes and reduced care costs. To learn more about Convatec, please visit http://www.convatecgroup.com

Forward Looking Statements

This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the Group's control. "Forward-looking statements" are sometimes identified by the use of forward-looking terminology, including the terms "believes", "estimates", "aims", "anticipates", "expects", "intends", "plans", "predicts", "may", "will", "could", "shall", "risk", "targets", "forecasts", "should", "guidance", "continues", "assumes" or "positioned" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, amongst other things, results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy of the Group and the industry in which it operates.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Company, are inherently subject to significant business, economic and competitive uncertainties and contingencies that are difficult to predict and many of which are outside the Group's control. As such, no assurance can be given that such future results, including guidance provided by the Group, will be achieved; actual events or results may differ materially as a result of risks and uncertainties facing the Group. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed, or implied in such forward-looking statements. Forward-looking statements are not guarantees of future performance and the actual results of operations, financial condition and liquidity, and the development of the industry in which the Group operates, may differ materially from those made in or suggested by the forward-looking statements set out in this document. Past performance of the Group cannot be relied on as a guide to future performance. Forward-looking statements are based only on information currently available to the Group and speak only as at the date of this document and the Group and its directors, officers, employees, agents, affiliates and advisers expressly disclaim any obligations or undertaking to release any update of, or revisions to, any forward-looking statements in this document.

Operating Review for the six months ended 30 June 2022

Revenue

Total Group revenue increased by 3.6% on a reported basis to $1,045 million.  There was a significant FX headwind during the period and on a constant currency basis revenue rose 8.0%.  Adjusting for M&A and business restructuring (see footnote 4 above) Group revenue rose 6.4% on an organic basis.  

Advanced Wound Care revenue of $307 million increased 4.4% on a reported basis or 10.6% on a constant currency basis.  This performance was enhanced by the acquisition of Triad Life Sciences on 14 March and on an organic basis revenue rose by 7.3%.

The business achieved strong growth in Global Emerging Markets and Europe.  This more than offset a decline in North America where shortages of healthcare practitioners impacted procedure volumes and our limited position in the foam segment continued to weigh on performance.  Convatec will be launching ConvaFoam in the US in Q4, which we anticipate will have strong exudate and adhesion properties. 

Ostomy Care revenue of $265 million declined 3.1% on a reported basis but increased 2.7% on a constant currency basis and 3.0% on an organic basis.

During the period the business achieved continued strong growth in Global Emerging Markets while Europe achieved a robust performance, notwithstanding further rationalisation of less profitable activities within Amcare UK.  In North America, HSG continued to grow referrals with new Ostomy patients although the impact of planned SKU rationalisation continued to reduce reported performance.  Overall we are improving the mix and consequently the margins.  Across all geographies revenue from Convatec ostomy products grew 4.3% on a constant currency basis.

Continence & Critical Care revenue of $277 million rose 4.1% on a reported basis, 6.1% on a constant currency basis and 3.6% on an organic basis.  A strong operating performance was supported by contributions from the Cure Medical and Patient Care Medical acquisitions partially offset by the non-core incontinence disposal and adjustments for the hospital care exit from 31^st May, when the Belarus factory closed. 

Continence Care achieved revenue of $197 million, up 4.3% on an organic basis with good levels of new patient starts.  Critical Care revenue rose 1.8% on an organic basis to $80 million during the period with Flexi-Seal^TM declining, as expected following strong growth during COVID-19, whilst the hospital care products saw a temporary increase in sales immediately following the announcement of Convatec's decision to exit this product range. 

Infusion Care revenue of $196 million increased 12.2% on a reported basis, 14.5% on a constant currency basis and 14.4% on an organic basis after adjusting for the exit of industrial sales from 31^st May. This growth was primarily driven by continued strong demand from diabetic customers for our innovative infusion sets supported by favourable order phasing from key customers. 

Historic revenue data

Pivoting to sustainable and profitable growth

The execution of our FISBE (Focus, Innovate, Simplify, Build, Execute) strategy is progressing well. 

Focus

-      We have continued to invest in our top 12 markets, particularly in Sales and Marketing, and achieved faster growth in these countries. 

-      We entered the large and rapidly growing wound biologics segment¹ through the acquisition of Triad Life Sciences - strengthening our Advanced Wound Care position in the US and securing access to a complementary and innovative technology platform.  The integration is progressing well and we have now renamed the business Advanced Tissue Technologies ('ATT'). We are optimistic about the prospects in the biologics space and the potential for our ATT business.

