TIDMCTEC
RNS Number : 4258E
ConvaTec Group PLC
28 February 2020
28 February 2020
ConvaTec Group Plc
Audited Annual Results for the twelve months ended 31 December
2019
Results on track and making strategic progress
Financial results in line with guidance, FY 2019 key points:
-- Group reported revenue of $1,827 million declined 0.3% year
on year but grew 2.3%(3) organically.
-- Reported EBIT(4) of $97million, declined 63.8% year on year
due to the impairment of acquired intangible assets, transformation
investments including MDR and the impact of adverse FX
movements.
-- As expected, adjusted(1) EBIT(4) of $354 million was down
17.5% (2018: $429 million), primarily due to the investment in
transformation ($40 million) and Medical Device Regulation ("MDR",
$5 million), and the impact of adverse FX movements ($14 million);
with adjusted(1) EBIT margin of 19.4% (2018: 23.4%).
Strategic progress:
-- New vision, strategy, operating model and values announced today, based on:
o Five pillars of our corporate strategy: Focus, Innovate,
Simplify, Build and Execute.
o Simplified operating model: more customer-centric, agile and
innovation led with clear accountability.
-- Transformation progressing well; increasing future investment. FY 2019 achievements:
-- Implementation of more than 100 initiatives underway.
-- More than 150 people trained on execution excellence and over
500 people directly involved in transformation.
-- Transformation cost investment of $40 million and capex
investment of $20m.
o Increasing transformation investment to c.$210 million over
2019 to 2021 (previously c.$150 million(5) over 2019 to 2021). For
further details see page 3.
o Recurring transformation costs related to commercial and
R&D investment expected to between $60 million and $65 million
in 2020, increasing to c.$75 million by 2021 (previously $50
million(5) by 2021). This was $13 million in 2019. For further
details see page 3.
o Anticipated annual gross benefits in 2021 increased to between
$150 million and $170 million (previously between $130 million and
$150 million(5) ).
Financial outlook, FY 2020
o Constant currency revenue growth expected to be 2.0% to
3.5%(6) .
o Constant currency adjusted EBIT margin 16.0% to 18.0%(6) ,
including c.$50 million of cost investment associated with the
transformation and c.$18 million of costs related to MDR.
Karim Bitar, Chief Executive Officer, commented:
"One of the key reasons that attracted me to ConvaTec was the
significant opportunity ahead of us. We operate in structurally
growing markets; however, our performance in different product
categories and markets varies markedly. With clear direction, an
emphasis on innovation and an execution excellence culture,
ConvaTec will focus on pivoting to sustainable and profitable
growth.
Since I joined ConvaTec, the ConvaTec Executive Leadership Team
("CELT") and I have undertaken a strategic assessment and concluded
that we need to move to a new operating model. The new model is
customer-centric, more agile, focuses on innovation and ensures
clear accountability. Our transformation goal and strategic intent
is to pivot to sustainable and profitable growth. "
Franchise Summary
Advanced Wound Care r evenue declined 3.0% on a reported basis
but grew 0.5%(3) organically. Overall our performance was in line
with internal expectations, but the franchise's US business
continued to be challenged, impacted by moving to a more
specialised salesforce, which should start to yield benefits in
2020.
Our AQUACEL(TM) Ag+/Advantage silver products performed
strongly, partly offset by our legacy base AQUACEL(TM) dressings
and continued declines in skin care. We saw strong momentum in
Latin America, APAC and most EMEA markets. The UK market has
stabilised; however, it remains challenging. French reimbursement
cuts were in line with our expectations.
Ostomy Care r evenue declined 1.6% on a reported basis but grew
1.9%(3) year on year on an organic basis. Against a weak prior
year, we continued to execute on our strategy to return the
franchise to consistent and improved levels of growth, with solid
performances in Latin America and EMEA offsetting weakness in the
US.
We continue to invest in and see traction with our more recent
Convex product launches such as Esteem+(TM) Flex and Natura(TM)
Accordion and grow our me+(TM) direct-to-consumer programme.
Continence & Critical Care revenue grew 3.1% on a reported
basis and 4.1%(3) organically, with a strong performance from our
Home Services Group ("HSG", formerly Home Distribution Group) in
the US, which continued to outgrow the overall US continence
market. Growth also benefited from the impact of a product recall
in the prior year. This was partially offset by the franchise's
Hospital & Critical Care businesses, which continued to
decline.
Infusion Care revenue grew 2.7% on a reported basis, and 4.1%(3)
on an organic basis. We saw strong orders from customers through
the year, and as expected, growth was towards the lower end of
historical market growth levels due to the exit of Animas from the
durable pump market in late 2018.
Twelve months ended
31 December
------------------------
2019 2018 Growth
Reported results $m (unless stated) Reported Organic
(3)
---------------------------- ------------------------ ---------- --------
Revenue 1,827 1,832 (0.3)% 2.3%
Gross margin 52.3% 53.2% (90) bps
EBIT 97 268 (63.8)% (59.6)%
EBIT margin 5.3% 14.6% (930)bps
Earnings per share ($
per share)* 0.00 0.11
Dividend per share (cents) 5.7 cents 5.7 cents
Twelve months ended
31 December
------------------------
2019 2018 Growth
Adjusted results $m (unless stated) Reported Organic
(3)
---------------------------- ------------------------ ---------- --------
Revenue 1,827 1,832 (0.3)% 2.3%
Gross margin 59.0% 60.2% (120) bps
EBIT 354 429 (17.5)% (14.2)%
EBIT margin 19.4% 23.4% (400)bps
Earnings per share ($
per share) 0.12 0.16
* The reduction in reported EPS from FY18 to FY19 includes an
impairment charge of $105.5 million relating to acquired intangible
assets. The charge, which is non-cash, reduced reported EPS by
$0.05 per share. For further information see note 5 of the
Financial Statements.
Transformation Initiative investments and benefits
We see a significant opportunity for sustainable and profitable
growth ahead of us by becoming more customer-centric and innovation
led, therefore we are investing more than was previously announced,
including costs related to the change in the operating model. This
increased investment will deliver a higher level of benefit than
previously announced.
Transformation investment
-- Transformation investment of c.$210 million over 2019 to 2021
(previously c.$150 million over 2019 to 2021). This consists
of:
o $140 million to $150 million of cost investment, of which
between $35 million and $40 million will be excluded from adjusted
EBIT, in line with our policy, and between $60 million and $65
million of capex investment
-- FY 2019: $64 million of investment:
-- $40 million of operational costs (largely opex)
-- $20 million of capex
-- $4 million of cost items excluded from adjusted EBIT, in line with our policy
-- FY 2020: $105 million to $110 million of investment:
-- c.$50 million of operational costs (largely opex)
-- c.$30 million capex
-- Between $25 million and $30 million of cost items to be
excluded from adjusted EBIT, in line with our policy
Recurring transformation investment
-- Recurring transformation costs related to commercial and
R&D investment increasing to c.$75 million by 2021 (previously
$50 million by 2021)
o FY 2019: $13 million in 2019
o FY 2020: Between $60 million and $65 million in 2020
Annual gross benefits
-- Anticipated annual gross benefits in 2021 increased to
between $150 million and $170 million (previously between $130
million and $150 million)
Investor and analyst presentation and webcast
There will be a management presentation for investors and
analysts at 9.00am GMT at The Auditorium, UBS, 5 Broadgate Street,
London. There will be a webcast of the presentation, details of
which can be found on the ConvaTec website,
www.convatecgroup.com/investors/reports.
A dial-in is also available for the meeting:
United Kingdom - 020 3936 2999
United States - 1 845 709 8568
All other locations - +44 20 3936 2999
Access code - 673349
The full text of this announcement and the presentation for the
analyst and investors meeting can also be downloaded from the
website above.
Next announcement
The Group will publish its Q1 2020 trading update on the 30
April 2020.
Analysts and Investors
Mark Reynolds, Director Investor Relations +44 (0)7551 036
625
ir@convatec.com
Media
Buchanan: Charles Ryland / Chris Lane / Vicky Haynes +44 (0)207
466 5000
Financial Calendar
Ex-dividend date* 2 April 2020
Dividend record date* 3 April 2020
Scrip dividend election date*
21 April 2020
Q1 trading update 30 April 2020
Annual General Meeting
7 May 2020
Dividend payment date*
14 May 2020
* subject to approval at AGM.
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 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
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(1) Certain financial measures in this document, including
adjusted results above, are not prepared in accordance with
International Financial Reporting Standards ("IFRS"). All adjusted
measures are reconciled to the most directly comparable measure
prepared in accordance with IFRS in the Non-IFRS Financial
Information below (pages 36 to 42).
(2) Constant currency growth is calculated by applying the
applicable prior period average exchange rates to the Group's
actual performance in the respective period.
(3) Organic growth presents period over period growth at
constant currency, excluding M&A activities.
(4) Adjusted EBIT is equivalent to adjusted operating profit and
reported EBIT is equivalent to reported operating profit.
(5) Previous guidance: recurring opex increase of $15 million in
2019 growing to $50 million in 2021, total Transformation
Initiative costs of c.$150 million over 2019 to 2021, anticipated
annual gross benefits previously between $130 million and $150
million.
(6) Our intention is to drive absolute revenue and earnings
growth, both organic and inorganic, therefore a constant currency
measure is more appropriate moving forward.
Chief Executive's Review
I am pleased to have joined ConvaTec as Chief Executive Officer
last September. I accepted the role for a number of reasons. I am
passionate about improving patient care by leveraging innovation,
technology and services. Serving patients and the people we touch
will be at the core of ConvaTec's culture. There is significant
potential for us to be more customer-centric and do more to support
and help the people who use and benefit from our products and
services.
ConvaTec operates in attractive, structurally growing chronic
care markets where there is long-term demand for our products and
services and market growth rates are expected to remain at current
levels (c.4% pa) in the medium term. However, our past performance
has been mixed. Whilst we have leadership positions in some markets
due to strong customer relationships and some innovative products,
in other areas our ability to perform to our full potential is
impeded by organisational complexity and limited capabilities.
The trends that are impacting the wider healthcare industry also
create challenges and opportunities for our organisation. These
trends include the increasing cost pressures on health systems; the
rising influence of the patient or consumer; an increasing shift
towards the importance of homecare; technological advancements; the
entrance of new competitors; and the growth in emerging markets. We
need to understand these trends and effectively differentiate our
offering as we strive to seize the opportunities created.
Since I joined ConvaTec, the CELT has undertaken an assessment
of our organisation, including the Transformation Initiative
commenced in 2019. This assessment has led to the wider strategic
changes detailed below. We launched the Transformation Office last
year to improve execution across key parts of our business and
ensure more effective delivery of our strategy. Improving the
execution capabilities of our commercial teams, operations and
business support services is fundamental to ConvaTec's success. We
are continuing to strengthen our execution excellence discipline
via our Transformation Office, which focuses on supporting improved
execution across the entire organisation. We are pleased that this
is already delivering some benefits, although there is still much
to be achieved.
Transforming by pivoting to sustainable and profitable
growth
To achieve our transformation goal of pivoting to sustainable
and profitable growth, more significant and fundamental change is
required; we are already taking action to achieve this.
We now have a clear new vision, which encompasses our purpose:
Pioneering trusted medical solutions to improve the lives we touch.
We will realise this through our five strategic pillars: Focus,
Innovate, Simplify, Build and Execute.
Our success will be underpinned by a new operating model that is
more customer-centric, agile, innovation led and with clear
accountability, supported by our refreshed Group values that are
consistent with our vision, strategy and operating model, and these
will guide the way we work. Further details on our vision and
values will be available in the 2019 Annual Report and
Accounts.
Our five strategic pillars:
Focus
We will focus on our 'must-win' markets and categories.
Innovate
We will innovate by investing in our R&D capabilities to
develop trusted medical solutions that customers need most. Our
innovation will focus on providing differentiated patient-centric
solutions, delivered across three frontiers: products, services,
and digital.
Simplify
We will simplify and strengthen the organisation by having a
customer-centric and agile operating model with clear
accountability. We will establish six integrated global business
units, create a new technology and innovation function and optimise
organisational layers.
Build
We will build critical core capabilities across the value chain
via centres of excellence focusing in areas such as salesforce
effectiveness and quality.
Execute
We will instil a culture of execution excellence across the
organisation via the Transformation Office. We will implement
transformation initiatives with measurable outcomes and clear,
accountable owners.
New operating model
As noted above, our organisational complexity and limited
capabilities have been key drivers of our past mixed performance;
therefore, we have started to simplify and strengthen our operating
model to make it more customer-centric, agile and accountable.
During 2020 we will transition to an organisation that will
operate with six integrated global business units: Advanced Wound
Care, Ostomy Care, Continence Care, Infusion Care (formerly
Infusion Devices), Emerging Markets and Home Services Group
(formerly Home Distribution Group). These six global business units
will be supported by: a new technology and innovation function, an
enhanced quality, operations and regulatory function, customer
support functions (Finance, IT, HR & Legal), and the
Transformation Office.
In the coming years, we plan to significantly increase our
investment in R&D as we strengthen our innovation capabilities
and improve our product development pipeline. We need to get closer
to the patients and people we serve, increase innovation and drive
execution excellence. To achieve this, R&D needs to be an
integral part of our organisation.
To lead our innovation strategy, strengthen the capability and
drive execution we have appointed Dr. Divakar Ramakrishnan, our
first Chief Technology Officer, who joined ConvaTec and the CELT on
21 January 2020. Divakar has significant experience, most recently
at Eli Lilly, in leading global R&D teams focused on developing
innovative and digitally-enabled devices to improve patient care.
