TIDMCTEC
RNS Number : 2901V
ConvaTec Group PLC
06 August 2020
6 August 2020
ConvaTec Group Plc
Interim results for the six months ended 30 June 2020
Solid H1 performance, strategy implementation on track, COVID-19
challenges continue
Key points:
-- Group reported revenue of $908 million up 2.1% year on year,
4.3% in constant currency(1) driven by Continence and Critical Care
and Infusion Care, partially offset by lower Advanced Wound Care
revenue.
o As expected, second quarter growth was impacted by lower
volumes in Advanced Wound Care and by the unwinding of increased
customers' inventories in Ostomy Care.
-- The strategic transformation is progressing well; with
investments proactively re-phased in response to conditions
resulting from COVID-19.
o Recurring transformation investment in 2020 expected to be
between $50 million and $55 million (previously $60 million and $65
million), of which $16 million in the first half.
o As a result, annual gross benefits in 2021 now expected to be
between $130 million and $150 million (previously between $150
million and $170 million).
-- Reported EBIT(4) of $113 million, 20.7% higher year on year,
and Adjusted EBIT(2) of $182 million, 10.0% higher, reflecting the
prior year rebate provision, temporary cost reductions due to
COVID-19 and net productivity gains. Adjusted(2) EBIT margin
increased to 20.0% (2019: 18.6%).
-- Interim dividend of 1.717 cents declared, in line with the prior year.
-- Reduction in leverage to 2.2x net debt/adjusted EBITDA(2, 3)
(31 December 2019: 2.5x), adjusted cash conversion(2) of 73% (30
June 2019: 90%) with the prior year benefiting from favourable
inventory movements.
-- FY2020 outlook maintained: uncertainty and risk of disruption due to COVID-19 remains.
o Lower revenue growth and higher transformation investment
expected in the second half, alongside a return to higher operating
expense levels.
Group revenue
Six months ended 30 June 2020 Q2
-------------------------------------------------------
2020 2019 Reported Foreign Constant Constant
Exchange Currency(1) Currency(1)
impact growth
/ (decline)
$m $m growth growth
/ (decline)
------------------------- ----- ----- -------------- ---------- -------------
Revenue by Franchise
Advanced Wound Care 251 271 (7.6)% (2.8)% (4.8)% (13.2)%
Ostomy Care 252 252 (0.2)% (3.3)% 3.1% (2.7)%
Continence and Critical
Care 244 222 10.3% (1.1)% 11.5% 12.0%
Infusion Care 161 144 11.9% (0.7)% 12.6% 12.6%
------------------------- ----- ----- -------------- ---------- ------------- -------------
Total 908 889 2.1% (2.2)% 4.3% 0.0%
------------------------- ----- ----- -------------- ---------- ------------- -------------
Karim Bitar, Chief Executive Officer, commented:
"In the first half, despite the disruption caused by COVID-19,
we delivered a solid trading performance and continued to implement
our strategy to Pivot to Sustainable and Profitable Growth.
Whilst there remains much work to do, we continue to push
forward with key initiatives. In light of the current
circumstances, we have accelerated some investments, in particular
in our digital capabilities to respond to changes in customer
engagement preferences, and our new operating model is embedding
well. Conversely, other investments, such as salesforce expansions,
have been deferred.
Looking ahead, we remain committed to supporting and protecting
our colleagues and the people and care givers we serve, whilst
continuing to maintain the resilience of our supply chain. We are
conscious of COVID-19 related challenges in the second half, have
taken proactive steps to address them where possible and are
maintaining our full year outlook."
Six months ended 30
June
------------------------
2020 2019 Growth
Reported results $m (unless stated) Reported Constant
Currency (1)
Revenue 908 889 2.1% 4.3%
Gross margin 54.1% 51.7% 240 bps
EBIT/Operating profit 113 94 20.7% 18.9%
EBIT margin 12.4% 10.5% 190 bps
Earnings per share
($) 0.03 0.02 30.4%
Dividend per share
($ cents) 1.717 1.717
Six months ended 30
June
------------------------
2020 2019 Growth
Adjusted(2) results $m (unless stated) Reported Constant
Currency (1)
----------------------- ------------------------ --------- --------------
Revenue 908 889 2.1% 4.3%
Gross margin 60.0% 58.6% 140 bps
EBIT/Operating profit 182 165 10.0% 9.3%
EBIT margin 20.0% 18.6% 140 bps
Earnings per share
($) 0.06 0.06 8.9%
Analyst and Investor call
There will be an analysts and investors call/webcast
presentation today at 9.00am BST, which can be accessed live
through the ConvaTec website
www.convatecgroup.com/investors/reports. A recording will be
available on the site shortly afterwards.
United Kingdom: +44 20 3936 2999
United States: +1 646 664 1960
All other locations: +44 20 3936 2999
Access Code: 271507
The full text of this announcement and the presentation can also
be downloaded from the website above.
Enquiries:
Analysts and Investors
Mark Reynolds, Director, Investor Relations +44 (0)7551 036
625
ir@convatec.com
Media
Buchanan: Charles Ryland / Chris Lane / Vicky Hayns +44 (0)207
466 5000
Financial Calendar
Ex-dividend date 3 September 2020
Dividend record date 4 September 2020
Scrip dividend election date 22 September 2020
Dividend payment date 15 October 2020
Q3 trading update 30 October 2020
About ConvaTec
ConvaTec is a global medical products and technologies company
focused on therapies for the management of chronic conditions, with
leading market positions in advanced wound care, ostomy care,
continence and critical care, and infusion care. Our vision, which
encompasses our purpose, is: Pioneering trusted medical solutions
to improve the lives we touch. Our products provide a range of
clinical and economic benefits including infection prevention,
protection of at-risk skin, improved patient outcomes and reduced
total cost of care. To learn more about ConvaTec, please visit
www.convatecgroup.com
Operating Review for the six months ended 30 June 2020
Group revenue
Group revenue of $908 million increased 2.1% on a reported basis
and 4.3% in constant currency(1) . This reflects robust growth in
Continence and Critical Care and Infusion Care, partially offset by
the decline in Advanced Wound Care and adverse foreign exchange
movements of $19 million.
Advanced Wound Care revenue of $251 million declined 7.6% on a
reported basis and 4.8% in constant currency(1) , including a 13.2%
decline in the second quarter. As expected, this was due to the
negative impact of reduced elective surgeries, as well as lower
non-surgical volumes.
The second quarter decline was broad based both geographically
and across products. Despite reduced hospital visits, AQUACEL(TM)
Ag+ / Advantage performed well, whilst our legacy products remain
challenged.
Ostomy Care revenue of $252 million declined 0.2% on a reported
basis and increased 3.1% in constant currency(1) , despite a 2.7%
decline in the second quarter, which was largely due to a partial
reversal of customers' inventory building in the first quarter.
We achieved good growth in key emerging markets such as China,
Brazil and Colombia driven by continued traction with our more
recent Convex product launches, Esteem+(TM) Flex and Natura+(TM)
Accordion.
Continence and Critical Care revenue of $244 million increased
10.3% on a reported basis and 11.5% in constant currency(1) ,
including a 12.0% increase in the second quarter. First half growth
included a $1.9 million contribution from Southlake Medical
Supplies, acquired in October 2019.
The elevated growth in the first half was driven by COVID-19
related demand for Critical and Hospital Care products and
continued good growth in Home Services Group in the US driven by
GentleCath(TM) Glide.
Infusion Care revenue of $161 million increased 11.9% on a
reported basis and 12.6% in constant currency(1) in both the first
half and second quarter, driven by a strong performance in a
growing pump market.
Adjusted EBIT(2)
Adjusted gross margin of 60.0% improved 140 basis points versus
the prior year due to the impact of the rebate provision in the
prior year, favourable foreign exchange movements and some net
productivity gains which more than offset modest price and mix
headwinds.
Operational expenditure increased $16 million on a constant
currency basis driven by strategic investment in key markets such
as the US and China, other transformation investment and costs
related to Medical Device Regulations ("MDR"). This was partially
offset by temporarily lower operating expenses driven by
circumstances relating to COVID-19. On a reported basis operational
expenditure increased $7 million, or 2.1%, year on year, including
a $9 million positive impact from foreign exchange movements.
In the first half we incurred $25 million of one-off
transformation investment ($14 million in the first half of 2019),
whilst our recurring transformation investment grew to $16 million
(negligible in the first half of 2019), and we also incurred $9
million of MDR costs ($1 million in the first half of 2019). We
anticipate a significant increase in recurring transformation
investments in the second half of the year. See page 4 below for
further details.
As a result, Adjusted EBIT margin(2) was 20.0% in the first
half, an increase of 140 basis points year on year.
Pivoting to Sustainable and Profitable Growth
The execution of our strategic transformation focusing on five
pillars: Focus, Innova te, Simplify, Build and Execute ("FISBE"),
is progressing well. However, as we adapt to the challenges
resulting from COVID-19, we are proactively re-phasing our
investments, pushing forward with increased impetus in certain
areas, such as enhancing our digital capabilities, whilst delaying
spend in others to reflect the current environment.
Focus : we are concentrating our efforts on key markets and
categories . We have today announced the divestment of the skin
care business and we will continue to rationalise our product
portfolio, for example, in Ostomy Care.
Innovation : we are significantly increasing our investment in
R&D; initial steps include augmenting our capabilities, with
the elevation of our Technology function, recent key hires and the
opening of our innovation centre in Boston. Commercially, we are
making greater use of digital platforms to meet changing customer
preferences.
Simplify: our new operating model is being embedded across the
organisation, and our new Global Business Services centre in
Lisbon, Portugal, is now operational and will focus on delivering
improved service and efficiency.
Build: we are building core capabilities across the value chain;
we are starting to improve our competencies in key areas such as
salesforce effectiveness, design for manufacturing and pricing.
Execution: our Transformation Office is now well established and
is continuing to drive a culture of execution excellence across the
organisation.
As a result of the current circumstances and our re-phasing of
investments, we are expecting that the increase in our recurring
investment in the current year will be lower than previously
communicated; we now expect this to be between $50 million and $55
million in 2020 (previously $60 million and $65 million).
-- FY2020 one-off transformation investment
o $50-55 million of operational costs (largely opex), of which
$25 million in the first half.
o c.$30 million capex, of which $12 million in the first
half.
o In addition, between $20 million and $25 million of costs to
be excluded from adjusted EBIT(2) , in line with our policy, of
which $6 million in the first half.
-- FY2020 recurring transformation investment
o Between $50 million and $55 million in 2020 (previously $60
million and $65 million), of which $16 million in the first
half.
-- Annual gross benefits
o As a result of the COVID-19 pandemic and the resulting
deferral of some investments we expect annual gross benefits in
2021 will now be between $130 million and $150 million (previously
between $150 million and $170 million).
Dividend
Whilst we remain mindful of the uncertainty due to COVID-19, the
business is making progress and has a strong financial position; we
are therefore declaring an interim 2020 dividend of 1.717 cents per
share, in line with the prior year. See Dividends in the Financial
Review for more detail.
Cash flow and leverage
The Group ended the period with net debt of $1,038 million (31
December 2019: $1,100 million), which amounted to 2.2x adjusted
EBITDA(2,) (3) (31 December 2019: 2.5x).
Adjusted net cash for cash conversion(2) was $163 million in the
first half (30 June 2019: $184 million), with the year on year
reduction largely as a result of the prior year benefiting from
favourable inventory movements. As a result, adjusted cash
conversion(2) was 73% (30 June 2019: 90%). See Capital structure
and liquidity management in the Financial Review for more
detail.
Divestment of Skin Care
In line with our strategic transformation and consistent with
our five pillars, FISBE, we will focus on key markets and
categories, and today we announce we have entered into an agreement
with Medline Industries Inc. for the divestment of the non-core
Skin Care business within Advanced Wound Care. The sales proceeds
are expected to be approximately $29 million and we expect the
transaction to complete in the third quarter of 2020. See note 11
in the Financial Statements for further details.
