ConvaTec Group Plc First Half Results 2019

 

ConvaTec Group Plc First Half Results 2019

Improving growth trend in second quarter, Transformation Initiative on track, guidance confirmed

Key points:

·    Group reported revenue of $888.9 million in the first half was 3.5% lower year on year and flat¹ on an organic basis;

o  Excluding the one-off rebate provision⁶ taken in the first quarter ($8.9 million) to revise the estimate of the distributor rebates accrual, growth in the first half was 1.0%¹ on an organic basis;

o  The second quarter saw an improving revenue trend, with positive organic revenue growth across all franchises and Group growth of 2.1%¹;  

·    Transformation Initiative on track: three-year programme, $150 million investment (including c.$45 million capex), anticipated gross benefits in 2021 of $130 - $150 million per annum;

o  $14 million cost in first half;

o  Operational Excellence programme delivered net positive productivity in the first half, with benefits more than offsetting inflation and depreciation;

·    Reported operating profit / EBIT of $93.6 million, 23.3% lower year on year, reflecting the one-off rebate provision⁶, foreign exchange, plus investment in commercial areas and regions, and the Transformation Initiative;

·    Adjusted² operating profit / EBIT of $165.2 million, 18.8% lower year on year, due to same drivers as above; adjusted² EBIT margin declined, as expected, to 18.6% (2018: 22.1%);

·    Interim dividend 1.717 cents maintained;

·    Leverage 2.6 times Net Debt/EBITDA³, continued good adjusted cash conversion 89.8% (2018: 75.2%);

·    Guidance for the full year maintained: organic revenue growth 1.0% - 2.5%¹, adjusted EBIT² margin 18% -  20%, including c. $40 million Transformation Initiative and c. $10 million of MDR⁴ costs.

Group revenue

	Six months ended 30 June
	2019 $m	2018 $m	Reported growth	Foreign Exchange impact	Organic1 growth	Organic1,* growth ex. rebate	Q2 Organic1 growth
Revenue by Franchise
Advanced Wound Care	271.4	290.0	(6.4)%	(4.6)%	(1.8)%	0.0%	3.3%
Ostomy Care	252.2	266.0	(5.2)%	(5.0)%	(0.2)%	0.6%	0.3%
Continence and Critical Care	221.4	220.1	0.6%	(1.8)%	2.3%	3.0%	2.8%
Infusion Devices	143.9	145.2	(0.9)%	(1.8)%	0.8%	0.8%	1.9%
Total	888.9	921.3	(3.5)%	(3.6)%	0.0%	1.0%	2.1%

* Excluding one-off provision of $8.9 million taken in Q1 to revise the estimate of the distributor rebates accrual.

 

Rick Anderson, Executive Chairman, commented

"All of our Franchises delivered organic¹ revenue growth in the second quarter, indicating positive progress against our performance improvement plans. There is more work to do, but we are well positioned to deliver on our objectives for the full year and consequently our revenue and adjusted EBIT margin guidance is maintained. Throughout the second half of the year, our priority remains improving execution. In addition, I look forward to welcoming Karim Bitar as our new CEO on 30 September.

 

We expect to see further revenue growth for the Group in the second half. A key focus area is our US Wound business, where a more targeted and effective salesforce is already showing encouraging signs. Ostomy is continuing to deliver a slow but steady recovery, and within Continence and Critical Care our Home Distribution Group (HDG) continues to outgrow the market in the US, albeit at a lower rate. Infusion Devices saw strong orders from customers in the second quarter.

 

Our Transformation Initiative has made good progress in many areas, but there is much more to do. Launched in February, we invested $14 million in the first half to establish the programme, identify opportunities and begin execution of the first wave of projects, with detailed tracking of key milestones and weekly reviews by the Executive team. Our Transformation Office provides a model to embed more discipline and better execution into the business: initial progress is encouraging and a "ConvaTec Way" is emerging.

 

We expect a significant increase in transformation spend in the second half, in line with previous guidance of $40 million spend for the year, as more projects move from planning into execution. We will continue to "forward invest" for growth and efficiency, to enable us to capture more opportunities for value creation over the medium to long term for all our stakeholders."

