TIDMCTEC
RNS Number : 3675S
ConvaTec Group PLC
09 March 2023
9 March 2023
Convatec Group Plc
Annual Results for the twelve months ended 31 December 2022
Strong financial performance and continued strategic
progress
-- Delivered good revenue growth and positive margin expansion,
notwithstanding the challenging market backdrop
-- Continued to strengthen competitive position through
execution of FISBE (Focus, Innovate, Simplify, Build, Execute)
strategy, notably:
o Over 90% of revenue now derived from chronic care categories;
entered the attractive wound biologics(1) segment and exited
non-core hospital care and related sales
o Good progress with three new product launches: GentleCath(TM)
Air for Men, InnovaMatrix(R) and Extended Wear Infusion Sets
o Significantly advanced our simplification and productivity
agenda, reducing adjusted G&A(2) spend to 8.9% of sales (2021:
11.7%)
o Refreshed Convatec masterbrand launched, including new
'forever caring' promise reflected in strengthened digital presence
and improved packaging
o Continued progress embedding 'Convatec Cares', our
Environmental, Social & Governance (ESG) framework
Key financial highlights
Reported results Adjusted(2) results
FY 2022 FY 2021 Change FY 2022 FY 2021 Change CC Change(3)
Revenue $2,073m $2,038m 1.7% $2,073m $2,038m 1.7% 6.9%
$ 404
Operating profit $207m $204m 1.8% m $362m 11.6% 12.2 %
Operating profit 19.5
margin 10.0% 10.0% - % 17.7% 1.8%pts -
Diluted earnings 13.0
per share 3.1 cents 5.8 cents (46.6)% 12.6 cents cents (3.1)% -
Dividend per share 6.047 5.871 3.0%
========== ========== ======== =========== ======== ======== =============
-- Good revenue growth: reported +1.7% with significant FX
headwind. +6.9% on a constant currency(3) basis and +5.6% on an
organic(4) basis
o Strong organic(4) growth in Advanced Wound Care and Infusion
Care, good organic growth in Ostomy Care and Continence &
Critical Care
o There was additional revenue from the acquisition in the wound
biologics(1) segment, which was partially offset by the hospital
care exit
-- Adjusted operating profit(2) : +11.6% and +12.2% on a
constant currency(3) basis despite significant COGS inflation of
8.6% in line with guidance. Reported operating profit +1.8%
-- Adjusted operating profit(2) margin was 19.5% (2021: 17.7%)
with price and mix improvement, G&A spend reduction and 80bps
FX tailwind more than offsetting inflation and continued organic
investment in commercial capabilities
-- Adjusted(2) diluted EPS was 3.1% lower, primarily because of
a significant increase in the effective book tax rate to 23.9%
(2021: 15.0%), compared to a cash tax rate of 15.7%. Reported
diluted EPS was down 46.6% primarily owing to higher adjusting
items mostly relating to the exit of hospital care and Triad
acquisition.
-- Strategic investments in acquisitions, higher capex to
support future growth and increased inventory to improve resilience
led to an increase in net debt(5) of $187 million.
-- Leverage(6) at year end of 2.1x (2021: 1.9x) was in line with guidance.
-- Increased final dividend of 4.330 cents proposed, giving
total dividend of 6.047 cents (2021: 5.871 cents)
2023 outlook
For 2023 we expect organic(4) revenue growth to be between 4.5 -
6%, consistent with our medium-term target shared at our Capital
Markets Event in November.
We remain focused on expanding our operating margin by growing
revenue, improving our mix/price and delivering on our
simplification and productivity agenda. Inflation is expected to
remain a significant headwind in 2023 with COGS inflation of 5-7%.
In addition we anticipate labour inflation in opex of 5-7% which is
approximately double that of 2022. On this basis, we expect modest
further improvement in the adjusted operating margin in 2023 to at
least 19.7% on a constant currency basis (3) .
Karim Bitar, Chief Executive Officer, commented:
" Convatec achieved good sales growth and, despite the
challenging market backdrop, delivered positive adjusted operating
margin expansion, ahead of guidance. Over the course of the year,
we continued to make progress with our FISBE strategy, launching
three new products and improving our competitive positions. The
resulting financial performance is further proof that Convatec is
pivoting to sustainable and profitable growth.
"We remain focused on executing our FISBE 2.0 strategy and are
confident in Convatec's growth prospects and ability to increase
its operating margin to the mid-20s over the medium term."
(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 41 to 46).
(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 2022, the
discontinuation of hospital care, related industrial sales and
associated Russia operations.
(5) Net debt (excluding lease liabilities)
(6) Net debt(5) /adjusted EBITDA(2)
( 7) Market size and growth based on aggregate of category
estimates, internal analysis and publicly available sources,
including SmartTRAK and Global Industry Analysts Inc. reports.
Contacts
Analysts & Investors Kate Postans, Vice President of +44 (0) 7826 447807
Investor Relations & Corporate
Communications +44 (0) 7805 011046
Sheebani Chothani, Investor Relations ir@convatec.com
& Corporate Communications Manager
Buchanan: Charles Ryland / Chris
Media Lane +44 (0)207 466 5000
Investor and analyst presentation
The results presentation will be held in person at The
Auditorium, Chartered Accountants' Hall, One Moorgate Place, London
EC2R 6EA at 9.30am (UK time) today. The event will be
simultaneously webcast and the link can be found here .
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
AGM and Trading update (for 4 months) 18 May 2023
Interim Results 2 August
2023
Dividend calendar
Ex-dividend date* 6 April 2023
Dividend record date* 11 April
2023
Scrip dividend election date* 3 May 2023
Annual General Meeting 18 May 2023
Dividend payment date* 25 May 2023
* subject to approval at AGM.
About Convatec
Pioneering trusted medical solutions to improve the lives we
touch: Convatec is a 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. With around
10,000 colleagues, we provide our products and services in almost
100 countries, united by a promise to be forever caring. Our
solutions provide a range of benefits, from infection prevention
and protection of at-risk skin, to improved patient outcomes and
reduced care costs. Group revenues in 2022 were over $2 billion.
The company is a constituent of the FTSE 100 Index (LSE:CTEC). To
learn more about Convatec, please visit
http://www.convatecgroup.com
Forward Looking Statements
This document includes certain forward-looking statements with
respect to the operations, performance and financial condition of
the Group. Forward-looking statements are generally identified by
the use of terms such as "believes", "estimates", "aims",
"anticipates", "expects", "intends", "plans", "predicts", "may",
"will", "could", "targets", continues", or their negatives or other
similar expressions. These forward-looking statements include all
matters that are not historical facts.
Forward-looking 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. Forward-looking statements are not guarantees of future
performance and such uncertainties and contingencies, including the
factors set out in the "Principal Risks" section of the Strategic
Report in our Annual Report and Accounts, could cause the actual
results of operations, financial condition and liquidity, and the
development of the industry in which the Group operates, to differ
materially from the position expressed or implied in 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 knowledge and
information available to the Group at the date of preparation of
this document and speak only as at the date of this document. The
Group and its directors, officers, employees, agents, affiliates
and advisers expressly disclaim any obligations to update any
forward-looking statements (except to the extent required by
applicable law or regulation).
Chief Executive's Review
Convatec continued to successfully execute its FISBE strategy,
strengthening its competitive position and delivering on our
forever caring promise for patients and customers. The various
strategic initiatives actioned during the period have enhanced the
quality of the business and improved our financial performance and
prospects.
Attractive growth prospects
Convatec operates in the structurally-growing, attractive
chronic care markets. We focus on four categories. These have a
combined market size (7) of $14 billion p.a. and market growth
rates (7) of between 4-8% p.a. We are leaders in the categories in
which we operate and expect to grow revenue in line with or faster
than each market.
We serve a diverse set of chronic care markets, producing
high-volume, high-quality consumables resulting in attractive
recurring revenues. This diversity provides resilience and
synergies, notably in areas such as: biomaterial sciences, product
and clinical development, automated manufacturing and shared supply
chain capabilities. Consistent with our FISBE strategy we have been
investing in our innovation pipeline, building mission-critical
capabilities, expanding capacity and increasing our resilience.
A chronic care focused business well positioned to deliver
sustainable and profitable growth
We continued to make progress executing our FISBE strategy,
thereby strengthening our competitive position and our ability to
consistently deliver sustainable and profitable growth.
Over the course of 2022, through acquisitions and exits, we
further focused the Group on chronic care categories - entering the
fast-growing wound biologics (1) segment while exiting our hospital
care business. Our continued focus on innovation has resulted in
three new products being launched (2021: one new launch), and the
R&D function has been strengthened by an increased emphasis on
intellectual property. We continue to invest in building core
capabilities. Our Centres of Excellence (in Marketing, Pricing and
Sales) are having a positive impact which, coupled with our
simplification and productivity agenda, are driving better
results.
The progress made under FISBE 1.0 has resulted in a stronger,
higher-quality business. Further details on the progress made under
each pillar can be found on pages 7 to 9. We hosted an Innovation
Day on 17 May 2022 and then a Capital Markets Event in November
where we outlined our refreshed strategy, FISBE 2.0. Details of
this next stage are set out below.
We delivered a strong financial performance
Group reported revenue of $2,073 million rose 1.7% (2021: $2,038
million). Adjusting for the significant FX headwind, revenue grew
6.9% on a constant currency (3) basis and 5.6% on an organic(4)
basis, slightly ahead of our initial guidance.
Adjusted operating profit(2) rose 11.6% and 12.2% on a constant
currency(3) basis despite significant COGS inflation of 8.6%.
Adjusted operating profit(2) margin was 19.5% (2021: 17.7%) with
mix/price, operations productivity, significant G&A spend
reduction and 80bps of foreign exchange tailwind more than
offsetting significant inflation and continued investment in
commercial capabilities.
Reported operating profit was broadly flat over the previous
year, as G&A savings were partially offset by higher operating
expenses arising from selling and distribution as well as costs
related to the exit of hospital care.
Adjusted diluted EPS(2) was down 3.1% with operating profit
growth more than offset by higher adjusted tax expenses and finance
expense from higher market interest rates.
Reported diluted EPS was down 46.6% impacted by higher adjusting
items mostly relating to the exit of hospital care and Triad
acquisition .
Capital expenditure during 2022 was $144.2 million as we
continued to invest for future growth, expanding our manufacturing
facilities in Infusion Care, beginning to increase the automation
at our production facilities and developing new digital
technologies to deliver enhanced customer experiences. We were able
to accelerate our plans, making good progress on several
significant projects, notably the expansion of capacity in Osted
and Reynosa for our Infusion Care business, and beginning to
increase automation at our Deeside wound care facility. We also
invested in acquiring intellectual property for our Ostomy Care
accessories portfolio.
Cash conversion was 55.6% (2021: 73.0%) primarily reflecting
increased capital expenditure and the strategic decision to build
inventory for resilience, coupled with the timing of receivables.
We expect phasing of some receivables to reverse in H1 2023 while
strategic capex investment and inventory will remain elevated in
2023.
Net debt(5) increased by $187 million after the acquisition of
Triad Life Sciences ($173 million) and investment in BlueWind
Medical ($31 million). Leverage(6) was 2.1x (2021: 1.9x) in line
with our guidance. We continue to target leverage(6) of 2x over
time but will be comfortable going up to c.2.5x for appropriate
M&A opportunities.
Revenue
Total Group revenue increased by 1.7 % on a reported basis to
$2,073 million. There was a significant FX headwind during the
period and on a constant currency (3) basis revenue rose 6.9% .
Given the largely reimbursed markets that we serve, there is
limited opportunity to pass on the significant inflation we have
seen in 2022. However, initiatives executed through our Pricing
Centre of Excellence (CoE) in collaboration with the business units
have successfully delivered positive price impact on revenue.
Adjusting for M&A and business restructuring (see footnote 4 on
page 2) Group revenue rose 5.6% on an organic (4) basis.
Twelve months ended 31 December
Reported Foreign Constant
growth Exchange Currency(3) Organic(4)
2022 2021 / (decline) impact growth growth
$m $m
Revenue by Category
Advanced Wound Care 621 592 4.8 % (7.9)% 12.7 % 6.8%
(4.5)
Ostomy Care 522 546 % (7.3)% 2.8 % 3.4 %
Continence and Critical
Care 546 543 0.6% (2.0)% 2.6 % 3. 6 %
Infusion Care 384 357 7.5 % (2.7)% 10.2 % 9.8 %
------------------------- ------ ------ ------------- ---------- ----------------- ------------
Total 2,073 2,038 1.7 % (5.2)% 6.9 % 5.6 %
========================= ====== ====== ============= ========== ================= ============
Advanced Wound Care (AWC)
During 2022, the business achieved strong growth in GEM and
Europe which more than offset a decline in North America where our
limited position in the foam segment and lower surgical volumes
continued to weigh on performance. As a result, the business saw
overall growth across all segments globally.
Revenue of $621 million increased 4.8% on a reported basis or
12.7% on a constant currency(3) basis. This performance reflected
the acquisition of Triad Life Sciences, now known as Advanced
Tissue Technologies (ATT) which generated $35 million of revenue.
On an organic(4) basis revenue rose by 6.8%.
We made continued strategic progress in AWC during the period.
In March 2022, we strengthened our position with our entry into the
wound biologics (1) segment through the acquisition of Triad Life
Sciences. Our commercial execution continued to improve, as we
leveraged our common Customer Relationship Management (CRM)
platform in North America and Europe. ConvaFoam was cleared for
launch at the end of 2022 and began the US roll out in early 2023,
which will strengthen our competitive position in the large and
rapidly growing foam segment.
In 2023 we will focus on:
-- Successfully launching ConvaFoam in the US and preparing for
a European launch in 2024; driving development of ConvaVac and
preparing to launch in 2024
-- Growing the InnovaMatrix(TM) platform in the US and developing the product outside the US.
-- Continuing to strengthen commercial execution globally
Ostomy Care (OC)
Under the new leadership of Bruno Pinheiro, our OC business
continued to make good strategic progress during 2022. He and the
team increased the focus on driving an improved experience across
the continuum of care. The highly-rated Home Services Group is
helping to grow the number of new US ostomy patients, while in
Europe, during the year, we launched new digital services to
support both health care professionals and patients better.
Revenue of $522 million declined 4.5% on a reported basis but
increased 2.8% on a constant currency(3) basis and 3.4% on an
organic(4) basis.
The business achieved continued strong growth in GEM,
particularly in Latin America and China, while Europe achieved a
robust performance with some pricing initiatives helping to offset
the continued planned rationalisation of lower-margin non-Convatec
products at Amcare UK. In North America, new patient starts
remained stable, supported by HSG ostomy sales.
Overall, we have continued to improve our mix and expand our
margins. We saw good demand for Convatec products, for example our
accessories sales saw strong growth in 2022, following the relaunch
of the Esenta brand. Across all geographies, revenue from Convatec
ostomy products grew 5.5% on an organic basis.
In 2023 we will focus on:
-- Driving new patient starts and continuing collaboration with HSG
-- Improving consistency of commercial execution across the continuum of care
-- Preparing to launch Esteem 2.0 in H1 2024
Continence & Critical Care (CCC)
Revenue of $546 million rose 0.6% on a reported basis, 2.6% on a
constant currency(3) basis and 3.6% on an organic(4) basis. A good
operating performance in Continence Care was supported by
contributions from the Cure Medical and Patient Care Medical
acquisitions, as well as an improving pricing environment in North
America.
Continence Care achieved revenue of $409 million in 2022, up
5.0% on an organic(4) basis, with continued strength in new patient
starts and high customer retention. This was complemented by good
demand for our Cure and GentleCath(TM) portfolios in the US and
Latin America, and our developing presence in France and the UK
following the launch of the GentleCath(TM) Air for Men compact
catheter.
During 2022 the strategic decision was taken to exit hospital
care and related industrial sales. The hospital care activities,
reported as part of CCC, generated $72 million of revenue in 2022
(2021: $79 million). From 31 May, when we closed the Belarus
factory, revenue has been excluded from organic(4) calculations.
The related industrial sales, reported as part of IC, generated $26
million of revenue in 2022 (2021: $22 million).
Critical Care revenue of $137 million declined 1.3% on an
organic(4) basis with Flexi-Seal(TM) , which remains in the Group
portfolio, declining following strong COVID-19 impacted
comparatives.
In 2023 Continence Care will focus on:
-- Continuing to drive US growth via
o Exceptional service,
o Both Cure Medical and GentleCath(TM) portfolios (including the
new GC Air for Men)
-- Expanding in Europe and Global Emerging Markets
-- Preparing to launch GentleCath(TM) Air for Women in late 2023/early 2024
From 2023 onwards, Flexi-Seal(TM) (2022 revenue: $66 million),
our faecal management system, will move from Critical Care to
Ostomy Care. The remaining industrial sales, predominantly
continence related supplies for B2B customers (2022 revenue: $17
million), will move from Infusion Care into Continence Care. Going
forward the CCC category will be renamed Continence Care and we
will restate comparatives.