FY2020 Outlook and Guidance
As we expect a number of factors that drove a positive impact in
the first half to reverse in the second half, we are maintaining
our 2020 guidance of 2.0% to 3.5% constant currency(1) revenue
growth and between 16% and 18% constant currency(1) adjusted EBIT
margin(2) , whilst remaining cautious about the risk of COVID-19
related disruption.
We expect the impact of reduced elective surgeries and lower
non-surgical volumes as well as the unwinding of customer
inventories to continue in the second half. In addition, whilst we
expect to achieve good growth in Continence and Critical Care, we
expect the higher, first half COVID-19 related demand to reduce,
and there to be a negative impact from portfolio rationalisation in
Ostomy Care. In addition, strategic transformation investment will
increase in the second half, alongside a return to higher expense
levels as the impact of COVID-19 reduces.
People
In these unprecedented times, the resilience, pragmatism and
adaptability shown by colleagues in response to the pandemic has
been fantastic to witness and the Board's heartfelt thanks goes out
to all.
As previously announced, there have also been a number of Board
changes during the period to enhance healthcare, financial and
innovation expertise.
Brian May, formerly Chief Financial Officer of Bunzl plc from
2006 to 2019, joined the Board as a Non-Executive Director in March
2020. Brian has extensive financial and international business
experience and will assume the Chair of the Remuneration Committee
position following the departure of Dr. Ros Rivaz on 31st August
2020.
In July 2020, Heather Mason joined the Board as a Non-Executive
Director. Heather spent 27 years with Abbott Laboratories where she
held a number of global senior commercial, operational and
international roles, and has deep healthcare sector knowledge.
In addition, and as we increase our focus on R&D and
innovation, in September 2020, we will welcome Professor Constantin
Coussios to the Board as a Non-Executive Director. Constantin is
the Director of the Institute of Biomedical Engineering at the
University of Oxford. In addition to his expertise in biomedical
engineering, he brings first-hand experience of successfully
developing innovative products from concept through to
commercialisation.
Since March, we have continued to reinforce the strength of the
executive team and we welcomed Natalia Kozmina, our new Chief Human
Resources Officer, in June 2020. Natalia brings strong leadership
skills across the value chain as well as key aspects of the human
resources agenda including global talent, reward, organisational
effectiveness, diversity and inclusion. Natalia has more than 20
years of global experience in healthcare, predominantly at Abbott
Laboratories, in a variety of roles ranging from general
management, product management and R&D.
2020 LTIP
In our 2019 Annual Report and Accounts on pages 130-131, the
Remuneration Committee noted that the adjusted PBT targets for the
2020 LTIP awards for all participants would be set to align with
the new strategy and operating model. The performance conditions
that will be attached to the 2020 LTIP awards are set out in the
table below, and are considered by the Committee to be
appropriately stretching.
Threshold Stretch Maximum
Measure Weighting (25% vesting) (90% vesting) (100% vesting)
============================================ ========= ============== =============== ===============
Three-year compound annualised growth
in adjusted PBT 75% 4.5% p.a. 10%p.a.
============================================ ========= ============== =============== ===============
Three-year Relative TSR rank vs constituents 75th percentile
of FTSE 350 excluding investment trusts 25% Median 90th percentile
============================================ ========= ============== =============== ===============
The adjusted PBT element shall vest on a straight line sliding
scale between the performance measurement points. The TSR element
will continue to vest at 25% for median performance, and require
90th percentile performance for full vesting. The Committee also
concluded that it would be appropriate to introduce an intermediate
'stretch' target at the 75th percentile, for which 90% of this
element shall vest. A straight-line sliding scale shall operate
between 'threshold' and 'stretch', and between 'stretch' and
'maximum'.
The performance period is from 1st January 2020 to 31st December
2022, and all definitions are consistent with the descriptions in
the 2019 Annual Report and Accounts.
To the extent the 2020 LTIP awards vest, vested shares will be
required to be held by Directors for a further two-year
post-vesting holding period. As previously announced, on 1 May
2020, Karim Bitar and Frank Schulkes were granted 2020 LTIP awards
of 1,061,532 and 535,752 shares respectively.
Responding to COVID-19
Our focus has been on ensuring th e health and wellbeing of our
colleagues and we continue to support the people and care givers we
serve by meeting the demand for our products and services.
In March we established a dedicated team, involving experts from
around our global business, focused on key workstreams: medical,
people; supply chain; customer interaction; and financial
liquidity.
-- Medical: Led by our Chief Medical Officer, we have closely
monitored the developing scientific understanding of COVID-19,
government regulations and the impact of evolving regulations on
our people and the care givers we serve. We have also tracked cases
within our colleagues versus local population trends. All of this
scientific based analysis has guided our response to the challenges
of COVID-19.
-- People: All sites have adjusted work practices, including
enhanced hygiene protocols and social distancing measures. We have
temperature checking at our sites and provide personal protective
equipment ("PPE"). We rapidly responded to all office-based
colleagues becoming remote workers and drove access and adoption of
IT tools to support the change, ensuring that our controls remained
effective. These enhanced IT tools have also facilitated
communication to colleagues and increased access to online
training.
-- Supply Chain: Our global quality and operations team has been
working closely across our sites to maintain production capability
and our warehouses. We have responded rapidly in our sites to
evolving local government restrictions and requirements with the
overriding focus being on the well-being of our colleagues. We are
liaising regularly with our supply-chain partners including
third-party manufacturers to work with them to ensure the
sustainability of supply. To date, delivery to wholesalers,
distributors, hospitals, and patients remains uninterrupted, and we
continue to monitor the situation as it develops.
-- Customer interaction: We are accelerating investment in our
digital capabilities to enable us to use alternative digital and
social media channels to communicate with customers, hospitals and
clinicians alongside, and to complement, face to face interactions
as access to healthcare facilities returns. Furthermore, we are
investing in the advancement of e-commerce platforms to facilitate
the purchasing and delivery of products.
-- Financial liquidity: The maintenance of a strong cash
position, together with an undrawn, revolving credit facility of
$200 million, provided the Group with c.$650 million of liquidity
at the end of June. Financial liquidity remains strong with a
positive net cash inflow that is monitored on a daily basis.
It is relevant to note that a significant proportion of
ConvaTec's revenue is generated in chronic categories and is of a
recurring nature; however, in the second quarter we experienced
negative demand as a result of COVID-19 within Advanced Wound Care
and this is expected to continue to be a headwind in the second
half.
We have not furloughed any colleagues as a result of COVID-19
nor made use of any government support programmes.
Whilst the future remains uncertain in relation to the pandemic,
including the potential for a second wave, the Group has
demonstrated both operational and financial resilience to date and
we believe that delivery across our key workstreams and our future
strategic transformation plans leave the business well positioned
to remain successful under these difficult circumstances.
UK withdrawal from the European Union ("Brexit")
We continue to monitor the Brexit negotiations, assessing the
potential effects on our organisation, and preparing contingency
plans to address the potential outcomes. At this stage, m anagement
does not expect there to be material financial or operational
impacts which could arise, as a result of Brexit. However, it
remains unclear what the position will be for the UK after the
transition period ends on 31 December 2020 and our planning will
continue to evolve and adapt with the political developments.
(1) Constant currency growth is calculated by applying the
applicable prior period average exchange rates to the Group's
actual performance in the respective period.
(2) Certain financial measures in this document, including
adjusted results, are not prepared in accordance with International
Financial Reporting Standards ("IFRS"). All adjusted measures are
reconciled to the most directly comparable measure prepared in
accordance with IFRS in the Non-IFRS Financial Information (page
29).
(3) Last 12 months adjusted EBITDA of $462m.
(4) Adjusted EBIT is equivalent to adjusted operating profit and
reported EBIT is equivalent to reported operating profit
Principal risks and uncertainties
We recognise that risk is inherent in our business.
Identification, understanding, evaluation and response to the risks
we face is fundamental to the effective development and delivery of
our strategic priorities to ensure longer term viability and
resilience.
Our principal risks, which the Board reviews and approves on a
bi-annual basis, and details of our enterprise risk management
framework are set out in the Group's 2019 Annual Report and
Accounts on pages 24 to 33. Our system of risk management and
internal control continues to develop and takes into account
current internal and external factors and the Group's risk
appetite, and updates to the principal risks and mitigation plans
are made as required.
The Board has reviewed the principal risks that exist at 30 June
2020, taking into consideration the risks that existed during the
first six months of 2020 and those that it believes will have an
impact on the business over the remaining six months of the period.
Our principal risks, as disclosed in our 2019 Annual Report and
Accounts, other than in respect of the impacts of COVID-19, remain
largely unchanged as at 30 June 2020 as to their potential effect
on our ability to successfully deliver our strategy. The risk
landscape, however, has become more challenging in light of the
COVID-19 pandemic and the consequential emerging longer-term
economic and social implications. The Board has considered the
impact of COVID-19 on the Group's business and principal risks, the
additional controls and mitigations required to address these
challenges and reprioritised the principal risks accordingly.
The nature of ConvaTec's business and its geographic and product
diversification, provides a level of mitigation to fluctuations in
demand. As such, the Group has, to date and summarised earlier in
the document, experienced minimal negative trading implications
from the COVID-19 pandemic (except in those parts of our business
linked to elective surgery and hospital visits more generally) and
the Board believes this to be relevant to its future trading
position. The Group has demonstrated operational strength in this
challenging environment, meeting robust demand and continuing to
drive forward with the transformation programme, which has been
adapted to address the expectation of continued uncertainty and
volatility in the business environment. COVID-19, however, has
brought certain challenges to our people, manufacturing facilities,
supply chain and the sales of our products that are linked to
elective surgery. A Rapid Response Team was assembled in early
March 2020 to actively focus on addressing these challenges in four
key areas:
-- People: All manufacturing sites have adjusted work practices,
including in the area of social distancing and hygiene factors. All
office-based employees were mandated to work remotely from
home.
-- Supply Chain: Maintaining manufacturing, principal warehouses
and supporting the viability and sustainability of third-party
supply chain and logistics partners so delivery to wholesalers,
distributors, hospitals, and patients remained uninterrupted.
-- Customers: Use of alternative digital and social media
channels to communicate with customers, hospitals and clinicians
and continuing to optimise e-commerce platforms to facilitate the
purchasing and delivery of products.
-- Liquidity: Ensuring the maintenance of a strong cash position
and directly accessible, undrawn, revolver credit line of $200
million. Financial liquidity remains strong with a positive net
cash inflow that is closely monitored on a daily basis.
Information on the Group's approach to the COVID-19 pandemic is
found on pages 4 and 5 of this document. The Group is closely
monitoring and responding to the course of COVID-19 and its known
and potential impacts on our business units and markets, whilst
implementing interventions to mitigate external risk beyond our
control. A transition from the Rapid Response Team to a New Normal
Oversight Team that focuses on medium-term efforts as part of the
Transformation Office has been undertaken to ensure the Group
remains well positioned for long-term success. We recognise that
there are additional emerging risks as a result of the longer-term
implications of the pandemic, particularly in respect of: the
geopolitical environment as trade conditions may place pressure on
markets and supply chains across all businesses; the global economy
potentially continues to contract from the effects of national
lockdowns and responses; the possible threat of a new wave of
protectionist policies as countries take stock of events; and,
pricing and reimbursement, as healthcare systems adapt to the new
economic context and the financial cost of containing and
responding to the initial and any subsequent national and localised
waves and spikes.
Principal risks continue to be appropriately mitigated and work
continues to reduce the net exposure. As a result of COVID-19
challenges, however, the risk profile of four of our principal
risks (Legal and Compliance, Information Security, Global
Operations and Supply Chain, Pricing and Reimbursement) listed
below has altered. In addition, the nature of the Brexit principal
risk has been extended to include the wider emerging Geopolitical
landscape. A summary of the principal risks and how the risk
profile has altered in respect of four of the risks is provided
below:
-- Change and Transformation - The scale of our transformation
programme is significant. Successful delivery through robust change
management processes and investment in infrastructure and
capabilities is required to realise our vision and pivot to
sustainable and profitable growth. A material delay or challenge in
realisation of our forecasts, including as a result of COVID-19,
may affect the transformation or growth of our business areas
resulting in a failure to meet stakeholder and shareholder
expectations.