He has deep competencies in product, process and clinical
development.
Supratim Bose, previously Executive Vice President of APAC, will
lead Global Emerging Markets and Seth Segel will lead our Home
Services Group. Seth was previously President of Home Distribution
Group having joined ConvaTec in September 2017 following the
acquisition of Woodbury Health Products, where he served as CEO for
five years. Seth became a member of the CELT on 1 January 2020.
Mani Gopal joined ConvaTec and the CELT on 13 January 2020 as
President of our Global Ostomy Care business unit. He was
previously with Cooper Vision and Abbott Laboratories and has
extensive experience of running and improving the performance of
integrated healthcare businesses.
We are pleased that Kjersti Grimsrud, formerly President of
EMEA, has agreed to lead the Global Continence Care business unit,
whilst David Shepherd will continue to lead our Global Advanced
Wound Care business unit.
Finally, in keeping with the new values of the Group, in
particular improving care, we are aligning the name of our infusion
set business, formerly Infusion Devices, to our other global
business units, and renaming it Infusion Care. John Lindskog will
continue to lead this business unit.
Following the above changes Frank Gehres and Stephan Bonnelycke
have left ConvaTec. They played important roles as members of the
leadership team and we would like to thank them for their
contributions and wish them well for the future.
Our new vision, strategy, operating model and values combined
with our strengthened leadership team, will bring greater focus and
stronger execution. Further information on all members of the CELT
is available on our website (www.convatecgroup.com).
I have had the pleasure of visiting a great many of our sites
since joining the organisation and taken the opportunity to meet
many colleagues and customers. I want to thank my colleagues for a
very warm welcome and their commitment to transforming
ConvaTec.
2019 Financial performance
It is encouraging that the full year results are in line with
the guidance we provided in February 2019. However, this is only a
first step and much hard work needs to be undertaken to achieve our
strategic intent of pivoting to sustainable and profitable
growth.
Group reported revenue of $1,827 million (2018: $1,832 million)
declined 0.3% year-on-year but grew 2.4%(2) on a constant currency
basis and 2.3%(3) organically, towards the top of the guidance
range provided in February 2019. The performance reflects solid
growth in Continence & Critical Care and Infusion Care,
although both benefited from weaker 2018 performances. Advanced
Wound Care continued to underperform the market, largely due to
transition in the franchise's US business. Ostomy Care, against a
declining prior year, also remained soft as good performances in
Latin America and some EMEA markets were partly offset by
underperformance in the US.
Reported EBIT margin was 5.3% (2018: 14.6%), a result of
impairment related to acquired intangible assets, investment in
transformation, and adverse FX movements.
Adjusted EBIT margin at 19.4% (2018: 23.4%) was above the
mid-range of guidance provided. Investment in transformation ($40
million) and MDR ($5 million) were the main drivers of lower
adjusted EBIT margin, in addition to the impact of adverse FX
movements ($14 million). A net positive productivity contribution
was more than offset by price pressures and negative sales mix.
Cash flow remained robust with adjusted cash conversion at 98%
(2018: 81%), driven by improved working capital. See the Financial
Review for further information on costs and margin.
Franchise revenue performance
Twelve months ended
31 December
----------------------
2019 2018 Growth Q4
$m $m Reported Organic(3) Organic growth(3)
Revenue by Franchise
----------------------- ---------- ---------- --------- ----------- ------------------
Advanced Wound Care 570 588 (3.0)% 0.5% 1.8%
Ostomy Care 525 533 (1.6)% 1.9% 5.2%
Continence & Critical
Care 457 443 3.1% 4.1% 3.8%
Infusion Care 275 268 2.7% 4.1% 12.4%
----------------------- ---------- ---------- --------- ----------- ------------------
Total 1,827 1,832 (0.3)% 2.3% 4.6%
----------------------- ---------- ---------- --------- ----------- ------------------
Advanced Wound Care ("AWC")
Organic growth in 2019 remained subdued as it was impacted by
disruption and transition in the franchise's US business moving to
a more specialised salesforce. We continued to see improved call
rates and customer targeting, the benefits of this in terms of
revenue growth should be seen in 2020 and beyond.
Throughout the year, we remained focused on three priorities to
drive growth in AWC:
- Transitioning to a new specialised salesforce in the US.
- Expanding our AQUACEL(TM) dressings offering through the
extension of AQUACEL(TM) Ag+/Advantage dressing with anti-biofilm
technology and the expansion of the AQUACEL(TM) Surgical product
portfolio into new surgical areas.
- Continuing to grow in the foam market and expanding our
portfolio of dressings, targeting the fast-growing protection and
prevention foam segments.
AWC 2019 revenue performance
In 2019 reported revenue of $570 million declined 3.0% compared
to the prior year, but on an organic basis revenue grew 0.5%. In
the fourth quarter, revenue grew 1.8% on an organic basis, driven
by growth in Latin America, APAC and some EMEA markets, partly
offset by the US.
Sales of our AQUACEL(TM) brand remain strong. We are leaders in
market share in several categories, including silver, and we
continue to build our position in foam, growing in line with the
market. Our AQUACEL(TM) Ag+/Advantage dressing, launched just over
a year ago in the US, has been positively received by clinicians.
In Q4 2019, we also launched ConvaMax (TM) , our first entry into
the super absorber segment within Europe and will launch in the US
in Q1 2020. Growth in AQUACEL(TM) surgical cover dressing remained
low, impacted by the changes to the US salesforce.
The franchise's legacy DuoDERM(TM) and base AQUACEL(TM)
Hydrofiber(TM) products, together with its skin care business, make
up a little under 40% of AWC revenues and, as a whole, were a
significant drag on revenue growth in 2019. However, DuoDERM(TM)
made some progress and delivered modest growth in the year.
AQUACEL(TM) Hydrofiber(TM) was negatively impacted by the
challenging UK market dynamics, although performance did improve in
the second half of the year. We expect these UK market pressures to
remain in 2020.
We saw strong growth in our emerging markets in APAC and Latin
America as well as some EMEA markets. As noted above, we continued
to underperform in the US, however this has been impacted by the
planned restructure of the salesforce that led to some disruption
in 2019. Whilst in France we experienced the impact of the
reimbursement cuts.
Ostomy Care ("OC")
As expected, p erformance in Ostomy Care also remained subdued
as a result of underperformance in the US. However, we saw solid
performances in Latin America, EMEA and in certain markets in APAC
driven by good traction with our recent product launches such as
Esteem(TM) + Flex and Natura (TM) Accordion as well as good growth
in accessories.
During the year we focused on three priorities to drive our
growth in OC:
- Continuing to strengthen relationships with ostomy nurses in
hospitals to increase familiarity with our products and to provide
them with the tools to make ostomy care simple, easy and
accessible.
- Expanding our me+(TM) direct-to-consumer programmes to engage
directly and frequently with patients to build strong and long-term
customer relationships.
- Continuing to enhance our portfolio of offerings by leveraging
our technology and investing in consumer-led solutions.
OC 2019 revenue performance
Reported revenue of $525 million for 2019 declined 1.6% against
the prior year, but on an organic basis revenue grew 1.9%. In the
fourth quarter revenue grew 5.2% on an organic basis, driven by
broad-based growth across the business albeit against a weak prior
year.
We continued to see good traction with our recent product
launches including Esteem(TM) + Flex Convex, Natura(TM) Convex
Accordion Flange and Varimate strips and ongoing investment in our
me+(TM) platform is leading to a continued increase in the number
of enrolled patients.
We saw solid performances and market share gains in Latin
America and in certain markets in APAC and Europe. We continued to
see underperformance in the US.
To address the underperformance, we have been implementing
changes to our commercial approach to improve salesforce
effectiveness, including flattening our organisational structure to
get closer to the customer, improved segmentation and revised sales
incentive programmes. We are also increasingly leveraging our HSG
service offering and integrating our product and me+ (TM) programme
into selected accounts.
In January 2020 we were pleased to agree a three-year extension
to the Premier GPO (General Purchasing Organisation) contract for
Ostomy Care in the US, commencing April 2020. This is the second
largest GPO contract in the US covering around 25% of hospitals and
our contract now runs until March 2023.
Continence & Critical Care ("CCC")
Growth in CCC was driven by HSG, which continues to outgrow the
overall US continence market, partly offset by the drag from our
Hospital and Critical Care businesses. The growth also benefited
from the impact of a product recall in the prior year.
Growth in 2019 was focused on two priorities:
- Leveraging the reach of HSG, the largest supplier of intermittent catheters in the US.
- Continuing to innovate and expand the GentleCath(TM)
intermittent catheter portfolio to cover a wider range of needs
together with expanding our me+(TM) platform for intermittent
catheter users.
CCC 2019 revenue performance
2019 Reported revenue of $457 million grew 3.1% against the
prior year, including a small net revenue contribution of $1.3
million from J&R Medical, which was acquired by HSG on 1 March
2018 and Southlake Medical Supplies, which was acquired by HSG on 1
October 2019, net of the Symbius divestment in 2018. Revenue grew
4.1% year on year on an organic basis. In the fourth quarter
revenue grew by 3.8% on an organic basis, again driven by strong
growth in HSG.
HSG, driven by its high-touch patient care model, continues to
be the driver of growth in the franchise. It aims to deliver
superior patient experiences by providing direct support, advice
and liaison with clinicians, insurance companies and state funded
health coverage programmes on reimbursement.
Infusion Care ("IC")
2019 performance was in line with expectations with good
underlying revenue growth, driven by strong customer orders and the
continued growth of MiniMed(TM) Mio(TM) Advance with our partner
Medtronic. However, the organic growth was towards the lower end of
the historical market growth of 4% to 5% per annum due to the exit
of Animas from the market in late 2018.
During 2019 we focused on three priorities to drive our
growth:
- Maintaining our strong and long-term partnerships with insulin
pump manufacturers to secure long-term business.
- Continuing to develop innovative products for both insulin and other drug delivery.
- Leveraging our leading industry position to ensure that we
were the supplier of choice for new entrants into the insulin
market and delivery of other sub-cutaneous drugs.
IC 2019 revenue performance
Revenue in 2019 of $275 million grew 2.7% year on year on a
reported basis and 4.1% on an organic basis driven by strong
customer orders. In the fourth quarter revenue grew by 12.4% on an
organic basis, largely driven by materially lower revenue in the
prior year, following a change in inventory policy at our biggest
customer in Q4 2018.
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. Our Brexit taskforce is
actively preparing for a "No-Deal" scenario with external advisory
support as required. Management considers there will be no material
financial effect on our business, or significant operational issues
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.
COVID-19 ("Coronavirus")
We are closely monitoring the Coronavirus outbreak, with
particular regard to the wellbeing of all our colleagues, our
production processes and our supply chain. In 2019, sales in China
accounted for less than 1% of Group revenues and within our supply
chain there are a small number of component parts and accessories
that are manufactured by third-parties in affected areas of APAC.
At this stage, assuming that the situation normalises in Q2 and
that the outbreak is contained, we do not anticipate any
significant business interruption, however we are continuing to
assess potential impacts, and the subsequent mitigating actions. We
have a number of employees in affected areas and we aim to ensure
that they are in an environment which is safe and secure.
Dividend
The Board is proposing to maintain our 2019 full year dividend
at 5.7 cents per share, in line with the interim dividend for 2019.
Whilst this is outside our stated policy of 35% to 45% of adjusted
net profit, resulting from our investment in transformation, it is
a reflection of the Board's confidence in the future performance of
the Group and its underlying financial strength, distributable
reserves position and cash generation of the Group.
Group 2020 outlook
In 2020 we expect constant currency revenue growth of 2.0% to
3.5%(2,6) , with an improved performance year on year driven by AWC
and Infusion Care, we expect a similar year in Continence Care,
whilst Ostomy Care will deliver very low single-digit growth due to
the impact of product portfolio and market rationalisation.
Constant currency adjusted EBIT margin in 2020 is expected to be
16.0% to 18.0% (4,6) , including c.$50 million of cost investment
associated with the transformation and c.$18 million of costs
related to the implementation of the Medical Devices
Regulation.
Whilst we have made some progress, driving forward with the
transformation and laying the foundations of organisational change
through the new Group vision, strategy, operating model and values,
there is much more to do as we pivot to sustainable and profitable
growth. Our opportunity over the medium term is to drive improved
revenue and EBIT growth. I look forward to updating you further
later in the year.
Principal risks
The Group's risk management process is in place to identify,
assess and prioritise risks that could impact the Group's
performance. For 2019, the Group has reconfirmed and reprioritised
the eleven principal risks as disclosed in the Group's 2018 Annual
Report and Accounts on pages 34 to 43, and listed below:
-- Change and transformation;
-- Failure to attract, engage and retain leadership talent;
-- Legal and compliance;
-- Product innovation and intellectual property;
-- Information security;
-- Quality and regulatory;
-- Brexit;
-- Global operational and supply chain;
-- Pricing and reimbursement;
-- Forecasting process;
-- Macroeconomic and foreign exchange.
We continually review our risk profiles and risk mitigation
activities to respond to current and future drivers, opportunities
and vulnerabilities. Whilst COVID-19 is not a principal risk as we
do not anticipate any significant business interruption, we
continue to assess potential impacts and the subsequent mitigating
actions.