Infusion Care (IC)
Our Infusion Care business continued to strengthen in 2022. To
respond to the underlying demand for automated insulin delivery
systems and their accessories, during 2022, we built additional
capacity at our Osted, Denmark and Reynosa, Mexico plants. We
continued to innovate, launching our MioAdvance Extended Wear
Infusion Sets (EWIS) in the US, and are diversifying our customer
base by growing applications outside of diabetes, such as
Parkinson's.
Revenue of $384 million increased 7.5% on a reported basis,
10.2% on a constant currency (3) basis and 9.8% on an organic (4)
basis. The difference between constant currency and organic growth
was due to the impact of the industrial sales exit. This strong
growth was primarily driven by continued demand for our infusion
sets used by diabetic patients. Growth was also supported by
increasing demand for differentiated infusion sets for alternative
therapies, such as pain management, albeit off a small base.
In 2023 we will focus on:
-- Scaling up production of MioAdvance EWIS
-- Expanding the usage of infusion sets for the delivery of
other subcutaneous therapies, including launching with AbbVie, once
regulatory approval is received for their Parkinson's drug
therapy
-- Successfully launching a tailored infusion set for Tandem
Mobi once regulatory approval is received
Delivering continued strategic progress
The execution of our FISBE strategy is progressing well. We
continue to make progress in each of the five pillars as we drive
towards our vision of pioneering trusted medical solutions to
improve the lives we touch. In November, at our Capital Markets
Event, we announced that in 2023 our strategy will evolve to FISBE
2.0.
Focus
We further reshaped the business to focus on our four chronic
care categories through bolt-on acquisitions, notably the Triad
Life Sciences acquisition which gives us a foothold in the
important wound biologics(1) segment. This, coupled with the
withdrawal from non-core hospital care activities and related
industrial sales, means that over 90% of our revenue now comes from
chronic care markets.
We continued to focus and invest in our 12 key markets which
cumulatively delivered constant currency (3) revenue growth of
9.6%, ahead of the overall group growth.
Looking ahead to 2023, with FISBE 2.0, we will become even more
focused on strengthening customer loyalty in our key markets and
categories, measuring and tracking our net promoter scores. We will
continue to invest in the US and China, our most important markets
and continue to evaluate appropriate bolt-on M&A opportunities
to further strengthen the business in our core categories.
Innovate
Innovation remains at the heart of our business. We have made
significant progress advancing our pipeline and strengthened our
Technology & Innovation capabilities. The R&D expenditure
for the year increased 3.7% on a constant currency basis. On a
reported basis R&D expenditure was $92 million (2021: $95
million), and additional capital expenditure of $14 million was
incurred over the period. We invested a further $10 million in
Intellectual Property licenses relating to accessories products,
accounted for as capital expenditure.
We began launching three new products during 2022, a step up
from our historical level:
- ATT's porcine placenta-derived extracellular matrix product,
InnovaMatrix(TM) , in the US, which has contributed meaningfully to
the growth in AWC during 2022
- GentleCath(TM) Air for Men, our new hydrophilic compact male
catheter (utilising our proprietary FeelClean(TM) Technology),
began rolling-out in France and the UK, with plans to roll out in
the US and other key markets in 2023, and has been well
received
- The Extended Wear Infusion Set (EWIS), our innovative
seven-day wear technology improving value and use to customers
whilst also reducing its environmental impact, available in Europe
and now the US
It is by continually refreshing our product portfolio and
ensuring it is differentiated that we can deliver sustained and
profitable growth over time.
In addition, 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
continence space.
We have also made progress on product sustainability as it
relates to technology & innovation, part of our wider ESG
agenda. Green Design Guidelines are an important part of our
development process, and we are systematically examining the
environmental footprint of our solutions and considering ways to
reduce waste.
We are developing a much richer longer-term pipeline, as
mentioned at the Capital Markets Day, and have further visibility
on product launches - for example, we're already working on the
next generation hydrofiber (R) technology platform.
We continue to pursue our R&D without walls approach; as
well as driving organic projects we will pursue inorganic activity.
We will continue leveraging the IDEAL process, launched in 2021,
and are seeking to improve cycle time. Our goal is to more
frequently refresh our portfolio to provide an improved customer
experience. This deeper and broader innovation pipeline will
underpin our growth in the future. To measure progress against this
ambition we are targeting that by the end of 2025, 30% of our
revenue will be generated from new products launched in the
previous five years.
In 2023, we will continue to strengthen our product pipeline,
innovation capabilities and improve our cycle time. In AWC we began
the US roll out of ConvaFoam in January 2023, which will strengthen
our competitive position in the large foam segment. We intend to
roll-out ATT's new products, InnovaBurn(TM) and InnovaMatrix(TM)
PD, for which we have already received clearance. In CC, we will be
preparing for the launch of GentleCath(TM) Air for Women in late
2023/early 2024, ahead of schedule, whilst in IC, during 2023, we
expect to launch tailored infusion sets for Tandem's new Mobi
hybrid micro-pump and for AbbVie's Parkinson's therapy, both of
which are subject to regulatory approval. The other major new
products are progressing well. The Esteem 2.0 ostomy product and
AWC's ConvaVac are expected to launch in 2024.
Simplify
We made significant progress on our simplification and
productivity agenda in 2022. Adjusted G&A expenditure was
reduced by 22.2% to $185 million, down 16.4% on a constant currency
(3) basis, or 8.9% of sales (2021: 11.7%) as positive progress with
initiatives brought forward benefits. We transitioned more finance
and IT activities to our Global Business Services (GBS) centres in
Lisbon and Bogota. 2022 was the first complete year of GBS activity
and we have started to see early benefits of standardised processes
and automation, lowering finance and IT costs. An increasing number
of activities are also now being resourced by internal talent, thus
reducing spend on external consultants. The foundations are now in
place to build additional in-house expertise to further streamline
processes and reduce additional spend.
During 2022 we also initiated a review of our facilities
footprint and are in the process of closing some underutilised
offices, replacing them with flexible working alternatives which
will improve our colleagues' experience.
In 2023, as part of FISBE 2.0, we will look to improve
productivity further across the organisation, reducing low value
activity and driving economies of scale. On the commercial front we
will leverage the Salesforce CoE and our CRM system more broadly
across the organisation. In quality and operations, we will
increase automation and drive our continuous improvement agenda. In
G&A we will expand the scope of GBS and build more end-to-end
processes. For example, we have started our HR transformation,
which will see us leverage central processes such as payroll,
training and onboarding transitioning to GBS.
Build
We strengthened the Convatec Executive Leadership Team (CELT)
during 2022. Jonny Mason joined us as CFO of the Group during Q1,
while Kjersti Grimsrud took over leadership of our Infusion Care
business and consequently Seth Segel added Continence Care to his
existing HSG responsibilities. 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, took over Ostomy Care. John Haller
joined us as EVP, Chief Quality and Operations Officer, having
previously been at Stryker Corporation.
We developed and embedded our Pricing CoE, which in
collaboration with our business units, achieved 50 bps of pricing
improvement on gross margin over the period.
Our refreshed brand and new company promise of 'forever caring'
was launched in May. It has been well received by customers and
HCPs. In the second half of the year we rolled-out new websites and
social media digital interfaces reflecting the refreshed brand
across all of our focus markets.
Our Salesforce CoE has now established a single CRM platform in
North America and Europe, and we have begun rolling it out across
GEM. This is driving enhanced salesforce productivity by increasing
call rates and improving account targeting.
Going forward we will leverage the Marketing CoE more broadly
across the Group and build new capabilities, particularly focused
on customer experience and measurement of Net Promoter Scores.
Culture is a critical element in building high performing teams
and creating a motivating work environment. Results from our latest
Organisational Health Index (OHI) survey were strong, sustaining
our top performance from 2020. We will continue to cultivate
talent, recognise colleagues and focus on Diversity, Equity &
Inclusion (DE&I) and Wellbeing over the next year.
Execute
We continue to execute well on our strategic initiatives,
following a consistent methodology that identifies metrics and
tracks milestones regularly.
We delivered positive manufacturing productivity improvements in
the face of significant COGS inflation and continued to improve the
resilience of the supply chain. We are committed to sustaining our
strong safety record while improving the quality of our products
and services for our customers. Complaints per million decreased by
13% over the period.
One year on since launching 'Convatec Cares', our refreshed
Environmental, Social & Governance (ESG) approach, we have made
good progress integrating ESG practices across our business and
value chain:
o Elevated ESG through our strategic planning process and
engaging all business units and functional areas on priorities,
targets and commitments
o Emissions reduction: In line with our net zero commitment, we
reduced Scope 1 and Scope 2 greenhouse gas emissions by 32% in
2022. We are on track to validate our Scope 1, 2 and 3 (near term)
Science Based Targets in 2023. Our manufacturing sites increasingly
use renewable electricity, and we expect that to reach 100% by the
end of 2023
o Progress in DE&I and Wellbeing approach where now 36% of
our CELT are women, 40% of our Board are women, and we are on track
to ensure 40% of our senior management (CELT member plus their
direct reports) are women by the end of 2024
o Elevated our focus on supply chain sustainability , improving
the average EcoVadis score of our suppliers by 6.5%
o We committed more than $2 million in both product and cash
donations in 2022, including a humanitarian relief response for
Ukraine valued at over $1.5 million. This year, we've also
committed more than $100k in response to the earthquakes in Turkey
and Syria in both product and cash donations.
We announced today a new $2 million health partnership with
Partners In Health (PIH), a leading international NGO focused on
building equitable health systems globally. The innovative
partnership expands recruitment and support of Community Health
Workers and improves their training on chronic conditions. Living
in the communities where they work, Community Health Workers are
trusted neighbours who are able to provide high-quality health
services. Over three years, Convatec's support - through cash,
product donation and training - will enable PIH to reach over
250,000 children and adults, with a particular focus on programmes
in Mexico, Peru and the United States.
Dividend
The Board is pleased to recommend a 3.0% increase in the full
year dividend reflecting the improved underlying performance of the
business and confidence in its future growth prospects. This
equates to a proposed final dividend of 4.330 cents to bring FY
dividend to 6.047 cents (2021: 5.871 cents).
Group 2023 outlook
We are pleased with the growth we achieved in 2022 and are
focused on pivoting to sustainable and profitable growth.
We expect organic(4) revenue growth to be between 4.5 - 6%,
consistent with our medium-term target shared at our Capital
Markets Event in November. Growth will be H2 weighted because of
stronger comparatives in H1 2022, especially in Infusion Care, and
because ATT will contribute to organic growth following the
anniversary of the acquisition.
The reported revenue will be impacted by the exit of hospital
care and related sales, which generated $102 million in 2022.
We remain focused on expanding our operating margin by growing
revenue, improving our mix/price and delivering on our
simplification and productivity agenda. Inflation is expected to
remain a significant headwind in 2023 with COGS inflation of 5-7%.
In addition we anticipate labour inflation in opex of 5-7% which is
approximately double that of 2022. On this basis, we expect modest
improvement in the adjusted operating margin in 2023 to at least
19.7% on a constant currency (3) basis. Furthermore, our
medium-term target of mid-20s operating margin remains
unchanged.
Based on current interest rates, we expect adjusted net finance
expense for the full year to be $70-80 million. The cash tax rate
for the year is expected to be around 19%, while the adjusted book
tax rate is expected to be approximately 25%. Capex will remain
elevated at around $120-140 million for the full year reflecting
the continued growth investments we are making across the Group and
we intend to increase inventory by c.$20 million to further
strengthen supply chain resilience.
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 system of risk management
and internal control continues 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 will be set out in the Group's
2022 Annual Report and Accounts to be published later in the
month.
The Board has reviewed the principal risks as at 31 December
2022 and made a number of changes to reflect our assessment of
their movement from those identified in 2021, the effect on the
Group, our evolving strategy and the current business environment.
The principal risks have been assessed against the context of the
global inflationary cost pressures that are continuing to impact
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;
-- Information Systems, Security and Privacy;
-- Customer and Markets;
-- Legal and Compliance;
-- Strategy and Change Management;
-- Environment and Communities; and,
-- Tax and Treasury.
The risk landscape, however, has changed for the following
principal risks, since the publication of the 2021 Annual Report
and Accounts:
-- Innovation and Regulatory -- has reduced in risk level
following the delivery of three key new products, the increased
robustness of our development pipeline and the continued delivery
of the EU-MDR compliance programme.
-- Political and Economic Environment - has been elevated
reflecting the continuing global inflationary pressure challenges
on all aspects of the business cost base, as well as ongoing global
supply chain constraints.
-- People - has increased as we see rising cost of living
pressures for our workforce and increased competition for talent
across our markets, which could impact our ability to attract,
recruit and retain key talent and skills.
The Board assesses the overall risk profile of the Group to
ensure it is within our risk appetite. In making this assessment
the Board considered the continued upward pressure from the
macro-economic environment and broader risk landscape (including
the ongoing supply chain and commercial impact of the war in
Ukraine and the fallout from the pandemic) on the business
environment and any continued or additional impact on the Group's
business and principal risks, coupled with the controls and
mitigations in place to address these challenges. In the main, as
our processes and risk mitigations further develop and mature, we
have continued to manage the challenges facing the wider business
landscape and build further resilience into our operations.
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
We made good progress in 2022 in executing or FISBE strategy and
demonstrated that we are pivoting to sustainable and profitable
growth. Revenue grew by 1.7% on a reported basis and 6.9% on a
constant currency basis. We delivered an adjusted operating profit
margin of 19.5%, representing expansion of 180bps over the previous
year with mix/price, operations productivity, significant G&A
spend reduction and 80bps of foreign exchange tailwind more than
offsetting significant inflation and continued investment in
commercial capabilities.
Adjusted basic earnings per share reduced year-on year primarily
due to adjusted operating profit growth being more than offset by
increases in adjusted net finance, non-operating and income tax
expenses. These are explained in further detail on page 13.
The competitive position of the Group was further strengthened
during the year, entering the attractive wound biologics(1) segment
through our acquisition of Triad Life Sciences whilst exiting the
lower-margin and lower-growth hospital care and industrial sales
activities. We also made good progress with our simplification and
productivity initiatives, most notably reducing G&A spend in
the year.
In November 2022, we successfully refinanced our bank facilities
with $1.2 billion committed for five years at slightly improved
margins over base rates compared to the previous facilities. The
Group's $500.0 million senior unsecured notes remain in place and
are committed until 2029. The Group's financial prospects are
attractive, and we have confidence in our ability, over the medium
term, to deliver sustainable annual mid-single-digit organic
revenue growth and to expand our adjusted operating profit margin
into the mid-20s.
1. Wound biologics segment as defined by SmartTRAK. Includes
skin substitutes, active collagen dressings and topical drug
delivery.
Reported and Adjusted results
The Group's financial performance, measured in accordance with
IFRS, is set out in the Financial Statements and Notes thereto on
pages 21 to 40 and referred to in this Annual Report as "reported"
measures.
The commentary in this Financial 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 measures in monitoring the underlying 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 measures prepared in accordance with
IFRS on pages 41 to 46.
Constant Currency Growth
Management and the Board review revenue on a constant currency
basis which removes the effect of fluctuations in exchange rates 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 reported revenue performance
in the current period. Revenue and the revenue growth on a constant
currency basis are non-IFRS financial measures and should not be
viewed as replacements of IFRS reported revenue.
Group financial performance
Reported Reported Adjusted(1) Adjusted(1)
2022 2021 2022 2021
$m $m $m $m
---------------------------------- -------- -------- ----------- -----------
Revenue 2,072.5 2,038.3 2,072.5 2,038.3
-----------
Gross profit 1,103.9 1,123.1 1,245.6 1,233.3
---------------------------------- -------- -------- ----------- -----------
Operating profit 207.3 203.6 403.7 361.7
---------------------------------- -------- -------- ----------- -----------
Profit before income taxes 81.9 151.3 337.6 309.4
---------------------------------- -------- -------- ----------- -----------
Net profit 62.9 117.6 256.8 263.0
---------------------------------- -------- -------- ----------- -----------
Basic earnings per share (cents
per share) 3.1c 5.9c 12.7c 13.1c
---------------------------------- -------- -------- ----------- -----------
Diluted earnings per share (cents
per share) 3.1c 5.8c 12.6c 13.0c
---------------------------------- -------- -------- ----------- -----------
Dividend per share (cents) 6.047c 5.871c
---------------------------------- -------- -------- ----------- -----------
1. These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measures
prepared in accordance with IFRS on pages 41 to 46.
Revenue
Group revenue for the year ended 31 December 2022 of $2,072.5
million (2021: $2,038.3 million) increased 1.7% year-on-year on a
reported basis or 6.9% on a constant currency basis.
The Group experienced significant foreign exchange headwinds of
5.2% on its reported revenue growth. The majority of the Group's
2022 revenue was denominated in US Dollar (52%), however there are
other significant currencies in which revenue is denominated,
notably EUR (20%), GBP (6%) and DKK (2%). These currencies
depreciated significantly against the US Dollar during the
year.