-- Legal and Compliance - Our business is subject to a complex
environment of laws and regulations across multiple jurisdictions.
We seek to fully comply with all market and corporate obligations
and requirements. Real or perceived failure to do so, or adjust to
a change in conditions (including COVID-19 effects on the business
environment) and increase in scrutiny, could result in adverse
consequence such as penalties, a decrease in corporate trust from
stakeholders or additional compliance measures. The risk profile
has increased due to tightening market conditions and COVID-19 led
business changes resulting in the need to enhance our control
environment to ensure we continue to comply with policies and
industry codes across our business, distributors and supply chain.
Additional compliance resources have been onboarded in North
America and Europe and we have increased and enhanced virtual
ethics education provided to business commercial teams. We intend
to onboard new third-party providers to further develop the
management of fair market value compensation to health care
professionals, develop the management of external funding requests
(such as charitable contributions and medical educational grants)
and to undertake assessments of the business needs of healthcare
professionals.
-- Information Security - We rely upon our complex technology
systems, network and information management processes to support
the effective operation of our global business. Failure to ensure
that our systems, data management and related controls are
effective, available, and integral and secure, including those of
our third-party partners and during the current COVID-19
environment, could adversely affect our ability to maintain
continuity in our operations and the trust of our customers,
stakeholders and shareholders to provide a robust platform for our
business. The risk profile has increased following a rise in
illegal cyber security activity across businesses over the first
six months of 2020 due to COVID-19 and the switch to a broader
homeworking environment for our employees. Security, data
management and privacy improvements and updates have been
implemented in response, and these changes also reduce exposure to
cyber incidents from employee homeworking. We continue to improve
the resilience of our existing network and applications to reduce
exposure from the cyber security threat.
-- Global Operations and Supply Chain - We invest in the
maintenance, development and innovation of our manufacturing assets
to provide resilience in our operational integrity and performance.
We rely on resilient and cost-effective supply chain partners and
third parties for quality products, raw materials and services to
support our operations and to comply with legal, regulatory and
ethical obligations. Failure to respond to events, including
pandemics and any increase in extreme weather patterns from climate
change, that result in production and / or supply chain delays,
adverse product quality and health, safety and environmental
incidents could result in underperformance or a loss of confidence
in our ability to deliver our strategic objectives. The risk
profile has increased following the challenges to the viability and
sustainability of our operations brought about as a result of
COVID-19, and the potential for recurrent and sustained waves,
including internal (manufacturing plant hygiene) and external
(supply chain and logistics partner resilience) factors. Bespoke
manufacturing plant hygiene protocols have been implemented,
including temperature screening and social distancing and PPE. We
continue to perform an ongoing assessment and review of supply
chain partners' COVID-19 risk exposure.
-- Geopolitical (formerly Brexit) - The Group has revised this
risk to a broader Geopolitical principal risk. In our 2019 Annual
Report and Accounts we anticipated geopolitical risk factors to be
realised in 2020; however, the COVID-19 situation has exacerbated
this risk and it is now prudent to elevate the wider consequences
of continued emerging volatility in the international political
climate alongside that of final trade agreements between the UK and
EU on the Group's trading conditions. Our global operations and
markets are affected by changes in the international political
climate, particularly tariff structure changes, sanctions or other
trade limiting actions. These emerging changes can be brought about
by national approaches to trade policy, electoral campaigns,
regional geopolitical tensions and nationalism; resulting in the
potential implementation of national healthcare reforms and local
market tariffs, changes to regulation, legislation, tax and
corporate governance requirements, consumer / customer protection
and effects on the security of supply chain in the markets where we
operate. There is potential heightened risk associated with Brexit
final trade agreements on Group trading conditions including Group
EU and UK production plants and employees, the Netherlands'
logistics hub and sales in all EU countries. A failure to adapt to
these factors could impact the ability to source commodities and
services, operate in certain markets and / or retain a presence in
current locations. Compliance, Legal, Regulatory and Investor
Relations teams are in place to liaise with stakeholders externally
and respond to changing requirements. We continue to monitor the
final Brexit and other geo-political (such as US:China and, as a
result of the recent UK Government decision on Huawei involvement
in UK 5G telecommunication networks, UK:China) trade agreements
processes, taking into consideration the disruption already being
faced by COVID-19, and assess any further mitigating actions that
are required.
-- Failure to Attract, Engage and Retain Leadership Talent - To
transform our business we need to attract, retain and develop
skilled and talented people. Failure to secure the right level of
capability and capacity, particularly in our senior management,
develop a talent pipeline and successfully manage cultural
transformation, ambitious technical-change programmes, changes to
our current structure and / or effects of high business disruption
(e.g. COVID-19) will adversely affect our ability to transform our
business, achieve our strategic objectives and deliver growth.
-- Product Innovation and Intellectual Property - Sustainable
innovation in our product and development pipeline is fundamental
to future growth, and the ability to respond to disruptive new
technologies, changing customer behaviour, requirements and demand.
Failure to invest in and develop safe, effective, profitable
long-life products to meet market needs and fill unmet medical
needs, deliver development programmes during the current COVID-19
climate or maintain sufficient IP protection, could result in lost
market share, underperformance and a lack of confidence in our
operational integrity to deliver in line with expectations.
-- Quality and Regulatory - We are subject to oversight by a
number of regulatory jurisdictions that continue to implement
significant obligations and scrutinise how we operate. Failure to
absorb any cost increase, fulfil emerging obligations or produce
products and packaging that meet stringent customer and
environmental criteria, or operate inadequate manufacturing and
quality system procedures could result in our inability to supply
or a requirement to recall a product, with the potential for
patient class actions and individual patient liability claims, due
to non-compliance with regulatory bodies or a failure to meet
stakeholder expectations or due to patient harm from faulty
products.
-- Pricing and Reimbursement - Growth and value in our markets
rely on our product and future innovation pipeline meeting customer
demands and a competitive pricing strategy. Failure to respond to
changing customer behaviours and reimbursement rates, pricing
pressure from large and consolidating buying groups, competitor
movements and any reduction in local and national Government
healthcare budgets, including as a result of any emerging
longer-term consequences from COVID-19, could erode our market
performance, financial return and ability to maintain confidence
with stakeholders and shareholders. The risk profile has increased
following the deterioration in the overall global economic outlook
and the resultant potential emerging impact to healthcare systems
and customers as they adapt to the new economic context. We have
formed a market access centre of excellence to focus on
reimbursement, including the effects of COVID-19, on our business
and the markets in which we operate
-- Forecasting and Market Conditions - Failure to identify,
react or plan effectively to changes in market conditions, customer
demand or any perceived lack of demand visibility on a timely
basis, including those driven by the current COVID-19 environment
particularly affecting elective surgery and hospital visits in
general, could result in suboptimal decisions, underperformance and
adverse trading results. We rely on effective business planning and
accurate forecasting that link operational manufacturing,
commercial and supply processes to make effective management
decisions and prioritise how we use our resources.
-- Macroeconomic, Foreign Exchange and Tax - Our financial
performance and price competitiveness are dependent on the
management of exposure to changes in macroeconomics, particularly
foreign exchange and interest rate movements, the effects of
COVID-19 on the existing economic environment and tax obligations,
including duties and tariffs. Failure to respond to events that
have a direct impact on our credit, ratings, cash-flow and
liquidity could result in an increase in the cost of and access to
financing. An inability to maintain robust financial and tax
systems to fulfil accurate financial statements and filing
requirements, underpinned by appropriate accounting and tax
judgements, could result in inadequate disclosure or material
misstatement.
Forward Looking Statements
This document includes statements that are, or may be deemed to
be, "forward-looking statements". These forward-looking statements
involve known and unknown risks and uncertainties, many of which
are beyond the Group's control. "Forward-looking statements" are
sometimes identified by the use of forward-looking terminology,
including the terms "believes", "estimates", "aims", "anticipates",
"expects", "intends", "plans", "predicts", "may", "will", "could",
"shall", "risk", "targets", "forecasts", "should", "guidance",
"continues", "assumes" or "positioned" or, in each case, their
negative or other variations or comparable terminology. These
forward-looking statements include all matters that are not
historical facts. They appear in a number of places and include,
but are not limited to, statements regarding the Group's
intentions, beliefs or current expectations concerning, amongst
other things, results of operations, financial condition,
liquidity, prospects, growth, strategies and dividend policy of the
Group and the industry in which it operates.
By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. These
statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and
competitive uncertainties and contingencies. As such, no assurance
can be given that such future results, including guidance provided
by the Group, will be achieved; actual events or results may differ
materially as a result of risks and uncertainties facing the Group.
Such risks and uncertainties could cause actual results to vary
materially from the future results indicated, expressed, or implied
in such forward-looking statements. Forward-looking statements are
not guarantees of future performance and the actual results of
operations, financial condition and liquidity, and the development
of the industry in which the Group operates, may differ materially
from those made in or suggested by the forward-looking statements
set out in this Presentation. Past performance of the Group cannot
be relied on as a guide to future performance. Forward-looking
statements speak only as at the date of this document and the Group
and its directors, officers, employees, agents, affiliates and
advisers expressly disclaim any obligations or undertaking to
release any update of, or revisions to, any forward-looking
statements in this document.
First Half Financial Highlights
The following table sets forth the Group's revenue and expense
items for the six months ended 30 June 2020 and 2019:
Six months ended 30 June
Reported Reported Adjusted(a) Adjusted(a)
2020 2019 2020 2019
$m $m $m $m
---------------------------- ---------- ---------- ------------- -------------
Revenue 908.0 888.9 908.0 888.9
Cost of sales (416.4) (429.7) (363.1) (368.0)
----------------------------- ------ ------ --------- ---------
Gross profit 491.6 459.2 544.9 520.9
----------------------------- ------ ------ --------- ---------
Gross margin % 54.1% 51.7% 60.0% 58.6%
Selling and distribution
expenses(b) (218.2) (228.3) (218.2) (228.3)
General and administrative
expenses(b) (124.8) (113.6) (109.3) (103.7)
Research and development
expenses (35.6) (23.7) (35.6) (23.7)
Operating profit 113.0 93.6 181.8 165.2
----------------------------- ------ ------ --------- ---------
Operating margin % 12.4% 10.5% 20.0% 18.6%
Finance costs, net (26.3) (32.1) (26.3) (32.1)
Non-operating expense, net (5.2) (0.2) (5.2) (0.2)
Profit before income taxes 81.5 61.3 150.3 132.9
Income tax expense (22.4) (16.8) (28.5) (21.9)
----------------------------- ------ ------ --------- ---------
Net profit 59.1 44.5 121.8 111.0
----------------------------- ------ ------ --------- ---------
Net profit % 6.5% 5.0% 13.4% 12.5%
Basic and diluted earnings
per share ($ per share) 0.03 0.02 0.06 0.06
Dividend per share (cents) 1.717 1.717
----------------------------- ------ ------ ------------- -------------
(a) These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measure
prepared in accordance with IFRS on pages 29 to 33.
(b) Following a review of cost allocations, general and
administrative expenses of $12.1 million (2019: $13.6 million)
principally relating to employee costs and insurance, have been
reclassified to selling and distribution expenses to better reflect
the nature of the costs. The comparatives have been restated to
reflect the revised classification.
The commentary in this review includes discussion of reported
and alternative performance measures. Management uses alternative
performance measures as a meaningful supplement to reported
measures. These measures are disclosed in accordance with the
European Securities and Markets Authority guidelines and are
explained and reconciled to the most directly comparable measure
prepared in accordance with International Financial Reporting
Standards ("IFRS") on pages 29 to 33. Further detail on the Group's
financial performance, measured in accordance with IAS 34, Interim
Financial Reporting as adopted by the European Union, is set out in
the Financial Statements and selected notes thereto on pages 16 to
28.