Forward Looking Statements
This document includes statements that are, or may be deemed to
be, "forward-looking statements". These forward-looking statements
involve known and unknown risks and uncertainties, many of which
are beyond the Group's control. "Forward-looking statements" are
sometimes identified by the use of forward-looking terminology,
including the terms "believes", "estimates", "aims", "anticipates",
"expects", "intends", "plans", "predicts", "may", "will", "could",
"shall", "risk", "targets", "forecasts", "should", "guidance",
"continues", "assumes" or "positioned" or, in each case, their
negative or other variations or comparable terminology. These
forward-looking statements include all matters that are not
historical facts. They appear in a number of places and include,
but are not limited to, statements regarding the Group's
intentions, beliefs or current expectations concerning, amongst
other things, results of operations, financial condition,
liquidity, prospects, growth, strategies and dividend policy of the
Group and the industry in which it operates.
By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. These
statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and
competitive uncertainties and contingencies. As such, no assurance
can be given that such future results, including guidance provided
by the Group, will be achieved; actual events or results may differ
materially as a result of risks and uncertainties facing the Group.
Such risks and uncertainties could cause actual results to vary
materially from the future results indicated, expressed, or implied
in such forward-looking statements. Forward-looking statements are
not guarantees of future performance and the actual results of
operations, financial condition and liquidity, and the development
of the industry in which the Group operates, may differ materially
from those made in or suggested by the forward-looking statements
set out in this Presentation. Past performance of the Group cannot
be relied on as a guide to future performance. Forward-looking
statements speak only as at the date of this document and the Group
and its directors, officers, employees, agents, affiliates and
advisers expressly disclaim any obligations or undertaking to
release any update of, or revisions to, any forward-looking
statements in this document.
Financial review
The Financial review includes discussion of reported and
alternative performance measures. Management uses alternative
performance measures as a meaningful supplement to reported
measures. These measures are disclosed in accordance with the ESMA
guidelines and are explained and reconciled to the most directly
comparable measure prepared in accordance with IFRS on pages 36 to
42. Further detail on the Group's financial performance, measured
in accordance with IFRS, is set out in the Financial Statements and
selected Notes thereto on pages 26 to 36.
The commentary includes discussion of revenue on both a constant
currency basis and an organic basis. Constant currency removes the
effect of fluctuations in exchange rates. Organic removes the
effect of fluctuations in exchange rates and the impact of
acquisitions and disposals in the year and prior year. Both
measures enable the Group to focus on the underlying revenue
performance. Constant currency information is calculated by
applying the applicable prior period average exchange rates to the
Group's revenue performance in the respective period. Revenue
growth on a constant currency basis and an organic basis are
non-IFRS financial measures and should not be viewed as
replacements of IFRS reported revenue.
Results of operations
The following table sets forth the Group's revenue and expense
items from continuing operations for each of the
last two years:
Reported Reported Adjusted(a) Adjusted(a)
2019 2018 2019 2018
$m $m $m $m
-------------------------------------- --------- --------- ------------ ------------
Revenue 1,827.2 1,832.1 1,827.2 1,832.1
Cost of goods sold (871.6) (858.3) (749.0) (729.9)
-------------------------------------- --------- --------- ------------ ------------
Gross profit 955.6 973.8 1,078.2 1,102.2
-------------------------------------- --------- --------- ------------ ------------
Gross margin % 52.3% 53.2% 59.0% 60.2%
Selling and distribution expenses (433.0) (418.0) (431.3) (415.3)
General and administrative expenses (266.4) (238.2) (238.5) (208.3)
Research and development expenses (53.8) (49.9) (53.8) (49.2)
Other operating expenses (105.5) - (0.3) -
-------------------------------------- --------- --------- ------------ ------------
Operating profit 96.9 267.7 354.3 429.4
-------------------------------------- --------- --------- ------------ ------------
Operating margin % 5.3% 14.6% 19.4% 23.4%
Finance costs (73.6) (65.2) (73.6) (65.2)
Non-operating expense, net (4.4) (1.3) (4.4) (3.2)
-------------------------------------- --------- --------- ------------ ------------
Profit before income taxes 18.9 201.2 276.3 361.0
Income tax (expense)/benefit (9.1) 20.4 (44.3) (56.5)
-------------------------------------- --------- --------- ------------ ------------
Net profit 9.8 221.6 232.0 304.5
-------------------------------------- --------- --------- ------------ ------------
Net profit % 0.5% 12.1% 12.7% 16.6%
Basic and diluted earnings per share
($ per share) 0.00 0.11 0.12 0.16
Dividend per share (cents) 5.7 5.7
-------------------------------------- --------- --------- ------------ ------------
(a) These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measure
prepared in accordance with IFRS
on pages 36 to 42.
Revenue
The Group's revenue performance for the year ended 31 December
2019 is discussed on page 3.
Cost of goods sold and gross profit
Reported
Reported cost of goods sold increased by 1.5% to $871.6 million
(2018: $858.3 million). The increase was a result of negative mix
and pricing pressures offset by favourable foreign exchange
gains.
Reported gross profit decreased by $18.2 million to $955.6
million (2018: $973.8 million) and gross profit margin decreased to
52.3% (2018: 53.2%) reflecting net unfavourable foreign exchange of
$33.0 million, and offset by a net $14.8 million increase from
sales growth across the franchises net of changes in mix and
pricing.
Adjusted
Adjusted cost of goods sold for the year ended 31 December 2019
was $749.0 million (2018: $729.9 million), a 2.6% increase.
Adjusted gross profit decreased by $24.0 million to $1,078.2
million (2018: $1,102.2 million) with the respective gross profit
margin decreasing to 59.0% from 60.2%. The changes are consistent
with the drivers of the reported reduction.
Operating costs and expenses
The following is a summary of operating costs and expenses for
the year ended 31 December 2019 and 2018, and the cost in each
category is compared with the total revenue in the respective
period:
Reported Reported Adjusted Adjusted
2019 2018 2019 2018
$m $m $m $m
Category (a)
------------------------- ----------------------- ---------------------- ---------------------- ------------------
Selling and distribution 433.0 418.0 431.3 415.3
% revenue 23.7% 22.8% 23.6% 22.7%
------------------------- ----------------------- ---------------------- ---------------------- ------------------
General and
administration 266.4 238.2 238.5 208.3
% revenue 14.6% 13.0% 13.1% 1 1.4%
------------------------- ----------------------- ---------------------- ---------------------- ------------------
Research and development 53.8 49.9 53.8 49.2
% revenue 2.9% 2.7% 2.9% 2.7%
------------------------- ----------------------- ---------------------- ---------------------- ------------------
Other operating expenses 105.5 - 0.3 -
% revenue 5.8% -% -% -%
------------------------- ----------------------- ---------------------- ---------------------- ------------------
T otal operating costs 858.7 706.1 723.9 672.8
% revenue 47.0% 38.5% 39.6% 36.7%
------------------------- ----------------------- ---------------------- ---------------------- ------------------
(a) Percentages may not
sum due to rounding.
Reported
Selling and distribution expenses
On a reported basis, selling and distribution expenses increased
$15.0 million to $433.0 million (2018: $418.0 million). This
increase was driven by the continued strengthening of our
commercial resources, primarily in the US AWC franchise and across
EMEA.
General and administrative expenses
Reported general and administrative expenses increased $28.2
million to $266.4 million (2018: $238.2 million). The increase
reflects the costs incurred in the implementation of the
Transformation Initiative and increases in employee incentives,
including stock compensation costs resulting from the CEO
buy-out.
Research and development expenses ("R&D")
Reported R&D expenses increased $3.9 million to $53.8
million (2018: $49.9 million). The principal increase in spend in
the year included compliance costs incurred in relation to the
implementation of MDR of $5.2 million.
Other operating expenses
As part of the Transformation Initiative a product portfolio
review has been undertaken which has resulted in the identification
of impairment triggers in relation to a number of the Group's
intangible assets resulting in $105.5 million impairment of certain
intangible assets.
Adjusted
Selling and distribution expenses
Adjusted selling and distribution expenses increased $16.0
million or 3.9% to $431.3 million. The increase is a result of
investment in commercial resources as outlined in reported.
General and administrative expenses
Adjusted general and administrative expenses increased $30.2
million or 14.5% to $238.5 million. The increase, as discussed in
reported, relates to increases in employee incentives and the
Group's Transformation Initiative.
R&D
Adjusted R&D expenses increased $4.6 million or 9.3% to
$53.8 million. The increase is in line with reported R&D,
resulting from compliance costs incurred in relation to MDR.
Other operating expenses
Other operating expenses includes $0.3 million relating to the
impairment of certain intangible assets as outlined above. Further
details on adjusting items are outlined on pages 36 to 42.
Operating profit
Reported
On a reported basis, operating profit was $96.9 million, a
decrease of $170.8 million (2018: $267.7 million) reflecting
primarily the impairment of certain assets of $105.5 million,
operating cost increases of $69.1 million resulting from
Transformation Initiative costs including MDR, employee incentives
and net negative foreign exchange movements of $11.0 million offset
by the $14.8 million increase in gross margin.
Adjusted
Adjusted operating profit was $354.3 million, a decrease of
$75.1 million (2018: $429.4 million). The movement reflects the
cost of the Transformation Initiative ($39.4 million), MDR costs
($5.2 million) and negative foreign exchange movements, as
previously discussed, but excludes $105.2 million of impairment
charges on certain intangible assets.
Finance and non-operating expenses
The table below presents a summary of finance and non-operating
expense, net, on a reported and adjusted basis.
Reported Reported Adjusted Adjusted
2019 2018 2019 2018
$m $m $m $m
---------------------------- -------- ------------------- ------------------- ---------------
Finance costs (73.6) (65.2) (73.6) (65.2)
Non-operating expense, net (4.4) (1.3) (4.4) (3.2)
---------------------------- -------- ------------------- ------------------- ---------------
T otal (78.0) (66.5) (78.0) (68.4)
---------------------------- -------- ------------------- ------------------- ---------------
Finance costs
Finance costs consist of interest costs on bank and other
finance debt, non-utilisation of finance facility fees and the
interest cost on derivative financial instruments.
Finance costs increased $8.4 million, or 12.9%, to $73.6 million
(2018: $65.2 million). The increase primarily results from $11.2
million of deferred financing fees recognised upon early
termination of the Group's previous credit agreement (further
details can be found in Note 6 - Borrowings) and $1.8 million
increase in interest on leases predominently upon the adoption of
IFRS 16, Leases, offset by a $4.6 million net reduction in interest
charges and increased interest income recognised.
The are no adjusted measures reported in finance costs.
Taxation
Reported Reported Adjusted(1) Adjusted(1)
2019 2018 2019 2018
$m $m $m $m
--------------------------------------- --------- --------- ------------ ------------
Profit before taxation 18.9 201.2 276.3 361.0
Income tax (expense)/benefit (9.1) 20.4 (44.3) (56.5)
Effective tax rate 48.1% (10.1)% 16.0% 15.7%
--------------------------------------- --------- --------- ------------ ------------
2019 2018
$m $m
--------------------------------------- --------- --------- ------------ ------------
Reported income tax (expense)/benefit (9.1) 20.4
Tax effect of adjustments (12.2) (11.2)
Other discrete tax items(2) (23.0) (65.7)
--------------------------------------- --------- --------- ------------ ------------
Adjusted income tax expense (44.3) (56.5)
--------------------------------------- --------- --------- ------------ ------------
1. The tax effects of the adjustments relating to non-IFRS
financial measures are explained and reconciled on pages 36 to
42.
2. In 2019, other discrete items include the recognition of a
deferred tax asset, $23.0 million, in respect of the Swiss tax
reform. In 2018 tax benefits of
$30.4 million arose from the reassessment of deferred tax
liabilities in respect of unremitted earnings and $35.0 million
recognition of additional deferred tax assets resulting from the US
tax reform in December 2017. Refer to Note 3 of the Financial
Statements, for further information.
The reported tax expense for 2019 was $9.1 million (2018: tax
benefit of $20.4 million) and the adjusted tax expense was $44.3
million (2018: $56.5 million), representing an increase in the
effective tax rate to 16.0% (2018: 15.7%) on adjusted profit before
taxation. Further details on the reported tax expense are contained
in Note 3 of the Financial Statements.
Reported
The Group's tax expense of $9.1 million (2018: $20.4 million
benefit) is based on tax rates applicable in various jurisdictions
across the world in which the Group operates. The tax expense in
2019 has been influenced by a deferred tax benefit of $23.0 million
arising from the Swiss tax reform, $17.7 million relating to tax
losses where no deferred tax asset has been recognised and a tax
expense of $24.6 million relating to the impairment of certain
intangible assets in the Group where no tax relief for the costs
has been taken (refer to Note 5 of the Financial Statements).
In 2018, there were two discrete tax items totalling $65.7
million. These principally related to a deferred tax benefit of
$35.0 million in the US following the enactment of the US Tax Cuts
and Jobs Act on 22 December 2017, and released deferred tax
liabilities of $30.4 million in respect of unremitted earnings
related to the Dominican Republic.
Adjusted
The adjusted income tax expense for 2019 was $44.3 million
(2018: $56.5 million), reflecting a 0.3% increase in the adjusted
effective tax rate to 16.0% (2018: 15.7%). The adjusted income tax
expense of $44.3 million excludes the deferred tax benefit of $23.0
million (as noted above) and a tax benefit of $12.2 million (2018:
$11.2 million) pertaining to the tax effect of amortisation on
pre-2018 intangible assets, the cost of termination benefits
relating to specific Group-wide initiatives and certain components
of the CEO buy-out costs.