Adjusting for the foreign exchange headwind and acquisition and
divestiture-related activities(1) , Group revenue grew by 5.6% on
an organic basis. This was driven by continued strong growth in
Advanced Wound Care and Infusion Care, with good growth seen in
Ostomy Care and Continence & Critical Care. Given the largely
reimbursed markets that we serve, there was limited opportunity to
pass on the significant inflation we have seen in 2022. However,
initiatives executed through our Pricing Centre of Excellence have
successfully delivered positive price impact on revenue. Further
detail of the Group's revenue is discussed above on pages 5 to 6
.
1. Acquisitions were Triad Life Sciences in 2022 and Cure
Medical and Patient Care Medical in 2021. Divestiture-related
activities in 2022 were the discontinuation of hospital care,
related industrial sales and associated Russia operations , whilst
in 2021 it was the divestment of incontinence activities .
Revenue impact of strategic exits during 2022
The strategic exit of hospital care and industrial sales will
impact revenues as we move into 2023. The table below shows the
2022 revenue attributable to these activities. The ongoing
activities are more focused on higher-margin and higher-growth
chronic-care categories.
2022 revenue
from ongoing
2022 reported Impact (1) activities
$m $m $m
--------------------------- ------------- ---------- -------------
Advanced Wound Care 620.7 - 620.7
Ostomy Care 522.1 (4.9) 517.2
Continence & Critical Care 546.3 (71.8) 474.5
Infusion Care 383.4 (25.6) 357.8
--------------------------- ------------- ---------- -------------
Total 2,072.5 (102.3) 1,970.2
--------------------------- ------------- ---------- -------------
1. Sales related to discontinuation from hospital care, related
industrial sales and associated Russia operations.
Reported net profit
Reported operating profit was $207.3 million, an increase of
$3.7 million to the prior year. Reported gross margin decreased
year-on-year from 55.1% to 53.3%, driven by inflationary headwinds
on raw materials and freight. The reported gross margin was also
impacted by increases in one-time divestiture and termination costs
(primarily relating to the exit from hospital care and industrial
sales activities) of $21.4 million and the release of the fair
value uplift of inventory arising from the acquisition of Triad
Life Sciences of $8.7 million. These were partly offset by foreign
exchange tailwinds and mix/price benefits.
Reported operating expenses decreased by $22.9 million, which
was primarily due to a reduction of $70.4 million in general and
administrative expenses partly offset by increases in selling and
distribution expenses of $36.2 million and other operating expenses
of $13.8 million. The improvement in G&A reflected the Group's
increasing focus on simplifying its global processes and improving
productivity. The increase in selling and distribution expenses was
primarily driven by increases in headcount associated with higher
revenue, the inclusion of acquired businesses and inflationary
impacts on distribution costs. Other operating expenses of $13.8
million (2021: nil) largely reflected impairments arising from the
exit from hospital care and related industrial sales activities in
2022.
Reported net finance costs and non-operating expenses totalled
$125.4 million (2021: $52.3 million). Reported net finance costs
increased by $24.2 million to $67.7 million, reflecting an
additional $8.6 million of net finance expenses and $15.6 million
(2021: nil) for the unwind of discount relating to the contingent
consideration arising from the acquisitions of Cure Medical in 2021
and Triad Life Sciences in 2022. Reported non-operating expenses of
$57.7 million (2021: $8.8 million) principally arose from the
remeasurement charges in the year relating to the contingent
consideration payable in respect of the Cure Medical and Triad Life
Sciences acquisitions of $29.5 million (2021: nil), foreign
exchange losses of $14.2 million (2021: loss of $9.3 million), the
recycling of cumulative translation losses from reserves following
the closure activities associated with the hospital care and
industrial sales exit of $12.2 million (2021: nil) and a loss on
divestiture related activities of $2.0 million (2021: $0.5 million
gain).
After income tax expense of $19.0 million (2021: $33.7 million),
reported net profit was $62.9 million (2021: $117.6 million)
generating basic earnings per share of 3.1 cents (2021: 5.9
cents).
Adjusted net profit
Adjusted gross profit increased by 1.0% to $1,245.6 million
(2021: $1,233.3 million). The adjusted gross margin of 60.1% was
broadly flat to the previous year (2021: 60.5%), with the
significant inflationary pressures on both raw materials and
freight costs partly offset by foreign exchange tailwinds and
mix/price benefits.
The Group achieved adjusted operating profit of $403.7 million
(2021: $361.7 million) with an adjusted operating profit margin of
19.5% (2021: 17.7%). There was a decrease in operating expenses in
the year, with adjusted G&A reduced by $52.8 million, to 8.9%
of revenue (2021: 11.7%). This was partially offset by an increase
of $25.7 million in adjusted selling and distribution expenses.
Adjusted net profit fell 2.4% to $256.8 million (2021: $263.0
million) given the $8.6 million increase in adjusted net finance
expense from higher market interest rates coupled with a $34.4
million increase in the adjusted income tax expense (which is
explained below).
Adjusted basic and diluted EPS were 12.7 cents and 12.6 cents
respectively (2021: 13.1 cents and 13.0 cents), calculated on the
basic weighted average ordinary shares of 2,024 million shares
(2021: 2,009 million shares) and 2,040 million diluted shares
(2021: 2,026 million) respectively.
Taxation and tax strategy
Reported Reported Adjusted(1) Adjusted(1)
2022 2021 2022 2021
$m $m $m $m
--------------------------- -------- -------- ----------- -----------
Profit before income taxes 81.9 151.3 337.6 309.4
Income tax expense (19.0) (33.7) (80.8) (46.4)
Effective tax rate 23.2% 22.3% 23.9% 15.0%
--------------------------- -------- -------- ----------- -----------
1. These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measure
prepared in accordance with IFRS on pages 41 to 46.
The Group's reported income tax expense was $19.0 million (2021:
$33.7 million). The Group's reported effective tax rate of 23.2%
for the year was higher than the prior year (2021: 22.3%) mainly
due to the increase in US tax expenses following the acquisition of
Triad Life Sciences and non-deductible contingent consideration
relating to the acquisition of both Triad Life Sciences and Cure
Medical, partially offset by the recognition of deferred tax assets
for previously unrecognised tax losses of $20.1 million in the US
(2021: $6.8 million related to recognition of deferred tax assets
following the acquisition of Cure Medical). For further
information, see Note 6 - Income taxes to the Financial
Statements.
After adjusting items, the adjusted effective tax rate was 23.9%
(2021: 15.0%). 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 Life
Sciences, based on stronger future taxable profitability forecasts,
and the impact of profit mix between jurisdictions in which the
Group has a taxable presence. The adjusted effective tax rate of
23.9% was in line with guidance provided in the interim results for
the period ended 30 June 2022.
In 2021, the adjusted effective tax rate of 15.0% was
principally because of the lower incidence of taxes in the US, and
a net tax benefit in the UK for additional tax reliefs claimed in
respect of prior years. These factors were partially offset by the
impact of profit mix between jurisdictions in which the Group has a
taxable presence. Strategy has been published, which is available
on the corporate website
(www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement).
Convatec is a responsible business and promotes the highest
standards of compliance and ethical behaviour. Management takes a
responsible attitude to tax, recognising that it affects all of our
stakeholders. The Group had on average more than 10,000 employees
worldwide during 2022 and operated in over 100 countries through
direct sales and local distributors. As a result, our business
activities generated a substantial amount of taxes. These included
both corporate income taxes and non-income taxes such as payroll
taxes, property taxes, VAT/Sales & Use taxes, and other taxes.
In order to provide transparency on the Group's approach to tax,
the Global Tax Strategy has been published, which is available on
the corporate website (
www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement
).
Alternative performance measures ("APMs")
In line with the Group's APM policy, the following adjustments
were made to derive adjusted operating profit and adjusted profit
before tax.
Non-operating
Operating profit Finance expense expense
$'m $'m $'m
2022 2021 2022 2021 2022 2021
------------------------------ -------- -------- -------- ------- -------- -----
Reported 207.3 203.6 (67.7) (43.5) (57.7) (8.8)
Amortisation of acquired
intangibles 131.3 130.4 - - - -
Acquisitions and divestitures 56.6 17.8 15.6 - 43.7 -
Termination benefits and
related costs 7.1 4.3 - - - -
Impairment of assets 1.4 - - - - -
Litigation expenses - 5.6 - - - -
------------------------------ -------- -------- -------- ------- -------- -----
Adjusted 403.7 361.7 (52.1) (43.5) (14.0) (8.8)
------------------------------ -------- -------- -------- ------- -------- -----
Adjustments made to derive adjusted operating profit in 2022
included the amortisation of acquired intangibles of $131.3 million
(2021: $130.4 million), of which $93.0 million (2021: $96.8
million) resulted from intangible assets arising from the spin-out
from Bristol-Myers Squibb in 2008 and will be fully amortised by
December 2026, divestiture-related costs of $39.7 million
principally related to the exit from the hospital care and
industrial sales activities and acquisition-related costs of $16.9
million primarily related to the acquisition of Triad Life
Sciences. Termination costs of $7.1 million were in respect of the
exit from hospital care and industrial sales activities and an
impairment charge of $1.4 million related to a legacy
acquisition-related customer relationship asset.
In 2021, acquisition and divestiture costs of $17.8 million
related to potential and actual strategic transactions which were
executed, aborted or in-flight and sought to improve the strategic
positioning on the Group. Termination costs of $4.3 million were in
respect of the Group's Transformation Initiative whilst litigation
expenses of $5.6 million related to a one-off claim that was also
settled in 2021.
The adjustment of $15.6 million made to derive adjusted finance
expenses in 2022 wholly related to the discount unwind in respect
of the contingent consideration payable on the Triad Life Sciences
and Cure Medical acquisitions.
Adjustments made to derive adjusted non-operating expenses in
2022 included remeasurement charges of $29.5 million in respect of
the contingent consideration payable on the Triad Life Sciences and
Cure Medical acquisitions and divestiture-related costs of $14.2
million principally related to cumulative translation adjustments
and a loss on disposal from the exit of the hospital care and
industrial sales activities.
Of the total of $255.7 million of adjusting items in the year,
$244.6 million were non-cash items. For further information on
Non-IFRS financial information, see pages 41 to 46.
The Board, through the Audit and Risk Committee, continuously
reviews the Group's APM policy to ensure that it remains
appropriate and represents the way in which the performance of the
Group is managed.
Strategic transformation
During 2022, the Group completed the first phase of its FISBE
strategy ('FISBE 1.0'), a global multi-year transformation
programme which commenced in 2019. FISBE 1.0 started to position
the Group for sustainable and profitable growth and in 2022, we saw
improved organic revenue growth performance and adjusted operating
profit margin growth. Transformation costs associated with FISBE
1.0, treated as an adjusting item, were minimal in 2022 (2021: $4.3
million).
FISBE 1.0 strengthened the Group, with the business becoming
more focused on chronic care, developing a deeper and broader
innovation pipeline, notably delivering three new product launches
during 2022, and improving commercial and operational execution,
for example the significant reduction in complaints per million
across the past three years.
The Group has explored and executed acquisitions and
divestitures to strengthen the strategic positioning of the Group
and increase its focus on the four key categories. During 2022,
this included the acquisition of Triad Life Sciences, the equity
investment in the preference shares of BlueWind Medical Ltd
(BlueWind Medical), the strategic decision to withdraw from
hospital care activities and related industrial sales as announced
on 12 May 2022 and other potential transactions. Further details
are provided in Note 8 - Investment in financial assets, Note 9 -
Acquisitions, Note 10 - Divestitures and the Non-IFRS financial
information section to the Financial Statements.
As announced at the Capital Markets Event on 17 November 2022,
following the completion of FISBE 1.0, our strategy is now evolving
to deliver the pivot ('FISBE 2.0'). This is discussed further on
pages 7 to 9. Medium-term targets associated with FISBE 2.0 include
delivering sustainable mid-single-digit organic revenue growth per
annum and expanding the adjusted operating margin into the mid-20s.
This is to be delivered through simplification and productivity
initiatives, improving the product margin mix and operating
leverage. Furthermore, there may be potential M&A opportunities
to further strengthen the Group. The outcome of delivering on these
targets will be sustainable and profitable growth with double-digit
adjusted EPS and adjusted free cash flow compound annual growth
over the medium term.
Acquisitions and investments
As noted above, in line with our strategic transformation and
consistent with the "Focus" pillar of FISBE (see page 7), we
acquired Triad Life Sciences, a US based medical device company on
14 March 2022 for an initial consideration of $125.3 million. The
acquisition of Triad Life Sciences 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 is further contingent consideration payable of
up to $325.0 million, based on the achievement of two short-term
milestones (totalling $50.0 million) and sales performance during
the first two years post-completion (maximum earnout of $275.0
million based on stretching financial performance over the period).
The two short-term milestones were successfully achieved in 2022,
resulting in $50.0 million being paid during the year. Based on the
latest available information, the discounted fair value of the
remaining contingent consideration as at 31 December 2022 was
$130.8 million. Refer to Note 9 - Acquisitions to the Financial
Statements for further details.
Management have identified that reasonably possible changes in
certain key assumptions and forecasts may cause the calculated fair
value of the contingent consideration to vary materially within the
next financial year and accordingly, management have deemed this to
be a key estimate. See Note 1.2 - Critical accounting judgements
and key sources of estimation uncertainty to the Financial
Statements for further details.
The Group also has contingent consideration of up to $10.0
million in respect of the acquisition of Cure Medical in 2021,
which is based upon post-acquisition performance targets and due to
be paid within three years of the acquisition date. Based on the
latest available information, the discounted fair value of the
remaining contingent consideration as at 31 December 2022 was $9.2
million (2021: $3.1 million).
On 9 May 2022, the Group invested $30.7 million in preference
shares of BlueWind Medical, inclusive of transaction costs. This
represents an investment into an innovative technology in the large
and growing overactive bladder market, related to the Continence
space. Refer to Note 8 - Investment in financial assets to the
Financial Statements for further details.
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 lower-margin and lower-growth activities is consistent with
the Group's FISBE strategy, with the Group focusing on
higher-growth chronic care markets with higher margins and higher
levels of recurring revenue.
The manufacturing plant in Belarus which produced hospital care
goods ceased manufacturing on 31 May 2022 alongside the
discontinuation of associated Russia activities. The remainder of
the hospital care and industrial sales activities were mostly
phased out in the second half of 2022. The majority of the exit and
closure activities have been completed at the end of the year, with
minimal residual sales expected in 2023. Further details are
provided in Note 10 - Divestitures to the Financial Statements.
Dividends
Dividends are distributed based on the distributable reserves of
the Company, which are primarily derived from the dividends
received from subsidiary companies and are not based directly on
the Group's retained earnings. The distributable reserves of the
Company at 31 December 2022 were $1,562.9 million (2021: $1,590.3
million).
The Board declared an interim dividend of 1.717 cents per share
in August 2022 and has recommended a final 2022 dividend of 4.330
cents per share, which would bring the full year dividend to 6.047
cents per share (2021: 5.871 cents per share), an increase of 3%
and a pay-out ratio when compared to adjusted net profit of 48%.
Our stated policy is a pay-out ratio of 35% to 45% of adjusted net
profit but this is interpreted flexibly over time to reflect the
underlying performance of the business and the Board's confidence
in its future growth prospects.
Refer to Note 7 - Dividends to the Financial Statements for
further information.
Sources of cash and free cash flow
Sources of cash
One of the Group's primary sources of cash is net cash generated
from operations.
Net cash generated from operations Reported Reported
2022 2021
$m $m
--------------------------------------- -------- --------
EBITDA(1) 432.0 420.1
Share based payments 16.7 16.4
Working capital movement (62.5) (31.6)
(Loss) on foreign exchange derivatives (1.7) (4.3)
--------------------------------------- -------- --------
Net cash generated from operations 384.5 400.6
--------------------------------------- -------- --------
1. EBITDA is reconciled to the most directly comparable
financial measure prepared in accordance with IFRS in the cash
conversion table on page 45.
Reported net cash generated from operations decreased by $16.1
million to $384.5 million during the year, mainly due to working
capital movements. The increase in working capital in the year
ended 31 December 2022 was driven by increased inventory levels of
$36.3 million to build resilience across the Group and increases in
trade and other receivables of $63.6 million due to sales phasing
and the timing of receipts. This was partially offset by increases
in trade and other payables of $40.7 million primarily due to the
increase in derivative financial liabilities as a result of the
mark to market ("MTM") valuations at the year end and an increase
in restructuring provisions.
Free cash flow
Adjusted free cash flow (post-tax), is one of the four key
financial performance indicators we use to monitor the delivery of
our strategy.