-      In May, we announced the decision to withdraw from non-core hospital care activities and related industrial sales during the remainder of 2022.  Following the exit of these products, which last year generated approximately $100 million of revenue, the Group will be almost entirely focused on higher-growth and more profitable chronic care markets. 

Innovate

-      We have continued to invest to strengthen our Technology & Innovation capabilities and advance our pipeline; we increased R&D expenditure by 15% to $47 million in H1 (H1 2021: $41 million). 

-      During H1 we started launching two new products:

o  InnovaMatrix^TM , our new ATT product, in the US. The take up by healthcare providers has been promising. 

o  GentleCath^TM Air Male, our new hydrophyllic (proprietary FeelClean^TM Technology) compact male catheter, in France.  It is early days, but the initial feedback from users has been positive and we are now building out our commercial infrastructure in Europe, expanding to the UK in the second half of the year.  During H2 we shall also be launching GC Air Male in the US. 

-      We acquired a minority stake in BlueWind Medical Ltd, the developer of an innovative implantable tibial neuromodulation device for the over-active bladder segment, securing a relationship with a company developing a proprietary and differentiated solution to treat over-active bladders in the US Continence space.

Simplify

-      During H1 our adjusted G&A expenditure reduced by 5.1% on a constant currency basis to 9.7% of sales.

-      We continued to transition more finance and IT activities to our Global Business Services ('GBS') centre in Lisbon and made good progress with simplification of processes.

-      We also continued to simplify our product portfolio. The rationalisation of SKUs reduced growth in Ostomy Care by approximately 80bps.  This is expected to be more impactful in the second half given the phasing of the rationalisation.

Build

-      Our Pricing Centre of Excellence ('CoE'), in collaboration with our business units, achieved 60bps of pricing improvement. 

-      We launched the refreshed Convatec brand and our new company promise of 'forever caring' which have been well received by customers.

-      The Convatec Executive Leadership Team was strengthened in April.  Anne Belcher joined the Group from GSK to lead our Global Emerging Markets business and Bruno Pinheiro, who led our successful LATAM business before acting as Interim President for GEM last year, has taken over Ostomy Care.  John Haller joined us as EVP, Chief Quality and Operations Officer, having previously been at Stryker Corporation.  

-      Our Salesforce CoE has now established a single CRM platform in N.America and Europe and is driving enhanced salesforce productivity by increasing call rates and improving targeting. 

Execution

-      We delivered positive manufacturing productivity improvements in the face of significant COGS inflation and continue to improve the resilience of the supply chain.

-      We made further progress with our Environmental, Social & Governance (ESG) agenda:

o  Embedding 'Convatec Cares', our new ESG framework; elevating ESG through our strategic planning process and engaging all business units and functional areas on priorities, targets and commitments.

o  Launched a new Diversity, Equity & Inclusion (DE&I) and Wellbeing approach including strengthening our Employee Resource Groups with executive level sponsors and creating programmes such as our Black Education Leadership Programme (BELP).

o  In line with our commitment to reduce emissions and set Science Based Targets (SBTs), we completed our Scope 3 materiality assessment during the period and are on track to set our Scope 1 and 2 SBTs this year.

o  Consistent with our commitment to support our communities, we provided a humanitarian relief response for Ukraine valued at over $1.1 million.       

Operating profit

Adjusted gross profit rose 2.9% to $628 million (H1 2021: $611 million).  Adjusted gross profit margin of 60.1% was 50bps lower than the prior year with significant COGS inflation (of approximately 7%) more than offsetting foreign exchange benefit of 50bps, pricing, mix and productivity benefits.  Reported gross profit was $555 million (H1 2021: $555 million).

Operational expenditure increased $18 million, or 4.4% year on year on a reported basis or 9.2% on a constant currency basis, driven by additional investment in growth initiatives across the business partially offset by the reduction in G&A.

Total adjusted operating profit was unchanged at $204 million (H1 2021: $204 million).  The adjusted operating profit margin was 19.6% in the first half, a decrease of 70 bps versus prior year or 130bps on a constant currency basis. Reported operating profit was $87 million (H1 2021: $136 million) primarily driven by the closure costs and impairments relating to the exit of hospital care and industrial sales activities.

Dividend

The Board is declaring an unchanged interim dividend of 1.717 cents per share (H1 2021: 1.717) reflecting continued confidence in the future performance of the Group and cash generation.

Cash flow and leverage

Adjusted free cash flow post tax was $80 million (H1 2021: $113m) during the first half with the decrease principally reflecting higher working capital in the first half as well as increased investment in capital expenditure.