Net profit
Reported
Reported net profit for 2019 was $9.8 million (2018: $221.6
million), a decrease of $211.8 million, reflecting a decrease of
$182.3 million in reported profit before taxation (see above for
explanation) and the $29.5 million increase in the reported tax
charge for the year, principally driven by discrete tax adjustments
including the effect of the Swiss tax reform in 2019 ($23.0
million) and the US tax reform and changes in unremitted earnings
in 2018.
Adjusted
Adjusted net profit decreased $72.5 million, to $232.0 million
in 2019. The decrease primarily reflects the effects of foreign
exchange, headwinds in gross margin and the planned increase in
operating costs arising from the Group's Transformation
Initiative.
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:
Currency A verage rate/ Closing rate 2019 2018
------------ --------------------------------------------------------------------------- ------------ -------------
EUR/USD Average 1.12 1.18
Closing 1.12 1.15
---------------------------------------------------------------------------------------- ------------ -------------
GBP/USD Average 1.28 1.34
Closing 1.33 1.28
---------------------------------------------------------------------------------------- ------------ -------------
DKK/USD Average 0.15 0.16
Closing 0.15 0.15
---------------------------------------------------------------------------------------- ------------ -------------
Financial position
Selected measures of financial position
The following table presents a summary of the Group's financial
position at 31 December:
2019 2018 Change Change
$m $m $m %
At 31 December
-------------------------------- ---------------------- --------------- ----------------- -------------
Intangible assets and goodwill 2,166.9 2,377.5 (210.6) (8.9)%
Other non-current assets 474.6 379.7 94.9 25.0 %
Cash and cash equivalents 385.8 315.6 70.2 22.2 %
Current assets excluding cash
and cash equivalents 582.5 587.6 (5.1) (0.9)%
-------------------------------- ---------------------- --------------- ----------------- -------------
T otal assets 3,609.8 3,660.4 (50.6) (1.4)%
-------------------------------- ---------------------- --------------- ----------------- -------------
Current liabilities (397.3) (330.9) (66.4) 20.1 %
Non-current liabilities (1,651.5) (1,712.3) 60.8 (3.6)%
T otal equity (1,561.0) (1,617.2) 56.2 (3.5)%
-------------------------------- ---------------------- --------------- ----------------- -------------
Net equity and liabilities (3,609.8) (3,660.4) 50.6 (1.4)%
-------------------------------- ---------------------- --------------- ----------------- -------------
Intangible assets and goodwill
Intangible assets and goodwill reduced by $210.6 million to
$2,166.9 million (2018: $2,377.5 million). This reflects decreases
arising from the in-year amortisation of intangible assets of
$151.9 million, impairment charges of $105.5 million, realised as a
result of the Group's Transformation Initiative. This was partially
offset by increases relating to the acquisition of intangible
assets and goodwill in relation to Southlake Medical Supplies of
$12.3 million, the net effect of foreign exchange of $21.2 million
and other additions of $13.3 million. Other additions include the
investment in technology-enabling tools and platforms which
supports the business services transformation.
Other non-current assets
Other non-current assets, including property, plant and
equipment, right-of-use assets, deferred tax assets, restricted
cash, pension and other assets increased by $94.9 million to $474.6
million (2018: $379.7 million). This reflects a $75.4 million
increase in the value of property, plant and equipment and
right-of-use assets, of which $65.8 million was recognised upon
adoption of IFRS 16, Leases on 1 January 2019. The residual
increase of $9.6 million is principally due to our ongoing
investment in our manufacturing lines. Deferred tax assets
increased by $32.1 million to $55.0 million, as a result of the
$23.0 million asset recognised in respect of the Swiss tax reform.
Interest rate swaps decreased by $10.3 million following the close
out of the previous agreements as part of the refinancing and
subsequent replacement with a new US dollar interest rate swap
agreement on 5 December 2019.
Cash and cash equivalents
Cash and cash equivalents as at 31 December 2019 was $385.8
million (2018: $315.6 million). Further details are presented in
Sources and uses of cash on page 19.
Current assets excluding cash and cash equivalents
Current assets excluding cash and cash equivalents decreased by
$5.1 million to $582.5 million (2018: $587.6 million). The decrease
is driven by a reduction in inventory levels of $21.5 million as a
result of a coordinated rationalisation of inventory across the
Group and the normalisation of 2018 year-end inventory levels
following working capital changes at a key supplier. This was
offset by a $16.4 million increase in trade and other receivables,
primarily driven by sales phasing.
Liabilities
The Group adopted IFRS 16 on 1 January 2019, which introduced
changes to lessee accounting by removing the distinction between
operating and finance leases and required the recognition of a
right-of-use asset and a lease liability at the commencement for
all leases.
To more readily understand the year-on-year movement the table
below outlines the effects on movements in current and non-current
liabilities in relation to IFRS 16. The table presents 31 December
2018 on a reported basis and including the impact of the IFRS 16
opening lease liabilities.
2019 2018 2018
$m $m $m
Applying IFRS
16 opening lease
Reported Reported liabilities
------------------------------- --------- --------- ------------------
Extract from current
liabilities:
Borrowings 40.8 62.0 62.0
Finance leases - 1.0
-------------------------------- --------- --------- ------------------
Borrowings - as reported 40.8 63.0
-------------------------------- --------- --------- ------------------
ROU lease liabilities
- current 18.4 - 15.8
-------------------------------- --------- --------- ------------------
Current lease liabilities 18.4 1.0 15.8
-------------------------------- --------- --------- ------------------
Extract from non-current
liabilities :
Borrowings 1,445.3 1,558.8 1,558.8
Finance leases - 22.7
-------------------------------- --------- --------- ------------------
Borrowings - as reported 1,445.3 1,581.5
-------------------------------- --------- --------- ------------------
ROU lease liabilities
- non-current 70.1 - 73.7
-------------------------------- --------- --------- ------------------
Non-current lease liabilities 70.1 22.7 73.7
-------------------------------- --------- --------- ------------------
Total lease liabilities 88.5 23.7 89.5
-------------------------------- --------- --------- ------------------
Current liabilities
Current liabilities increased by $66.4 million to $397.3 million
(2018: $330.9 million), reflecting trade and other payables
increasing by $67.8 million, principally driven from changes in
accruals relating to interest payment terms on the new credit
facility and increases in the accrual for employee incentives, and
lease liabilities recognised as at 31 December 2019 of $18.4
million following adoption of IFRS 16, offset by a reduction in
current borrowings of $21.2 million as a result of the
refinancing.
Non-current liabilities
Non-current liabilities have reduced by $60.8 million to
$1,651.5 million (2018: $1,712.3 million). This principally
reflects a reduction in non-current borrowings of $113.5 million
after the refinancing and includes a change in scheduled loan
repayments. The reduction was offset by an increase in deferred tax
liabilities of $0.7 million and the additional non-current lease
liabilities recognised upon adoption of IFRS 16 of $51.0
million.
Sources and uses of cash
Cash flows
The following table displays cash flow information
for each of the last two years:
2019 2018
$m $m
------------------------------------------------------ -------------------- --------------
Net cash generated from operating activities 401.8 352.0
Net cash used in investing activities (72.8) (80.9)
Net cash used in financing activities (252.5) (229.4)
------------------------------------------------------ -------------------- --------------
Net change in cash and cash equivalents 76.5 41.7
Cash and cash equivalents at beginning of the period 315.6 289.3
Effect of exchange rate changes on cash and cash
equivalents (6.3) (15.4)
------------------------------------------------------ -------------------- --------------
Cash and cash equivalents at end of the year 385.8 315.6
------------------------------------------------------ -------------------- --------------
At 31 December 2019, the Group's cash and cash equivalents were
$385.8 million (2018: $315.6 million). Additionally, at 31 December
2019, the Group's revolving credit facility of $200.0 million was
undrawn and available (2018: $193.8 million). Restricted cash was
$3.6 million (2018: $4.4 million).
Net cash generated from operating activities was $401.8 million
and $352.0 million in 2019 and 2018, respectively. The increase of
$49.8 million primarily reflects a decrease in working capital of
$51.6 million (2018: increase of $23.2 million), offset by a net
decrease in EBITDA of $39.3 million after non-cash items are added
back.
The increase in cash and cash equivalents of $70.2 million is
primarily driven from increased cash generated from operating
activities of $49.8 million, a decrease in PP&E of $10.7
million and a reduction in realised foreign exchange movements of
$9.1 million. During 2019, the Group utilised c.$100 million cash
to reduce its net borrowings in the refinancing of the credit
facility, which is comparable to the 2018 voluntary prepayment of
$95.0 million on the previous Euro Term Loan A and $2.4 million of
mandatory prepayments.
The following table summarises the components of net cash
generated from operating activities for each of the last two
years:
Reported Reported Adjusted Adjusted
2019 2018 2019 2018
$m $m $m $m
--------------------------- ------------------------ --------------------- --------------------- -----------------
EBITDA (a) 421.0 457.7 443.1 482.4
Cash interest payments (48.0) (61.3) (48.0) (61.3)
Cash tax payment (37.0) (35.8) (37.0) (35.8)
Other payments (8.4) (11.6)
Non-cash items 14.2 14.6 - 2.9
W orking capital
decrease/(increase) 51.6 (23.2) 52.1 (24.6)
--------------------------- ------------------------ --------------------- --------------------- -----------------
Net cash generated from
operating
activities 401.8 352.0 401.8 352.0
--------------------------- ------------------------ --------------------- --------------------- -----------------
(a) EBITDA is explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS in
the cash conversion table on page 41.
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 was 101.0% (2018: 82.4%), which
reflects our focus on reducing inventory levels during the year,
increases in accruals including employee incentives,
reclassification of interest payments on lease liabilities upon
adoption of IFRS 16, Leases and reduced capital spend resulting
from phasing on certain projects.
Adjusted cash conversion was 97.9% (2018: 80.6%) in line with
adjusted EBITDA.
Reported Reported Adjusted(a) Adjusted(a)
2019 2018 2019 2018
$m $m $m $m
--------------------------------- -------- -------- ----------- -----------
EBITDA 421.0 457.7 443.1 482.4
Add: non-cash items 14.2 14.6 - 2.9
W orking capital 51.6 (23.2) 52.1 (24.6)
PP&E (61.4) (72.1) (61.4) (72.1)
--------------------------------- -------- -------- ----------- -----------
Cash generated from operations,
net of PP&E 425.4 377.0 433.8 388.6
--------------------------------- -------- -------- ----------- -----------
Cash conversion 101.0% 82.4% 97.9% 80.6%
--------------------------------- -------- -------- ----------- -----------
(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 41.
Reported Reported Adjusted Adjusted
2019 2018 2019 2018
$m $m $m $m
------------------------------ --------------------- --------------------- --------------------- -----------------
Cash generated from
operations,
net of PP&E 425.4 377.0 433.8 388.6
T ax paid (37.0) (35.8) (37.0) (35.8)
------------------------------ --------------------- --------------------- --------------------- -----------------
Free cash flow 388.4 341.2 396.8 352.8
------------------------------ --------------------- --------------------- --------------------- -----------------
Uses of cash
The Group ensures that all entities within the Group have
sufficient funding to deliver the Group's strategy while maximising
the return to shareholders through the debt and equity balance. The
following table presents the Group's primary uses of cash:
2019 2018
$m $m
Significant cash outflows
------------------------------------------- -------------------------------- ------------------
Debt servicing 206.6 215.8
Dividend paid 79.9 74.9
Acquisition of PP&E, capitalised software
and development 61.4 72.1
T ax paid 37.0 35.8
Acquisitions, net of cash acquired 12.3 14.4
Purchase of own shares 14.0 -
------------------------------------------- -------------------------------- ------------------
Cash flows from debt servicing includes net repayments on
borrowings of $137.7 million (2018: $153.7 million), lease payments
recognised upon the adoption of IFRS 16 of $20.9 million (2018:
finance leases of $0.8 million), and net interest payments of $48.0
million (2018: $61.3 million). The reduction in net cash on
borrowings and interest reflects the timing of loan and interest
repayments under the new credit agreement.
The Group's strategic investments in the year included Southlake
Medical Supplies, a Texas-based independent provider of
catheter-related supplies, whose trade and assets were acquired on
1 October 2019 for cash consideration of $12.3 million in
comparison to the acquisition of J&R Medical in 2018 for $14.4
million.
Investments in PP&E decreased by $10.7 million to $61.4
million (2018: $72.1 million) resulting from phasing on certain
projects, partially offset by proceeds from the sale of PP&E in
2018 (the Group's manufacturing plant in Greensboro was sold).
The Employee Benefit Trust purchased shares of $14.0 million to
satisfy anticipated future obligations under the Group's employee
share ownership programmes.