Reported Reported Adjusted(2) Adjusted(2)
2022 2021 2022 2021
$m $m $m $m
--------------------------------------- -------- -------- ----------- -----------
EBITDA 432.0 420.1 500.0 464.2
Share-based payments 16.7 16.4 - -
Working capital movement (62.5) (31.6) (98.6) (32.3)
(Loss) on foreign exchange derivatives (1.7) (4.3) (1.7) (3.9)
Capital expenditure (net) (144.2) (94.1) (144.2) (94.1)
--------------------------------------- -------- -------- ----------- -----------
Net cash generated from operations,
net of capital expenditure 240.3 306.5 255.5 333.9
--------------------------------------- -------- -------- ----------- -----------
Cash conversion 55.6% 73.0% 51.1% 71.9%
--------------------------------------- -------- -------- ----------- -----------
Income taxes paid (52.9) (59.2) (52.9) (59.2)
--------------------------------------- -------- -------- ----------- -----------
Free cash flow (post tax) 187.4 247.3 202.6 274.7
--------------------------------------- -------- -------- ----------- -----------
2. Adjusted free cash flow, 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 on page 45.
Adjusted free cash flow (post-tax), was $202.6 million (2021:
$274.7 million). The $35.8 million increase in adjusted EBITDA,
primarily driven by a reduction in adjusted operating costs (see
commentary in Adjusted net profit section), was more than offset by
the $50.1 million increase in capital programmes as well as the
increase in working capital.
Cash conversion was 55.6% (2021: 73.0%) and adjusted cash
conversion was 51.1% (2021: 71.9%). The decline in the ratio in
2022 primarily reflected the strategic decision to increase capital
expenditure and build inventory for resilience, coupled with the
timing of receipts from customers.
The $1.7 million loss (2021: $4.3 million loss) from foreign
exchange derivatives was a result of hedging activity to help
mitigate the impact on underlying exposures from volatility in
foreign exchange rates.
Liquidity and net debt
Net debt bridge
Reported Adjusted
2022 2022
$m $m
--------------------------------------- --------- ---------
Net debt(2) at 1 January (881.2) (881.2)
EBITDA(1,3) 432.0 500.0
Working capital(3) & FX on derivatives (64.2) (100.3)
Capital expenditure (144.2) (144.2)
Acquisitions and divestitures (173.4) (173.4)
Investment in financial assets (30.7) (30.7)
Debt servicing (77.2) (77.2)
Tax & others(3) (41.1) (73.0)
Dividends (88.1) (88.1)
Net debt(2) at 31 December (1,068.1) (1,068.1)
--------------------------------------- --------- ---------
1. Reported and Adjusted EBITDA are reconciled to the most
directly comparable financial measure prepared in accordance with
IFRS in the cash conversion table on page 45 and reconciliation of
earnings to adjusted earnings table on page 43 respectively.
2. Net debt is calculated as the carrying value of current and
non-current borrowings, net of cash and cash equivalents and
excluding lease liabilities.
3. EBITDA, working capital and tax & others are on an
adjusted basis. The reported numbers are disclosed above commented
on further below.
Adjusted EBITDA was $500.0 million and excludes $39.2 million in
respect of working capital movements arising from acquisitions and
divestitures, primarily driven by the Triad Life Sciences
acquisition and the exit from hospital care and related industrial
sales during the year. Other items excluded to derive adjusted
EBITDA were $5.0 million of acquisition and divestiture expenses,
$10.2 million of termination costs and $16.7 million of share-based
payments, offset by a decrease in termination accruals of $3.1
million. These numbers can be seen within the non-IFRS financial
information section on pages 45 to 46.
Adjusted working capital & FX on derivatives of $100.3
million included the $39.2 million working capital movement arising
from acquisitions and divestitures as explained above. A
reconciliation of adjusted working capital to reported working
capital is shown in the Non-IFRS financial information section on
page 46.
The Group continued to make significant investments to
strengthen and grow the business such as expanding the
manufacturing facilities in its Infusion Care business, adding more
automation to our production lines and developing new digital
technologies to deliver enhanced customer experiences.
Consequently, capital expenditure during 2022 was $144.2
million.
The Group made several strategic investments in 2022 to
strengthen its competitive position, including the acquisition of
Triad Life Sciences for an initial consideration of $123.3 million
and two additional payments totalling $50.0 million for the
successful achievement of two milestones in 2022 in relation to
that acquisition. The Group also made a $30.7 million equity
investment in BlueWind Medical, inclusive of transaction costs.
Debt servicing payments of $77.2 million are comprised of net
interest payments of $49.9 million, lease payments of $20.7 million
and the amortisation of financing fees of $6.6 million.
Tax & others of $73.0 million, on an adjusted basis,
consisted of income taxes paid of $52.9 million, foreign exchange
on cash and cash equivalents of $15.9 million, $5.0 million of
acquisition and divestiture expenses and $10.2 million of
termination costs, offset by foreign exchange on borrowings of
$11.0 million. Excluding $5.0 million of acquisition and
divestiture expenses, $10.2 million of termination costs and $16.7
million of share-based payments, tax & others, on a reported
basis, was $41.1 million.
Dividend cash payments of $88.1 million were made to
shareholders in the year. This represented 78.2% of total dividends
declared in the year, with the remaining 21.8% electing to settle
via scrip dividends.
Borrowings and net debt 2022 2021
$m $m
-------------------------------------------- --------- -------
Senior notes(1) (493.1) (492.1)
Credit facilities(1) (718.8) (852.5)
Cash and cash equivalents 143.8 463.4
-------------------------------------------- --------- -------
Net debt (excluding leases) (1,068.1) (881.2)
Lease liabilities (88.3) (90.5)
-------------------------------------------- --------- -------
Interest bearing liabilities net of cash (1,156.4) (971.7)
-------------------------------------------- --------- -------
Net debt (excluding leases)/adjusted EBITDA
At 31 December 2.1x 1.9x
-------------------------------------------- --------- -------
1. Senior notes of $493.1 million (2021: $492.1 million) are
stated net of financing fees of $6.9 million (2021: $7.9 million).
Credit facilities of $718.8 million (2021: $852.5 million) are
stated net of financing fees of $8.4 million (2021: $5.4
million).
As at 31 December 2022, the Group's cash and cash equivalents
were $143.8 million (31 December 2021: $463.4 million) and the debt
outstanding on borrowings was $1,211.9 million (31 December 2021:
$1,344.6 million).
The Group successfully refinanced its bank facilities in
November 2022, with $1.2 billion committed for five years at
slightly improved margins over base rates compared to the previous
facilities, comprising a multicurrency revolving credit facility of
$950.0 million and a term loan of $250.0 million, both with
maturity in November 2027. The Group's $500.0 million senior
unsecured notes, issued in October 2021, remain in place with
maturity in October 2029.
As at 31 December 2022, $472.8 million of the multicurrency
revolving credit facility remained undrawn. This, combined with
cash of $143.8 million, provided the Group with total liquidity of
$616.6 million at 31 December 2022 (31 December 2021: $663.4
million). Of this, $19.2 million was held in territories where
there are restrictions related to repatriation (31 December 2021:
$37.5 million).
At 31 December 2022, the Group had total interest-bearing
liabilities, including IFRS 16 lease liabilities, of $1,300.2
million (2021: $1,435.1 million). Offsetting cash of $143.8 million
(2021: $463.4 million) and excluding lease liabilities, net debt
was $1,068.1 million (2021: $881.2 million), equivalent to 2.1x
adjusted EBITDA (2021: 1.9x adjusted EBITDA), with the increase
primarily driven by strategic investments such as the acquisition
of Triad Life Sciences, equity investment in BlueWind Medical and
increased investment in capital expenditure.
For further information on borrowings see Note 11 - Borrowings
to the Financial Statements.
Covenants
At 31 December 2022, the Group was in compliance with all
financial and non-financial covenants associated with the Group's
outstanding debt.
The Group has two financial covenants, being net leverage and
interest cover, each of which is defined, where applicable, within
the borrowing documentation. The table below summarises the Group's
most restrictive covenant thresholds and position as at 31 December
2022 and 2021.
Maximum Minimum
covenant Covenant covenant Covenant
net leverage net leverage interest interest
(2) (2) cover (2) cover (2)
----------------- ------------- ------------- ---------- ----------
31 December 2022 3.50x 2.28x 3.5x 9.9x
31 December 2021 3.50x 1.97x 3.5x 11.7x
----------------- ------------- ------------- ---------- ----------
2. Net leverage is net debt/adjusted EBITDA and interest cover
is adjusted EBITDA/interest expense (net) in accordance with the
definitions contained in underlying borrowing documentation and are
not the same as the definitions of these measures presented in the
Adjusted Performance Measures section on pages 41 to 46 and applied
in the commentary in this Financial review.
Group financial position
2022 2021 Change
At 31 December $m $m $m
------------------------------- --------- --------- -------
Intangible assets and goodwill 2,149.5 2,058.5 91.0
Other non-current assets 553.2 504.7 48.5
Cash and cash equivalents 143.8 463.4 (319.6)
Other current assets 745.5 647.4 98.1
------------------------------- --------- --------- -------
Total assets 3,592.0 3,674.0 (82.0)
------------------------------- --------- --------- -------
Current liabilities (533.1) (569.2) 36.1
Non-current liabilities (1,449.2) (1,410.0) (39.2)
Equity (1,609.7) (1,694.8) 85.1
------------------------------- --------- --------- -------
Total equity and liabilities (3,592.0) (3,674.0) 82.0
------------------------------- --------- --------- -------
Intangible assets and goodwill
Intangible assets and goodwill increased by $91.0 million to
$2,149.5 million (2021: $2,058.5 million). This was primarily due
to intangible assets and goodwill arising from the Triad Life
Sciences acquisition of $284.7 million combined with intangible
asset additions of $44.6 million, partially offset by the in-year
amortisation of intangible assets of $147.4 million, the net effect
of foreign exchange of $84.7 million and an impairment charge of
$5.7 million against intangible assets. We regularly review our
trading performance to establish whether there were any triggers
that would require an impairment review of goodwill or other
intangible assets. During 2022, there was an impairment of $4.3
million relating to a product related intangible asset which has
been phased out as part of the hospital care exit. There was also a
$1.4 million impairment relating to a legacy acquisition-related
customer relationship intangible asset as part of the
rationalisation of activities in the portfolio.
The annual Cash Generating Unit ("CGU") impairment review was
conducted on the CGU groups and, taking into consideration our
future forecasts and reasonably possible scenarios, significant
headroom remained in the carrying value of all CGU groups in
comparison to the sensitised recoverable value. No impairment was
recognised against goodwill or indefinite lived intangible assets
during the year. In addition, management considered the severe but
plausible downside scenarios used in the Viability assessment and
headroom remained on the carrying value of all CGU groups.
Other non-current assets
Other non-current assets, including property, plant and
equipment ("PP&E"), right-of-use assets ("ROU assets"),
investment in financial assets, deferred tax assets, restricted
cash and other assets increased by $48.5 million to $553.2 million
(2021: $504.7 million). The increase reflected the continued
investment in our manufacturing facilities, with additions in
PP&E of $100.0 million offset by depreciation of $39.7 million,
the net effect of foreign exchange of $17.9 million and impairments
of $7.4 million. Included within other non-current assets was the
investment made in May 2022 in the preference shares of BlueWind
Medical. This was held at fair value of $30.7 million, which has
not changed since the date of investment. Restricted cash reduced
by $6.3 million primarily due to the reclassification to current
assets whilst ROU assets have reduced by $4.2 million.
Current assets excluding cash and cash equivalents
Current assets, excluding cash and cash equivalents, increased
by $98.1 million to $745.5 million (2021: $647.4 million), driven
by increases in trade and other receivables of $40.5 million,
inventory of $28.1 million and restricted cash of $17.8 million.
The increase in trade and other receivables, net of foreign
exchange effects of $17.2 million, was mainly due to sales phasing
and the timing of receipts whilst the increase in inventories, net
of foreign exchange effects of $19.0 million, was largely
attributable to the ramp-up of inventory in order to build
resilience across the Group.
Restricted cash increased by $17.8 million to $18.2 million,
driven by escrow amounts arising from the acquisition of Triad Life
Sciences in 2022 and the reclassification of escrow amounts arising
from the acquisitions of Cure Medical and Patient Care Medical in
2021 from non-current assets to current assets.
Current liabilities
Current liabilities decreased by $36.1 million to $533.1 million
(2021: $569.2 million), reflecting a $144.8 million decrease in the
current portion of borrowings as a result of a change in profile of
the Group's borrowings under the new credit facilities, largely
offset by a $95.2 million increase in provisions largely driven by
the contingent consideration payable on the Triad Life Sciences
acquisition and an increase of $20.8 million in derivative
financial liabilities, due to movements in the MTM valuations at
the year end.
Non-current liabilities
Non-current liabilities increased by $39.2 million to $1,449.2
million (2021: $1,410.0 million). This included an increase in
non-current borrowings of $12.1 million, resulting from a change in
profile of the Group's borrowings under the new credit facilities
and an increase in provisions of $51.4 million driven by the
contingent consideration payable on the Triad Life Sciences and
Cure Medical acquisitions. This was partially offset by a reduction
in other non-current liabilities primarily due to a reduction in
the Group's pension obligations and the reclassification of escrow
amounts from non-current liabilities to current liabilities.
Going concern
In preparing their assessment of going concern, the Directors
considered available cash resources, access to committed funding,
financial performance and forecast performance, including continued
implementation of the FISBE strategy, together with the Group's
financial covenant compliance requirements and principal risks and
uncertainties.
Management also applied the same severe but plausible downside
scenarios utilised in the preparation of the Viability statement.
Under each scenario, the Group retained significant liquidity and
covenant headroom throughout the going concern period, i.e. 12
months from the date of this report. A reverse stress test, before
mitigation, was also considered to demonstrate what reduction in
revenue would be required in the next 12 months to create
conditions which may lead to a potential covenant breach. For a
breach of covenants to occur in the next 12 months, before
mitigation, the Group would need to experience a sustained revenue
reduction of more than 10% across all categories and markets. This
was considered implausible given the Group's strong global market
position, diversified portfolio of products and the mitigations
available to the Board and management.
Accordingly, the Directors continue to adopt the going concern
basis in preparing the Financial Statements.
Financial control environment
The Group continues to closely monitor the financial & IT
general control environment, using a single system for the
self-certification of effectiveness of key financial controls
across our operations globally. The response rate remained high
throughout the year. The Global Financial Controls (GFC) team,
acting as the second line of defence, monitors responses and
reviews all notified control failures to ensure that there is no
risk of material financial misstatement. Focused support and
training is given to Global Business Services (GBS) and market
finance teams to review controls and ensure that the control
framework continues to operate effectively. A similar
self-certification process is operated by the IT governance, risk
& compliance team for IT controls covering cyber, privacy and
financial systems.
The global financial control framework was refreshed in 2022 to
increase focus on material risk, with the introduction of a less
resource-intensive framework for the smaller operating entities,
and additional controls to address new risk areas identified. The
control frameworks will continue to evolve to respond to the
development of corporate governance requirements in the UK.
Independent assurance on these control frameworks is provided by
the Internal Audit team, with a review of the global financial
controls and the IT general controls performed in the year, in
addition to sample testing carried out by the GFC and IT Governance
teams and reviews of financial controls of specific markets and
GBS.