The Group was also strengthened through inorganic investment - spending $148 million on the Triad Life Sciences acquisition and investing $31 million in the preference shares of BlueWind Medical.  A further $10 million of cash was used for lease payments and $59 million for dividends to shareholders.

The Group ended the period with total interest-bearing liabilities, including IFRS 16 lease liabilities, of $1,438 million (31 December 2021: $1,435 million). Offsetting cash of $272 million (31 December 2021: $463 million) and excluding lease liabilities, net debt was $1,077 million (31 December 2021: $881 million), equivalent to 2.3x adjusted EBITDA (31 December 2021: 1.9x adjusted EBITDA).

Group 2022 outlook

We are pleased with the growth we have achieved in 2022 and we confirm our full year guidance. 

We continue to expect full year organic revenue growth of 4.0-5.5% as growth in the second half is anticipated to be slower.  This is primarily owing to order phasing in Infusion Care coupled with other light headwinds such as increased SKU and customer rationalisation, US sequestration and French reimbursement cut. 

We are on track to achieve our full year targeted constant currency adjusted² operating profit margin of at least 18%, notwithstanding the inflationary backdrop (estimated 8-9% COGS increase for Convatec for the full year, as previously guided). The margin in the second half is expected to be lower than H1 driven by the lagging impact of COGS inflation.  Operating expenses are expected to be more evenly phased than last year. The currency tailwind on the margin is currently c.60 bps.

We continue to expect adjusted net finance expense for the full year to be $50-55 million.  The cash tax rate for the year is still expected to be 18-19%, however the adjusted book tax rate for the year is expected to be approximately 25%, following accounting adjustments on the acquisition of Triad.  Capex guidance is unchanged at $100-120 million for the full year.  We expect leverage to trend down towards our target of around 2x over time.

We are confident about the future prospects for the Group as we continue to pivot to sustainable and profitable growth.

Principal risks

The Board reviews and agrees our principal risks on a bi‐annual basis, taking account of our risk appetite together with our evolving strategy, current business environment and any emerging risks that could impact the business. Our framework and system of risk management and internal control continue to develop and updates to the principal risks and mitigation plans are made as required in response to changes in our risk landscape. Details of our enterprise risk management framework are set out in the Group's 2021 Annual Report and Accounts on pages 64 to 73. 

The Board has reviewed the principal risks as at 30 June 2022, taking into consideration the risks that existed during the first six months of 2022 and those that it believes will have an impact on the business over the remaining six months of the current financial year. The principal risks have been assessed against the context of the global inflationary pressures and volatile political environment that are impacting all businesses at present.  The overall profile for the risks set out below remains largely unchanged over the financial year in terms of their potential impact on our ability to successfully deliver on our strategy:

·    Operational Resilience and Quality; 

·    Innovation and Regulatory;

·    Information Systems, Security and Privacy; 

·    Customer and Markets; 

·    Legal and Compliance; 

·    People;

·    Strategy and Change Management;

·    Environment and Communities; and,

·    Tax and Treasury.

However, as indicated in our May 2022 trading update the risk landscape has changed in respect of our Political and Economic Environment risk and People risk since the Annual Report was published in March. The Political and Economic risk has been elevated reflecting the continuing harshening environment created by global inflationary pressures on all aspects of our business, specifically our supply chain and cost of goods. In addition, we are experiencing increased pressures on our ability to attract, retain and maintain competitive remuneration for talent and skills in light of the continuing squeeze on the cost of living for our workforce.

We responded quickly to the evolving situation in Ukraine and the surrounding region when it first emerged at the beginning of the year. We reported the closure of our manufacturing plant in Belarus that supplied products for our Critical Care and Ostomy portfolios. We continue to assess any potential impacts on our business with appropriate mitigation plans. We are fully committed to continuing to comply with all applicable laws and regulations, including any impacts of new sanctions relating to the ongoing situation.

The Board assesses the overall risk profile of the Group to ensure it is within our risk appetite. Principal risks continue to be appropriately mitigated and work continues to reduce the net exposure to the business to ensure that each risk remains within our risk appetite.

Financial Review for six months ended 30 June 2022

The following table sets forth the Group's revenue and expense items for the six months ended 30 June 2022 and 2021:

Reported and Adjusted results 

The Group's financial performance measured in accordance with IFRS (IAS 34 Interim Financial Reporting as adopted by the United Kingdom) is set out in the Condensed Consolidated Interim Financial Statements and Notes and is referred to in this review as "reported".