Audited Consolidated Income Statement
For the year ended 31 December 2019
2019 2018
$m $m
Notes
------------------------------------- -------------------- ------------------------------ ------------------------
Revenue 2 1,827.2 1,832.1
Cost of sales (871.6) (858.3)
------------------------------------- -------------------- ------------------------------ ------------------------
Gross profit 955.6 973.8
------------------------------------- -------------------- ------------------------------ ------------------------
Selling and distribution expenses (433.0) (418.0)
General and administrative expenses (266.4) (238.2)
Research and development expenses (53.8) (49.9)
Other operating expenses (105.5) -
------------------------------------- -------------------- ------------------------------ ------------------------
Operating profit 96.9 267.7
------------------------------------- -------------------- ------------------------------ ------------------------
Finance costs, net (73.6) (65.2)
Non-operating expense, net (4.4) (1.3)
------------------------------------- -------------------- ------------------------------ ------------------------
Profit before income taxes 18.9 201.2
Income tax (expense)/benefit 3 (9.1) 20.4
------------------------------------- -------------------- ------------------------------ ------------------------
Net profit 9.8 221.6
------------------------------------- -------------------- ------------------------------ ------------------------
Earnings per share
Basic and diluted earnings per
share ($ per share) $0.00 $0.11
------------------------------------- -------------------- ------------------------------ ------------------------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Audited Consolidated Statement of Comprehensive Income
For the year ended 31 December 2019
2019 2018
Notes $m $m
--------------------------------------------------------- --------- ----- ------
Net profit 9.8 221.6
Other comprehensive income/(loss)
Items that will not be reclassified subsequently
to Consolidated Income
Statement
Remeasurement of defined benefit obligation,
net of tax (3.5) (1.0)
Recognition of the pension assets restriction (0.6) 0.4
Items that may be reclassified subsequently
to Consolidated Income
Statement
Exchange differences on translation of foreign
operations 25.1 (66.6)
Effective portion of changes in fair value of
cash flow hedges 7 (9.5) 3.9
Changes in fair value of cash flow hedges reclassified
to the Consolidated
Income Statement 7 (0.8) -
Income tax relating to items that may be reclassified 2.8 (1.3)
--------------------------------------------------------- --------- ----- ------
Other comprehensive income/(loss) 13.5 (64.6)
--------------------------------------------------------- --------- ----- ------
T otal comprehensive income 23.3 157.0
--------------------------------------------------------- --------- ----- ------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Audited Consolidated Statement of Financial Position
As at 31 December 2019
2019 2018
Notes $m $m
-------------------------------- ------ -------- --------
Assets
Non-current assets
Property, plant and equipment 321.6 330.7
Right-of-use assets 8 84.5 -
Intangible assets and goodwill 5 2,166.9 2,377.5
Deferred tax assets 55.0 22.9
Derivative financial assets 7 1.0 11.3
Restricted cash 3.6 2.4
Other non-current receivables 8.9 12.4
-------------------------------- ------ -------- --------
2,641.5 2,757.2
-------------------------------- ------ -------- --------
Current assets
Inventories 281.8 303.3
Trade and other receivables 300.7 284.3
Cash and cash equivalents 385.8 315.6
-------------------------------- ------ -------- --------
968.3 903.2
-------------------------------- ------ -------- --------
Total assets 3,609.8 3,660.4
-------------------------------- ------ -------- --------
Equity and liabilities
Current liabilities
Trade and other payables 289.3 221.5
Borrowings 6 40.8 63.0
Lease liabilities 8 18.4 -
Current tax payable 44.6 41.9
Provisions 4.2 4.5
-------------------------------- ------ -------- --------
397.3 330.9
-------------------------------- ------ -------- --------
Non-current liabilities
Borrowings 6 1,445.3 1,581.5
Lease liabilities 8 70.1 -
Deferred tax liabilities 107.8 107.1
Provisions 1.7 1.5
Other non-current payables 26.6 22.2
-------------------------------- ------ -------- --------
1,651.5 1,712.3
-------------------------------- ------ -------- --------
Total liabilities 2,048.8 2,043.2
-------------------------------- ------ -------- --------
Net assets 1,561.0 1,617.2
-------------------------------- ------ -------- --------
Equity
Share capital 242.9 240.7
Share premium 70.7 39.8
Own shares (10.8) (6.8)
Retained deficit (847.7) (744.5)
Merger reserve 2,098.9 2,098.9
Cumulative translation reserve (99.1) (124.2)
Other reserves 106.1 113.3
-------------------------------- ------ -------- --------
Total equity 1,561.0 1,617.2
-------------------------------- ------ -------- --------
Total equity and liabilities 3,609.8 3,660.4
-------------------------------- ------ -------- --------
Audited Consolidated Statement of Changes in Equity
For the year ended 31 December 2019
Cumulative
Share Share Own Retained Merger translation Other
capital premium shares deficit reserve reserve reserves Total
Notes $m $m $m $m $m $m $m $m
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
At 1 January 2018 238.8 1.3 (8.1) (850.0) 2,098.9 (58.4) 101.3 1,523.8
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Net profit - - - 221.6 - - - 221.6
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Other
comprehensive
loss:
Foreign currency
translation
adjustment,
net of tax - - - (0.8) - (65.8) - (66.6)
Remeasurement of
defined benefit
obligation, net
of tax - - - - - - (1.0) (1.0)
Recognition of
pension assets
restriction - - - - - - 0.4 0.4
Effective portion
of changes in
fair
value of cash
flow
hedges, net of
tax - - - - - - 2.6 2.6
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Other
comprehensive
loss - - - (0.8) - (65.8) 2.0 (64.6)
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Total
comprehensive
income - - - 220.8 - (65.8) 2.0 157.0
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Dividends paid 4 - - - (74.9) - - - (74.9)
Scrip dividend 4 1.9 38.5 - (40.4) - - - -
Share-based
payments - - - - - - 11.2 11.2
Share awards
vested - - 1.3 - - - (1.3) -
Excess tax
benefits
from share-based
payments - - - - - - 0.1 0.1
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
At 31 December
2018 240.7 39.8 (6.8) (744.5) 2,098.9 (124.2) 113.3 1,617.2
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Net profit - - - 9.8 - - - 9.8
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Other
comprehensive
income:
Foreign currency
translation
adjustment,
net of tax - - - - - 25.1 - 25.1
Remeasurement of
defined benefit
obligation, net
of tax - - - - - - (3.5) (3.5)
Recognition of
pension assets
restriction - - - - - - (0.6) (0.6)
Effective portion
of changes in
fair
value of cash
flow
hedges, net of
tax - - - - - - (7.5) (7.5)
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Other
comprehensive
income - - - - - 25.1 (11.6) 13.5
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Total
comprehensive
income - - - 9.8 - 25.1 (11.6) 23.3
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Dividends paid 4 - - - (79.9) - - - (79.9)
Scrip dividend 4 2.2 30.9 - (33.1) - - - -
Share-based
payments - - - - - - 14.2 14.2
Share awards
vested - - 10.0 - - - (10.0) -
Excess tax
benefits
from share-based
payments - - - - - - 0.2 0.2
Purchase of own
shares - - -14 - - - - (14.0)
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
At 31 December
2019 242.9 70.7 (10.8) (847.7) 2,098.9 (99.1) 106.1 1,561.0
------------------- ------ --------- --------- -------- --------- --------- ------------- ---------- --------
Audited Consolidated Statement of Cash Flows
For the year ended 31 December 2019
2019 2018
Notes $m $m
----------------------------------------------------- ------ ---------- --------
Cash flows from operating activities
Net profit 9.8 221.6
Adjustments for
Depreciation of property, plant and equipment 35.5 37.4
Depreciation of right-of-use assets 8 22.4 -
Amortisation 5 151.9 152.6
Income tax expense/(benefit) 3 9.1 (20.4)
Non-operating expense, net 4.4 1.3
Finance costs, net 73.6 65.2
Share-based payment 14.2 11.2
Impairment/write-off of intangible assets 105.5 -
Write-off of property, plant and equipment 8.8 -
Disposal of assets - 3.4
Changes in assets and liabilities:
Inventories 20.4 (33.1)
Trade and other receivables (13.9) 6.7
Other non-current receivables 1.8 (1.6)
Trade and other payables 43.8 2.3
Other non-current payables (0.5) 2.5
----------------------------------------------------- ------ ---------- --------
Net cash generated from operations 486.8 449.1
Interest paid (48.0) (61.3)
Income taxes paid (37.0) (35.8)
----------------------------------------------------- ------ ---------- --------
Net cash generated from operating activities 401.8 352.0
Cash flows from investing activities
Acquisition of property, plant and equipment,
capitalised software and development (61.4) (72.1)
Proceeds from sale of property, plant and equipment
and other assets 0.1 4.3
Acquisitions, net of cash acquired (12.3) (14.4)
Change in restricted cash 0.8 1.3
----------------------------------------------------- ------ ---------- --------
Net cash used in investing activities (72.8) (80.9)
Cash flows from financing activities
Repayment of borrowings 6 (1,618.7) (153.7)
Proceeds from borrowings 6 1,481.0 -
Payment of lease liabilities(a) 8 (20.9) (0.8)
Purchase of own shares (14.0) -
Dividend paid 4 (79.9) (74.9)
----------------------------------------------------- ------ ---------- --------
Net cash used in financing activities (252.5) (229.4)
----------------------------------------------------- ------ ---------- --------
Net change in cash and cash equivalents 76.5 41.7
Cash and cash equivalents at beginning of the
year 315.6 289.3
Effect of exchange rate changes on cash and
cash equivalents (6.3) (15.4)
----------------------------------------------------- ------ ---------- --------
Cash and cash equivalents at end of the year 385.8 315.6
----------------------------------------------------- ------ ---------- --------
(a) Payment of lease liabilities for the year ended 31 December
2019 includes $20.1 million of payments in respect of new leases
recognised upon adoption of IFRS 16, Leases. In the year ended 31
December 2018, these payments were classified as operating leases
and included in cash flows from operating activities. Payment of
lease liabilities for the year ended 31 December 2018 relates to
amounts previously classified as finance leases. Refer to Note 8 -
Leases for further details.
1. Basis of preparation
1.1 General information
ConvaTec Group Plc (the "Company") is a company incorporated in
the United Kingdom under the Companies Act of 2006 with its
registered office situated in England and Wales. The Company's
registered office is 3 Forbury Place, 23 Forbury Road, Reading, RG1
3JH, United Kingdom.
The Company and its subsidiaries (collectively, the "Group") are
a global medical products and technologies group focused on
therapies for the management of chronic conditions, including
products used for advanced chronic and acute wound care, ostomy
care, continence and critical care and infusion devices used in the
treatment of diabetes and other conditions.
The announcement is based on the Group's Financial Statements
which are prepared in accordance with IFRS as adopted by the EU and
therefore comply with Article 4 of the EU International Accounting
Standards ("IAS") Regulations.
The Financial Statements are presented in US dollars ("USD"),
reflecting the profile of the Group revenue and operating profit,
which are primarily generated in US dollars and US dollar-linked
currencies. All values are rounded to $0.1 million except where
otherwise indicated.
The financial information set out in this announcement does not
constitute the Group's statutory accounts for the years ended 31
December 2019 and 2018 but is derived from those accounts.
Statutory accounts for 2018 have been delivered to the Registrar of
Companies and those for 2019 will be delivered following the
Company's Annual General Meeting. The auditor's report on the 2019
and 2018 accounts were unqualified, did not draw attention to any
matters by way of emphasis without qualifying their report and did
not contain a statement under section 498(2) or (3) of the
Companies Act 2006.
1.2 Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements, in conformity with
adopted IFRS, requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and
the reported value of assets and liabilities, income and expense.
Actual results may differ from these estimates or judgements of
likely outcome. In preparing these Consolidated Financial
Statements, two key sources of estimation uncertainty have been
identified that could potentially have a material adjustment to the
carrying amounts of assets and liabilities within the next
financial year. No critical accounting judgements have been
identified.
Impairment of finite-lived assets
As part of the Transformation Initiative, a product portfolio
review has been undertaken which has resulted in the identification
of impairment triggers in 2019 in relation to certain of the
Group's intangible assets. As a result of these activities, 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.
The impairment testing of finite-lived assets requires an
assessment of the recoverable amount, which the Group determined to
be fair value less costs to sell. The approach uses an excess
earnings methodology where estimated future cash flows are
discounted to their present value. A post-tax discount rate was
based on the Group's weighted average cost of capital, adjusted to
reflect the territory of the assets and risk and opportunity
factors specific to the business model.
Management considers that the methodologies are robust and
assumptions adopted in the valuation are supportable and
reasonable. There are inherent sources of estimation uncertainty
due to the inclusion of future cash flows in the valuation. IAS 1,
Presentation of Financial Statements, requires disclosure of major
sources of estimation uncertainty that have a significant risk of
resulting in a material adjustment in the next financial year.
The cash flows within the fair value model include benefits from
ongoing Transformation Initiative. Whilst management are confident
in delivery of the transformation benefits, the fair value model
includes an assessment of the value of Transformation Initiative to
a theoretical market participant at the valuation date. Given the
early stage of the transformation, there is a reasonably possible
outcome that the impact on the fair value associated with
transformation activities could change in the next twelve months
leading to an increase in the impairment charge of $13.0
million.
The cash flows within the fair value model also include
estimates of future trading of the products related to the
intangible assets. Management has assessed that there are
reasonably possible increases in margin headwinds, which could
negatively impact the recoverable amount and could lead to an
increase in the impairment charge of $9.0 million.
Recognition of deferred tax assets
At 31 December 2019 the Group has 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 has been calculated on management's best
estimate of the impact of the Swiss tax reform based on specific
methodology that is permitted under Swiss law and the information
currently available. Given the anticipated future transformative
changes in the business, there is significant estimation
uncertainty in the appropriate valuation method and underlying
assumptions and estimates that should be applied to calculate the
deferred tax asset. This remains subject to review as a key source
of estimation uncertainty and, therefore, to revaluation once the
impact to the Swiss operations, as a result of the Group's
Transformation Initiative, has been determined. It is not possible
to provide numerical sensitivity disclosures or quantify ranges of
potential outcomes, however, it is reasonably possible that
outcomes within the next financial year could be different from the
assumptions made at 31 December 2019 and could require a material
adjustment to the carrying value of the asset.