The commentary includes discussion on revenue on a constant
currency basis. Constant currency removes the effect of
fluctuations in exchange rates, which enables the Group to focus on
the underlying revenue performance. Constant currency information
is calculated by applying the applicable prior period average
exchange rates to the Group's revenue performance in the respective
period. Revenue growth on a constant currency basis is a non-IFRS
financial measure and should not be viewed as a replacement of IFRS
reported revenue.
Revenue
Group revenue by franchise is disclosed on page 1 of this
interim results announcement.
On a reported basis revenue increased by 2.1% to $908.0 million
for the six months to 30 June 2020 (2019: $888.9 million). On a
constant currency basis, this represented revenue growth of 4.3%,
attributable to strong performance in Continence and Critical Care
(11.5%) as a result of demand driven by COVID-19, as well as growth
in Infusion Care (12.6%) driven by continued strong orders from
customers due to growth in the insulin pump market. Overall, Ostomy
Care grew 3.1% in the first half but declined 2.7% in Q2 reflecting
destocking following the initial increase in orders in the early
stages of the pandemic. This growth across the three franchises was
partially offset by headwinds in Advanced Wound Care (-4.8%),
primarily as a result of reduced elective surgeries, and by the
unwinding of increased customers' inventories in Ostomy Care. The
Group's revenue performance for the six months ended 30 June 2020
is discussed in the Group's Operating Review on page 3.
Six months ended 30 June
Constant Constant
Reported currency currency Foreign exchange
2020 2019 growth revenue growth impact
$m $m % $m % $m %
---------------------- ----- ----- ---------- --------- ----------- ------------ ---------
Revenue by geography
Americas 493.5 462.4 6.7% 500.4 8.2% (6.9) (1.5)%
EMEA 346.8 358.0 (3.1)% 357.7 (0.1)% (10.9) (3.0)%
APAC 67.7 68.5 (1.2)% 69.2 1.0% (1.5) (2.2)%
----------------------- ----- ----- --------- --------
Total 908.0 888.9 2.1% 927.3 4.3% (19.3) (2.2)%
----------------------- ----- ----- ------ --------- ------ -------- -----
Americas revenue grew by 6.7% on a reported basis and 8.2% on a
constant currency basis reflecting a strong revenue performance in
Home Services Group ("HSG") combined with growth in Latin America
and the effect of the prior year rebate provision offset by the
reduction in elective surgeries which created a headwind in
Advanced Wound Care revenues in North America.
Europe, Middle East and Africa ("EMEA") revenue declined by 3.1%
on a reported basis and was flat on a constant currency basis.
Strong revenue growth in Infusion Care was offset by the COVID-19
related Advanced Wound Care decline.
Asia Pacific ("APAC") reported revenue fell by 1.2%, reflecting
unfavourable foreign exchange but increased by 1.0% on a constant
currency basis. This reflects a good performance in Australia and
New Zealand offset by the effect of COVID-19 in the wider APAC
region.
Gross margin
Reported gross profit increased by $32.4 million and gross
margin increased to 54.1% (2019: 51.7%), reflecting productivity
gains, the effect of the prior year rebate provision, a
year-on-year reduction in the amortisation of intangible assets and
the effect of foreign exchange.
On an adjusted basis, gross margin for the six months to 30 June
2020 was 60.0%, compared to 58.6% for the comparative period in
2019, driven by net productivity gains more than offsetting
price/mix headwinds (60 bps), together with the effect of the prior
year rebate provision (40 bps) and favourable foreign exchange (40
bps).
Operating profit
On a reported basis, operating profit for the six months to 30
June 2020 was $113.0 million, an increase of $19.4 million (2019:
$93.6 million) principally reflecting the increases in revenue and
gross margin noted above, and suspended cost incurrence as a result
of COVID-19 partially offset by an increase in costs associated
with our ongoing Transformation Initiative and an increase in MDR
costs of $7.6 million.
On an adjusted basis operating profit for the six months to 30
June 2020 was $181.8 million, an increase of $16.6 million (2019:
$165.2 million), reflecting the drivers of the reported
increase.
Finance and non-operating expenses
The table below presents a summary of finance and non-operating
expense, net on a reported and adjusted basis.
Six months ended 30 June
Reported Reported Adjusted Adjusted
2020 2019 2020 2019
$m $m $m $m
----------------------------- -------- -------- -------- ----------
Finance costs, net (26.3) (32.1) (26.3) (32.1)
Non-operating expenses, net (5.2) (0.2) (5.2) (0.2)
----------------------------- ------- ------- ------- -------
Total (31.5) (32.3) (31.5) (32.3)
----------------------------- ------- ------- ------- -------
Finance costs, net, decreased by $5.8 million to $26.3 million
for the six months ended 30 June 2020. The decrease is mainly
driven by a reduction in both the Group's level of borrowing and
associated weighted average interest rate on borrowings (net of
interest rate hedge).
Non-operating expense, net of $5.2 million (2019: $0.2 million)
relates primarily to foreign exchange losses arising on
intercompany loans as a result of the weakening of certain emerging
market currencies in the first quarter of the year, primarily
related to the effect of the COVID-19 crisis on the global
economy.
Taxation
Six months ended 30 June
Reported Reported Adjusted(a) Adjusted(a)
2020 2019 2020 2019
$m $m $m $m
---------------------------- ---------- ---------- ------------- -------------
Profit before taxation 81.5 61.3 150.3 132.9
Tax expense (22.4) (16.8) (28.5) (21.9)
Effective tax rate ("ETR") 27.5% 27.4% 19.0% 16.5%
---------------------------- ------ ------ -------- --------
(a) The tax effects of the adjustments relating to non-IFRS
financial measures are explained and reconciled on pages 29 to
33.
For the six months ended 30 June 2020, the Group reported an
income tax expense of $22.4 million (2019: $16.8 million). The
Group's reported effective tax rate of 27.5% for the period remains
in line with prior year (2019: 27.4%). The effective tax rate
includes the impact of taxable losses in the US on which a deferred
tax asset is not recognised.
After adjusting for certain financial measures that the Group
believes are useful supplemental indicators of future operating
performance, the adjusted effective tax rate on continuing
operations was 19.0% for the six months ended 30 June 2020 (2019:
16.5%). The increase in the adjusted effective tax rate is
primarily due to an increase in the Swiss tax rate and the
revaluation of the net deferred tax liability in the UK from 17% to
19% following the reversal of the change in corporation tax rate
originally due to come into effect from 1 April 2020. The impact of
COVID-19 has been considered but it has not resulted in a change to
the reported or adjusted ETR.
Capital structure and liquidity management
The Group has a robust funding position following the
refinancing in October 2019. This provided $1.5 billion of
financing through two five-year committed loan facilities expiring
in October 2024. At 30 June 2020, the Group's net debt was $1,037.9
million (31 December 2019: $1,100.3 million) representing
borrowings of $1,489.2 million (31 December 2019: $1,486.1 million)
partially offset by cash and cash equivalents of $451.3 million (31
December 2019: $385.8 million). Additionally, at 30 June 2020 and
31 December 2019, the Group's revolving credit facility of $200.0
million was undrawn and available, providing the Group with
liquidity of $651.3 million at 30 June 2020 (31 December 2019:
$585.8 million). The Group's net debt to adjusted EBITDA ratio at
30 June 2020 was 2.2x (31 December 2019: 2.5x).
The Group had net current assets of $653.3 million (31 December
2019: $571.0 million) and net assets of $1,525.0 million (31
December 2019: $1,561.0 million). The increase in net current
assets is principally attributable to the increase in cash and cash
equivalents.
COVID-19
In response to COVID-19, the Group has undertaken, on a regular
basis throughout the crisis, a detailed review of both the
potential short-term effects of the crisis on working capital and
longer-term forecast liquidity position.
In order to assess the short-term implications, and as part of
the actions taken by the dedicated rapid response team, management
has been closely monitoring the liquidity position of the Group.
Cash collections have remained strong, there has been no
deterioration in Days Sales Outstanding ("DSO") or trade
receivables aging and, as a result cash generation continues to be
robust. Although adjusted cash conversion reduced to 72.9% (2019:
89.8%) this reflects adjusted EBITDA being more than offset by
higher capex investment and increased inventories resulting from
higher customer demand against reductions in inventory in the prior
year.
Longer term, the Group has assessed its liquidity forecast and
ability to continue trading as a going concern. The Group has a
strong balance sheet with $451.3 million of available cash and $200
million of undrawn committed facilities at 30 June 2020. As noted
above, leverage, measured by net debt to adjusted EBITDA, continues
to improve and was at 2.2x on 30 June 2020 (31 December 2019:
2.5x). COVID-19 has introduced additional uncertainty into the
future and in response to this we have undertaken regular reviews
of our businesses and the resulting projections of future
performance under a range of potentially severe but plausible
downside scenarios. We have assessed our headroom under each
scenario against committed facilities and key financial covenants
over the going concern period, being 12 months from 5 August 2020,
although we have extended our review to the next covenant
measurement date of 31 December 2021. The scenarios have focused on
Advanced Wound Care, where the reduction in elective surgeries and
fewer hospital and clinic visits has the potential to significantly
reduce revenue, and supply chain disruption throughout the Group.
Under all scenarios, the Group continues to have headroom against
the financial covenants and good liquidity during the going concern
period. For further information, refer to Note 1 of the interim
financial statements.
Dividend
Reflecting our view on the potential of the Group over the
medium to long term and its financial strength, we are maintaining
our interim 2020 dividend at 1.717 cents per share, in line with
the interim dividend for 2019. This is consistent with our stated
policy of 35% to 45% of Adjusted net profit. The Board has taken
into consideration balancing the return to shareholders and the
potential effects of COVID-19 including the downside scenarios
referenced above. The decision to maintain the dividend reflects
the Board's confidence in the future performance of the Group, our
resilience during the COVID-19 pandemic to date and the underlying
financial strength, distributable reserves position and cash
generation of the Group.
Cash flow and working capital
Net cash generated from operating activities was $155.1 million
and $194.0 million in the six months to 30 June 2020 and 2019,
respectively. The decrease of $38.9 million primarily reflects an
increase in working capital requirements of $20.4 million (2019:
decrease of $36.6 million) and the receipt of $30.0 million in 2019
in relation to the gross settlement of a foreign exchange forward
contract which was not repeated in 2020, offset by the increase in
EBITDA of $13.6 million after non-cash items are added back. The
working capital movement principally results from the settlement of
Group incentive schemes in the first half of 2020, when no such
payments were made in 2019, and an increase in inventory levels to
satisfy the increase in demand.
The increase in cash and cash equivalents of $65.5 million is
primarily driven from net cash generated from operating activities
of $155.1 million, offset by property, plant and equipment of $36.7
million representing investment in our manufacturing lines, as well
as in our digital capabilities and our newly operational global
business services function. In addition, the Group made a cash
payment respect of the final dividend for 2019 of $38.0 million,
net of the scrip dividend issue of $37.8 million, and made lease
liability payments of $10.3 million.
Cash conversion
Cash conversion is a measure we use to ensure we derive value
from our operations and supports our decision making for potential
future investments.
Our reported cash conversion for the six months to 30 June 2020
was 76.2% (2019: 106.0%), which reflects an increase in inventory
levels during the period driven by investment to meet demand
requirements, the settlement of 2019 employee incentive programmes
(2019: $nil) and an increase in capital investment. Reported cash
conversion in 2019 included the timing of the receipt of $30.0
million on a foreign exchange forward contract as described
above.
Adjusted cash conversion was 72.9% (2019: 89.8%). The decrease
is in line with reported cash conversion as above, but excluding
the impact of the foreign exchange forward contract in the
comparative for the six months ended 30 June 2019.