The commentary in this review includes discussion of the Group's reported results and alternative performance measures (or adjusted measures) ('APMs'). Management and the Board use APMs as meaningful supplemental measures in monitoring the performance of the business. These measures are disclosed in accordance with the ESMA guidelines and are explained and reconciled to the most directly comparable reported measure prepared in accordance with IFRS in the Non-IFRS financial information section.

The commentary includes discussion on revenue on a constant currency basis. Constant currency removes the effect of fluctuations in exchange rates to focus on underlying revenue performance. Constant currency information is calculated by applying the applicable prior period average exchange rates to the Group's performance in the respective period. Revenue and revenue growth on a constant currency basis are non-IFRS financial measures and should not be viewed as a replacement of IFRS reported revenue. Organic growth represents period-on-period growth at constant currency, excluding acquisition and divestiture activities.

Revenue

Group reported revenue for the six months ended 30 June 2022 of $1,044.5 million (H1 2021: $1,008.0 million) increased 3.6% year-on-year or 8.0% on a constant currency basis. Group revenue grew by 6.4% on an organic basis, driven by strong growth in Advanced Wound Care and Infusion Care, good growth in Continence & Critical Care and robust growth in Ostomy Care. For more details about the category revenue performance, refer to the Operating Review.

(a)     Adjusted for the acquisition of Triad Life Sciences ("Triad"), Cure Medical and Patient Care Medical, as well as the divestment of the incontinence activities in 2021, and the exit from hospital care and industrial sales, and restructuring of activities in Russia during H1 2022.

(b)    During the year ended 31 December 2021, the geographical revenue information provided to the Group's CEO was changed to better reflect the way in which the Group managed its operations. The change was driven by the ongoing transformation initiatives and aligns with the current management and reporting structure. The six months to 30 June 2021 comparative revenue information has been re-presented to reflect this change. Europe includes Russia, North America comprises United States and Canada, and Rest of World ("RoW") comprises all countries in Asia Pacific, Latin America (including Mexico and the Caribbean), South America, the Middle East (including Turkey) and Africa.

North America revenue grew by 6.4% on a reported basis and 6.5% on a constant currency basis. This primarily reflected the strong revenue performance in Infusion Care and includes the acquisitions of Triad, Cure Medical and Patient Care Medical, as well as the impact of divestment of incontinence activities in 2021.

Europe revenue decreased by 3.0% on a reported basis which was primarily driven by currency headwinds. The growth was 6.1% on a constant currency basis, reflecting the strong revenue performance in Advanced Wound Care and supported by positive growth in all other categories.

Rest of World ("RoW") reported revenue grew by 11.6% and 18.5% on a constant currency basis, driven by strong growth in both Advanced Wound Care and Ostomy Care in Asia and Latin America.

Reported net profit

Reported operating profit was $87.1 million, a decrease of $48.4 million as compared to the prior year. This reflects the 200bps decrease in gross margin, which more than offset the 3.6% growth in revenue. The decrease in gross margin was driven by 120bps of divestiture and termination costs primarily relating to the exit from hospital care and industrial sales activities, with the remaining 80bps owing to significant inflationary pressures on both raw material and freight costs, partially offset by productivity/pricing/mix benefits.

Operating expenses increased $48.0 million to $467.8 million (H1 2021: $419.8 million) primarily reflecting $25.7 million of closure costs and impairments for hospital care and industrial sales activities, $22.0 million increase in selling and distribution costs associated with higher revenues, the inclusion of acquired businesses and higher labour costs in some areas. In addition, there was a $6.3 million increased investment in research and development to continue to develop the future pipeline of new products, offset by $6.9 million decrease in general and administrative expenses.

Reported net finance expenses increased by $8.4 million to $28.2 million in the six months to 30 June 2022 (H1 2021: $19.8 million), reflecting increased interest rates and $5.2 million for the unwind of discount relating to the contingent consideration for Triad. Non-operating expenses increased by $9.2 million to $12.8 million (H1 2021: $3.6 million) driven by $3.4 million of FX losses and a $5.8 million increase in contingent consideration relating to the 2021 acquisition of Cure Medical.  

The income tax benefit for the six months to 30 June 2022 was $2.2 million (H1 2021: $26.3 million expense), resulting in reported net profit of $48.3 million (H1 2021: $85.8 million) and basic reported earnings per share of 2.4 cents (H1 2021: 4.3 cents).