1.3 Accounting standards
New standards and interpretations applied for the first time
On 1 January 2019, the Group adopted the following new or
amended IFRS and interpretations issued by the IASB:
- IFRS 16, Leases
- IAS 19, Plan Amendments, Curtailment or Settlement (Amendments
to IAS 19)
- IFRIC 23, Uncertainty over Income Tax T reatments
- Annual Improvements of IFRS standards 2015-2017 Cycle (IFRS 3,
IFRS 11, IAS 12, IAS 23)
Their adoption has not had a material impact on the Consolidated
Financial Statements, with the exception of IFRS 16, Leases ("IFRS
16"). Apart from these changes, there have been no significant
changes to the accounting policies set out in ConvaTec's Annual
Report and Accounts 2018. Refer to Note 8 - Leases for the Group's
IFRS 16 disclosures.
New standards and interpretations not yet applied
At the date of authorisation of these 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.
2. Revenue and segmental information
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 for the year
ended 31 December by franchise:
Revenue by franchise
2019 2018
$m $m
--------------- -------- --------
AWC 569.9 587.5
Ostomy Care 525.0 533.3
CCC 456.7 443.0
Infusion Care 275.6 268.3
--------------- -------- --------
Total 1,827.2 1,832.1
--------------- -------- --------
Geographic information
Geographic markets
The following table sets out the Group's revenue in each
geographic market in which customers are located:
2019 2018
$m $m
-------------------- -------- --------
Geographic markets
EMEA 724.1 747.4
Americas 959.8 945.3
APAC 143.3 139.4
-------------------- -------- --------
Total 1,827.2 1,832.1
-------------------- -------- --------
Geographic regions
The following table sets out the Group's revenue on the basis of
geographic regions where the legal entity resides, including
countries representing over 10% of Group revenue and the UK, where
the Group is domiciled:
2019 2018
$m $m
----------------------------------------------- -------- --------
Geographic regions
US 643.9 643.4
UK 158.2 166.1
Denmark 271.9 270.0
Other(a) 753.2 752.6
----------------------------------------------- -------- --------
1,827.2 1,832.1
----------------------------------------------- -------- --------
(a) Other consists primarily of countries in
Europe, Asia-Pacific ("APAC"), Latin America
and Canada.
3. Income taxes
3.1 Taxation
The Group's income tax expense/(benefit) is the sum of the total
current and deferred tax expense.
2019 2018
$m $m
--------------------------------------- ------- -------
Current tax
UK corporation tax - -
Overseas taxation 38.4 56.2
Adjustment to prior years (1.5) (1.4)
--------------------------------------- ------- -------
Total current tax expense 36.9 54.8
Deferred tax
Origination and reversal of temporary
differences (26.4) (44.8)
Change in tax rates (4.0) (1.1)
Adjustment to prior years 2.6 (29.3)
--------------------------------------- ------- -------
Total deferred tax benefit (27.8) (75.2)
--------------------------------------- ------- -------
Income tax expense/(benefit) 9.1 (20.4)
--------------------------------------- ------- -------
3.2 Reconciliation of effective tax rate
The effective tax rate for the year ended 31 December 2019 was
an expense of 48.1%, as compared with a benefit of 10.1% for the
year ended 31 December 2018.
T ax reconciliation to UK statutory rate
The table below reconciles the UK statutory tax expense to the
Group's total income tax expense/(benefit):
2019 2018
$m $m
--------------------------------------- -------- ------ ------- --------
Profit before income taxes 18.9 201.2
Profit before income taxes multiplied
by rate of corporation tax in the
UK of 19.0% (2018: 19.0%) 3.6 38.2
Difference between UK and overseas
tax rates(a) (13.6) (6.8)
Non-deductible/non-taxable items 2.6 5.1
Tax impact of impairment of certain 24.6 -
intangibles assets
Movement in unrecognised losses and
other assets 17.7 (39.7)
Tax amortisation of indefinite-life
intangibles 0.9 5.2
Taxes on unremitted earnings(b) 0.6 (30.4)
Uncertain tax (benefit)/expense (5.3) 10.5
Deferred impact of the Swiss tax (23.0) -
reform
Other 1.0 (2.5)
--------------------------------------- -------- ------ ------- --------
Income tax expense/(benefit) reported
in the Consolidated Income Statement
at the effective tax rate 9.1 48.1% (20.4) (10.1)%
--------------------------------------- -------- ------ ------- --------
(a) Includes changes in tax rates based on substantively enacted
legislation across various tax jurisdictions as of 31 December
2019.
(b) The 2018 benefit relates predominately to the deferred tax
liability release in respect of unremitted earnings related to the
Dominican Republic.
The Group has worldwide operations and therefore is subject to
several factors that may affect future tax charges, principally the
levels and mix of profitability in different tax jurisdictions,
transfer pricing regulations, tax rates imposed and tax regime
reforms.
The calculation of the Group's tax expense therefore involves a
degree of estimation in respect of certain items for which the tax
treatment cannot be finally determined until resolution has been
reached with the relevant tax authority or, as appropriate, through
a formal legal process. In 2019, the Group provisions for uncertain
tax positions relate mainly to transfer pricing positions and
withholding tax liabilities. The net decrease in provisions during
2019 was driven by the reassessment of estimates and settlement of
open tax issues with tax authorities in various jurisdictions.
The Group's effective tax rate in 2019 has also been influenced
by a deferred tax benefit of $23.0 million arising from the Swiss
tax reform, $17.7 million relating to tax losses where no deferred
tax asset has been recognised and tax expense of $24.6 million
relating to the impairment of certain intangibles in the Group
where no tax relief for the costs has been taken (refer to Note 5 -
Intangible assets). In 2018, the Group's effective tax rate was
mainly driven by the deferred tax benefits of $35.0 million in the
US and $30.4 million in respect of unremitted earnings related to
the Dominican Republic, both of which were non-recurring items.
4. Dividends
Dividends paid and proposed were as follows:
Settled Settled No of scrip
in cash via scrip shares issued
------------------
T otal $m $m
$m
---------------------------------------------------------------- --------------- --------------- ------------------
Final dividend
2017 3.094 4.300 81.7 55.3 26.4 9,623,305
Interim dividend
2018 1.309 1.717 33.6 19.6 14.0 4,681,820
------------------ ----------------- ----------- ------------ --------------- --------------- ------------------
Paid in 2018 4.403 6.017 115.3 74.9 40.4 14,305,125
------------------ ----------------- ----------- ------------ --------------- --------------- ------------------
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
The Company operates a scrip dividend scheme allowing
shareholders to elect to receive their dividends in the form of new
fully paid ordinary shares. For any particular dividend, the
Directors may decide whether or not to make the scrip offer
available.
The final dividend proposed for 2019, to be distributed on 14
May 2020 to shareholders registered at the close of business on 3
April 2020, is based upon the issued and fully paid share capital
as at 31 December 2019 and is subject to shareholder approval at
our Annual General Meeting on 7 May 2020. The dividend will be
declared in US dollars and will be paid in Sterling at the chosen
exchange rate of $1.287/GBP1.00 determined on 27 February 2020. A
scrip dividend alternative will be offered allowing shareholders to
elect by 21 April 2020 to receive their dividend in the form of new
ordinary shares.
The interim and final dividends for 2019 give a total dividend
for the year of 5.700 cents per share (2018: 5.700 cents per
share).
5. Intangible assets
The split of intangible assets and goodwill is as follows:
2019 2018
$m $m
-------------------------------- -------- --------
Intangible assets 1,101.3 1,334.5
Goodwill 1,065.6 1,043.0
-------------------------------- -------- --------
Intangible assets and goodwill 2,166.9 2,377.5
-------------------------------- -------- --------
The movement in the carrying value of each major category of
intangible assets is as follows:
Customer
relationships
and Assets
Capitalised non-compete Trade Development under
Product-related(a) software(b) agreements names costs(c) construction Total
$m $m $m $m $m $m $m
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
Intangibles
at cost
1 January 2018 2,135.9 87.9 298.3 259.7 10.8 8.4 2,801.0
Additions 0.1 3.3 0.4 - - 9.6 13.4
Acquisitions - - 7.5 0.3 - - 7.8
Disposals - - (3.1) - - - 3.1
Transfers - 6.8 - - - (6.8) -
Foreign
exchange(d) (42.4) - (5.4) (0.8) (0.6) (0.3) (49.5)
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
31 December
2018 2,093.6 98.0 297.7 259.2 10.2 10.9 2,769.6
Additions - 5.0 0.1 - - 8.2 13.3
Acquisitions - - 2.7 - - - 2.7
Disposals - (2.3) (2.1) - (0.5) - (4.9)
Transfers - 6.7 - - 2.0 (8.7) -
Foreign
exchange(d) 24.3 0.2 (1.7) (0.4) (0.3) - 22.1
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
31 December
2019 2,117.9 107.6 296.7 258.8 11.4 10.4 2,802.8
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
Accumulated amortisation
1 January 2018 1,116.8 68.6 119.9 2.6 5.8 - 1,313.7
Amortisation 120.7 8.2 22.1 0.5 1.1 - 152.6
Disposals - - (3.0) - - - (3.0)
Foreign
exchange(d) (24.3) (0.1) (3.5) (0.1) (0.2) - (28.2)
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
31 December
2018 1,213.2 76.7 135.5 3.0 6.7 - 1,435.1
Amortisation 118.4 9.4 22.0 1.1 1.0 - 151.9
Disposals - (2.3) (2.1) - (0.5) - (4.9)
Impairment 103.6 - - 1.9 - - 105.5
Foreign
exchange(d) 15.3 - (1.2) - (0.2) - 13.9
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
31 December
2019 1,450.5 83.8 154.2 6.0 7.0 - 1,701.5
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
Net carrying
amount
31 December
2018 880.4 21.3 162.2 256.2 3.5 10.9 1,334.5
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
31 December
2019 667.4 23.8 142.5 252.8 4.4 10.4 1,101.3
---------------- ------------------- ------------- --------------- ------- ------------ -------------- --------
(a) Product-related intangible assets are primarily comprised of
patents, trademarks, licences and technological expertise that were
acquired as a result of business combinations. The presentation of
product-related intangible assets has been revised during the year
ended 31 December 2019 to aggregate amounts that were previously
presented separately as: Technology; and Patents, trademarks and
licences. The revised presentation better reflects that these
product-related intangible assets are complementary intangible
assets with similar useful economic lives, which can be treated as
single assets under IAS 38, Intangible Assets.
(b) Capitalised software relates to purchased software and internally generated software.
(c) Relates to internally generated development costs which have
met the requirements of being in the development phase as defined
in the Group accounting policy.
(d) Primarily relates to intangible assets denominated in Sterling.
As part of the Transformation Initiative a product portfolio
review has been undertaken which has resulted in the identification
of impairment triggers in relation to a number of the Group's
intangible assets. As a result, the Group has identified an
impairment indicator in respect of certain product-related
intangible assets acquired as part of historical business
combinations (previously disclosed as patents).
In accordance with the Group's impairment policy, the
recoverable amount of the product-related intangible assets was
assessed based on fair value less costs to sell. The fair value
measurements are categorised as Level 3 in accordance with IFRS 13,
Fair Value Measurements. Fair value was assessed using an income
approach, reflecting the current market expectation over their
remaining useful expected life. The approach uses estimated future
cash flows deemed attributable to the asset, discounted to their
present value using a post-tax discount rate that was based on the
Group's weighted average cost of capital adjusted to reflect the
territory of the assets. The post-tax discount rate used in the
fair value calculation was 11.0%.
The Group has recognised an impairment of $103.6 million during
the year ended 31 December 2019. Where a diminutive value was
determined, the useful economic life ("UEL") was reviewed. No
factors were deemed present for which to reassess the UEL.
During the year ended 31 December 2019, the Group refreshed the
strategy of the HSG business by starting the transition to
marketing through 180 Medical as a single trade name. As a result,
trade names which ceased to be used during the year, with a net
carrying amount of $1.9 million at 1 July 2019, were impaired (and
written off). A further trade name was assessed to have a remaining
useful economic life of two years under the revised strategy and
was changed from indefinite-lived effective from 1 July 2019,
resulting in an amortisation charge of $0.6 million in the year. A
further $1.3 million of amortisation will be recognised in the year
ended 31 December 2020.
6. Borrowings
The Group's outstanding borrowings as at 31 December were as
follows:
2019 2018
----------- -------
Currency Y ear Face value Face
of $m value
maturity $m
New facilities
Revolving Credit Facilities
Multicurrency 2024 - -
T erm Loan Facility A (a) USD/Euro 2024 600.9 -
T erm Loan Facility B (b) USD/Euro 2024 901.4 -
------------------------------------- ---------------------- ----------- ----------------- -------------
Previous facilities
US dollar Term A Loan Facility USD 2021 - 712.3
Euro Term A Loan Facility (c) Euro 2021 - 500.9
US dollar Term B Loan Facility USD 2023 - 421.4
------------------------------------- ---------------------- ----------- ----------------- -------------
T otal interest-bearing borrowings 1,502.3 1,634.6
-------------------------------------------------------------------------- ----------------- -------------
Financing fees (16.2) (13.8)
-------------------------------------------------------------------------- ----------------- -------------
T otal carrying value of borrowings
from credit facilities 1,486.1 1,620.8
-------------------------------------------------------------------------- ----------------- -------------
(a) Included within Term Loan Facility A is EUR161.3 million
($180.9 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 is EUR242.0 million
($271.4 million) denominated in Euros representing 30% of facility
B borrowings denominated in Euros and 70% denominated in US
dollars.
(c) Total face value of the borrowings outstanding under the
Euro Term A Loan Facility denominated in Euros was EUR436.8 million
($500.9 million) at 31
December 2018.