Six months ended 30 June
Reported Reported Adjusted(a) Adjusted(a)
2020 2019 2020 2019
$m $m $m $m
------------------------------------- ---------- ---------- ------------- -------------
EBITDA 209.8 197.2 223.4 204.7
Add: non-cash items 7.2 6.2 - 0.1
Working capital (20.4) 36.6 (23.8) 10.0
PP&E (36.7) (30.9) (36.7) (30.9)
------------------------------------- ------ ------ -------- --------
Cash generated from operations, net
of PP&E 159.9 209.1 162.9 183.9
------------------------------------- ------ ------ -------- --- -------- ---
Cash conversion 76.2% 106.0% 72.9% 89.8%
------------------------------------- ------ ------ -------- --------
(a) Adjusted EBITDA, adjusted working capital and adjusted
non-cash items are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS in
the cash conversion table on page 32.
Six months ended 30 June
Reported Reported Adjusted Adjusted
2020 2019 2020 2019
$m $m $m $m
----------------------------------------
Cash generated from operations, net of
PP&E 159.9 209.1 162.9 183.9
Tax paid (14.5) (16.5) (14.5) (16.5)
---------------------------------------- ------- ------- ------- -------
Free cash flow 145.4 192.6 148.4 167.4
---------------------------------------- ------- ------- ------- -------
2020 Condensed Consolidated Interim Financial Statements
Condensed Consolidated Income Statement
Six months ended
30 June
2020 2019 restated(a)
Notes $m $m
------------------------------------- ----- ----------- ------------------
(unaudited) (unaudited)
Revenue 2 908.0 888.9
Cost of sales (416.4) (429.7)
-------------------------------------- ----- ---------- --------------
Gross profit 491.6 459.2
-------------------------------------- ----- ---------- --------------
Selling and distribution expenses (218.2) (228.3)
General and administrative expenses (124.8) (113.6)
Research and development expenses (35.6) (23.7)
-------------------------------------- ----- ---------- --------------
Operating profit 113.0 93.6
-------------------------------------- ----- ---------- --------------
Finance costs, net (26.3) (32.1)
Non-operating expense, net 3 (5.2) (0.2)
-------------------------------------- ----- ---------- --------------
Profit before income taxes 81.5 61.3
Income tax expense 4 (22.4) (16.8)
-------------------------------------- ----- ---------- --------------
Net profit 59.1 44.5
-------------------------------------- ----- ---------- --------------
Earnings per share
Basic and diluted earnings per
share ($ per share) 0.03 0.02
-------------------------------------- ----- ---------- --------------
(a) Following a review of cost allocations, general and
administrative expenses of $12.1 million (2019: $13.6 million)
principally relating to employee costs and insurance, have been
reclassified to selling and distribution expenses to better reflect
the nature of the costs. The comparatives have been restated to
reflect the revised classification.
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Condensed Consolidated Statement of Comprehensive Income
Six months ended
30 June
2020 2019
Notes $m $m
------------------------------------------------------- ----- ----------- -------------
(unaudited) (unaudited)
Net profit 59.1 44.5
Other comprehensive loss
Items that will not be reclassified subsequently
to Consolidated Income Statement
Remeasurement of defined benefit pension plans 6 (2.1) -
Change in pension asset restriction 6 4.7 -
Items that may be reclassified subsequently
to Consolidated Income Statement
Exchange differences on translation of foreign
operations (58.5) (4.6)
Effective portion of changes in fair value
of cash flow hedges 8 (10.4) (9.2)
Income tax relating to items that may be reclassified 2.0 2.5
-------------------------------------------------------- ----- ---------- ----------
Other comprehensive loss (64.3) (11.3)
-------------------------------------------------------- ----- ---------- ----------
Total comprehensive (loss)/income (5.2) 33.2
-------------------------------------------------------- ----- ---------- ----------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Condensed Consolidated Statement of Financial Position
31 December
30 June 2020 2019
Notes $m $m
---------------------------------- ----- ------------ -------------
(unaudited) (audited)
Assets
Non-current assets
Property, plant and equipment 317.9 321.6
Right-of-use assets 84.2 84.5
Intangible assets and goodwill 2,063.2 2,166.9
Deferred tax assets 56.1 55.0
Derivative financial assets 8 - 1.0
Restricted cash 4.4 3.6
Other non-current receivables 12.4 8.9
----------------------------------- ----- ----------- ----------
2,538.2 2,641.5
---------------------------------- ----- ----------- ----------
Current assets
Inventories 288.5 281.8
Trade and other receivables 299.8 300.7
Cash and cash equivalents 451.3 385.8
----------------------------------- ----- ----------- ----------
1,039.6 968.3
---------------------------------- ----- ----------- ----------
Total assets 3,577.8 3,609.8
----------------------------------- ----- ----------- ----------
Equity and liabilities
Current liabilities
Trade and other payables 269.8 289.3
Borrowings 7 40.9 40.8
Lease liabilities 16.7 18.4
Current tax payable 51.5 44.6
Provisions 7.4 4.2
----------------------------------- ----- ----------- ----------
386.3 397.3
---------------------------------- ----- ----------- ----------
Non-current liabilities
Borrowings 7 1,448.3 1,445.3
Lease liabilities 72.3 70.1
Deferred tax liabilities 106.7 107.8
Provisions 1.3 1.7
Derivative financial liabilities 8 9.4 -
Other non-current payables 28.5 26.6
----------------------------------- ----- ----------- ----------
1,666.5 1,651.5
Total liabilities 2,052.8 2,048.8
----------------------------------- ----- ----------- ----------
Net assets 1,525.0 1,561.0
----------------------------------- ----- ----------- ----------
Equity
Share capital 245.0 242.9
Share premium 106.4 70.7
Own shares (8.4) (10.8)
Retained deficit (864.4) (847.7)
Merger reserve 2,098.9 2,098.9
Cumulative translation reserve (157.6) (99.1)
Other reserves 105.1 106.1
----------------------------------- ----- ----------- ----------
Total equity 1,525.0 1,561.0
----------------------------------- ----- ----------- ----------
Total equity and liabilities 3,577.8 3,609.8
----------------------------------- ----- ----------- ----------
Condensed Consolidated Statement of Changes in Equity
Cumulative
Share Share Own Retained Merger translation Other
capital premium shares deficit reserve reserve reserves Total
$m $m $m $m $m $m $m $m
---------------
At 1 January
2020
(audited) 242.9 70.7 (10.8) (847.7) 2,098.9 (99.1) 106.1 1,561.0
Net profit - - - 59.1 - - - 59.1
--------------- ------- ------- ------ ------- ------- -------- --- ------- -------
Other
comprehensive
loss:
Foreign
currency
translation
adjustment,
net of tax - - - - - (58.5) - (58.5)
Remeasurement
of
defined
benefit
pension
plans, net of
tax - - - - - - (2.1) (2.1)
Change in
pension
asset
restriction - - - - - - 4.7 4.7
Effective
portion
of changes in
fair
value of cash
flow
hedges, net
of tax - - - - - - (8.4) (8.4)
--------------- ------- ------- ------ ------- ------- -------- --- ------- -------
Total other
comprehensive
loss - - - - - (58.5) (5.8) (64.3)
Total
comprehensive
loss - - - 59.1 - (58.5) (5.8) (5.2)
--------------- ------- ------- ------ ------- ------- -------- ------- -------
Dividends paid - - - (38.0) - - - (38.0)
Scrip dividend 2.1 35.7 - (37.8) - - - -
Share-based
payments - - - - - - 7.2 7.2
Share awards
vested - - 2.4 - - - (2.4) -
At 30 June
2020
(unaudited) 245.0 106.4 (8.4) (864.4) 2,098.9 (157.6) 105.1 1,525.0
--------------- ------- ------- ------ ------- ------- -------- ------- -------
Cumulative
Share Share Own Retained Merger translation Other
capital premium shares deficit reserve reserve reserves Total
$m $m $m $m $m $m $m $m
--------------- ------- ------- ------- -------- ------- ------------- -------- ----------
At 1 January
2019
(audited) 240.7 39.8 (6.8) (744.5) 2,098.9 (124.2) 113.3 1,617.2
Net profit - - - 44.5 - - - 44.5
--------------- ------- ------- ------ ------- ------- -------- --- ------- -------
Other
comprehensive
loss:
Foreign
currency
translation
adjustment,
net of tax - - - - - (4.6) - (4.6)
Effective
portion
of changes in
fair
value of cash
flow
hedges, net
of tax - - - - - - (6.7) (6.7)
Total other
comprehensive
loss - - - - - (4.6) (6.7) (11.3)
--------------- ------- ------- ------ ------- ------- -------- ------- -------
Total
comprehensive
income - - - 44.5 - (4.6) (6.7) 33.2
Dividends paid - - - (59.1) - - - (59.1)
Scrip dividend 1.5 18.5 - (20.0) - - - -
Share-based
payments - - - - - - 6.0 6.0
Share awards
vested - - 1.4 - - - (1.4) -
--------------- ------- ------- ------ ------- ------- -------- --- ------- -------
At 30 June
2019
(unaudited) 242.2 58.3 (5.4) (779.1) 2,098.9 (128.8) 111.2 1,597.3
--------------- ------- ------- ------ ------- ------- -------- ------- -------
Condensed Consolidated Statement of Cash Flows
Six months ended
30 June
2020 2019
Notes $m $m
----------------------------------------------- ----- ----------- -------------
Cash flows from operating activities (unaudited) (unaudited)
Net profit 59.1 44.5
Adjustments for
Depreciation of property, plant and equipment 18.3 17.1
Depreciation of right-of-use assets 10.9 11.1
Amortisation 67.3 75.4
Income tax expense 4 22.4 16.8
Non-operating expense, net 3 5.2 0.2
Finance costs, net 26.3 32.1
Share-based payments 7.2 6.1
Write-off of property, plant and equipment 0.3 0.1
Changes in assets and liabilities:
Inventories (14.4) 11.0
Trade and other receivables (6.1) (20.1)
Other non-current assets (3.6) 1.0
Restricted cash (0.8) -
Trade and other payables 0.4 15.2
Other financial liabilities(a) - 29.9
Other non-current payables 4.1 (0.4)
Net cash generated from operations 196.6 240.0
Net interest paid (27.0) (29.5)
Income taxes paid (14.5) (16.5)
------------------------------------------------ ----- ---------- ----------
Net cash generated from operating activities 155.1 194.0
Cash flows from investing activities
Acquisition of property, plant and equipment,
capitalised software and development (36.7) (31.5)
Change in restricted cash - 0.4
Net cash used in investing activities (36.7) (31.1)
Cash flows from financing activities
Repayment of borrowings - (31.0)
Payment of lease liabilities (10.3) (10.4)
Dividend paid 5 (38.0) (59.1)
------------------------------------------------ ----- ---------- ----------
Net cash used in financing activities (48.3) (100.5)
------------------------------------------------ ----- ---------- ----------
Net change in cash and cash equivalents 70.1 62.4
Cash and cash equivalents at beginning
of the period 385.8 315.6
Effect of exchange rate changes on cash
and cash equivalents (4.6) (2.0)
------------------------------------------------ ----- ---------- ----------
Cash and cash equivalents at end of the
period 451.3 376.0
------------------------------------------------ ----- ---------- ----------
(a) Other financial liabilities for the six months ended 30 June
2019 includes the receipt of $30.0 million which was the gross
settlement of a foreign exchange forward contract. The net
settlement of this instrument was an overall payment of $nil, but
due to a timing difference, $30.0 million was received 28 June 2019
and $30.0 million was paid on 1 July 2019.
Notes to the Condensed Consolidated Financial Statements
1. Basis of preparation and accounting standards
ConvaTec Group Plc (the "Company") is a company incorporated in
the United Kingdom. The accompanying unaudited Condensed
Consolidated Financial Statements of the Company and its
subsidiaries (the "Group") for the six months ended 30 June 2020
have been prepared in accordance with the Disclosure and
Transparency Rules of the Financial Conduct Authority and with IAS
34, Interim Financial Reporting as adopted by the European
Union.