Consolidated Income Statement
For the year ended 31 December 2022
2022 2021
Notes $m $m
------------------------------------------- ----- ------- -------
Revenue 2 2,072.5 2,038.3
Cost of sales (968.6) (915.2)
------------------------------------------- ----- ------- -------
Gross profit 1,103.9 1,123.1
------------------------------------------- ----- ------- -------
Selling and distribution expenses (575.9) (539.7)
General and administrative expenses (214.9) (285.3)
Research and development expenses (92.0) (94.5)
Other operating expenses 3 (13.8) -
------------------------------------------- ----- ------- -------
Operating profit 207.3 203.6
------------------------------------------- ----- ------- -------
Finance income 4 5.5 0.8
Finance expense 4 (73.2) (44.3)
Non-operating expense, net 5 (57.7) (8.8)
------------------------------------------- ----- ------- -------
Profit before income taxes 81.9 151.3
Income tax expense 6 (19.0) (33.7)
------------------------------------------- ----- ------- -------
Net profit 62.9 117.6
------------------------------------------- ----- ------- -------
Earnings per share
Basic earnings per share (cents per share) 3.1c 5.9c
Diluted earnings per share (cents per
share) 3.1c 5.8c
------------------------------------------- ----- ------- -------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2022
2022 2021
Notes $m $m
------------------------------------------------- ----- ------- ------
Net profit 62.9 117.6
Other comprehensive (expense)/income
Items that will not be reclassified subsequently
to the Consolidated Income Statement
Remeasurement of defined benefit pension
plans, net of tax 8.4 3.3
Change in pension asset restriction - 1.3
Items that may be reclassified subsequently
to the Consolidated Income Statement
Foreign currency translation, net of tax (113.6) (29.6)
Realisation of cumulative translation
adjustments 12.2 -
Effective portion of changes in fair value
of cash flow hedges 12 (7.7) (5.1)
Changes in fair value of cash flow hedges
reclassified to the Consolidated Income
Statement 12 16.5 5.7
Costs of hedging 12 (1.1) (0.4)
Income tax in respect of items that may
be reclassified 2.4 (0.9)
------------------------------------------------- ----- ------- ------
Other comprehensive expense (82.9) (25.7)
------------------------------------------------- ----- ------- ------
Total comprehensive (expense)/income (20.0) 91.9
------------------------------------------------- ----- ------- ------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Consolidated Statement of Financial Position
As at 31 December 2022
2022 2021
Notes $m $m
--------------------------------- ----- ------- -------
Assets
Non-current assets
Property, plant and equipment 400.4 366.7
Right-of-use assets 79.4 83.6
Intangible assets and goodwill 2,149.5 2,058.5
Investment in financial assets 8 30.7 -
Deferred tax assets 26.6 28.9
Derivative financial assets 12 0.2 -
Restricted cash 7.3 13.6
Other non-current receivables 8.6 11.9
--------------------------------- ----- ------- -------
2,702.7 2,563.2
--------------------------------- ----- ------- -------
Current assets
Inventories 336.9 308.8
Trade and other receivables 364.0 323.5
Derivative financial assets 12 26.4 15.1
Restricted cash 18.2 -
Cash and cash equivalents 143.8 463.4
--------------------------------- ----- ------- -------
889.3 1,110.8
--------------------------------- ----- ------- -------
Total assets 3,592.0 3,674.0
--------------------------------- ----- ------- -------
Equity and liabilities
Current liabilities
Trade and other payables 346.6 342.5
Borrowings 11 - 144.8
Lease liabilities 20.3 19.7
Current tax payable 33.5 45.5
Derivative financial liabilities 12 32.5 11.7
Provisions 13 100.2 5.0
--------------------------------- ----- ------- -------
533.1 569.2
--------------------------------- ----- ------- -------
Non-current liabilities
Borrowings 11 1,211.9 1,199.8
Lease liabilities 68.0 70.8
Deferred tax liabilities 83.2 87.2
Provisions 13 53.1 1.7
Derivative financial liabilities 12 0.3 2.9
Other non-current liabilities 32.7 47.6
--------------------------------- ----- ------- -------
1,449.2 1,410.0
--------------------------------- ----- ------- -------
Total liabilities 1,982.3 1,979.2
--------------------------------- ----- ------- -------
Net assets 1,609.7 1,694.8
--------------------------------- ----- ------- -------
Equity
Share capital 250.7 247.0
Share premium 165.7 142.3
Own shares (1.5) (2.2)
Retained deficit (892.2) (842.0)
Merger reserve 2,098.9 2,098.9
Cumulative translation reserve (177.1) (75.7)
Other reserves 165.2 126.5
--------------------------------- ----- ------- -------
Total equity 1,609.7 1,694.8
--------------------------------- ----- ------- -------
Total equity and liabilities 3,592.0 3,674.0
--------------------------------- ----- ------- -------
Consolidated Statement of Changes in Equity
For the year ended 31 December 2022
Cumulative
Share Share Own Retained Merger translation Other
capital premium shares deficit reserve reserve reserves Total
Notes $m $m $m $m $m $m $m $m
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
At 1 January 2021 245.5 115.3 (6.7) (845.3) 2,098.9 (46.1) 109.1 1,670.7
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Net profit - - - 117.6 - - - 117.6
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
income:
Foreign currency
translation adjustment,
net of tax - - - - - (29.6) - (29.6)
Remeasurement of
defined benefit pension
plans, net of tax - - - - - - 3.3 3.3
Change in pension
asset restriction - - - - - - 1.3 1.3
Changes in fair value
of cash flow hedges,
net of tax - - - - - - (0.7) (0.7)
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
(expense)/income - - - - - (29.6) 3.9 (25.7)
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Total comprehensive
income - - - 117.6 - (29.6) 3.9 91.9
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Dividends paid 7 - - - (85.8) - - - (85.8)
Scrip dividend 7 1.5 27.0 - (28.5) - - - -
Share-based payments - - - - - - 16.4 16.4
Share awards vested - - 4.5 - - - (3.5) 1.0
Excess deferred tax
benefit from share-based
payments - - - - - - 0.6 0.6
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
At 31 December 2021 247.0 142.3 (2.2) (842.0) 2,098.9 (75.7) 126.5 1,694.8
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Net profit - - - 62.9 - - - 62.9
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
(expense)/income:
Foreign currency
translation adjustment,
net of tax - - - - - (113.6) - (113.6)
Realisation of cumulative
translation adjustments - - - - - 12.2 - 12.2
Remeasurement of
defined benefit pension
plans, net of tax - - - - - - 8.4 8.4
Changes in fair value
of cash flow hedges,
net of tax - - - - - - 10.1 10.1
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
(expense)/income - - - - - (101.4) 18.5 (82.9)
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Total comprehensive
income - - - 62.9 - (101.4) 18.5 (20.0)
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Dividends paid 7 - - - (88.1) - - - (88.1)
Scrip dividend 7 1.1 23.4 - (24.5) - - - -
Allotment of shares
to Employee Benefit
Trust 2.6 - (2.6) - - - - -
Share-based payments - - - - - - 16.6 16.6
Share awards vested - - 3.3 - - - 2.9 6.2
Excess deferred tax
benefit from share-based
payments - - - - - - 0.2 0.2
Transfer between
reserves - - - (0.5) - - 0.5 -
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
At 31 December 2022 250.7 165.7 (1.5) (892.2) 2,098.9 (177.1) 165.2 1,609.7
-------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Consolidated Statement of Cash Flows
For the year ended 31 December 2022
2022 2021
Notes $m $m
---------------------------------------------------- ----- ------- -------
Cash flows from operating activities
Net profit 62.9 117.6
Adjustments for
Depreciation of property, plant and equipment 39.7 40.6
Depreciation of right-of-use assets 22.1 22.8
Amortisation of intangible assets 147.4 147.2
Income tax 6 19.0 33.7
Non-operating expense, net 5 56.0 4.5
Finance costs, net 4 67.7 43.5
Share-based payments 16.7 16.4
Impairment/write-off of intangible assets 6.3 2.9
Impairment/write-off of property, plant and
equipment 9.2 3.0
Change in assets and liabilities:
Inventories (36.3) (19.6)
Trade and other receivables (63.6) (29.4)
Other non-current receivables 3.0 1.1
Restricted cash (11.8) (8.4)
Trade and other payables 40.7 10.7
Other non-current payables 5.5 14.0
---------------------------------------------------- ----- ------- -------
Net cash generated from operations 384.5 400.6
Interest received 5.5 0.8
Interest paid (55.4) (36.3)
Income taxes paid (52.9) (59.2)
---------------------------------------------------- ----- ------- -------
Net cash generated from operating activities 281.7 305.9
---------------------------------------------------- ----- ------- -------
Cash flows from investing activities
Acquisition of property, plant and equipment
and intangible assets (144.2) (94.1)
Acquisitions, net of cash acquired 9 (123.3) (113.8)
Payment of contingent consideration arising
from acquisitions 9 (50.0) -
Net cash (outflow)/inflow arising from divestitures 10 (0.1) 1.4
Investment in financial assets 8 (30.7) -
---------------------------------------------------- ----- ------- -------
Net cash used in investing activities (348.3) (206.5)
---------------------------------------------------- ----- ------- -------
Cash flows from financing activities
Repayment of borrowings 11 (842.5) (583.9)
Proceeds from borrowings 11 714.2 491.8
Payment of lease liabilities (20.7) (22.0)
Dividends paid 7 (88.1) (85.8)
---------------------------------------------------- ----- ------- -------
Net cash used in financing activities (237.1) (199.9)
---------------------------------------------------- ----- ------- -------
Net change in cash and cash equivalents (303.7) (100.5)
Cash and cash equivalents at beginning of
the year 463.4 565.4
Effect of exchange rate changes on cash
and cash equivalents (15.9) (1.5)
---------------------------------------------------- ----- ------- -------
Cash and cash equivalents at end of the
year 143.8 463.4
---------------------------------------------------- ----- ------- -------
1 . Basis of preparation
1.1 General information
Convatec Group Plc (the "Company") is a public limited company
incorporated in the United Kingdom under the Companies Act of 2006.
The Company's registered office is 3 Forbury Place, 23 Forbury
Road, Reading, RG1 3JH, United Kingdom.
The Company and its subsidiaries (collectively, the "Group") are
a global medical products and technologies group 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 care.
The announcement is based on the Group's Consolidated Financial
Statements which have been prepared in accordance with United
Kingdom adopted international accounting standards and
International Financial Reporting Standards ("IFRS") as issued by
the International Accounting Standards Board (IASB).
The Financial Statements are presented in US dollars ("USD"),
reflecting the profile of the Group's revenue and operating profit,
which are primarily generated in US dollars and US dollar-linked
currencies. All values are rounded to $0.1 million except where
otherwise indicated.
The financial information set out in this announcement does not
constitute the Group's statutory accounts for the year ended 31
December 2022 and 2021 but is derived from those accounts.
Statutory accounts for 2021 have been delivered to the Registrar of
Companies and those for 2022 will be delivered following the
Company's Annual General Meeting. The auditor's reports on the 2022
and 2021 accounts were unqualified, did not draw attention to any
matters by way of emphasis without qualifying their report and did
not contain a statement under section 498(2) or (3) of the
Companies Act 2006.
1.2 Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements, in conformity with
adopted IFRS, requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and
the reported value of assets and liabilities, income and expense.
Actual results may differ from these estimates or judgements of
likely outcome. Management regularly reviews, and revises as
necessary, the accounting judgements that significantly impact the
amounts recognised in the Consolidated Financial Statements and the
sources of estimation uncertainty that are considered to be "key
estimates" due to their potential to give rise to material
adjustments in the Group's Consolidated Financial Statements within
the next financial year.
Considerations for the identification of critical accounting
judgements and key estimates
A detailed assessment was performed by management of the
potential impact on each balance sheet caption and associated
accounting estimates and judgements at each reporting date during
the year. In preparing the Consolidated Financial Statements, no
critical accounting judgements have been identified. A key estimate
has been identified in relation to the valuation of the contingent
consideration related to the acquisition of Triad Life Sciences
Inc.
The Group's Audit and Risk Committee has reviewed, discussed,
and challenged management on identification and, where appropriate,
the determination of its critical accounting judgements and key
estimates.
Valuation of the contingent consideration in relation to the
acquisition of Triad Life Sciences
The contingent consideration is based on both specified
post-acquisition financial and non-financial performance targets as
defined by the Merger Agreement. The contingent consideration is
fair valued at the date of acquisition with key inputs including a
weighted probability of different scenarios and revenue projections
based on internal forecasts, discounted using an appropriate
discount rate that reflects the relative risk of the investment as
well as the time value of money.
Actual revenue results may differ from estimates, leading to a
change in the fair value of the contingent consideration.
Management has identified that reasonably possible changes in
certain key assumptions and forecasts may cause the calculated fair
value of the contingent consideration to vary materially within the
next financial year. The maximum undiscounted contingent
consideration payable under the Merger Agreement was $325.0
million, of which $50.0 million was paid during the year following
successful attainment of the two short-term milestones. The
estimated discounted fair value of the remaining contingent
consideration as at 31 December 2022 was $130.8 million.
Management has determined that the reasonable potential range of
discounted outcomes within the next financial year is between $85.2
million and $230.8 million, compared to a maximum remaining
undiscounted contingent consideration of $275.0 million.
The timing and amount of future contingent elements of
consideration is therefore considered a key source of estimation
uncertainty. Refer to Note 9 - Acquisitions for more
information.
1.3 Accounting standards
New standards, interpretations and amendments applied for the
first time
On 1 January 2022, the Group adopted the following amendments
which are mandatorily effective for the period beginning 1 January
2022:
-- Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37);
-- Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);
-- Annual Improvements to IFRS Standards 2018-2020 (Amendments
to IFRS 1, IFRS 9, IFRS 16 and IAS 41); and
-- References to Conceptional Framework (Amendments to IFRS 3) .
The adoption during the year of the amendments and
interpretations has not had a material impact on the Consolidated
Financial Statements.
Apart from these changes, the accounting policies set out in the
Notes have been applied consistently to both years presented in
these Consolidated Financial Statements.
New standards, interpretations and amendments not yet
effective
There are a number of standards, amendments to standards and
interpretations which have been issued by the IASB that are
effective in future accounting periods that the Group has decided
not to adopt early.
The following amendments are effective for the period beginning
1 January 2023:
-- Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2);
-- Definition of Accounting Estimates (Amendments to IAS 8); and
-- Deferred Tax Related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12).
The following amendments are effective for the period beginning
1 January 2024:
-- IFRS 16 Leases (Amendment - Liability in a Sale and Leaseback);
-- IAS 1 Presentation of Financial Statements (Amendment -
Classification of Liabilities as Current or Non-current); and
-- IAS 1 Presentation of Financial Statements (Amendment -
Non-current liabilities with Covenants)
The Group is currently assessing the impact of these new
accounting standards and amendments and does not believe these will
have a material impact on the Group.
Other interpretations and amendments
In addition to these issued standards, there are a number of
other interpretations, amendments and annual improvement project
recommendations that have been issued but not yet effective that
have not yet been adopted by the Group because application is not
yet mandatory, or they are not relevant for the Group.
-- IFRS 17 - Insurance contracts (effective from 1 January 2023)
is ultimately intended to replace IFRS 4. It sets out the
requirements that a company should apply in reporting information
about insurance contracts it issues and reinsurance contracts it
holds. The Group believes that the adoption of IFRS 17 will not
have a significant impact on the Consolidated Financial
Statements.
2. Revenue and segmental information
The Board considers the Group's business to be a single segment entity
engaged in the development, manufacture and sale of medical products,
services and technologies. R&D, manufacturing and central support functions
are managed globally for the Group, supporting all categories of sales.
Revenues are managed both on a category and regional basis. This note
presents the performance and activities of the Group as a single segment.
Pages 5 to 6 of the Chief Executive's Review provide further detail of
category revenue.
The Group's CEO, who is the Group's Chief Operating Decision
Maker, evaluates the Group's global product portfolios on a revenue
basis and evaluates profitability and associated investment on an
enterprise-wide basis due to shared infrastructures and support
functions between the categories and geographies. Financial
information in respect of revenues provided to the CEO for
decision-making purposes is made on both a category and geographic
basis. Resources are allocated on a Group-wide basis, with a focus
on key categories and the key markets. The allocations are based on
the relative merits of the individual proposals across the
Group.
Revenue by category
The Group generates revenue across four major product
categories. The following table sets out the Group's revenue for
the year ended 31 December by category:
2022 2021
$m $m
--------------------------- ------- -------
Advanced Wound Care 620.7 592.3
Ostomy Care 522.1 546.5
Continence & Critical Care 546.3 542.9
Infusion Care 383.4 356.6
--------------------------- ------- -------
Total 2,072.5 2,038.3
--------------------------- ------- -------
From 2023 onwards, Flexi-Seal(TM) (2022 revenue: $65.8 million),
our faecal management system, will move from Continence &
Critical Care to Ostomy Care. The remaining industrial sales,
predominantly continence-related supplies for B2B customers (2022
revenue: $16.7 million) will move from Infusion Care into
Continence Care. Going forward, the Continence & Critical Care
category will be renamed Continence Care.
Geographic information
Geographic markets
The following table sets out the Group's revenue by geographic
market in which third-party customers are located:
2022 2021
$m $m
-------------- ------- -------
Europe 688.6 741.6
North America 1,090.3 1,022.1
RoW (1) 293.6 274.6
Total 2,072.5 2,038.3
-------------- ------- -------
1. 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.
3. Other operating expenses
Other operating expenses were as follows:
2022 2021
$m $m
---------------------------------------- ---- ----
Exit and divestiture-related activities 12.4 -
Impairment of other intangible assets 1.4 -
---------------------------------------- ---- ----
13.8 -
---------------------------------------- ---- ----
As a result of the exit from hospital care and industrial
sales-related activities and disposal of a foreign subsidiary,
impairments of $8.1 million to property, plant and equipment and
$4.3 million to intangible assets have been recognised during the
period. See Note 10 - Divestitures for further details. The
impairment of other intangible assets relates to a legacy
acquisition-related customer relationship asset which was impaired
as part of the rationalisation of activities in the portfolio.
4. Finance income and expense
Finance expenses arise from interest on the Group's borrowings and lease
liabilities and unwind of discount on contingent consideration payable
on acquisitions. Finance income arises from interest earned on investment
of surplus cash.
Finance costs, net for the year ended 31 December were as
follows:
2022 2021
$m $m
---------------------------------------------- ------ ------
Finance income
Interest income on cash and cash equivalents 5.5 0.8
---------------------------------------------- ------ ------
Total finance income 5.5 0.8
---------------------------------------------- ------ ------
Finance expense
Interest expense on borrowings (46.4) (29.2)
Other financing-related fees(1) (8.2) (8.1)
Interest expense on interest rate derivatives (1.4) (3.8)
Interest expense on lease liabilities (3.3) (3.8)
Capitalised interest(2) 2.0 0.6
Unwinding of discount(3) (15.6) -
Other finance costs (0.3) -
---------------------------------------------- ------ ------
Total finance expense (73.2) (44.3)
---------------------------------------------- ------ ------
Finance costs, net (67.7) (43.5)
---------------------------------------------- ------ ------
1. Other financing-related fees include the amortisation of
deferred financing fees associated with the multicurrency revolving
credit facilities, term loan facilities and senior notes. This also
includes $2.7 million of deferred financing fees related to the
early termination of the Group's previous credit agreement.