Adjusted net profit

Adjusted gross profit was $628.1 million (H1 2021: $610.5 million) and the adjusted gross margin was 60.1% (H1 2021: 60.6%), resulting from significant inflationary pressures on both raw material and freight costs which more than offset productivity/pricing/mix benefits and FX tailwinds.  

The Group achieved adjusted operating profit of $204.3 million (H1 2021: $204.4 million) with an adjusted operating margin of 19.6% (H1 2021: 20.3%). The 3.6% growth in revenue was offset by the 50bps decrease in adjusted gross margin and increases of $22.0 million and $6.3 million in selling and distribution and research and development expenses respectively.

Adjusted net profit fell 9.7% to $131.1 million (H1 2021: $145.2 million), driven by a $7.4 million increase in adjusted income tax expense and a $3.2 million increase in the net finance expense.  The adjusted effective tax rate ("ETR") increased from 19.8% to 24.8% principally due to the increase in US deferred tax expense (non-cash) for the utilisation of federal tax losses that were fully recognised as deferred tax assets following the acquisition of Triad and profit mix between jurisdictions with different tax rates.

Adjusted basic and diluted EPS at 30 June 2022 was 6.5 cents (H1 2021: 7.2 cents).

Taxation

The Group's reported income tax benefit for the six months ended 30 June 2022 was $2.2 million (H1 2021: $26.3 million expense) driven by recognition of deferred tax assets in respect of previously unrecognised tax losses in the US, partially offset by the increase in US tax expenses following the acquisition of Triad.  

After adjusting for certain financial measures that the Group believes are useful supplemental indicators of future operating performance, the adjusted effective tax rate was 24.8% for the six months ended 30 June 2022 (H1 2021: 19.8%). The increase in adjusted effective tax rate was principally driven by the non-cash deferred tax expenses due to the utilisation of US Federal tax losses which are now fully recognised as deferred tax assets following the acquisition of Triad, and the profit mix between jurisdictions with different tax rates.

Acquisitions and investments

Triad Life Sciences Inc ("Triad"), a US-based medical device company, was acquired on 14 March 2022 for an initial consideration of $125.3 million. The acquisition of Triad strengthens the Group's Advanced Wound Care position in the US, securing access to a complementary and innovative technology platform that enhances advanced wound management and patient outcomes. In addition to the initial consideration, there could be further contingent consideration of up to $325.0 million based on two short-term milestones and the performance during the first two years post-completion, of which $25.0 million was paid in April 2022. Refer to Note 7 - Acquisitions in the Condensed Consolidated Finance Statements for further details.

The Group has contingent consideration of up to $10.0 million in respect of Cure Medical, which is based upon post-acquisition performance targets and to be paid by 2024. The contingent consideration was increased by $5.8 million to $8.9 million (discounted) in the period to 30 June 2022 (31 December 2021: $3.1 million), as a result of strong performance and forecast financials which are expected to exceed previous expectations.

On 9 May 2022, the Group invested $30.7 million in preference shares of BlueWind Medical Limited ("BlueWind Medical"). This represents an investment into an innovative technology in the large and growing over-active bladder market and strengthening of the Group's Continence & Critical Care category. The investment is held at fair value in the Condensed Consolidated Financial Statements, which has not changed since the date of the investment.

Strategic decision to exit from hospital care and industrial sales

On 12 May 2022, it was announced that the Group would be withdrawing from its hospital care activities and related industrial sales during the remainder of 2022. The withdrawal from these low margin activities is consistent with the Group's FISBE strategy, with the Group focusing on higher-growth chronic care markets with improved margins and higher levels of recurring revenue.

Given the geopolitical situation in the region, the manufacturing plant in Belarus which produces hospital care goods ceased manufacturing on 31 May 2022 alongside a significant restructuring of all operations in Russia. The remainder of the hospital care and industrial sales activities will be mostly phased out in the second half of 2022. Given this phased exit of the hospital care and related industrial sales products, reported revenue in 2022 is expected to be approximately $10 million to $20 million lower as a result of the exit, with the adjusted operating profit impact of the exit being a decrease of $3 million to $5 million in 2022. At 30 June 2022, $38.4 million of closure costs had been recognised, primarily related to asset impairments and restructuring provisions.

Dividends

We are maintaining our interim 2022 dividend at 1.717 cents per share, in line with the interim dividend for 2021. The decision to maintain the dividend reflects the underlying financial strength and cash generation of the Group, as well as the progress on pivoting to sustainable and profitable growth and confidence in the future prospects of the Group.

