Convatec Group Plc First Half Results 2019

01 August 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;
  • 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;
  • 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;
  • $14 million cost in first half;
  • 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.

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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.”

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