2. Capitalised interest was calculated using the Group's
weighted average interest rate over the year of 3.4% (2021:
2.0%).
3. The unwinding of discount is in respect of the contingent
consideration payable in relation to the Triad Life Sciences and
Cure Medical acquisitions. Refer to Note 9 - Acquisitions.
5. Non-operating (expense)/income, net
Non-operating (expense)/income, net was as follows:
2022 2021
Notes $m $m
------------------------------------------ ----- ------ -----
Net foreign exchange (loss)/gain(1) (13.5) 4.3
Realisation of cumulative translation
adjustments 10 (12.2) -
Gain/(loss) on foreign exchange forward
contracts 12 15.8 (9.7)
Loss on foreign exchange cash flow hedges 12 (16.5) (3.9)
Change in contingent consideration(2) 9 (29.5) -
(Loss)/gain on divestiture 10 (2.0) 0.5
Other non-operating income 0.2 -
------------------------------------------ ----- ------ -----
Non-operating expense, net(3) (57.7) (8.8)
------------------------------------------ ----- ------ -----
1. The foreign exchange losses in 2022 primarily relate to the
foreign exchange impact on intercompany transactions, including
loans transacted in non-functional currencies. The Group uses
foreign exchange forward contracts to manage these exposures in
accordance with the Group's foreign exchange risk management
policy.
2. The $29.5 million expense relates to the change in fair value
of the contingent consideration for the Cure Medical ($5.8 million)
and Triad Life Sciences ($23.7 million) acquisitions as described
in Note 9 - Acquisitions.
3. Of the total net non-operating expense, $1.7 million (2021:
$4.3 million) relates to mark-to-market derivatives, the cash flow
impact of which have been shown within the changes in working
capital section of the Consolidated Statement of Cash Flows.
6. Income taxes
The note below sets out the current and deferred tax charges, which together
comprise the total tax expense in the Consolidated Income Statement.
6.1 Taxation
The Group's income tax expense is the sum of the total current
and deferred tax expense.
2022 2021
$m $m
-------------------------------------------------- ------ -----
Current tax
UK corporation tax - 0.8
Overseas taxation 46.8 46.8
Adjustment to prior years (2.0) (4.3)
-------------------------------------------------- ------ -----
Total current tax expense 44.8 43.3
-------------------------------------------------- ------ -----
Deferred tax
Origination and reversal of temporary differences (3.7) (6.5)
Change in tax rates (3.2) 4.4
Adjustment to prior years 1.2 (0.7)
Benefit from previously unrecognised tax losses (20.1) (6.8)
-------------------------------------------------- ------ -----
Total deferred tax benefit (25.8) (9.6)
-------------------------------------------------- ------ -----
Income tax expense 19.0 33.7
-------------------------------------------------- ------ -----
In 2022, the deferred tax movement included a benefit of $20.1
million in respect of the recognition of previously unrecognised
tax losses in the US following the acquisition of Triad Life
Sciences.
In 2021, the change in tax rates mainly relates to the
revaluation of the net deferred tax liability in the UK following
the enactment of Finance Act 2021, which increases the UK
corporation tax rate from 19.0% to 25.0% from 1 April 2023.
The Group's deferred tax benefit in the year ended 31 December
2021 was mainly influenced by the deferred tax benefit of $6.8
million for the recognition of deferred tax assets following the
acquisition of Cure Medical LLC ("Cure Medical") in respect of
previously unrecognised tax losses in the US.
6.2 Reconciliation of effective tax rate
The effective tax rate for the year ended 31 December 2022 was
23.2%, as compared with 22.3% for the year ended 31 December
2021.
Tax reconciliation to UK statutory rate
The table below reconciles the Group's profit before income
taxes at the UK statutory rate to the Group's total income tax
expense:
2022 2021
$m $m
---------------------------------------- ------ ----- ----- -----
Profit before income taxes 81.9 151.3
Profit before income taxes multiplied
by rate of corporation tax in the UK
of 19.0% (2021: 19.0%) 15.6 28.7
Difference between UK and overseas tax
rates(1) 3.0 4.0
Deferred tax impact for increase in UK
tax rate - 4.8
Non-deductible/non-taxable items 14.4 1.3
Movement in unrecognised tax losses and
other assets 1.0 (0.1)
Recognition of previously unrecognised
US deferred tax assets (20.1) (6.8)
Movement in provision for uncertain tax
positions 2.5 (0.3)
Other(2) 2.6 2.1
---------------------------------------- ------ ----- ----- -----
Income tax expense and effective tax
rate 19.0 23.2% 33.7 22.3%
---------------------------------------- ------ ----- ----- -----
1. This includes changes in tax rates based on substantively
enacted legislation across various tax jurisdictions as of 31
December.
2. Includes tax on amortisation of indefinite-lived intangibles
and taxes on unremitted earnings.
The Group's income tax expense includes a $20.1 million tax
benefit due to the recognition of deferred tax assets following the
acquisition of Triad in respect of previously unrecognised tax
losses in the US, and the $9.5 million effect of non-deductible
contingent consideration on the acquisition of both Triad Life
Sciences and Cure Medical. Refer to Note 9 - Acquisitions for the
acquisition accounting of Triad Life Sciences.
The Group has worldwide operations and therefore is subject to
several factors that may affect future tax charges, principally the
levels and mix of profitability in different tax jurisdictions,
transfer pricing regulations, tax rates imposed and tax regime
reforms. The calculation of the Group's tax expense involves a
degree of estimation and judgements in respect of certain items for
which the tax treatment cannot be finally determined until
resolution has been reached with the relevant tax authority,
specifically in relation to open tax and transfer pricing matters.
Due to the high volume of intercompany transactions, the Group's
evolving business model and the increasing complexity in
interaction between multiple tax laws and regulations, transfer
pricing requires judgement in determining the appropriate
allocation of profits between jurisdictions. The Group assessed the
impact of ongoing changes to the Group's operating model, the
supporting documentation for the tax and transfer pricing
positions, existing tax authority challenges, and the likelihood of
new challenges by tax authorities. In line with the requirements of
IFRIC 23, Uncertainty over Income Tax Treatments, the Group has
provided for uncertain tax positions in respect of transfer pricing
positions and withholding tax liabilities. The net increase in
provisions during 2022 was driven by the reassessment of estimates
and settlement and expiry of open tax issues in various
jurisdictions. Where open issues exist, the ultimate liability for
such matters may vary from the amounts provided and is dependent
upon the outcome of discussions with the relevant tax authorities
or, where applicable, appeal proceedings. Accordingly, settlement
and expiry of open tax issues could have a significant impact on
future tax expenses.
The Group is monitoring tax reforms driven by the OECD's project
to address the tax challenges arising from the digitalisation of
the economy, including Global Anti-Base Erosion Model Rules (Pillar
Two). The Group has analysed the tax impact of the project to the
Group based on OECD model rules issued on 20 December 2021 and
draft legislations available in jurisdictions in which the Group
operates in and expect the tax impact to be not material in the
foreseeable future. The Group will reassess the tax impact once new
legislation becomes available. This has no impact on the Group's
result for 2022.
7. Dividends
Dividends paid and proposed were as follows :
Settled
Pence Cents in Settled No of scrip
per share per share Total cash via scrip shares issued
$m $m $m
---------------------- ---------- ---------- ----- ------- ---------- --------------
Final dividend 2020 2.845 3.983 79.7 53.6 26.1 9,475,532
Interim dividend 2021 1.229 1.717 34.6 32.2 2.4 750,265
---------------------- ---------- ---------- ----- ------- ---------- --------------
Paid in 2021 4.074 5.700 114.3 85.8 28.5 10,225,797
---------------------- ---------- ---------- ----- ------- ---------- --------------
Final dividend 2021 3.161 4.154 77.8 58.9 18.9 7,192,010
Interim dividend 2022 1.410 1.717 34.8 29.2 5.6 2,107,103
---------------------- ---------- ---------- ----- ------- ---------- --------------
Paid in 2022 4.571 5.871 112.6 88.1 24.5 9,299,113
---------------------- ---------- ---------- ----- ------- ---------- --------------
Final dividend 2022
proposed 3.657 4.330 88.5
---------------------- ---------- ---------- ----- ------- ---------- --------------
The final dividend proposed for 2022, to be distributed on 25
May 2023 to shareholders on the register at the close of business
on 11 April 2023, is based upon the issued and fully paid share
capital as at 31 December 2022 and is subject to shareholder
approval at the Annual General Meeting on 18 May 2023. The dividend
will be declared in US dollars and will be paid in Sterling at the
chosen exchange rate of $1.184/GBP1.00 determined on 8 March
2023.
The Company operates a scrip dividend scheme allowing
shareholders to elect to receive their dividends in the form of new
fully paid ordinary shares. For any particular dividend, the
Directors may decide whether or not to make the scrip offer
available. A scrip dividend alternative will be offered allowing
shareholders to elect by 3 May 2023 to receive their dividend in
the form of new ordinary shares.
The interim and final dividends for 2022 give a total dividend
for the year of 6.047 cents per share, an increase of 3.0% over the
prior year (2021: 5.871 cents per share).
8. Investment in financial assets
On 9 May 2022, the Group invested $30.0 million in preference
shares of BlueWind Medical Limited (BlueWind Medical). BlueWind
Medical is developing an implantable tibial neuromodulation device,
for the treatment of urge incontinence and urinary urgency. This
represents an investment into an innovative technology in the large
and growing overactive bladder market, related to the Continence
space.
In line with IFRS 9 Financial Instruments, the investment met
the definition of an equity instrument, and the Group has made an
irrevocable election on initial recognition to measure the
investment at FVOCI. The Group considers this investment to be
strategic in nature and it is not held for trading.
In line with IFRS 13 Fair value measurement, this investment has
been classified as Level 3 in the fair value hierarchy as its
measurement is derived from significant unobservable inputs. As at
the date of the transaction, the equity investment was recorded at
its cost of investment which approximates to fair value plus
transaction costs of $0.7 million.
As at 31 December 2022, the fair value of the investment has
been remeasured and remained at $30.7 million. No dividends were
recognised during the year.
9. Acquisitions
During the year to 31 December 2022, the Group completed the acquisition
of Triad Life Sciences Inc (Triad Life Sciences), a US-based medical device
company.
This note provides details of the transaction and the acquisition accounting
that has been recorded to reflect the fair value of assets acquired and
liabilities assumed as well as the intangible assets and goodwill recognised
upon acquisition. This note also provides details of any fair value changes
identified post-acquisition in respect of previous acquisitions that the
Group has completed.
Triad Life Sciences Inc
Description of the transaction
On 14 March 2022, the Group completed its acquisition of 100% of
the share capital of Triad Life Sciences Inc. 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 of $125.3 million, the
sellers may earn contingent consideration up to a maximum of $325.0
million, in the form of (i) two additional payments of $25.0
million each relating to short-term milestones; and (ii) two
earnout payments conditional on performance during year 1 and year
2 post completion, with the maximum earnout for these two payments
totalling $275.0 million based on stretching financial performance
over the period.
The discounted fair value of the contingent consideration at the
date of acquisition was $141.8 million, of which $25.0 million was
paid in April 2022 and a further $25.0 million paid in October 2022
following attainment of the first and second short-term milestones.
The earnout payments are due to be paid within three years of the
acquisition date, subject to achieving the specified targets.
Following completion of the initial acquisition accounting, any
changes in the fair value of the contingent consideration at each
reporting date will be recorded in the Consolidated Income
Statement in accordance with the Group's accounting policies. This
is explained further on in this note.
Assets acquired and liabilities assumed
The transaction meets the definition of a business combination
and has been accounted for under the acquisition method of
accounting. The following table summarises the provisional fair
values of the assets acquired and liabilities assumed as of the
acquisition date:
Triad Life
Sciences
Provisional
$m
--------------------------------------------------------- -----------
Non-current assets
Property, plant & equipment 0.5
Right-of-use assets 2.2
Intangible assets - Product-related 154.8
Current assets
Trade and other receivables 4.7
Inventories 10.8
Cash and cash equivalents 15.9
--------------------------------------------------------- -----------
Total assets acquired 188.9
Non-current liabilities
Lease liabilities (2.7)
Deferred tax liabilities (32.3)
Current liabilities
Trade and other payables (2.6)
Lease liabilities (0.2)
--------------------------------------------------------- -----------
Total liabilities assumed (37.8)
--------------------------------------------------------- -----------
Net assets acquired 151.1
--------------------------------------------------------- -----------
Goodwill 129.9
--------------------------------------------------------- -----------
Total 281.0
--------------------------------------------------------- -----------
Initial cash consideration 125.3
Deferred purchase consideration paid into escrow(1) 13.8
Working capital adjustment(2) 0.1
Contingent consideration 141.8
--------------------------------------------------------- -----------
Total consideration 281.0
--------------------------------------------------------- -----------
Provisional
Analysis of cash outflow in the Consolidated Statement $m
of Cash Flows
--------------------------------------------------------- -----------
Initial cash consideration 125.3
Deferred purchase consideration paid into escrow(1) 13.8
Cash and cash equivalents acquired (15.9)
Working capital adjustment(2) 0.1
--------------------------------------------------------- -----------
Net cash outflow from acquisitions, net of cash acquired 123.3
--------------------------------------------------------- -----------
1. $13.8 million was paid on closing into escrow as security and
indemnity by the seller for its obligations under the Merger
Agreement. $1.3 million was released in December 2022 to the
sellers following agreement of the closing statement. It is
expected that the remaining balance will be released within the
next 12 months subject to the terms of the Merger Agreement.
2. This is the Group's calculation of the working capital
adjustment and forms part of the initial consideration. The final
amount was determined in accordance with the terms of the Merger
Agreement and this was finalised and paid by the reporting
date.
The fair values of the assets acquired and liabilities assumed
are provisional at 31 December 2022. The Group will finalise these
amounts as it obtains the information necessary to complete the
measurement process. Any changes resulting from facts and
circumstances that existed as of the acquisition date may result in
retrospective adjustments to the provisional amounts recognised at
the acquisition date. The Group will finalise these amounts no
later than one year from the acquisition date.
As part of the acquisition accounting, a $10.2 million fair
value adjustment was applied to the carrying value of inventory
held at the acquisition date. The fair value adjustment relates to
work-in-progress and finished goods and was calculated as the
estimated selling price less costs to complete and sell the
inventory, associated margins on these activities, and holding
costs. As at 31 December 2022, $8.7 million has been expensed to
cost of goods sold in the Consolidated Income Statement as these
have been sold. The remaining fair value uplift of $1.5 million is
expected to be released over the next 6 to 12 months, in line with
forecast revenues.
The fair value of trade and other receivables amounts to $4.7
million, with a gross contractual amount of $7.0 million. At the
acquisition date, the Group's best estimate of the contractual cash
flows expected not to be collected amounts to $2.3 million.
The goodwill recorded, which is not deductible for tax purposes,
represents the cost savings, operating synergies and future growth
opportunities expected to result from combining the operations of
Triad with those of the Group. The Triad acquisition is included in
the Advanced Wound Care CGU group.
Fair value of contingent consideration at reporting date
The two short term milestones were achieved and paid during the
year ended 31 December 2022. As at 31 December 2022, management
reviewed the fair value of the remaining contingent consideration
since the acquisition date, based on the most recent Board approved
strategic plan and forecast information. Consequently, the
discounted fair value of the remaining contingent consideration was
increased by $23.7 million since the amount recognised at 30 June
2022, and was recognised in non-operating expenses in the
Consolidated Income Statement (see Note 5 - Non-operating
(expense)/income, net). The amount of discount unwind recognised in
the Consolidated Income Statement during 2022 was $15.3 million and
shown within finance expenses (see Note 4 - Finance income and
expense). The discounted fair value of the remaining contingent
consideration as at 31 December 2022 was $130.8 million. Refer to
Note 13 - Provisions for the movement in the contingent
consideration during the year.
Management have determined that the potential range of
discounted outcomes within the next financial year is between $85.2
million and $230.8 million, from a maximum undiscounted contingent
consideration of $275.0 million.
Acquisition-related costs
The Group incurred $2.4 million of acquisition-related costs
directly related to the Triad acquisition in the year ended 31
December 2022, primarily in respect of legal and advisers' fees.
The acquisition-related costs have been recognised in general and
administrative expenses in the Consolidated Income Statement.
Revenue and profit
The revenue of Triad for the period from the acquisition date to
31 December 2022 was $34.8 million and net profit for the period
was $5.8 million, before recognising acquisition-related intangible
asset amortisation charge of $9.2 million and the inventory fair
value uplift release of $8.7 million. If the acquisition had been
completed on 1 January 2022, reported Group revenue would have been
$4.4 million higher and Group profit for the year would have been
$0.9 million lower, before recognising acquisition-related
intangible asset amortisation charges of $2.0 million.