Free cash flow

Adjusted free cash flow, post tax, is one of the four key performance indicators we use to monitor the delivery of our strategy.

(a)      Adjusted EBITDA, adjusted working capital and adjusted non-cash items are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS in the cash conversion table in the Non-IFRS financial information section.

Adjusted free cash flow, post tax, was $79.5 million (H1 2021: $113.2million), with the decrease of $33.7 million principally driven by the increase in investment in capital programmes, as well as increase in working capital primarily reflecting the build of inventory to improve resilience.  

Sources and uses of cash 

Sources of cash

The Group's primary source of liquidity is net cash generated from operations.

Net cash generated from operations

(a)     EBITDA is explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS in the cash conversion table in the Non-IFRS financial information section.

Reported net cash generated from operating activities was $112.5 million (H1 2021: $131.0 million). The decrease of $18.5 million primarily reflects a decrease in net cash generated from operations of $25.3 million. The decrease in EBITDA of $34.5 million was partially offset by $4.3 million of additional cash inflows from foreign exchange derivatives in the six months to 30 June 2022 as compared to the prior year, as well as $3.8 million of more favourable working capital movements resulting from increases in liabilities relating to strategic projects such as the exit from hospital care and industrial sales activities, partially offset by increases in inventory to improve resilience. Tax paid decreased by $9.9 million to $19.1 million as a result of the timing of payments on account and decrease in tax payments in the US, which is partially offset by net interest paid which increased by $3.1 million, reflecting higher interest costs on the Group's borrowings.

On an adjusted basis, the net cash generated from operating activities decreased by $16.3 million to $121.7 million (H1 2021: $138.0 million), primarily reflecting the $1.2 million decrease in adjusted EBITDA and $26.2 million increase in working capital, offset by $9.9 million decrease in tax paid.

Uses of cash

Cash and cash equivalents have decreased by $191.8 million to $271.6 million at 30 June 2022 (31 December 2021: $463.4 million). The $112.5 million of net cash generated from operations, together with the decrease in cash and cash equivalents, was used to acquire Triad for $123.2 million, pay the first $25.0 million milestone in relation to Triad, invest in preference shares of BlueWind Medical for $30.7 million, invest $64.1 million of capital expenditure in our manufacturing lines and digital technologies, pay $10.4 million in lease payments and $58.9 million in dividends to shareholders. The year-on-year increase of $5.3 million in the cash dividend payment reflects the increase in the 2021 final dividend and the level of uptake of the scrip alternative as compared to the prior year. 

Liquidity and net debt

As at 30 June 2022, the Group's cash and cash equivalents were $271.6 million (31 December 2021: $463.4 million) and the debt outstanding on our borrowings was $1,348.8 million (31 December 2021: $1,344.6 million). Borrowings reflect a $500 million unsecured senior note maturing in October 2029 and two five-year multi-currency committed loan facilities which expire in October 2024. The Group has a $200 million revolving credit facility which remained undrawn as at 30 June 2022 and also expires in October 2024. This, combined with cash of $271.6 million, provided the Group with total liquidity of $471.6 million at that date. Of this, $29.3 million is held in territories where there are restrictions related to repatriation (31 December 2021: $37.5 million). From time to time we review our balance sheet structure including debt maturity profile, cost of capital and liquidity needs, and to the extent we deem appropriate may consider various financing alternatives, including opportunistically accessing the loan and debt capital markets.

At 30 June 2022, the Group was in compliance with all financial and non-financial covenants associated with the Group's outstanding debt.

The Group ended the period with total interest-bearing liabilities, including IFRS 16 lease liabilities, of $1,437.8 million (31 December 2021: $1,435.1 million). Offsetting cash of $271.6 million (31 December 2021: $463.4 million) and excluding lease liabilities, net debt was $1,077.2 million (31 December 2021: $881.2 million), equivalent to 2.3x adjusted EBITDA (31 December 2021: 1.9x adjusted EBITDA), with the increase being driven by strategic investments such as the acquisition of Triad, purchase of preference shares in BlueWind Medical and increased investment in capital expenditure.

(a)     Based on net debt, excluding lease liabilities, and the last 12 months adjusted EBITDA.

2022 Condensed Consolidated Interim Financial Statements

Condensed Consolidated Income Statement

All amounts are attributable to shareholders of the Group and wholly derived from continuing operations.

Condensed Consolidated Statement of Comprehensive Income

All amounts are attributable to shareholders of the Group and wholly derived from continuing operations.

Condensed Consolidated Statement of Financial Position