The interim Condensed Consolidated Financial Statements should
be read in conjunction with the 2019 ConvaTec Group Plc Annual
Report and Accounts, which were prepared in accordance with IFRS as
adopted by the European Union. The accounting policies adopted by
the Group in preparation of these interim Condensed Consolidated
Financial Statements are consistent with those set out in the 2019
Annual Report and Accounts, except for those described below as new
standards and interpretations applied for the first time.
These interim Condensed Consolidated Financial Statements and
the comparatives are not statutory financial statements. The
statutory financial statements for the Group in respect of the year
ended 31 December 2019 have been reported on by the Group's auditor
and delivered to the Registrar of Companies. The audit report on
those accounts was (i) unqualified, (ii) did not include a
reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report, and (iii) did not
contain a statement under section 498 (2) or (3) of the Companies
Act 2006.
The Condensed Consolidated Financial Statements are presented in
US dollars ("USD"), reflecting the profile of the Group revenue and
operating profit, which are primarily generated is US dollars and
US dollar-linked currencies. All values are rounded to the nearest
$0.1 million except where otherwise indicated.
The Condensed Consolidated Financial Statements for the six
months ended 30 June 2020 were approved by the Board on 5 August
2020.
New standards and interpretations applied for the first time
On 1 January 2020, the Group adopted the following new or
amended IFRS and interpretations issued by the International
Accounting Standards Board ("IASB"):
- Amendments to References to the Conceptual Framework in IFRS Standards
- Definition of a Business (Amendments to IFRS 3)
- Definition of Material (Amendments to IAS 1 and IAS 8)
- Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)
Their adoption has not had a material impact on the Condensed
Consolidated Financial Statements.
The transition away from LIBOR and other IBORs (together "IBOR
Reform") will remove IBOR as an interest rate benchmark for
financial instruments, including floating rate debt and interest
rate swaps held by the Group. There is uncertainty as to the timing
and the methods of transition for replacing existing IBOR benchmark
rates with alternative rates. The Group has considered whether
hedge relationships continue to qualify for hedge accounting as at
30 June 2020. IBOR continues to be used as a reference rate in
financial markets and is used in the valuation of instruments with
maturities that exceed the expected transition deadline. Therefore,
the Group believes the current market structure supports the
continuation of hedge accounting as at 30 June 2020 and IBOR Reform
is not considered to have an impact on the Group as at this date.
We will continue to monitor market developments throughout the
remainder of 2020.
New standards and interpretations not yet applied
At the date of approval of these Condensed Consolidated
Financial Statements, there were no new or revised IFRSs,
amendments or interpretations in issue but not yet effective that
are potentially relevant for the Group and which have not yet been
applied.
Going concern
The Directors have, at the time of approving these Condensed
Consolidated Financial Statements, a reasonable expectation that
the Group and the Company will have adequate liquid resources to
meet its liabilities as they become due and will be able to sustain
its business model, strategy and operations and remain solvent for
a period of at least 12 months from 5 August 2020.
As discussed, the overall financial performance of the business
remains robust and we are retaining our guidance for the full year.
As at 30 June 2020, the Group held cash and cash equivalents of
$451.3 million and two multicurrency term loans totalling $1.5
billion, of which $900 million is available until October 2024. The
remaining $600 million is amortising requiring $45.0 million to be
repaid within the next 12 months. The Group also has access to a
$200.0 million multicurrency revolving credit facility, which
remains undrawn. In preparing their assessment of going concern the
Directors have considered available cash resources, performance to
date and forecast performance for 18 months from the balance sheet
date together with the Group's financial covenant compliance
requirements (as embedded in the term loans) and principal risks
and uncertainties. The Board has reviewed a number of severe but
plausible COVID-19 downside scenarios which include assumptions
regarding substantial reductions in elective procedures in the
remainder of 2020, with the potential to materially affect Advanced
Wound Care revenue, and a significant supply chain disruption event
across the Group. The scenarios include possible mitigating actions
achieved through reductions in both operating cost and capital
expenditure, both of which are in management's control to effect.
Under each scenario, the Group continues to meet all financial
covenants with material headroom and maintains sufficient liquidity
to enable the Group to meet its obligations as they fall due for a
period of at least twelve months from the date of approving the
Condensed Consolidated Financial Statements and to continue to
implement its strategy and the related transformation. The impact
of a reverse stress test was considered but the conditions of the
reverse stress test were not considered to be reasonably
probable.
Accordingly, having reviewed the downside scenarios, the
Directors have a reasonable expectation that the Group has
sufficient liquidity to continue in operational existence for the
foreseeable future and hence continue to adopt the going concern
basis in preparing the interim financial statements.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of the interim financial statements requires
judgements, estimates and assumptions to be made that affect the
application of accounting policies and the reported value of assets
and liabilities in our balance sheet and results within our income
statement.
The significant judgements made by management in applying the
Group's accounting policies and the key sources of estimation
uncertainty were the same as those that applied to the Consolidated
Financial Statements for the year ended 31 December 2019. In the
application of each of our accounting policies, management has
considered the potential impact of COVID-19 and this is further
discussed below.
In preparing the Annual Report and Accounts 2019, two key
sources of estimation uncertainty were identified, which could
potentially result in a material adjustment within the next
financial year to the carrying value of certain assets, being
"Impairment of finite-lived assets" and "Recognition of deferred
tax assets". Management has reviewed the position at the interim
balance sheet date.
Impairment of finite-lived assets
As part of the Transformation Initiative, a product portfolio
review was undertaken in 2019 which resulted in the identification
of impairment triggers in relation to certain of the Group's
intangible assets. As a result, an impairment review was performed
in accordance with IAS 36, Impairment of Assets. This resulted in
the Group recognising an impairment of $103.6 million for
product-related intangible assets in the year ended 31 December
2019.
No impairment of assets has been recognised in the six months
ended 30 June 2020 and the performance of the finite-lived assets
has been in line with expectations. The assessment of the
reasonably possible outcomes that could impact the recoverable
amount remain consistent with those disclosed on page 144 in the
2019 ConvaTec Group Plc Annual Report and Accounts.
Recognition of deferred tax assets
At 31 December 2019 the Group recognised a deferred tax asset of
$23.0 million following the Swiss tax reform, which was
substantively enacted on 4 October 2019. The value of the deferred
tax asset of $23.0 million remains unchanged at 30 June 2020 as
there has been no change to the underlying assumptions and estimate
made at 31 December 2019. The deferred tax asset is calculated on a
best estimate basis using a specific methodology that is permitted
under Swiss law. Given the anticipated future transformative
changes in the business, there is uncertainty in the calculation of
the deferred tax asset and it remains subject to review as a key
source of estimation uncertainty. Once the impact to the Group's
Swiss operations as a result of the transformative changes has been
determined, it is reasonably possible that the recalculation of the
carrying value of the deferred tax asset could require a material
adjustment.
COVID-19 accounting considerations
In preparing the interim financial statements the current and
potential implications of COVID-19 on defining critical accounting
judgements and key sources of estimation uncertainty and the
potential effect on the carrying value of items on the balance
sheet have been considered together with the evaluation of the
adoption of the going concern assumption, as discussed above.
The potential impacts of COVID-19 have been assessed in the
preparation of the balance sheet specifically in relation to
impairment triggers for property, plant and equipment, goodwill and
indefinite-lived intangibles. No additional critical accounting
judgements or key sources of estimation uncertainty have been
identified from this assessment.
The carrying values of property, plant and equipment are
reviewed for indicators of impairment annually or when events or
changes in circumstances indicate the carrying value may be
impaired. The majority (c.90%) of the carrying value of the Group's
property, plant and equipment relates to our manufacturing sites.
These sites have continued to operate within normal parameters,
with appropriate safety precautions and requirements implemented
during H1 2020 and therefore there is no indicator of impairment in
relation to COVID-19.
Goodwill and indefinite-lived intangible assets are not subject
to amortisation but tested for impairment annually or when events
or changes in circumstances indicate the carrying value may be
impaired. Management has considered whether the effect of COVID-19
is a trigger for impairment. In light of the robust H1 2020
financial performance, reiteration of guidance in relation to the
full year and the headroom on the impairment sensitivity testing
performed as at 31 December 2019, management has concluded that
there is no indicator of impairment in relation to COVID-19.
2. Segment information
The Group's management considers its business to be a single segment
entity engaged in the development, manufacture and sale of medical
products and technologies. R&D, manufacturing and central support
functions are managed globally for the Group. Revenues are managed
both on a franchise and regional basis. This note presents management's
view of the performance and activities of the Group as a single
segment.
Page 3 of the Operating Review provide further detail of franchise
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 geographic infrastructures and
support functions between the franchises. Financial information
relating to revenues provided to the CEO for decision-making
purposes is made on both a franchise and regional basis, however
profitability measures are presented and resources allocated on a
Group-wide basis.
Revenue by franchise
The following table sets out the Group's revenue by
franchise:
Six months ended 30
June
2020 2019
Revenue by franchise $m $m
---------------------------- ---------- ------------
Advanced Wound Care 250.9 271.4
Ostomy Care 251.8 252.2
Continence & Critical Care 244.3 221.4
Infusion Care 161.0 143.9
----------------------------- ---------- ----------
Total 908.0 888.9
----------------------------- ---------- ----------
Geographic information
The following table sets out the Group's revenue in each
geographic market in which customers are located:
Six months ended 30
June
2020 2019
Geographic markets $m $m
-------------------- ---------- ------------
EMEA 346.8 358.1
Americas 493.5 462.3
APAC 67.7 68.5
--------------------- ---------- ----------
Total 908.0 888.9
--------------------- ---------- ----------
Details on revenue performance is discussed in the First Half
Financial Review on page 3.
3. Non-operating expense, net
Non-operating expense, net was as follows:
Six months ended 30
June
2020 2019
$m $m
-------------------------------- ------------ ----------
Net foreign exchange losses(a) 5.1 0.1
Other expense 0.1 0.1
--------------------------------- ------------ --------
Non-operating expense, net 5.2 0.2
--------------------------------- ------------ --------
(a) The foreign exchange losses in 2020 primarily relate to the
foreign exchange impact on intercompany transactions, including
loans transacted in non-functional currencies.
4. Income taxes
The Group's income tax expense is accrued using the tax rate that
would be applicable to expected total annual earnings (i.e. the
estimated average annual effective income tax rate applied to the
profit before tax).
For the six months ended 30 June 2020, the Group recorded an
income tax expense of $22.4 million (2019: $16.8 million). The
Group's reported effective tax rate of 27.5% remains in line with
the prior year (2019: 27.4%). The effective tax rate includes the
impact of taxable losses in the US on which a deferred tax asset is
not recognised.
5. Dividends
The Group ensures that adequate realised distributable reserves
are available in the Company in order to meet proposed shareholder
dividends and the purchase of shares for employee share scheme
incentives. The Company principally derives distributable reserves
from dividends paid by subsidiary companies.
In determining the level of dividend in the year, the Board considers
the following factors and risks that may influence the proposed
dividend:
- Availability of realised distributable reserves;
- Available cash resources and commitments;
- Strategic opportunities and investments, in line with the Group's
Strategic Plan;
- The potential impact of COVID-19 on the performance of the Group;
and
- Principal risks of the Group including the risks associated with
the COVID-19 pandemic (as disclosed in the 2019 Annual Report and
Accounts on pages 28 to 33 and updated on pages 7 to 9 of this
interim results announcement).
The Board paid the 2019 final dividend in May 2020 and proposes
an interim dividend to be paid in October 2020. The Board has taken
into consideration balancing the return to shareholders, the potential
effects of COVID-19 and the additional investment in transformation
in the period. The decision to maintain the dividend reflects the
Board's confidence in the future performance of the Group, our
resilience during the COVID-19 pandemic and the underlying financial
strength, distributable reserves position and cash generation of
the Group. Further details of the Group's considerations and rationale
for its policy in respect of the dividend distribution are given
in the Directors' report in the 2019 Annual Report and Accounts
on page 132.