 

 

	Six months ended 30 June
	2019	2018	Growth
Adjusted results2	$m (unless stated)		Reported	Organic1
Revenue	888.9	921.3	(3.5)%	0.0%
Gross margin	58.6%	59.3%	(70) bps
EBIT/Operating profit	165.2	203.5	(18.8)%	(15.4)%
EBIT margin	18.6%	22.1%	(350) bps
Earnings per share ($)	0.06	0.07
	Six months ended 30 June
	2019	2018	Growth
Reported results	$m (unless stated)		Reported	Organic1
Revenue	888.9	921.3	(3.5)%	0.0%
Gross margin	51.7%	52.1%	(40) bps
EBIT/Operating profit	93.6	122.0	(23.3)%	(18.6)%
EBIT margin	10.5%	13.2%	(270) bps
Earnings per share ($)	0.02	0.05
Dividend per share (cents)	1.717 cents	1.717 cents

 

 

Enquiries:

Analysts and Investors

John Crosse, VP Investor Relations                                                                                                      +44 (0)7500 141435

Mark Reynolds, Director Investor Relations                                                                                       +44 (0)7551036625

[email protected]

 

Media

Bobby Leach, VP Group Corporate Affairs                                                                                           +44 (0)7770 842226

Finsbury                                                                                                                                                     +44 (0)207 2513801

 

There will be an analysts and investors meeting today at 9.00am BST at The Auditorium, UBS, 5 Broadgate Street, London, which can be viewed live through the ConvaTec website www.convatecgroup.com/investors/reports. A recording will be available on the site shortly afterwards.

 

United Kingdom:  +44 20 3936 2999

United States:  +1 646 787 9445 

All other locations: use UK number                                                     

Access Code: 528708

The full text of this announcement and the presentation for the analyst and investors meeting can also be downloaded from the website above.

 

Financial Calendar

Ex-dividend date                                                                                                                                         5 September 2019

Dividend record date                                                                                                                                 6 September 2019

Scrip dividend election date                                                                                                                     23 September 2019

Dividend payment date                                                                                                                             17 October 2019

Q3 trading update                                                                                                                                      30 October 2019

 

 

 

About ConvaTec

ConvaTec is a global medical products and technologies company focused on therapies for the management of chronic conditions, with leading market positions in advanced wound care, ostomy care, continence and critical care, and infusion devices. Our products provide a range of clinical and economic benefits including infection prevention, protection of at-risk skin, improved patient outcomes and reduced total cost of care. To learn more about ConvaTec, please visit www.convatecgroup.com where a copy of this announcement can also be found.

 

 

 

(1) Organic growth presents period over period growth at CER⁵, excluding M&A activities.

(2) Certain financial measures in this document, including adjusted results, 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 (page 17).

(3) Last 12 months adjusted EBITDA of $458m.

(4) EU Medical Device Regulation.

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

(6) One-off provision of $8.9 million taken in Q1 to revise the estimate of the distributor rebates accrual.

(7) Medium to long term is 3 to 5 years.

 

 

Operating Review

For the six months ended 30 June 2019

Group reported revenue of $888.9 million in the first half was 3.5% lower year on year, impacted by the one-off rebate provision⁶ recognised in the first quarter of $8.9 million, and adverse foreign exchange movements of $33.2 million.

Organic revenue was flat¹ for the half year and grew 2.1%¹ in the second quarter. Excluding the $8.9 million one-off rebate provision⁶, revenue grew 1.0%¹ on an organic basis in the first half. The most significant impact leading to differences between reported and organic revenue is the effect of exchange rate movements.

Advanced Wound Care ("AWC")

Organic revenue in the first half of 2019 was 1.8%¹  lower year on year, with growth of 3.3%¹ in the second quarter. Reported revenue of $271.4 million was 6.4% lower compared to the first half of 2018, and reported revenue of $141.7 million in the second quarter declined 0.8% versus the prior year.

Excluding the one-off rebate provision⁶ taken in the first quarter, organic growth in the first half was flat¹.

AQUACEL^TM Foam and AQUACEL^TM Ag+ / Advantage performed well, excluding the one-off rebate provision⁶, offset by continued challenges in our legacy products, in particular base AQUACEL^TM dressings and skin care. However, our skin care business was less of a drag to growth in the second quarter, compared to the first, as expected.