Cure Medical LLC ("Cure Medical")
On 15 March 2021, the Group acquired 100% of the share capital
of Cure Medical.
During 2022, management reviewed the expectation of the
contingent consideration based on the most recent Board-approved
strategic plan and forecast information. The Cure Medical business
has outperformed its performance targets to date and forecast
financial performance was expected to exceed the original
expectations. Consequently, the discounted fair value of the
contingent consideration has been revised from $3.1 million to $8.9
million during the year and the remeasurement charge of $5.8
million has been recognised in non-operating expenses in the
Consolidated Income Statement (see Note 5 - Non-operating
(expense)/income, net). The amount of discount unwind recognised in
the Consolidated Income Statement during 2022 was $0.3 million and
shown within finance expenses (see Note 4 - Finance income and
expense). The discounted fair value of the contingent consideration
as at 31 December 2022 was $9.2 million. Refer to Note 13 -
Provisions for the movement in the contingent consideration during
the year.
This is due to be paid within three years of the acquisition
date, subject to the terms of the Share Purchase Agreement.
10. Divestitures
During the year ended 31 December 2022, the Group withdrew from its hospital
care activities and related industrial sales.
Exit from hospital care and industrial sales activities
On 12 May 2022, following a strategic review, it was announced
that the Group would be withdrawing from its hospital care
activities and related industrial sales during 2022. This does not
represent a separate major line of business or component of the
Group.
As a result of the exit from the hospital care and industrial
sales activities, the Group recognised impairment losses in the
year ended 31 December 2022 in relation to the following:
- $8.1 million was recognised, within other operating expenses,
as an impairment to property, plant and equipment, primarily in
relation to manufacturing equipment in Belarus and Slovakia.
- $4.3 million was recognised, within other operating expenses,
as an impairment to product-related intangible assets.
- $13.4 million was recognised, within cost of sales, in
relation to the write-off of inventories and provision for those
which are not expected to be sold.
In addition, the Group recognised $7.3 million of severance
costs, of which $1.2 million remains as a provision as at 31
December 2022, and also recognised a $6.9 million provision in
relation to contract exit costs. Management will review this at
each reporting period. The Group incurred $6.7 million of
divestiture-related costs in relation to legal fees and closing
down of manufacturing site costs. The majority of the exit and
closure activities have been completed at the end of the year, with
minimal costs expected in 2023.
As part of the exit from all hospital care and related
industrial sales activities, a subsidiary was sold during the year.
The cumulative amount of exchange losses of $12.2 million
recognised in Other Comprehensive Income relating to those
operations, and a loss on disposal of $2.0 million, have been
recognised in the Consolidated Income Statement as non-operating
expenses. All costs associated with the exit have been classified
as an adjusting item in accordance with our Alternative Performance
Measures policy.
11. Borrowings
The Group's sources of borrowing for funding and liquidity purposes derive
from senior notes and credit facilities including a committed revolving
credit facility.
In November 2022, the Group refinanced its bank facilities with $1.2 billion
committed for a 5-year term. The Group's 2029 unsecured senior notes of
$500.0 million remain in place.
The Group's borrowings as at 31 December were as follows:
2022 2021
---------- ----------
Year of Face value Face value
Currency maturity $m $m
----------------------------------- -------------- --------- ---------- ----------
Revolving Credit Facility(1) USD/Euro 2027 477.2 -
Term Loan USD 2027 250.0 -
Senior Notes USD 2029 500.0 500.0
----------------------------------- -------------- --------- ---------- ----------
Revolving Credit Facility Multicurrency 2024 - -
Term Loan Facility A(2) USD/Euro 2024 - 461.2
Term Loan Facility B(3) USD/Euro 2024 - 396.7
----------------------------------- -------------- --------- ---------- ----------
Interest-bearing borrowings 1,227.2 1,357.9
Financing fees(4) (15.3) (13.3)
-------------------------------------------------------------- ---------- ----------
Total carrying value of borrowings 1,211.9 1,344.6
-------------------------------------------------------------- ---------- ----------
Current portion of borrowings - 144.8
Non-current portion of borrowings 1,211.9 1,199.8
-------------------------------------------------------------- ---------- ----------
1. Included within the Revolving Credit Facility was EUR145.0
million ($155.2 million) at 31 December 2022 (2021: nil),
representing 32.5% of RCF debt denominated in Euros and 67.5%
denominated in US dollars.
2. Included within Term Loan Facility A as at 31 December 2021
was EUR78.4 million ($89.2 million) representing 19% of the loan
denominated in Euros and 81% denominated in US dollars.
3. Included within Term Loan Facility B as at 31 December 2021
was EUR67.5 million ($76.7 million), representing 19% of the loan
denominated in Euros and 81% denominated in US dollars.
4. Financing fees of $15.3 million (2021: $13.3 million) related
to the remaining unamortised fees incurred on the credit facilities
of $8.4 million (2021: $5.4 million) and on the senior notes of
$6.9 million (2021: $7.9 million).
Credit facilities
The credit facilities held by the Group are committed and
available for the refinancing of certain existing financial
indebtedness and general corporate purposes. On 15 November 2022,
the Group refinanced its credit facilities. The original
facilities, maturing in October 2024 and, consisting of two
five-year multicurrency term loans totalling $1.5 billion and an
undrawn $200.0 million multicurrency revolving credit facility,
were settled and extinguished respectively on refinancing. During
the year and until the refinancing activity, $27.5 million (2021:
$88.4 million) was repaid in accordance with the repayment schedule
for the original facilities.
The new credit facility for $1.2 billion comprises of a $250.0
million term loan and a $950.0 million multicurrency revolving
credit facility, both committed for a five-year term. As at 31
December 2022, the term loan was fully drawn and $477.2 million of
the revolving credit facility was drawn, with $472.8 million
undrawn.
Transaction costs directly attributable to the refinancing have
been capitalised and are amortised over the term of the facility
using the effective interest rate method. Unamortised deferred
financing fees of $2.7 million associated with the previous credit
agreement have been written off to the Consolidated Income
Statement in 2022 (refer to Note 4 - Finance income and
expense).
The principal financial covenants are based on a permitted net
debt to covenant-adjusted EBITDA (1) ratio and interest cover test
as defined in the credit facilities agreement. Testing is required
on a semi-annual basis, at June and December, based on the last 12
months' financial performance. At 31 December 2022, the permitted
net debt to covenant-adjusted EBITDA (1) ratio was a maximum of
3.50 times and the interest cover a minimum of 3.50 times, terms as
defined by the credit facilities agreement. In accordance with the
credit facilities agreement, the net debt to covenant-adjusted
EBITDA (1) ratio can increase to a maximum 4.00 times for permitted
acquisitions or investments.
Senior notes
Unsecured senior notes of $500.0 million were issued on 7
October 2021 with a maturity date of 15 October 2029 at a coupon
rate of 3.875% per annum, payable semi-annually and, except for
certain options redemption conditions, is not redeemable at the
issuer's option prior to 7 October 2024. The Group's refinancing
activity did not affect the senior notes.
The senior notes are subject to a financial covenant which is an
interest cover test (minimum of 2 times) as defined in the
indenture. Testing is required annually based on the last 12
calendar months' financial performance.
Financial covenants
The Group was in compliance with all financial and non-financial
covenants at 31 December 2022, with significant available headroom
on the financial covenants (in excess of $588 million debt headroom
on net debt to covenant-adjusted EBITDA (1) ).
Excluding the impact of interest rate swaps, the weighted
average interest rate on borrowings for the year ended 31 December
2022 was 3.4% (2021: 2.0%). The increase in the weighted average
interest rate was due to rising underlying reference base rates on
debt with floating rates and a full year of interest on the senior
notes issued in 2021.
1. Covenant-adjusted EBITDA is calculated based on terms as
defined in the credit facilities agreement. This is different to
adjusted EBITDA, which is an alternative performance measure
("APM") as disclosed on pages 41 to 46.
Borrowings not measured at fair value
The senior notes are listed and their fair value at 31 December
2022 of $430.8 million (2021: $507.7 million) has been obtained
from quoted market data and therefore categorised as a Level 1
measurement in the fair value hierarchy under IFRS 13, Fair Value
Measurements. For the Group's other borrowings, the fair value is
based on discounted cash flows using a current borrowing rate and
is categorised as a Level 2 measurement. At 31 December 2022, the
estimated fair value of the Group's other borrowings was $762.4
million (2021: $847.3 million).
12. Financial instruments
A derivative financial instrument is a contract that derives its value
from the performance of an underlying variable, such as foreign exchange
rates or interest rates. The Group uses derivative financial instruments
to manage foreign exchange and interest rate risk arising from its operations
and financing. Derivative financial instruments used by the Group are foreign
exchange forwards and interest rate swaps.
The Group utilises interest rate swap agreements, designated as cash flow
hedges, to manage its exposure to variability in expected future cash outflows
attributable to the changes in interest rates on the Group's committed
borrowing facilities.
Financial instruments are classified as Level 1, Level 2 or
Level 3 in the fair value hierarchy in accordance with IFRS 13,
Fair Value Measurements, based upon the degree to which the fair
value movements are observable. The only instrument classified as
Level 1 are the senior notes, given the availability of quoted
market price (Note 11 - Borrowings). The Group's derivative
financial instruments, discussed below, are classified as Level 2,
and the Group's equity investment in preference shares is
classified as Level 3 (Note 8 - Investment in financial assets).
The Group holds interest rate swap agreements to fix a proportion
of variable interest on US dollar denominated debt, in accordance
with the Group's risk management policy. The interest rate swaps
are designated as hedging instruments in a cash flow hedging
relationship.
In accordance with Group policy, the Group uses forward foreign
exchange contracts, designated as cash flow hedges, to hedge
certain forecast third-party foreign currency transactions. When a
commitment is entered into a layered approach is taken when hedging
the currency exposure, ensuring that no more than 100% of the
transaction exposure is covered. The currencies hedged by forward
foreign exchange contracts are US dollars, Swiss francs, Pound
sterling, Danish krone and Japanese yen.
The Group further utilises foreign exchange contracts and swaps
classified as FVTPL to manage short-term foreign exchange
exposure.
Cash flow hedges
The fair values are based on market values of equivalent
instruments at 31 December. The following table presents the
Group's outstanding interest rate swaps, which were designated as
cash flow hedges at 31 December:
2022 2021
------------------------ ------------------------
Fair value(1) Fair value(1)
Effective Maturity Notional assets/ Notional assets/
date date amount (liabilities) amount (liabilities)
$m $m $m $m
-------------------------- ---------- --------- -------- -------------- -------- --------------
3 Month LIBOR Float to 24 Jan 24 Jan
Fixed Interest Rate Swap 2020 2023 275.0 2.0 275.0 (2.9)
6 Month term SOFR Float
to Fixed Interest Rate 23 Jan 23 Jan
Swap 2023 2024 90.0 0.2 - -
6 Month term SOFR Float
to Fixed Interest Rate 23 Jan 23 July
Swap 2023 2024 40.0 - - -
6 Month term SOFR Float
to Fixed Interest Rate 23 Jan 23 Jan
Swap 2023 2025 50.0 (0.3) - -
-------------------------- ---------- --------- -------- -------------- -------- --------------
1. The fair values of the interest rate swaps were disclosed in
non-current derivative financial liabilities in the Consolidated
Statement of Financial Position. There was no ineffectiveness
recognised in the Consolidated Income Statement.
Foreign exchange forward contracts
The following table presents the Group's outstanding foreign
exchange forward contracts valued at FVTPL and foreign currency
forward contracts designated as cash flow hedges, disclosed in
current derivative financial assets and liabilities, at 31
December:
2022 2021
-------------------------------- --------------------------------
Notional Fair value Notional Fair value
Term amount assets/ (liabilities) amount assets/ (liabilities)
$m $m $m $m
------------------------------- ------------ -------- ---------------------- -------- ----------------------
Foreign exchange contracts <= 3 months 996.6 21.3 864.6 14.5
Foreign currency forward
exchange contracts designated <= 12
as cash flow hedges months 72.7 3.1 40.8 0.6
------------------------------- ------------ -------- ---------------------- -------- ----------------------
Derivative financial
assets 1,069.3 24.4 905.4 15.1
--------------------------------------------- -------- ---------------------- -------- ----------------------
Foreign exchange contracts <= 3 months 703.7 (30.2) 695.9 (6.5)
Foreign currency forward
exchange contracts designated <= 12
as cash flow hedges months 132.8 (2.3) 130.2 (5.2)
------------------------------- ------------ -------- ---------------------- -------- ----------------------
Derivative financial
liabilities 836.5 (32.5) 826.1 (11.7)
--------------------------------------------- -------- ---------------------- -------- ----------------------
During the year ended 31 December 2022, the Group realised a net
gain of $15.8 million (2021: $9.7 million loss) on foreign exchange
forward contracts designated as FVTPL in Note 5 - Non-operating
(expenses)income, net, in the Consolidated Income Statement.
Impact of hedging on other comprehensive income
The following table presents the impact of hedging on other
comprehensive income:
2022 2021
$m $m
----------------------------------------- ------ -----
Recognised in other comprehensive
income:
Effective portion of changes in fair
value of cash flow hedges:
Interest rate swaps 3.3 (1.0)
Foreign currency forward exchange
contracts designated as cash flow
hedges (11.0) (4.1)
Changes in fair value of cash flow
hedges reclassified to the Consolidated
Income Statement 16.5 5.7
Cost of hedging (1.1) (0.4)
------------------------------------------ ------ -----
Total 7.7 0.2
------------------------------------------ ------ -----
13. Provisions
A provision is an obligation recognised when there is uncertainty over
the timing or amount that will be paid. Provisions held by the Group are
primarily in respect of restructuring, decommissioning, dilapidations,
legal liabilities and contingent consideration relating to acquisitions.
The movements in provisions are as follows :
Decommissioning Contingent
and dilapidations Restructuring Legal consideration Total
$m $m $m $m $m
----------------------------- ------------------ ------------- ----- -------------- ------
1 January 2022 1.2 5.0 0.5 - 6.7
Contingent consideration
from acquisitions - - - 141.8 141.8
Charged to income statement 1.7 15.7 (0.3) 29.5 46.6
Utilised - (10.4) - (50.0) (60.4)
Discount unwinding - - - 15.6 15.6
Reclassification from
trade and other payables(1) - - - 3.1 3.1
Foreign exchange (0.1) - - - (0.1)
----------------------------- ------------------ ------------- ----- -------------- ------
31 December 2022 2.8 10.3 0.2 140.0 153.3
----------------------------- ------------------ ------------- ----- -------------- ------
Current - 10.3 - 89.9 100.2
Non-current(2) 2.8 - 0.2 50.1 53.1
----------------------------- ------------------ ------------- ----- -------------- ------
1. During the year ended 31 December 2022, $3.1 million was
reclassified from trade and other payables in relation to the Cure
Medical acquisition to better reflect the estimation uncertainty of
the contingent consideration.
2. The expected timings of the payment of the contingent
consideration are disclosed in Note 9 - Acquisitions. The timing
for other non-current provisions is undefined.
Decommissioning and dilapidation provisions
Decommissioning provisions represent the estimated costs of
dismantling and removing PP&E and restoring the site on which
it was located. Dilapidation provisions are in respect of
contractual obligations, on the expiry of a lease, to return leased
properties in the condition which is specified in the individual
leases.
Restructuring provisions
Restructuring provisions are mainly related to the exit from the
low margin hospital care and industrial sales portfolio. Further
details are provided in Note 10 - Divestitures. All restructuring
provisions are supported by detailed plans and a valid expectation
has been raised in those affected as required by the Group's
accounting policy.
Legal provision
Legal provision of $0.2 million is in respect of an ongoing
case. Legal issues are often subject to uncertainties over the
timing and the final amounts of any settlement.
Contingent consideration
Contingent consideration arising from business combinations is
fair valued on acquisition and at each reporting period.
As at 31 December 2022, the discounted fair value of the
contingent consideration payable in respect of the Cure Medical
acquisition was $9.2 million (2021: $3.1 million) with an increase
of $5.8 million arising as a result of good performance to date,
together with the latest financial forecasts, and the unwind of
discount of $0.3 million during the year. This has been charged to
the Consolidated Income Statement.
As at 31 December 2022, the discounted fair value of the
contingent consideration payable in respect of the Triad
acquisition was $130.8 million, with the movements since the
acquisition date fair value of $141.8 million being a combination
of an increase of $23.7 million arising from management's view that
the latest available financials are expected to exceed original
expectations and the unwind of discount of $15.3 million during the
year, partly offset by the payments of $50.0 million to the sellers
following successful attainment of the two short-term milestones
per the Merger Agreement. Further detail is provided in Note 9 -
Acquisitions.
14. Commitments and contingencies
Capital commitments
At 31 December 2022, the Group had non-cancellable commitments
for the purchase of property, plant and equipment, capitalised
software and development of $39.3 million (2021: $32.1
million).
Contingent liabilities
There are no contingent liabilities recognised as at 31 December
2022 and 31 December 2021.
15. Subsequent events
The Group has evaluated subsequent events through to 8 March
2023, the date the Consolidated Financial Statements were approved
by the Board of Directors.