Settled Settled No of scrip
pence per cents per Total in cash via scrip shares
share share $m $m $m issued
------------------ --------- --------- ----- -------- ---------- -------------
Final dividend
2018 3.097 3.983 79.1 59.1 20.0 11,198,285
Interim dividend
2019 1.404 1.717 33.9 20.8 13.1 6,159,842
Paid in 2019 4.501 5.700 113.0 79.9 33.1 17,358,127
------------------- --------- --------- ----- -------- ---------- -----------
Final dividend
2019 3.095 3.983 75.8 38.0 37.8 16,991,621
Paid in 2020 to
date 3.095 3.983 75.8 38.0 37.8 16,991,621
------------------- --------- --------- ----- -------- ---------- -----------
Interim dividend
2020 proposed 1.306 1.717 34.3
------------------- --------- --------- ----- -------- ---------- -------------
The Company operates a scrip dividend scheme allowing
shareholders to elect to receive their dividend 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.
The proposed interim dividend for 2020, to be distributed on 15
October 2020 to shareholders registered at the close of business on
4 September 2020, is based upon the issued and fully paid share
capital as at 30 June 2020. The dividend will be declared in US
dollars and will be paid in Sterling at the chosen exchange rate of
$1.315/GBP1.00 determined on 5 August 2020. A scrip dividend
alternative will be offered allowing shareholders to elect by 22
September 2020 to receive their dividend in the form of new
ordinary shares.
Distributable reserves
Distributable reserves equate to the retained surplus of the
Company, ConvaTec Group Plc. The capacity of the Company to make
dividend payments is primarily determined by the availability of
these distributable reserves (which are fully realised) and cash
resources. The Company principally derives distributable reserves
from dividends paid by subsidiary companies.
At 30 June 2020, the retained surplus of ConvaTec Group Plc was
$1,433.0 million (31 December 2019: $1,528.5 million). The
movements in distributable reserves were as follows:
$m
----------------------------------------- ----------
At 1 January 2020 1,528.5
Total comprehensive loss for the period (19.7)
Dividends paid (38.0)
Scrip dividend (37.8)
----------------------------------------- -------
Retained surplus at 30 June 2020 1,433.0
----------------------------------------- -------
6. Post-employment benefits
The Group operates a number of defined benefit and defined contribution
pension plans for its employees. Each individual plan is subject
to the applicable laws and regulations of the country in which
the plan operates. The Group has defined benefit plans in six European
countries. The most significant plans are in the UK, Switzerland
and Germany. Further details of the Group's defined benefit plans
can be found on page 165 of the 2019 Annual Report and Accounts.
On 24 March 2020, the Trustee of the UK plan completed a buy-in
transaction whereby the assets of the plan were invested in a bulk
purchase annuity policy with the insurer Aviva Life & Pensions
UK Limited ("Aviva"), under which the benefits payable to defined
benefit members are now fully insured. The Scheme paid $12.6
million to Aviva on 30 March 2020 to fund the buy-in premium. The
Group intends to move to a full buy-out as soon as practical,
following which the insurance company will become directly
responsible for pension payments.
An actuarial valuation for the UK plan has been prepared by an
independent actuary and a net pension asset of $2.4 million (31
December 2019: $nil) is recognised in the Consolidated Statement of
Financial Position. An expense of $0.2 million is recognised in the
Consolidated Income Statement and a loss on remeasurement of $2.1
million is recognised in the Consolidated Statement of
Comprehensive Income for the six months ended 30 June 2020.
Surplus assets within the plan are only recognised to the extent
that they are recoverable in accordance with IFRIC Interpretation
14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction ("IFRIC 14"). Certainty over the
recoverability of the surplus has resulted in a gain of $4.7
million recognised in the Consolidated Statement of Comprehensive
Income for the six months ended 30 June 2020.
The net impact on the Group's interim financial statements of
valuations prepared for the Group's other defined benefit plans as
at 30 June 2020 was negligible.
7. Borrowings
The Group's sources of borrowing for funding and liquidity purposes
derive from bank term loans together with a committed revolving
credit facility. In October 2019, the Group voluntarily prepaid
and discharged all outstanding contractual obligations under its
previous credit agreement and refinanced under a new five year
credit agreement.
The Group's outstanding borrowings are outlined in the table
below:
30 June 31 December
2020 2019
Face value Face value
-----------
Year $m $m
of
Currency maturity
------------------------------------- --------------- ----------- ---------- -------------
Revolving Credit Facilities Multicurrency 2024 - -
Term Loan Facility A(a) USD/Euro 2024 601.3 600.9
Term Loan Facility B(b) USD/Euro 2024 901.9 901.4
------------------------------------- ---------------- ------------ --------- ----------
Total interest-bearing liabilities 1,503.2 1,502.3
Financing fees (14.0) (16.2)
--------------------------------------------------------------------- --------- ----------
Total carrying value of borrowings from credit
facilities 1,489.2 1,486.1
Less: current portion of borrowings 40.9 40.8
--------------------------------------------------------------------- --------- ----------
Total non-current borrowings 1,448.3 1,445.3
--------------------------------------------------------------------- --------- ----------
(a) Included within Term Loan Facility A at 30 June 2020 and 31
December 2019 is EUR161.3 million denominated in Euros representing
30% of Facility A borrowings denominated in Euros and 70%
denominated in US dollars.
(b) Included within Term Loan Facility B at 30 June 2020 and 31
December 2019 is EUR242.0 million denominated in Euros representing
30% of Facility B borrowings denominated in Euros and 70%
denominated in US dollars.
At 30 June 2020, the Group was in compliance with all financial
and non-financial covenants associated with the Group's outstanding
debt.
Borrowings not measured at fair value
At 30 June 2020, the estimated fair value of the Group's
borrowings approximated $1,541.4 million (31 December 2019:
$1,513.2 million). The fair value of the Group's borrowings is
based on discounted cash flows using a current borrowing rate and
are categorised as a Level 2 measurement in the fair value
hierarchy under IFRS 13, Fair Value Measurements.
8. 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 borrowing facilities.
Financial instruments are classified as Level 2 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. Level 2 fair value measurements are
defined as those derived from inputs other than quoted prices that
are observable for the asset or liability, either directly (prices
from third parties) or indirectly (derived from third-party
prices).
The fair values are based on market values of equivalent
instruments. The following table presents the Group's outstanding
interest rate swaps at 30 June 2020 and 31 December 2019
respectively:
Notional
Notional amount
amount at 31
at 30 Fair value December Fair value
June 2020 liabilities(a) 2019 assets(a)
---------- ---------
Effective Maturity
Date Date $m $m $m $m
--------------------------- ---------- --------- ---------- ----------------- --------- ------------
3 Month LIBOR Float to 24 Jan 24 Jan
Fixed Interest Rate Swap 2020 2023 275.0 (9.4) 275.0 1.0
--------------------------- ---------- --------- ---------- ------------ --------- ----------
(a) The fair values of the interest rate swaps are shown in
derivative financial liabilities/assets in the Consolidated
Statement of Financial Position. Finance costs, net in the
Consolidated Income Statement includes the negligible ineffective
impact of the interest rate swaps.
At 30 June 2020, the interest rate swaps were in a $9.4 million
liability position (31 December 2019: $1.0 million asset). The
reduction in fair value follows a reduction in US interest rates in
the six months to 30 June 2020 as a response to the global COVID-19
pandemic.
The Group has assessed its ability to continue to apply hedge
accounting at 30 June 2020 and concluded the hedge to be
effective.
Foreign exchange forward contracts
The following table presents the Group's outstanding foreign
exchange forward contracts:
31 December
30 June 2020 2019
Notional Notional
amount Fair value amount Fair value
------- --------------------
Financial Statement
Term line item $m $m $m $m
------------------ ------- -------------------- -------- ------------ -------- ------------
Foreign exchange 30-45 Trade and other
contracts days receivables 367.7 1.3 130.7 1.0
Foreign exchange 30-45 Trade and other
contracts days payables 71.1 (0.2) 136.0 (2.2)
------------------ ------- -------------------- -------- -------- -------- --------
438.8 1.1 266.7 (1.2)
----------------------------------------------- -------- -------- -------- --------
9. Foreign exchange
The table set out below summarises the exchange rates used for
the translation of currencies into US dollars that have the most
significant impact on the Group results:
Six months ended Year ended
30 June 31 December
--------------
Currency Average rate/Closing rate 2020 2019 2019
---------- -------------------------- -------- -------- --------------
EUR/USD Average 1.10 1.13 1.12
Closing 1.12 1.14 1.12
------------------------------------- -------- -------- ------------
GBP/USD Average 1.26 1.29 1.28
Closing 1.24 1.27 1.33
------------------------------------- -------- -------- ------------
DKK/USD Average 0.15 0.15 0.15
Closing 0.15 0.15 0.15
------------------------------------- -------- -------- ------------
10. Commitments and contingent liabilities
Capital commitments
At 30 June 2020, the Group had non-cancellable commitments for
the purchase of property, plant and equipment, capitalised software
and development of $22.4 million (30 June 2019: $17.4 million).
Contingent liabilities
Liability claims
On 31 May 2019, ConvaTec Inc. filed a lawsuit against Scapa
Group plc (trading as Scapa Tapes North America LLC) and Webtec
Converting LLC seeking a declaration that the company was within
its rights to terminate a contract between the parties. On 10 July
2019, the defendants filed a motion seeking dismissal of the
declaratory judgement action, and Scapa Tapes North America LLC
filed a separate complaint seeking damages of $83.8 million against
ConvaTec Inc. in relation to the contract cancellation. ConvaTec
Inc., in turn, has asserted a claim for damages against Scapa Tapes
North America LLC and Scapa Group plc. All claims are being
litigated before the Connecticut state court in the United States
and the court has directed the parties to proceed with discovery
and has tentatively scheduled trial for October 2021. The Group's
Board, in conjunction with its legal advisors, do not believe the
claim has merit and no provision is recognised as at 30 June
2020.
11. Subsequent events
The Group has evaluated subsequent events through 5 August 2020,
the date the Condensed Consolidated Financial Statements were
approved by the Board of Directors.
On 30 July 2020, the Group signed an agreement to sell the trade
and assets of its US Skincare product line, a limited product range
within Advanced Wound Care, for an expected consideration of
approximately $29 million. The sale is expected to complete in Q3
2020. The offer was deemed non-adjusting and did not meet the
criteria to be recognised as held for sale as at 30 June 2020.
On 5 August 2020, the Board declared the interim dividend to be
distributed on 15 October 2020. Refer to Note 5 - Dividends for
further details.
Non-IFRS financial information
Non-IFRS financial information or alternative performance
measures ("APMs") are used as supplemental measures in monitoring
the performance of our business. The adjustments applied to IFRS
measures reflect the effect of certain cash and non-cash items that
Group management believe are not related to the underlying
performance of the Group and provide a meaningful supplement to the
reported numbers to provide meaningful insight on how the business
is managed and measured on a day-to-day basis. Reconciliations for
these adjusted measures determined under IFRS are shown on pages 30
to 32. The definitions of adjusted measures are provided within the
reconciliation tables.
These items are excluded from the adjusted measures to reflect
performance in a consistent manner and are in line with how the
business is managed and measured on a day-to-day basis. They are
typically gains or losses/costs arising from events that are not
considered part of the core operations of the business or are
considered to be significant in nature. They may cross several
accounting periods. We also adjust for the tax effect of these
items. The APMs are consistent with those disclosed in the 2019
Annual Report and Accounts. The Group has made no adjustment to the
Group's reported results related to COVID-19.
Adjusted profit items, excluding the impact of tax, for the six
months ended 30 June 2020 and 2019 comprise the following credits
or costs that are reflected in the reported measures:
- Amortisation of intangible assets relating to acquisitions pre
1 January 2018 (ongoing) ($62.4 million and $70.2 million
respectively).
- Termination benefits in relation to major change programmes
($6.4 million and $1.4 million respectively).