In the US we have completed our move to a new salesforce model and lead indicators show good momentum, such as the volume of sales calls with clinicians increasing by over 20% in the second quarter, compared to the first. AQUACEL^TM Ag Advantage, launched late last year, has been positively received by clinicians and although early days, our Avelle™ Negative Pressure Wound Therapy ("NPWT") is seeing progress and recording its first sales, following launch earlier this year, and we remain excited by the market opportunity.

We saw good momentum in markets in EMEA and APAC. The UK market remains challenging, although stable. Reimbursement reductions in France announced during the second quarter were within our expectations for price headwinds in 2019.

Ostomy Care ("OC")

Organic revenue in our OC franchise declined in the first half by 0.2%¹, but grew 0.3%¹ in the second quarter. Reported revenue of $252.2 million in the first six months declined 5.2% compared to the same period in 2018. Reported revenue of $132.6 million in the second quarter declined 3.9% year on year.

Excluding the one-off rebate provision⁶ taken in the first quarter, organic growth in the first half was 0.6%¹.

We continue to execute our strategy to return the franchise to consistent growth, with a good performance in the second quarter in a number of markets in EMEA and LatAm.

We were pleased to win a contract with one of the top 3 hospitals by volume of surgeries in the US, based on our product and service offering, leveraging our HDG model of patient support. We hope to use this as a template with other hospitals and IDNs (Integrated Delivery Networks) in the future.

We continue to invest in and grow our me+™ direct-to-consumer programme, and see traction with our more recent Convex product launches such as Esteem+™ Flex and Natura™ Accordion.

Continence & Critical Care ("CCC")

On a reported basis revenue grew 0.6% to $221.4 million in the first half, with constant currency growth of 2.4%⁵, reflecting the contribution of J&R Medical and divestment of the Group's Symbius Medical respiratory business, which both occurred on 1 March 2018. Revenue in the first half grew 2.3%¹ on an organic basis. Reported revenue in the second quarter was $113.0 million, growth of 1.2% year on year, or 2.8%¹ on an organic basis.

Excluding the one-off rebate provision⁶ taken in the first quarter, organic growth in the first half was 3.0%¹. 

Growth in CCC was driven by HDG which continued to outgrow the overall US continence market, albeit the absolute level of growth was lower than in prior years partly due to the inclusion of the lower growth incontinence business of Woodbury (acquired in September 2017) in organic growth rates. Final patient testing of our next generation catheter against the market leader generated very positive feedback and this will be incorporated into our launch activity in Europe.

Infusion Devices ("ID")

In our ID franchise, revenue of $143.9 million declined 0.9% on a reported basis, but grew 0.8%¹ organically in the first half of 2019. Revenue of $71.0 million in the second quarter grew by 0.7% on a reported basis and 1.9%¹ organically.

 

Infusion Devices saw strong orders from customers during the first half, driven by continued growth in the insulin pump market.

 

Transformation Initiative ("TI")

Our Transformation Initiative is on track. Launched in February, during the first half of the year we established the Transformation Office to accelerate delivery of our programme, identified and prioritised opportunities across our four workstreams (Commercial Excellence, Operational Excellence, Business Services Transformation and Portfolio Optimisation) and began execution of the first wave of projects. There is clear accountability for delivery of projects and robust governance, with detailed tracking of key milestones with weekly reviews of the programme by the Executive Chairman, CFO and the rest of the Executive team. Allocation of investment and resource is tightly controlled.

Our Commercial Excellence programme is currently helping to drive a more targeted and effective salesforce in US AWC; Operational Excellence delivered net positive productivity in the first half; in Business Services Transformation we have moved to the final stages of detailed design and in Portfolio Optimisation analysis is ongoing, to identify tail-end SKUs and determine how to serve markets more effectively.

 

First half cost was $14 million, out of an anticipated full year spend of c. $40 million in supporting the Transformation Initiative. We expect investment to increase in the second half as more projects move from planning into execution.

 

Overall we anticipate the annual gross benefits in 2021 arising from the $150 million investment will be $130 - $150 million. These benefits will be partially offset by ongoing permanent investment in the business, which will rise to $50 million per annum by 2021 (vs. 2018), and the usual headwinds of price, inflation, and increased depreciation. We expect to deliver margin expansion, over the medium to long term⁷, from our adjusted EBIT margin in 2018 of 23.4%, and the anticipated decline to 21.0% to 22.5% in 2019, excluding TI and MDR⁴ costs.