Credit agreement
On 24 October 2019, the Group entered into a new credit
agreement and voluntarily prepaid and discharged its contractual
obligations under its previous credit agreement at that date,
totalling $1,587.6 million. Unamortised deferred financing fees of
$11.2 million associated with the previous credit agreement have
been written off.
The new credit agreement entered into by the Group is committed
and available for the refinancing of certain existing financial
indebtedness and general corporate purposes. Provided by a group of
financial institutions, it consists of two 5-year multicurrency
term loans totalling $1.5 billion and a $200.0 million
multicurrency revolving credit facility. Of the $1.5 billion term
loan debt, $600.0 million is amortising requiring scheduled annual
repayments of the principal. The remaining $900.0 million is
repayable in full at the maturity of the term loan. The revolving
credit facility has an option to increase its amount by up to 50%
($100.0 million) subject to certain conditions. The revolving
credit facility was undrawn as at 31 December 2019.
The credit agreement is secured by way of a share pledge and
contains various provisions, covenants and representations that are
customary for such a facility. The principal financial covenants
are based on a net leverage and an interest cover test. At 31
December 2019 and 2018, the Group was in compliance with all
financial and non-financial covenants related to the relevant
credit agreement in place.
Excluding the impact of interest rate swaps, the weighted
average interest rate on borrowings for the year ended 31 December
2019 was 3.8% (2018: 3.5%).
Borrowings not measured at fair value
At 31 December 2019, the estimated fair value of the Group's
borrowings, excluding leases obligations, approximated $1,513.2
million (2018: $1,586.6 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.
7. Financial instruments
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).
At 31 December 2018 the Group held interest rate swaps with a
notional amount of $833.8 million. These interest rate swap
agreements were settled on 24 October 2019 at the same time as the
voluntary prepayment and cancellation of the Group's previous
credit agreement. The early termination of the interest rate swap
agreements resulted in a $0.8 million gain reclassified to finance
costs, net, in the Consolidated Income Statement, in the year ended
31 December 2019.
On 5 December 2019 the Group entered into interest rate swap
agreements to fix a proportion of variable interest on US dollar
denominated debt, in accordance with the Group's risk management
policy. The interest rate swaps were designated as hedging
instruments in a cash flow hedging relationship.
The fair values are based on market values of equivalent
instruments at 31 December 2019. The following table presents the
Group's outstanding interest rate swaps at 31 December:
2019 2018
------------------------- -------------------------
Effective Maturity Notional Fair value(a) Notional Fair value(a)
date date amount assets amount assets
$m $m $m $m
----------------------------------- ----------- ---------- --------- -------------- --------- --------------
3 Month LIBOR Float to 30 Jun 24 Oct
Fixed Interest Rate Swap 2017 2019 - - 833.8 11.3
3 Month LIBOR Float to 24 Jan 24 Jan
Fixed Interest Rate Swap 2020 2023 275.0 1.0 - -
----------------------------------- ----------- ---------- --------- -------------- --------- --------------
275.0 1.0 833.8 11.3
---------------------------------------------------------- --------- -------------- --------- --------------
Recognised in other comprehensive
income:
Effective portion of changes
in fair value of cash flow
hedges (9.5) 3.9
Changes in fair value of (0.8) -
cash flow hedges reclassified
to the Consolidated Income
Statement
----------------------------------- ----------- ---------- --------- -------------- --------- --------------
Total (10.3) 3.9
------------------------------------------------------------ --------- -------------- --------- --------------
(a) The fair values of the interest rate swaps are shown in
derivative financial assets in the Audited Consolidated Statement
of Financial Position. Finance costs, net in the Audited
Consolidated Income Statement includes the negligible ineffective
impact of the interest rate swaps.
8. Leases
The Group adopted IFRS 16 on 1 January 2019, which introduced
changes to lessee accounting by removing the distinction between
operating and finance leases, and required the recognition of a
right-of-use asset and a lease liability at the lease commencement
for most leases.
The Group's operating leases impacted by IFRS 16 principally
relate to real estate and vehicles.
Finance leases existing at the date of adoption continue to be
treated as finance leases and have been reclassified from
borrowings to lease liabilities in the Consolidated Statement of
Financial Position. For operating leases existing at the date of
adoption, the Group has applied the modified retrospective approach
by measuring the right-of-use asset at an amount equal to the lease
liability and therefore comparative information has not been
restated. Upon transition the Group also applied the following
practical expedients:
- Application of a single discount rate to a portfolio of leases
with similar characteristics;
- Exclude initial direct costs from the right-of-use assets;
- Use hindsight when assessing the lease term; and
- Not to reassess whether a contract is or contains a lease.
The Group has elected to apply the recognition exemptions to
all:
- Leases with a term of 12 months or less and containing no
purchase options ("short-term leases"); and
- Leases where the underlying asset has a value of less than
$5,000 ("low-value leases").
The lease liability was initially measured at the present value
of the lease payments that were not paid at the transition date,
discounted by using the rate implicit in the lease. If this rate
could not be readily determined, the Group has used its incremental
borrowing rate, which was 3.1% at the date of transition.
Generally, the Group uses its incremental borrowing rate as the
discount rate. Options such as lease extensions or terminations on
lease contracts are considered on a case-by-case basis by regular
management assessment. The right-of-use asset is being depreciated
on a straight-line basis.
The following table sets out the reconciliation from operating
lease commitments disclosed in the 2018 Consolidated Financial
Statements and the financial impact of adopting IFRS 16 for the
year ended 31 December 2019:
Reconciliation of lease liabilities $m
---------------------------------------------------------------- -------
Operating lease commitments disclosed as at 31 December 2018 61.9
Add: changes in minimum lease term to expected lease term 15.7
Less: discounting using the lessees' incremental borrowing
rate at the date of initial application (11.8)
---------------------------------------------------------------- -------
Lease liabilities recognised on adoption of IFRS 16 65.8
Add: finance leases recognised in borrowings as at 31 December
2018 23.7
---------------------------------------------------------------- -------
Lease liabilities as at 1 January 2019 89.5
Lease additions 21.9
Payment of lease liabilities (20.9)
Leases terminated (1.6)
Interest expense on lease liabilities 3.6
Interest paid on lease liabilities (3.6)
Foreign exchange (0.4)
---------------------------------------------------------------- -------
Lease liabilities as at 31 December 2019 88.5
---------------------------------------------------------------- -------
Lease liabilities by category at 31 December
2019 was as follows:
Real estate V ehicles T otal
and other
$m $m $m
-------------------- --------------------------- ------------------- ------------------
Current 11.4 7.0 18.4
Non-current 61.0 9.1 70.1
-------------------- --------------------------- ------------------- ------------------
T otal 72.4 16.1 88.5
-------------------- --------------------------- ------------------- ------------------
The movements in right-of-use assets
were as follows:
Real estate and
other V ehicles T otal
$m $m $m
------------------------------------- --------------------------- ------------------ -----------------
Right-of-use assets recognised on
adoption of IFRS 16 51.1 14.7 65.8
Reclassification from PP&E (a) 20.9 0.2 21.1
------------------------------------- --------------------------- ------------------ -----------------
Right-of-use assets as at 1 January
2019 72.0 14.9 86.9
Lease additions 12.0 9.9 21.9
Leases terminated (0.9) (0.7) (1.6)
Depreciation of right-of-use assets (14.2) (8.2) (22.4)
Foreign exchange (0.3) - (0.3)
------------------------------------- --------------------------- ------------------ -----------------
As at 31 December 2019 68.6 15.9 84.5
------------------------------------- --------------------------- ------------------ -----------------
(a) Amounts previously recognised as finance lease assets have
been reclassified to right-of-use assets upon transition to IFRS 16
on 1 January 2019.
Upon adoption of IFRS 16 at 1 January 2019, there was an
increase in both deferred tax assets and deferred tax liabilities
of $15.2 million.
For the year ended 31 December 2019, expenses related to
short-term leases and low-value leases of $3.3 million were
recognised in the Consolidated Income Statement.
The Group's Consolidated Income Statement for the year ended 31
December 2019 includes a net expense of $0.6 million as a result of
adopting IFRS 16. Total cash outflow of lease liabilities including
interest for the year ended 31 December 2019 was $24.5 million.
9. 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. The Group's
Board, in conjunction with its legal advisors, do not believe the
claim has merit and no provision is recognised as at 31 December
2019.
1 0. Subsequent events
The Group has evaluated subsequent events through 27 February
2020, the date the Consolidated Financial Statements were approved
by the Board of Directors. No subsequent events requiring
disclosure have been identified other than the proposed final
dividend, details of which are disclosed in Note 4 - Dividends.
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. These measures include adjusted
cost of goods sold, adjusted gross margin, adjusted selling and
distribution costs, adjusted general and administrative expenses,
adjusted research and development costs, adjusted other operating
expenses, adjusted operating profit ("adjusted EBIT"), adjusted
EBITDA, adjusted profit before tax, adjusted finance costs,
adjusted non-operating expense, net, adjusted net profit, adjusted
earnings per share, adjusted working capital, adjusted cash
conversion, free cash flow and net debt. 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. Reconciliations for these adjusted
measures determined under IFRS are shown on pages 36 to 42. The
definitions of adjusted measures are as calculated within the
reconciliation tables.
In management's and the Board's view, the APMs reflect the
underlying performance of the business and provide a meaningful
supplement to the reported numbers to support how the business is
managed and measured on a day-to-day basis. Adjusted results
exclude certain items because, if included, these items could
distort the understanding of our performance for the year and the
comparability between periods. Adjusted measures also form the
basis for performance measures for remuneration, e.g. adjusted
EBIT. For further information see pages 36 and 42.
In determining whether an item should be presented as an
allowable adjustment to IFRS measures, the Group considers items
which are significant either because of their size or their nature,
and which are non-recurring. For an item to be considered as and
allowable adjustment to IFRS measures, it must initially meet at
least one of the following criteria:
- It is a one-off significant item, which may cross more than one accounting period.
- It has been directly incurred as a result of either an
acquisition, divestiture, or arises from termination benefits
without condition of continuing employment related to a major
business change or restructuring programme.
- It is unusual in nature, e.g. outside the normal course of business.
If an item meets at least one of the criteria, the Board,
through the Audit and Risk Committee, then exercises judgement as
to whether the item should be classified as an allowable adjustment
to IFRS performance measures.
Key adjustments for adjusted EBIT (also referred to as adjusted
operating profit) are pre-IPO costs, CEO-related compensation not
subject to continuing employment, together with termination
benefits arising exclusively from major change programmes. Further
adjustments, which include amortisation of pre-2018 acquisition
intangibles and impairments to intangible and fixed assets are also
made in arriving at adjusted EBIT. The tax effect of the
adjustments is reflected in the adjusted tax expense to remove
their effect from adjusted net profit and adjusted earnings per
share.
Adjusted EBITDA, which is used to calculate our metric of
adjusted cash conversion and the effective use of our working
capital, is calculated by adding back pre-IPO costs, CEO-related
compensation not subject to continuing employment, share-based
payment expenses, together with termination benefits and related
costs to our reported EBITDA.
Adjusted items, excluding the impact of tax, for the year ended
31 December 2019 and 2018 include the following credits or costs
that are reflected in the reported measures:
- Amortisation of intangible assets relating to acquisitions pre
1 January 2018 (ongoing) ($140.2 million and $142.4 million
respectively).
- Impairment of assets as a result of transformation or an
unusual circumstance (loss of $105.2 million and $0.5 million
respectively).
- Divestiture activities including assets held for sale (gain of
$1.9 million for the year ended 31 December 2018).
- Termination benefits in relation to major change programmes ($5.8 million and $12.6 million respectively).
- CEO buy-out costs reflecting non-performance-related
compensation for the loss of incentive awards from previous
employment ($6.2 million), not subject to continuing
employment.
- Share-based payment compensation expense arising from pre-IPO
equity grants. This concluded in 2018 ($6.2 million for the year
ended 31 December 2018).
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.
Acquisition-related amortisation of intangible assets
Our adjusted measures exclude the amortisation of intangibles
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. Management will review significant acquisitions
on a case-by-case basis to determine whether the exclusion of the
amortisation of acquired intangibles would provide a more
meaningful comparison of our results.
Impairment of assets
Impairments, write-offs and gains and losses from the disposal
of fixed assets are adjusted when management consider the
circumstances surrounding the adjustment are not reflective of our
core business or when the adjustments relate to pre-2018
acquisition intangibles.
Divestiture activities
These include significant assets which are disposed of as a
result of a sale, major business change or restructuring programme,
including gains and losses resulting from classification of assets
as held for sale.
T ermination 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.
CEO buy-out costs
The Group has incurred costs following the commencement of
employment of Karim Bitar as CEO of ConvaTec Group Plc on 30
September 2019 to compensate for the loss of incentive awards from
his previous employment. These costs relate to past performance in
a previous employment, were not contingent on continuing employment
with ConvaTec Group Plc, have no future performance requirements
and do not represent the underlying cost base or performance of the
Group in 2019. Awards granted include both cash and equity-based
payment components which vested immediately.
Pre-IPO share-based payment compensation
In order to provide greater comparability and reflecting the
changes within the Group as a result of the IPO (October 2016),
certain IPO related costs were excluded from adjusted measures.
Final residual share-based costs were incurred in 2018.