Adjusted cash conversion for the six months ended 30 June 2019
excludes a receipt of $30.0 million in relation to the gross
settlement of a foreign exchange forward contract. The net
settlement of this instrument had no overall impact on the Group's
cash conversion however, due to a timing difference, $30.0 million
was received 28 June 2019 and $30.0 million was paid on 1 July
2019.
Acquisition related amortisation of intangible assets
Our adjusted measures exclude the amortisation of intangible
assets arising from acquisitions made before 1 January 2018. After
1 January 2018, amortisation in relation to incremental "bolt-on"
acquisitions is not excluded as smaller acquisitions are part of
our Group strategy and should be included in our reported and
adjusted measures. The Board will review significant acquisitions
on a case-by-case basis to determine whether the exclusion of the
amortisation of the acquired intangibles would provide a more
meaningful comparison of our results.
Termination benefits and related costs
Termination benefits and related costs arise from Group-wide
initiatives to reduce the recurring cost base and improve
efficiency in the business. 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
discreet qualifying items are identified these costs are
highlighted and excluded from the calculation of our adjusted
measures. Restructuring-related costs not related to termination
benefits are reported in the normal course of business.
Reconciliation of reported earnings to adjusted earnings for the
six months ended 30 June 2020 and 2019
Finance Non-operating
Gross Operating Operating costs, expense, Net
Revenue profit costs profit net net PBT Taxation profit
Six months
ended
30 June 2020 $m $m $m $m $m $m $m $m $m
-------------- ------- ------- --------- --------- ------- --------------- ----- -------- ---------
Reported 908.0 491.6 (378.6) 113.0 (26.3) (5.2) 81.5 (22.4) 59.1
Amortisation
of
pre-2018
acquisition
intangibles - 53.3 9.1 62.4 - - 62.4 (4.9) 57.5
Termination
benefits
and other
related
costs - - 6.4 6.4 - - 6.4 (1.2) 5.2
-------------- ------- ------- -------- --------- ------ --------- ---- ----- ------- -------
Total
adjustments
and their
tax effect - 53.3 15.5 68.8 - - 68.8 (6.1) 62.7
Adjusted 908.0 544.9 (363.1) 181.8 (26.3) (5.2) 150.3 (28.5) 121.8
-------------- ------- ------- -------- --------- ------ --------- --- ----- ------- -------
Software and R&D amortisation 3.9
Post-2017 acquisition
amortisation 1.0
Depreciation 29.2
Write-off of property, plant
and equipment 0.3
Share-based payments 7.2
--------- ---------
Adjusted
EBITDA 223.4
-------------- ------- ------- --------- ---------
Termination benefits and other related costs were $6.4 million,
pre-tax, in the six months ended 30 June 2020. The Transformation
Initiative is a global multi-year transformation programme which
will simplify the way in which the business operates. We expect to
incur c.$35 million of severance and associated retention costs
over 2020 and 2021.
Finance Non-operating
Gross Operating Operating costs, expense, Net
Revenue profit costs profit net net PBT Taxation profit
Six months
ended
30 June 2019 $m $m $m $m $m $m $m $m $m
-------------- ------- ------- --------- --------- ------- --------------- ----- -------- ---------
Reported 888.9 459.2 (365.6) 93.6 (32.1) (0.2) 61.3 (16.8) 44.5
Amortisation
of
pre-2018
acquisition
intangibles - 61.7 8.5 70.2 - - 70.2 (5.1) 65.1
Termination
benefits
and other
related
costs - - 1.4 1.4 - - 1.4 - 1.4
Total
adjustments
and their
tax effect - 61.7 9.9 71.6 - - 71.6 (5.1) 66.5
Adjusted 888.9 520.9 (355.7) 165.2 (32.1) (0.2) 132.9 (21.9) 111.0
-------------- ------- ------- -------- --------- ------ --------- --- ----- ------- -------
Software and R&D amortisation 4.7
Post-2017 acquisition
amortisation 0.5
Depreciation 28.2
Share-based payments 6.1
--------- ---------
Adjusted
EBITDA 204.7
-------------- ------- ------- --------- ---------
Termination benefits and other related costs were $1.4 million,
pre-tax, in the six months to 30 June 2019 and related to the
transition of the head office support functions from the US to the
UK and restructuring of geographical sales teams. These programmes
were completed in 2019.
Reconciliation of reported operating costs to adjusted operating
costs for the six months ended 30 June 2020 and 30 June 2019
Six months ended 30 June
2020 2019
Operating Operating
S&D(a) G&A(b) R&D(c) costs S&D(a) G&A(b) R&D(c) costs
$m $m $m $m $m $m $m $m
-------------------------- ------- ------- ------ --------- ------- ------- ------ -----------
Reported(d) (218.2) (124.8) (35.6) (378.6) (228.3) (113.6) (23.7) (365.6)
Amortisation of pre-2018
acquisition intangibles - 9.1 - 9.1 - 8.5 - 8.5
Termination benefits
and other related costs - 6.4 - 6.4 - 1.4 - 1.4
------ ------ ----- -------- ------ ------ ----- --------
Adjusted (218.2) (109.3) (35.6) (363.1) (228.3) (103.7) (23.7) (355.7)
-------------------------- ------ ------ ----- -------- ------ ------ ----- --------
(a) "S&D" represents selling and distribution expenses
(b) "G&A" represents general and administrative expenses
(c) "R&D" represents research and development expenses
(d) Following a review of cost allocations, general and
administrative expenses of $12.1 million (2019: $13.6 million)
principally relating to employee costs and insurance, have been
reclassified to selling and distribution expenses to better reflect
the nature of the costs. The comparatives have been restated to
reflect the revised classification.
Reconciliation of basic and diluted reported earnings per share
to adjusted earnings per share for the six months ended 30 June
2020 and 30 June 2019
Six months ended 30 June
Reported Adjusted Reported Adjusted
2020 2020 2019 2019
$m $m $m $m
--------------------------------------------- ----------- ----------- -------- ----------
Net profit attributable to the shareholders
of the Group 59.1 121.8 44.5 111.0
--------------------------------------------- ----------- ----------- -------- --------
Number Number
--------------------------------------------- ------------------------ --------------------
Basic weighted average ordinary
shares in issue 1,983,903,773 1,966,554,877
Diluted weighted average ordinary
shares in issue 1,997,251,095 1,971,471,328
---------------------------------------------
$ per $ per
$ per share $ per share share share
--------------------------------------------- ----------- ----------- -------- ----------
Basic and diluted earnings per share 0.03 0.06 0.02 0.06
--------------------------------------------- ----------- ----------- -------- --------
Cash conversion for the six months ended 30 June 2020 and 30
June 2019
Six months ended 30
June
2020 2019
$m $m
------------------------------------------------------ -------------- ----------
Reported Operating profit/EBIT 113.0 93.6
Depreciation of property, plant and equipment 18.3 17.1
Depreciation of right-of-use assets 10.9 11.1
Amortisation 67.3 75.4
Write-off of property, plant and equipment 0.3 -
Reported EBITDA 209.8 197.2
Non-cash items in EBITDA
Share-based payment expense 7.2 6.1
Disposals - 0.1
------------------------------------------------------- -------- ---- ------
7.2 6.2
Working capital movement (20.4) 36.6
Capital expenditure (36.7) (30.9)
------------------------------------------------------- -------- --- ------
Reported net cash for cash conversion 159.9 209.1
Less: tax paid (14.5) (16.5)
-------- --- ------
Reported free cash flow 145.4 192.6
------------------------------------------------------- -------- ---- ------
Reconciliation of Adjusted EBITDA, Adjusted Non-Cash Items, Adjusted
Working Capital and Adjusted Net Cash
(for Adjusted Cash Conversion measurement)
Reported EBITDA 209.8 197.2
Share-based payment expense 7.2 6.1
Termination benefits and other related costs 6.4 1.4
Total adjustments (a) 13.6 7.5
------------------------------------------------------- -------- ---- ------
Adjusted EBITDA 223.4 204.7
------------------------------------------------------- -------- ---- ------
Reported non-cash items 7.2 6.2
Share-based payment expense (7.2) (6.1)
Total adjustments (b) (7.2) (6.1)
------------------------------------------------------- -------- --- ------
Adjusted non-cash items - 0.1
------------------------------------------------------- -------- ---- ------
Reported working capital movement (20.4) 36.6
(Increase)/decrease in severance provision (3.4) 3.4
Increase in other financial liabilities due
to foreign exchange forward contract - (30.0)
------------------------------------------------------- -------- ---- ------
Total adjustments (c) (3.4) (26.6)
------------------------------------------------------- -------- --- ------
Adjusted working capital movement (23.8) 10.0
------------------------------------------------------- -------- --- ------
Reported net cash for cash conversion 159.9 209.1
Total adjustments above (a), (b), (c) 3.0 (25.2)
Adjusted net cash for cash conversion 162.9 183.9
Less: tax paid (14.5) (16.5)
Adjusted free cash flow 148.4 167.4
------------------------------------------------------- -------- ---- ------
Reported cash conversion 76.2% 106.0%
Adjusted cash conversion 72.9% 89.8%
------------------------------------------------------- -------- --- ------
Net debt
Net debt, which is used to monitor the leverage of the business,
is calculated as the carrying value of current and non-current
borrowings on the face of the Condensed Consolidated Statement of
Financial Position (Note 7 - Borrowings), net of cash and cash
equivalents.
31 December
30 June 2020 2019
$m $m
Reported Reported
----------------------------------- ------------ -------------
Borrowings 1,489.2 1,486.1
Lease liabilities 89.0 88.5
----------------------------------- ----------- ----------
Total interest-bearing borrowings 1,578.2 1,574.6
Cash and cash equivalents (451.3) (385.8)
----------------------------------- ----------- ----------
Net debt (including leases) 1,126.9 1,188.8
----------------------------------- ----------- ----------
Net debt 1,037.9 1,100.3
----------------------------------- ----------- ----------
Leverage(a) 2.2 2.5
----------------------------------- ----------- ----------
(a) Leverage is calculated as net debt / last 12 months adjusted EBITDA.
The Directors confirm that to the best of their knowledge:
-- the Condensed Consolidated Financial Statements have been
prepared in accordance with IAS 34 as adopted by the European
Union; and
-- the interim management report includes a fair review of the information required by:
a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first
six months of the financial year and their impact on the Condensed
Consolidated Financial Statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
b. DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period, and any changes in the related party transactions
described in the last annual report that could do so.
The Board of Directors of ConvaTec Group Plc on 5 August 2020
are the same as those listed in the 2019 Annual Report with the
exception of Brian May, who joined as a Non-Executive Director on 2
March 2020, and Heather Mason, who joined as a Non-Executive
Director on 1 July 2020.
By order of the Board:
Karim Bitar Chief Executive Officer 5 August 2020
Frank Schulkes Chief Financial Officer 5 August 2020
INDEPENT REVIEW REPORT TO CONVATEC GROUP PLC
We have been engaged by the Group to review the condensed set of
financial statements in the interim financial report for the six
months ended 30 June 2020 which comprises the Condensed
Consolidated Income Statement, the Condensed Consolidated Statement
of Comprehensive Income, the Condensed Consolidated Statement of
Financial Position, the Condensed Consolidated Statement of Changes
in Equity, the Condensed Consolidated Statement of Cash Flows and
related notes 1 to 11. We have read the other information contained
in the interim financial report and considered whether it contains
any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
Directors' responsibilities
The interim financial report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the interim financial report in accordance with the
Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in Note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this interim financial report has been prepared in accordance
with International Accounting Standard 34 "Interim Financial
Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Group a conclusion on
the condensed set of financial statements in the interim financial
report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the interim financial report for the six months ended 30 June
2020 is not prepared, in all material respects, in accordance with
International Accounting Standard 34 as adopted by the European
Union and the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the Group in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the Group those matters we are required to state to it in
an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Group, for our review work,
for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
Reading, United Kingdom
5 August 2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FLFLATRIEIII
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