 

Regional Revenue

	Six months ended 30 June
	2019	2018	Growth			Q2
	$m	$m	Reported	Organic1	Organic1 growth ex. rebate*	Organic1 growth
Geographic markets
EMEA	358.1	378.3	(5.3)%	1.5%	1.5%	3.3%
Americas	462.3	475.1	(2.7)%	(1.9)%	(0.1)%	1.1%
APAC	68.5	67.9	0.9%	5.6%	5.6%	2.8%
Total	888.9	921.3	(3.5)%	0.0%	1.0%	2.1%

* Excluding one-off provision of $8.9 million taken in Q1 to revise the estimate of the distributor rebates accrual.

Revenue in Europe, Middle East and Africa ("EMEA") in the first half declined 5.3% on a reported basis due to unfavorable foreign exchange, more than offsetting growth of 1.5%¹ on an organic basis. Growth in OC and ID was partially offset by weakness in hospital and critical care.  In the second quarter EMEA organic revenue grew 3.3%¹, driven by an improved performance from both OC and AWC, again offset by CCC.

Revenue in Americas in the first half declined 2.7% on a reported basis, or 1.9%¹ on an organic basis, which includes the one-off rebate provision⁶ taken in the first quarter of $8.9 million. Whilst OC and AWC delivered strong growth in LatAm, and HDG delivered a good performance, this was more than offset by declines in both OC and AWC in North America, which included the impact of the rebate provision⁶. Excluding the rebate revenue in the Americas was broadly flat¹ year on year on an organic basis. Second quarter growth of 1.1%¹ on an organic basis saw an improved AWC performance.

Revenue in Asia Pacific grew 0.9% on a reported basis in the first half, reflecting unfavorable foreign exchange, with 5.6%¹ growth on an organic basis, driven by OC and AWC. Organic growth in the second quarter of 2.8%¹ was primarily driven by AWC, offset by a weaker OC performance.  

Adjusted EBIT margin

Adjusted EBIT margin was 18.6% in the first half, a decline of 350 basis points year on year. The main drivers were the one-off rebate provision⁶, foreign exchange and increased investment.

Adjusted gross margin declined 70 basis points, a result of negative foreign exchange and the one-off rebate provision⁶.  Our Operational Excellence programme delivered a net productivity benefit in the first half, which helped offset negative price and mix.

Operational expenditure increased, as expected, driven by investment in commercial areas and regions, and spend related to the Transformation Initiative and MDR⁴.

In the first half we incurred $14 million and $1 million of cost related to the Transformation Initiative and MDR⁴ respectively. We anticipate a significant increase in expenditure in these two areas in the second half, and continue to expect c. $50 million cost for both TI and MDR⁴ combined in FY 2019.

See Financial Review for further information on costs and margin.

Cash generation and leverage

Net cash from operating activities was $194.0 million (31 December 2018: $164.9 million), principally reflecting the receipt of $30 million which was the gross settlement of a foreign exchange forward contract. Adjusted cash conversion was 89.8% (2018: 75.2%), reflecting reduced EBITDA but improved working capital year on year. 

The Group ended the period with net debt of $1,211.8 million (31 December 2018: $1,305.2 million), which amounted to 2.6x adjusted EBITDA³ (31 December 2018: 2.7x).

See Liquidity and net debt in the Financial Review for more detail.

Dividend

We are maintaining our interim 2019 dividend at 1.717 cents per share, in line with the interim dividend for 2018. Whilst this is outside our stated policy of 35% to 45% of adjusted net profit, resulting from our investment in transformation, it is a reflection of the Board's confidence in the future performance of the Group and its underlying financial strength, distributable reserves position and cash generation of the Group.

See Note 5 - Dividends, for more detail.

 

Outlook and Guidance

Full year 2019 guidance of organic revenue growth of 1.0% to 2.5%¹ and adjusted² EBIT margin of 18% - 20% is maintained.

The adjusted² EBIT margin guidance includes investments in the Transformation Initiative and MDR⁴ costs, which totalled $15 million in the first half. We anticipate a significant increase in expenditure in these two areas in the second half and continue to expect c. $50 million of cost for both TI and MDR⁴ combined for the full year.  

Excluding TI and MDR⁴ costs we expect the adjusted² EBIT margin to be 21.0% to 22.5%.

FY 2019 adjusted² effective tax rate is expected to be approximately 16.5%.