Details of the proposed final dividend are disclosed in Note 7 -
Dividends.
16. Responsibility statement of the directors on the Annual
Report
The Responsibility Statement below has been prepared in
connection with the 2022 Annual Report. Certain parts thereof are
not included within this announcement.
We confirm to the best of our knowledge:
-- The Financial Statements, prepared in accordance with United
Kingdom adopted international accounting standards which have been
prepared in accordance with United Kingdom adopted international
accounting standards and International Financial Reporting
Standards ("IFRS") as issued by the International Accounting
Standards Board (IASB) , give a true and fair view of the assets,
liabilities, financial position and profit and loss of the Company
and the undertakings included in the consolidation taken as a
whole;
-- The Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties they face; and
-- The Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary to assess the Group's and Company's performance, business
model and strategy.
This Responsibility Statement was approved by the Board of
Directors on 8 March 2023 and is signed on its behalf by:
Karim Bitar Jonny Mason
Chief Executive Officer Chief Financial Officer
8 March 2023 8 March 2023
Non-IFRS financial information
Non-IFRS financial information or alternative performance
measures ("APMs") are those measures used by management on a
day-to-day basis in their assessment of profit and performance and
comparison between periods. The adjustments applied to IFRS
measures reflect the effect of certain cash and non-cash items that
the Board believes distort the understanding of the quality of
earnings and cashflows as, by their size or nature, they are not
considered part of the core operations of the business. Adjusted
measures also form the basis for performance measures for
remuneration, e.g. adjusted operating profit. For further
information see pages 42 to 46.
The APMs used include adjusted gross profit, adjusted general
& administrative expenses, adjusted selling and distribution
expenses, adjusted operating profit, EBITDA, adjusted EBITDA,
adjusted net finance expenses, adjusted non-operating expenses,
adjusted net profit, adjusted earnings per share, adjusted working
capital, adjusted cash conversion, adjusted free cash flow and net
debt. Reconciliations for these adjusted measures determined under
IFRS are shown on pages 43 to 46. The definitions of adjusted
measures are as calculated within the reconciliation tables.
It should be noted that the Group's APMs may not be comparable
to other similarly titled measures used by other companies and
should not be considered in isolation or as a substitute for the
equivalent measures calculated and presented in accordance with
IFRS.
In determining whether an item should be presented as an
allowable adjustment to IFRS measures, the Group considers items
which are significant either because of their size or their nature
and arise from events that are not considered part of the core
operations of the business. These tend to be one-off events but may
still cross more than one accounting period. Recurring items may be
considered in respect of the amortisation of acquisition-related
intangibles assets in order to provide comparability between peer
groups where such assets may have been internally generated and
therefore, are not reflected on that company's balance sheet with a
resulting amortisation charge.
If an item meets at least one of these criteria, the Board,
through the Audit and Risk Committee, then exercises judgement as
to whether the item should be classified as an allowable adjustment
to IFRS performance measures.
Adjustments to derive adjusted operating profit, excluding the
impact of tax, for the years ended 31 December 2022 and 2021
include the following costs:
- Amortisation of intangible assets in respect of material
acquisitions ($131.3 million and $130.4 million respectively).
- Costs incurred in respect of acquisition and divestiture
activities ($56.6 million and $17.8 million respectively).
- Impairment of intangible assets from material acquisitions
($1.4 million and $nil respectively).
- Termination costs in respect of the Group's transformation
programme and exit from hospital care business and related
industrial sales activities ($7.1 million and $4.3 million
respectively).
- Litigation expenses arising on matters deemed outside the
ordinary course of business ($nil and $5.6 respectively).
The tax effect of the adjustments is reflected in the adjusted
tax expense to remove the tax impact from adjusted net profit and
adjusted earnings per share.
Adjusted EBITDA, which is used to calculate the metric of
adjusted cash conversion and adjusted working capital, is
calculated by adding back share-based payments to adjusted
operating profit, together with the annual depreciation,
amortisation charge and impairment/write-off of assets not already
removed within the adjusted operating profit.
Amortisation of acquisition-related intangible assets
The Group's strategy is to grow both organically and through
acquisition, with larger acquisitions being targeted to strengthen
our position in key geographies and/or business categories or which
provide access to new technology. The nature of the businesses
acquired includes the acquisition of significant intangible assets,
which are required to be amortised. The Board and management regard
the amortisation as a distortion to the quality of earnings and it
has no cash implications in the year. The amortisation also
distorts comparability with peer groups where such assets may have
been internally generated and, therefore, not reflected on their
balance sheet. Amortisation of acquisition-related intangible
assets is, by its nature, a recurring adjustment.
Acquisition-related activities
Costs directly related to potential and actual strategic
transactions which have been executed, aborted or are in-flight and
which would improve the strategic positioning of the Group are
deemed adjusting items.
Acquisition-related costs relate to deal costs, integration
costs and earn-out adjustments including discounting impact which
are incurred directly as a result of the Group undertaking or
pursuing an acquisition. Deal costs are wholly attributable to the
deal, including legal fees, due diligence fees, bankers'
fees/commissions and other direct costs incurred as a result of the
actual or potential transaction. Integration costs are wholly
attributable to the integration of the target and based on
integration plans presented at the point of acquisition, including
the cost of retention of key people where this is in excess of
normal compensation, redundancy of target staff and early lease
termination payments.
Adjusted measures in relation to acquisition also include
aborted deal costs.
Divestiture-related activities
Divestiture-related activities comprise the gains or losses
resulting from disposal of assets or divestment of a business as a
result of a sale, major business change or restructuring programme.
These include write-down of non-current assets, provisions to
recognise inventories at realisable value, provisions for costs of
exiting contracts and associated legal fees, and any other directly
attributable costs. Any income from the ultimate disposal of a
business or subsidiary is included in the gain or loss.
Adjusted measures in relation to divestiture also include
aborted deal costs.
Impairment of assets
Impairments, write-offs and gains and losses from defined
programmes and where the Group considers the circumstances of such
event are not reflective of normal business trading performance or
when transactions relate to acquisition-related intangible assets
where the amortisation is already excluded from the calculation of
adjusted measures.
Termination benefits and related costs
Termination benefits and other related costs arise from
Group-wide initiatives to reduce the ongoing cost base and improve
efficiency in the business, including divestitures from
non-strategic activities. The Board considers each project
individually to determine whether its size and nature warrants
separate disclosure. Qualifying items are limited to termination
benefits (including retention) without condition of continuing
employment in respect of major Group-wide change programmes. Where
discrete qualifying items are identified these costs are
highlighted and excluded from the calculation of adjusted measures.
Due to their nature, these adjusted costs may span more than one
year. Restructuring costs not related to termination benefits are
reported in the normal course of business and are not adjusted.
Litigation expenses
Litigation expenses may arise from the ongoing defence or
pursuit of claims against or for the Group or the settlement of
claims. The Board considers each litigation claim individually to
determine whether the financial consequences were due to a major
incident or uncontrollable factors which distort IFRS measures, and
determine if adjusting for the expense would aid the user in
understanding the Group's performance in that year and comparative
periods.
Reconciliation of earnings to adjusted earnings for the years
ended 31 December 2022 and 2021
Finance Non-operating
Year ended 31 December Gross Operating Operating expense, expense, Income Net
2022 Revenue profit costs profit net net PBT tax profit
$m $m $m $m $m $m $m $m $m
------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
As reported 2,072.5 1,103.9 (896.6) 207.3 (67.7) (57.7) 81.9 (19.0) 62.9
Amortisation of acquired
intangibles - 111.6 19.7 131.3 - - 131.3 (29.2) 102.1
Acquisition related
costs - 8.7 8.2 16.9 15.6 29.5 62.0 (3.5) 58.5
Divestiture related
costs - 16.6 23.1 39.7 - 14.2 53.9 (7.8) 46.1
Termination benefits
and related costs - 4.8 2.3 7.1 - - 7.1 (1.2) 5.9
Impairment of assets - - 1.4 1.4 - - 1.4 - 1.4
------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
Total adjustments
including tax effect - 141.7 54.7 196.4 15.6 43.7 255.7 (41.7) 214.0
Other discrete tax
items - - - - - - - (20.1) (20.1)
------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
Adjusted 2,072.5 1,245.6 (841.9) 403.7 (52.1) (14.0) 337.6 (80.8) 256.8
------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
Software and R&D amortisation 16.1
Depreciation 61.8
Impairment/write-off
of assets 1.7
Share-based payments 16.7
------------------------- ------- ------- --------- ---------
Adjusted EBITDA 500.0
------------------------------------------------------ ---------
Finance Non-operating
Year ended 31 December Gross Operating Operating expense, expense, Income Net
2021 Revenue profit costs profit net net PBT tax profit
$m $m $m $m $m $m $m $m $m
---------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
As reported 2,038.3 1,123.1 (919.5) 203.6 (43.5) (8.8) 151.3 (33.7) 117.6
Amortisation of acquired
intangibles - 109.5 20.9 130.4 - - 130.4 (10.8) 119.6
Acquisitions and
divestitures - - 17.8 17.8 - - 17.8 - 17.8
Termination benefits
and related costs - 0.7 3.6 4.3 - - 4.3 (0.7) 3.6
Litigation expenses - - 5.6 5.6 - - 5.6 - 5.6
---------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
Total adjustments
including tax effect - 110.2 47.9 158.1 - - 158.1 (11.5) 146.6
Other discrete tax
items - - - - - - - (1.2) (1.2)
---------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
Adjusted 2,038.3 1,233.3 (871.6) 361.7 (43.5) (8.8) 309.4 (46.4) 263.0
---------------------------- ------- ------- --------- --------- --------- ------------- ----- ------ -------
Software and R&D amortisation 13.7
Amortisation of immaterial
acquired intangibles 3.1
Depreciation 63.4
Impairment/write-off of assets 5.9
Share-based payments 16.4
--------------------------------------------------------- ---------
Adjusted EBITDA 464.2
--------------------------------------------------------- ---------
Included within the amortisation of acquired intangibles of
$131.3 million (2021: $130.4 million), $93.0 million (2021: $96.8
million) related to intangible assets arising from the spin-out
from Bristol-Myers Squibb in 2008. The carrying amount of these
intangible assets at 31 December 2022 was $330.2 million and will
be fully amortised by 31 December 2026.
Acquisition-related costs of $62.0 million are directly related
to potential and actual strategic transactions which have been
executed, aborted or are in-flight and which seek to improve the
strategic positioning of the Group. The majority of
acquisition-related costs are in respect of the Triad acquisition,
which included $2.4 million of legal and adviser's fees, $23.7
million of remeasurement charge on contingent consideration, $15.3
million of discounting unwind and $8.7 million of inventory fair
value uplift release. The net cash impact in relation to
acquisition-related costs was $2.9 million.
Divestiture-related costs of $53.9 million are mainly related to
the phased exit from the low margin hospital care business and
industrial sales portfolio, and include the impairment of
intangible assets and property, plant and equipment, write-off of
inventories, and contract exit costs (refer to Note 10 -
Divestitures). The net cash impact in relation to
divestiture-related costs was $2.1 million.
Termination benefits and related costs of $7.1 million, pre-tax,
are primarily in respect of the severance costs from the Group's
withdrawal from its hospital care and industrial sales portfolio.
The net cash impact of these costs was $10.3 million.
Of the total net cash impact of $15.3 million as presented
above, $4.2 million related to accruals recorded in the prior
year.
Impairment of assets of $1.4 million relates to a legacy
acquisition-related customer relationship asset which was impaired
as part of rationalisation of activities in the portfolio.
Other discrete tax items in 2022 relate to the tax benefit from
the recognition of deferred tax assets following the acquisition of
Triad Life Sciences. In 2021, other discrete tax items related to
the tax benefit of $6.8 million resulting from the recognition of
deferred tax following the acquisition of Cure Medical, partially
offset by a tax expense of $5.6 million relating to the revaluation
of deferred tax liabilities on UK-acquired intangibles as a result
of the increase in the UK corporation tax rate from 1 April
2023.
Reconciliation of operating costs to adjusted operating costs
for the years ended 31 December 2022 and 31 December 2021
2022 2021
--------------------------------------------- -----------------------------------
S&D(1) G&A(2) R&D(3) Other(4) Operating S&D(1) G&A(2) R&D(3) Operating
costs costs
$m $m $m $m $m $m $m $m $m
As reported (575.9) (214.9) (92.0) (13.8) (896.6) (539.7) (285.3) (94.5) (919.5)
Amortisation of acquired
intangibles - 19.7 - - 19.7 - 20.9 - 20.9
Acquisitions and divestitures 9.0 9.9 - 12.4 31.3 0.5 17.3 - 17.8
Impairment of assets - - - 1.4 1.4 - - - -
Termination benefits
and related costs 2.0 0.3 - - 2.3 - 3.7 (0.1) 3.6
Litigation expenses - - - - - - 5.6 - 5.6
------- ------- ------ --------
Adjusted (564.9) (185.0) (92.0) (0.0) (841.9) (539.2) (237.8) (94.6) (871.6)
1. "S&D" represents selling and distribution expenses.
2. "G&A" represents general and administrative expenses.
3. "R&D" represents research and development expenses.
4. "Other" relates to the impairment of assets from the Group's
withdrawal from hospital care and industrial sales portfolio and
impairment of product-related intangible assets from previous
acquisition.
Reconciliation of income tax expense to adjusted income tax
expense
2022 2021
$m $m
Income tax expense (19.0) (33.7)
Tax effect of adjustments (41.7) (11.5)
Other discrete tax items (1) (20.1) (1.2)
Adjusted income tax expense (80.8) (46.4)
1. Other discrete tax items - see note above in respect of adjustments to profit.
Reconciliation of basic and diluted earnings per share to
adjusted earnings per share for the years ended 31 December 2022
and 31 December 2021
Adjusted Adjusted
2022 2022 2021 2021
$m $m $m $m
Net profit attributable to
the shareholders of the Group 62.9 256.8 117.6 263.0
Number Number
Basic weighted average ordinary
shares in issue 2,023,839,657 2,008,923,797
Diluted weighted average ordinary
shares in issue 2,040,247,468 2,026,340,345
Cents per Cents per Cents per Cents per
share share share share
Basic earnings per share 3.1 12.7 5.9 13.1
Diluted earnings per share 3.1 12.6 5.8 13.0
Cash conversion for the years ended 31 December 2022 and 31
December 2021
2022 2021
$m $m
Operating profit 207.3 203.6
Depreciation of property, plant and equipment 39.7 40.6
Depreciation of right-of-use assets 22.1 22.8
Amortisation of intangible assets 147.4 147.2
Impairment/write-off of intangible assets and property,
plant and equipment 15.5 5.9
EBITDA 432.0 420.1
Non-cash items
Share-based payments 16.7 16.4
Working capital movement (62.5) (31.6)
Loss on foreign exchange derivatives (1.7) (4.3)
Net cash generated from operations 384.5 400.6
Acquisition of property, plant and equipment and intangibles
assets (144.2) (94.1)
Net cash for cash conversion 240.3 306.5
Income taxes paid (52.9) (59.2)
Free cash flow (post-tax) 187.4 247.3
Reconciliation of adjusted net cash and adjusted free cash flow
(to calculate adjusted cash conversion)
2022 2021
$m $m
Net cash for cash conversion 240.3 306.5
Non-operating (gain)/loss on foreign exchange forward
contracts - 0.4
Acquisitions and divestitures adjustments 5.0 13.0
Termination benefits and related costs adjustments 10.2 8.4
Litigation costs adjustments - 5.6
Adjusted net cash for cash conversion 255.5 333.9
Income taxes paid (52.9) (59.2)
Adjusted free cash flow (post-tax) 202.6 274.7
EBITDA 432.0 420.1
Adjusted EBITDA 500.0 464.2
Cash conversion 55.6% 73.0%
Adjusted cash conversion 51.1% 71.9%
Reconciliation of adjusted working capital
2022 2021
$m $m
Working capital movement(1) (62.5) (31.6)
Decrease in termination benefits(2) 3.1 4.1
Increase in respect of acquisitions and divestitures(2) (39.2) (4.8)
Adjusted working capital movement (98.6) (32.3)
1. Working capital movement is the change in assets and
liabilities total within the Consolidated Statement of Cash Flows
on page 25.
2. These are the cash flow impacts to the adjusted items shown
in the reconciliation of earnings to adjusted earnings table on
page 43.
Net debt
Net debt is calculated as the carrying value of current and
non-current borrowings on the face of the Consolidated Statement of
Financial Position, net of cash and cash equivalents and excluding
lease liabilities.
2022 2021
$m $m
------- -------
Borrowings 1,211.9 1,344.6
Lease liabilities 88.3 90.5
-------
Interest-bearing liabilities 1,300.2 1,435.1
Cash and cash equivalents (143.8) (463.4)
Interest-bearing liabilities net of cash 1,156.4 971.7
Net debt (excluding lease liabilities) 1,068.1 881.2
Net debt (excluding lease liabilities)/adjusted
EBITDA 2.1 1.9
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