Reconciliation of reported earnings to adjusted earnings for the
years ended 31 December 2019 and 2018
Y ear ended Gross Operating Operating Finance Non-operating Net
31 Revenue profit costs profit cost expense, PBT T axation profit
December net
2019
$m $m $m $m $m $m $m $m $m
-------------- ------------ ------------ -------------- --------------- ----------- ------------------ ----------- -------------- ------------
Reported 1,827.2 955.6 (858.7) 96.9 (73.6) (4.4) 18.9 (9.1) 9.8
Amortisation
of
pre-2018
acquisition
intangibles - 122.6 17.6 140.2 - - 140.2 (10.1) 130.1
Impairment of
assets - - 105.2 105.2 - - 105.2 - 105.2
T ermination
benefits
and other
related
costs - - 5.8 5.8 - - 5.8 (0.9) 4.9
CEO buy-out
costs - - 6.2 6.2 - - 6.2 (1.2) 5.0
-------------- ------------ ------------ -------------- --------------- ----------- ------------------ ----------- -------------- ------------
T otal
adjustments
and their
tax
effect - 122.6 134.8 257.4 - - 257.4 (12.2) 245.2
Other
discrete
tax items - - - - - - - (23.0) (23.0)
-------------- ------------ ------------ -------------- --------------- ----------- ------------------ ----------- -------------- ------------
Adjusted 1,827.2 1,078.2 (723.9) 354.3 (73.6) (4.4) 276.3 (44.3) 232.0
-------------- ------------ ------------ -------------- --------------- ----------- ------------------ ----------- -------------- ------------
Software and R&D amortisation 10.4
Post-2017 acquisition amortisation 1.3
Depreciation 57.9
Impairment/write-off assets 9.1
Post-IPO share-based payment
compensation 10.1
------------------------------------ ------
Adjusted EBITDA 443.1
------------------------------------ ------
Impairment of assets of $105.2 million is predominantly related
to a review of the product portfolio which has been undertaken as
part of the Transformation Initiative, which has resulted in the
identification of impairment triggers in 2019 in relation to
certain of the Group's intangible assets.
Termination benefits and other related costs were $5.8 million,
pre-tax, in the year ended 31 December 2019. All initiatives
recognised in 2018 are considered complete, $1.5 million was
recognised in the current year in respect of these programmes. The
Transformation Initiative is a global multi-year transformation
programme which will simplify the way in which the business
operates. Costs incurred for the year ended 31 December 2019 were
$4.3 million. We expect to incur between $31 million and $36
million of severance and associated retention costs over 2020 and
2021.
CEO buy-out costs were $6.2 million, pre-tax, in the year ended
31 December 2019 and relate to cash paid of $2.1 million and
equity-based incentive awards of $4.1 million granted to the CEO
upon commencement of employment with ConvaTec Group Plc on 30
September 2019. These awards were not subject to continuing
employment or performance conditions.
Other discrete tax items are a result of the Swiss tax reform
which was substantively enacted on 4 October 2019 and is effective
on 31 December 2019. As a result, ConvaTec International Services
GmbH, is subject to a significant change in effective tax rate. The
Swiss effective rate, which will increase over a ten-year period to
1 January 2030, is alleviated by grandfathering provisions which
results in the estimation and recognition of a deferred tax asset.
The value of the deferred tax asset of $23.0 million has been
calculated on a best estimate basis using a specific methodology
that is permitted under Swiss law. Given the future anticipated
transformative changes in the business, there is significant
judgement and uncertainty in the calculation of the deferred tax
asset and this remains subject to review as a key source of
estimation uncertainty. For further details on deferred taxation,
see Note 3 - Income taxes to the Consolidated Financial
Statements.
Year ended 31 Revenue Gross Operating Operating Finance Non-operating PBT Taxation Net
December 2018 margin costs profit costs expense, profit
net
$m $m $m $m $m $m $m $m $m
------------------- -------- -------- ---------- ---------- -------- -------------- ------ --------- --------
Reported 1,832.1 973.8 (706.1) 267.7 (65.2) (1.3) 201.2 20.4 221.6
Amortisation
of pre-2018
acquisition
intangibles - 125.1 17.3 142.4 - - 142.4 (10.3) 132.1
Disposal of assets - 0.4 0.1 0.5 - - 0.5 - 0.5
Divestiture
activities - - - - - (1.9) (1.9) - (1.9)
Termination
benefits
and other related
costs - 2.9 9.7 12.6 - - 12.6 (0.9) 11.7
Pre IPO share
based payment
expense - - 6.2 6.2 - - 6.2 - 6.2
------------------- -------- -------- ---------- ---------- -------- -------------- ------ --------- --------
Total adjustments
and their tax
effect - 128.4 33.3 161.7 - (1.9) 159.8 (11.2) 148.6
Other discrete
tax items - - - - - - - (65.7) (65.7)
------------------- -------- -------- ---------- ---------- -------- -------------- ------ --------- --------
Adjusted 1,832.1 1,102.2 (672.8) 429.4 (65.2) (3.2) 361.0 (56.5) 304.5
------------------- -------- -------- ---------- ---------- -------- -------------- ------ --------- --------
Software and R&D
amortisation 9.3
Post-2017 acquisition
amortisation 0.9
Depreciation 37.4
Post-IPO share-based payment
compensation 5.4
--------------------------------------- ---------- ----------
Adjusted EBITDA 482.4
------------------- -------- -------- ---------- ----------
Disposal of assets relates to $0.5 million for the final
write-off of certain manufacturing fixed assets following the
closure of the Greensboro site in 2017. Divestiture activities of
$1.9 million reflect a gain from the sale of the plant in
Greensboro.
Termination benefits and other related costs were $12.6 million,
pre-tax, in 2018 and related to three significant programmes
including:
- $2.5 million in relation to the completion of the pre-IPO
Margin Improvement Programme, incurred pre-June 2018, giving total
costs incurred in relation to this programme of $25.6 million from
2015 to 2018.
- $4.7 million in relation to the transition of head office
support functions from the US to the UK. The programme completed in
2019 with a total cost of $5.8 million.
- $5.4 million in relation to restructuring geographical sales
teams. The programme completed in 2019 with a total cost of $6.9
million.
Other discrete items principally represent tax benefits of $30.4
million and $35.0 million arising from the reassessment of deferred
tax liabilities in relation to unremitted earnings and recognition
of additional deferred tax assets resulting from the December 2017
US tax reform respectively.
Reconciliation of basic and diluted reported earnings per share
to adjusted earnings per share for the years ended 31 December 2019
and 31 December 2018
Reported 2019 Adjusted 2019 Reported Adjusted
2018 2018
$m $m $m $m
---------------------- ------------------------------ --------------------- ------------------ -------------------
Net profit
attributable to
the shareholders of
the Group 9.8 232.0 221.6 304.5
---------------------- ------------------------------ --------------------- ------------------ -------------------
Number Number
---------------------- ------------------------------ --------------------- ------------------ -------------------
Basic weighted
average ordinary
shares in issue 1,971,014,011 1,956,085,112
Diluted weighted
average ordinary
shares in issue 1,976,156,374 1,958,078,762
---------------------- ------------------------------ --------------------- ------------------ -------------------
$ per share $ per share $ per share $ per share
---------------------- ------------------------------ --------------------- ------------------ -------------------
Basic and diluted
earnings
per share 0.00 0.12 0.11 0.16
---------------------- ------------------------------ --------------------- ------------------ -------------------
Reconciliation of reported and adjusted operating costs for the
years ended 31 December 2019 and 31 December 2018
2019 2018
-------------------------------------------------- --------------------------------------------------
S&D(a) G&A(b) R&D(c) Other(d) Operating S&D(a) G&A(b) R&D(c) Other(d) Operating
costs costs
$m $m $m $m $m $m $m $m $m $m
-------------- -------- -------- ------- --------- ---------- -------- -------- ------- --------- ----------
Reported (433.0) (266.4) (53.8) (105.5) (858.7) (418.0) (238.2) (49.9) - (706.1)
Amortisation
of pre-2018
acquisition
intangibles - 17.6 - - 17.6 - 17.2 0.1 - 17.3
Impairment
of assets - - - 105.2 105.2 - 0.1 - - 0.1
Termination
benefits
and other
related
costs 1.7 4.1 - - 5.8 2.7 6.4 0.6 - 9.7
CEO buy-out
costs - 6.2 - - 6.2 - - - - -
-------------- -------- -------- ------- --------- ---------- -------- -------- ------- --------- ----------
1.7 27.9 - 105.2 134.8 2.7 23.7 0.7 - 27.1
IPO related
costs
Pre-IPO
share-based
payment
expense
and related
costs - - - - - - 6.2 - - 6.2
-------------- -------- -------- ------- --------- ---------- -------- -------- ------- --------- ----------
Total in
relation
to IPO - - - - - - 6.2 - - 6.2
-------------- -------- -------- ------- --------- ---------- -------- -------- ------- --------- ----------
Adjusted (431.3) (238.5) (53.8) (0.3) (723.9) (415.3) (208.3) (49.2) - (672.8)
-------------- -------- -------- ------- --------- ---------- -------- -------- ------- --------- ----------
(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) "Other" represents other operating expenses.
Cash conversion for the years ended 31 December 2019
and 31 December 2018
2019 2018
$m $m
---------------------------------------------------------------- -------------- -------------
Reported Operating profit/EBIT 96.9 267.7
Depreciation of property, plant and equipment 35.5 37.4
Depreciation of right-of-use assets 22.4 -
Amortisation 151.9 152.6
Impairment of intangible assets/ write-off of property, 114.3 -
plant and equipment
---------------------------------------------------------------- -------------- -------------
Reported EBITDA 421.0 457.7
Non-cash items in EBITDA
Share-based payment expense 14.2 11.2
Disposals - 3.4
---------------------------------------------------------------- -------------- -------------
14.2 14.6
W orking capital movement 51.6 (23.2)
Capital expenditure (61.4) (72.1)
---------------------------------------------------------------- -------------- -------------
Reported net cash for cash conversion 425.4 377.0
Less: tax paid (37.0) (35.8)
---------------------------------------------------------------- -------------- -------------
Reported free cash flow 388.4 341.2
---------------------------------------------------------------- -------------- -------------
Reconciliation of Adjusted EBITDA, Adjusted Non-Cash
Items, Adjusted Working Capital and
Adjusted Net Cash (for Adjusted Cash Conversion measurement)
Reported EBITDA 421.0 457.7
Share-based payment expense 14.2 11.2
Pre-IPO share-based payment associated costs - 0.4
CEO buy-out costs 2.1 -
Disposals - 0.5
T ermination benefits and other related costs 5.8 12.6
---------------------------------------------------------------- -------------- -------------
T otal adjustments (a) 22.1 24.7
---------------------------------------------------------------- -------------- -------------
Adjusted EBITDA 443.1 482.4
---------------------------------------------------------------- -------------- -------------
Reported non-cash items 14.2 14.6
Share-based payment expense (14.2) (11.2)
Disposals - (0.5)
---------------------------------------------------------------- -------------- -------------
T otal adjustments (b) (14.2) (11.7)
---------------------------------------------------------------- -------------- -------------
Adjusted non-cash items - 2.9
---------------------------------------------------------------- -------------- -------------
Reported working capital movement 51.6 (23.2)
Decrease/(increase) in severance provision 0.3 (3.6)
Decrease in accruals for remediation costs, corporate
development and IPO-related costs - 2.3
Decrease/(increase) in accruals for share-based payment
associated costs 0.1 (0.4)
Decrease in liability for pre-IPO MIP 0.1 0.3
---------------------------------------------------------------- -------------- -------------
T otal adjustments (c) 0.5 (1.4)
---------------------------------------------------------------- -------------- -------------
Adjusted working capital movement 52.1 (24.6)
---------------------------------------------------------------- -------------- -------------
Reported net cash for cash conversion 425.4 377.0
T otal adjustments above (a), (b), (c) 8.4 11.6
---------------------------------------------------------------- -------------- -------------
Adjusted net cash for cash conversion 433.8 388.6
Less: tax paid (37.0) (35.8)
---------------------------------------------------------------- -------------- -------------
Adjusted free cash flow 396.8 352.8
---------------------------------------------------------------- -------------- -------------
Reported cash conversion 101.0% 82.4%
Adjusted cash conversion 97.9% 80.6%
-------------------------- ------ -----------
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 Consolidated Statement of Financial
Position, net of cash and cash equivalents.
2019 2018 2018
$m $m $m
Applying IFRS
16 opening
Reported Reported lease liabilities
(a)
--------------------------- ---------- ---------- -------------------
Borrowings 1,486.1 1,620.8 1,620.8
Finance leases - 23.7 -
IFRS 16 lease liabilities 88.5 - 89.5
--------------------------- ---------- ---------- -------------------
T otal interest-bearing
borrowings 1,574.6 1,644.5 1,710.3
Cash and cash equivalents (385.8) (315.6) (315.6)
--------------------------- ---------- ---------- -------------------
Net debt (including
leases) 1,188.8 1,328.9 1,394.7
--------------------------- ---------- ---------- -------------------
Net debt 1,100.3 1,305.2 1,305.2
--------------------------- ---------- ---------- -------------------
(a) On adoption of IFRS 16 an opening lease liability of $89.5
million was recognised. To more readily understand the year-on-year
movement in net debt, the net debt for the year ended 31 December
2018 is presented above on both a reported basis, which includes
finance lease liabilities only, and using the IFRS 16 opening lease
liability which includes all leases as defined by our IFRS 16
accounting policy. For further information see Note 8 - Leases to
the Consolidated Financial Statements.
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
FR EADAXALSEEAA
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February 28, 2020 02:00 ET (07:00 GMT)
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