ConvaTec Group Plc Disappointing results, in light of revenue and margin guidance

ConvaTec Group Plc and its subsidiaries (LON:CTEC), a leading global medical products and technologies company focused on therapies for the management of chronic conditions, today reports audited Annual Results for the twelve months ended 31 December 2018 in line with the revised guidance provided in October 2018.

FY2018 key points:

· Group reported revenue of $1,832.1 million grew 3.8% year on year, 2.7%2 CER or 0.2%3 organically;

· Reported EBIT5 of $267.7 million, grew 8.0% year on year due to lower restructuring and pre-IPO share-based payments;

· Adjusted1 EBIT5 of $429.4 million was down 6.0% year on year primarily due to increased levels of investment in commercial activities and negative mix, more than offsetting increased revenue; adjusted1 EBIT margin 23.4% (2017: 25.9%);

Actions to address strategy execution issues:

· Transformation Initiative established to implement a refreshed execution model “Pivot to Growth” to deliver strategy more effectively and drive higher revenue growth and profitability;

o Investment: total of around $150 million over three years, with a two to three year payback expected. Around 30% of this total will be capex investment, with the remaining 70% being operational spend related to restructuring, project management and other transformation costs which will cease at the end of the three year period;

o By year three of the Transformation Initiative we also expect to incur $50 million of ongoing annual costs related to commercial spend and R&D, building from $15 million in 2019;

o Benefits: higher revenue growth, $80 million gross annual cost savings by year three, (increasing to $120 million gross annual savings by 2023), and improved profit margin;

Guidance:

· Guidance for FY2019: organic revenue growth expected to be 1% to 2.5%, adjusted EBIT margin 18% to 20%, including $50 million of operational spend associated with the Transformation Initiative and costs related to MDR (Medical Device Regulation). Excluding these transformation costs and MDR, the adjusted EBIT margin would be 21% to 22.5%;

· Medium to long term4, targeting revenue growth in line with or above market and adjusted EBIT margin expansion.

Rick Anderson, Group Chief Executive Officer, commented

“These are disappointing results, in light of our revenue and margin guidance at the beginning of 2018. With the Executive Committee, I have undertaken an extensive review of the business since my appointment as CEO and it is clear that swift and strong action is required to address the failures in execution which have caused the Company to underperform.

“Following Board approval, we are now implementing a refreshed execution model to support our strategy and deliver sustainable and profitable growth. We will achieve this by concentrating on those product and market segments which offer the best returns, developing a strong and innovative pipeline of new products, simplifying our business to run it more efficiently and investing to strengthen our commercial and operational execution. This model can be leveraged by an incoming CEO, without constraining any potential strategic changes they may wish to implement.

“We have solid fundamentals, robust cash flows and we have reduced our leverage, but need to invest in the business over the next three years. I fully believe the changes we are making to our execution model will deliver the returns that our shareholders and other stakeholders rightly expect in the future.

“The search for a permanent CEO has made significant progress since October, with a very strong short-list of candidates. The Board is moving quickly on this key appointment.”

Franchise Summary:

Group reported revenue in 2018 grew 3.8%, 2.7%2 CER or 0.2%3 organically and in the fourth quarter declined by 6.0% on a reported basis, 3.8% CER2 or 4.0%3 organically.

• Advanced Wound Care (“AWC”) revenue grew 1.7% on a reported basis, or 0.2%3 organically in 2018. Our AQUACELTM Foam and anti-biofilm silver dressings performed well, offset by challenges in our older DuoDERMTM and base AQUACELTM dressings, as a result of the supply constraints of 2017 and challenging market dynamics, most notably in the UK. Performance in the US continued to be below expectations, driven primarily by weak sales of surgical cover dressing and disappointing progress on the wound acceleration plan. Revenue declined 4.5% on a reported basis and 1.8%3 organically in the fourth quarter.

• Ostomy Care (“OC”) revenue grew 0.8% on a reported basis, but fell 0.5%3 year on year on an organic basis. This was primarily driven by lost patients, a result of the supply constraints in the second half of 2017. We also saw some weakness in the US retail channel and the recent trend in new patient capture rates in US hospitals. However, we delivered good results in both Latin America and certain markets in Asia Pacific and Europe. There were encouraging results from our recent product launches such as EsteemTM + Flex Convex. Revenue in the fourth quarter declined 4.4% on a reported basis or 1.5%3 organically.

• Continence and Critical Care (“CCC”) revenue grew 15.7% on a reported basis, 15.2%2 CER or 4.1%3 organically in 2018, with a strong performance from our Home Distribution Group (“HDG”) in the US being partially offset by continuing planned product rationalisation and the impact of a packaging recall in the second half of 2018, which together negatively impacted revenue by c. $6 million. Reported revenue grew by 15.7% primarily as a result of the inclusion of Woodbury Holdings, which was acquired on 1 September 2017, and J&R Medical, which was acquired on 1 March 2018 net of the Symbius Medical divestiture on 1 March 2018. In the fourth quarter revenue grew by 3.3% on a reported basis, 4.6%2 CER or 3.9%3 organically.

• Infusion Devices (“ID”) revenue fell by 2.4% on a reported basis, and 3.5%3 on an organic basis in 2018, and in the fourth quarter declined 25.6% on a reported basis and 24.9%3 organically, with good underlying growth offset by significantly reduced orders in the fourth quarter, due to an unexpected change in inventory policy by our largest customer.