People

As previously announced, Karim Bitar will join the Group as CEO on 30 September.

Following the retirement of Sir Christopher Gent at our AGM in May, the search for a Chairman has made good progress and we expect to provide an update in due course.

 

The search process is also underway for new Non-Executive Directors, following the departures of Jesper Ovesen and Steve Holliday, as previously announced.

David Shepherd, President of AWC, has assumed direct responsibility for the US Wound business. This will drive continued improvement in performance and ensure the US has the focus and resource it requires.  George Poole has stepped down as President of the Americas.

2019 LTIP

In our 2018 Annual Report and Accounts on page 110 the Remuneration Committee noted that it would be appropriate to align the targets and metrics that apply to the 2019 LTIP awards with our Pivot to Growth plans. Those targets have now been agreed by the Committee. The performance measures will each pay out one third.  The performance period is from 1st January 2019 to 31st December 2021. All performance measures will vest on a straight line sliding scale between the performance measurement points. All definitions are consistent with the descriptions in the 2018 Annual Report and Accounts.

 

The performance conditions that will be attached to the 2019 LTIP awards are set out in the table below.

 

	Vesting schedule
Measure	Performance	% vesting
Three-year Relative TSR against same comparator group as in 2018 Annual Report and Accounts	< Median	0%
	Median	25%
	≥ 90th percentile	100%
Three-year cumulative EPS (i.e. FY19 EPS + FY20 EPS + FY21 EPS)	< 39 cents	0%
	39 cents	25%
	≥ 49 cents	100%
Three-year average Return on Invested Capital	< 7.0%	0%
	7.0%	25%
	≥9.0%	100%

To the extent the 2019 LTIP awards vest, vested shares will be required to be held by Directors for a further two-year post-vesting holding period.

 

 

Principal risks and uncertainties

The Group's risk management process identifies, evaluates, and manages the identified risks that could impact the Group's performance. The Group's principal risks and uncertainties, together with an explanation of the potential impact and mitigating actions, are included in the Group's 2018 Annual Report and Accounts on pages 36 to 43. The Group has reviewed these risks and concluded that they all remain relevant for the first six months of the financial year and are summarised below:

·    Change and transformation;

·    Attract, engage and retain leadership talent;

·    Brexit;

·    Legal and Compliance;

·    Global Operational and Supply Chain;

·    Product Innovation and Intellectual Property;

·    Pricing and reimbursement;

·    Forecasting Process;

·    Information security;

·    Macroeconomic and foreign exchange;

·    Quality and Regulatory.

 

 

UK withdrawal from the European Union ("Brexit")

The Group has, for some time and with external advisory support as required, been monitoring the potential outcomes of the Brexit negotiations, assessing the potential effects on our business, whatever the circumstances under which the UK will cease to be a member of the EU, including a "No Deal" scenario and preparing contingency plans to address the potential outcomes of the UK leaving on 31 October 2019. However, it remains unclear what will be the position for the UK on the revised leaving date of 31 October 2019 and our planning will continue to evolve and adapt in light of political developments. Based on our understanding today, we do not believe that Brexit will generate unmanageable risks for our business. For further information on our analysis of Brexit risks and our preparations, please see our 2018 Annual Report and Accounts.

 

 

 

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. 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 Presentation. Past performance of the Group cannot be relied on as a guide to future performance. Forward-looking statements 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.

 

 

 

Financial Review

The commentary in this financial review includes discussion of reported and alternative performance measures. Management uses alternative performance measures as a meaningful supplement to reported measures. These measures are disclosed in accordance with the European Securities and Markets Authority guidelines and are explained and reconciled to the most directly comparable measure prepared in accordance with International Financial Reporting Standards ("IFRS") on pages 17 to 21. Further detail on the Group's financial performance, measured in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union, is set out in the Financial Statements and Notes thereto on pages 22 to 34.

In addition, the discussion below includes commentary on revenue on a constant currency basis and on an organic basis. Constant currency removes the effect of fluctuations in exchange rates. Organic removes the effect of fluctuations in exchange rate and the impact of acquisitions and disposals. Both measures enable the Group to focus on the underlying revenue performance. Constant currency information is calculated by applying the applicable prior period average exchange rates to the Group's revenue performance in the respective period. Revenue growth on an organic basis is a non-IFRS financial measure and should not be viewed as a replacement of IFRS reported revenues.