TIDMCTEC
RNS Number : 9869H
ConvaTec Group PLC
02 August 2023
2 August 2023
Convatec Group Plc
Interim Results for the six months ended 30 June 2023
Accelerating revenue growth and expanding operating margin
Raising full year guidance
Accelerating organic revenue growth of 6.6% (1) , broad-based
across all four categories:
-- AWC: 8.7%(1) with significant growth in ATT(2) and strong
performance in Global Emerging Markets
-- OC: 3.1%(1) driven by 6.5%(1) growth in Convatec ostomy
products, moderated by Flexi-Seal(TM) phasing
-- CC: 7.6%(1) good operating performance supported by higher reimbursement pricing in the US
-- IC: 7.5%(1) ongoing strong demand for our innovative infusion sets, as expected
Reported revenue growth was 1.1% and 2.7% on a constant
currency(4) basis reduced by the strategic exit of the hospital
care activities and related industrial sales in 2022
Further expansion of the adjusted operating margin by 70 bps to
20.3%:
-- Improved mix of profitability across and within categories,
stronger pricing and increased productivity more than offset COGS
inflation, resulting in 220bps of gross margin expansion
-- Continued good progress in simplification and productivity,
particularly in G&A, was more than offset by targeted
investments for future growth and inflationary headwinds
Adjusted operating profit was $214.1m (H1 2022: $204.3m).
Reported operating profit was $123.4m (H1 2022: $87.1m)
Further strengthening of competitive position
-- Successfully launching Innovamatrix(R) and ConvaFoam(TM) in
the US - positive clinical feedback
-- Acquired innovative anti-infective nitric oxide technology
platform - potential applications across categories
-- Broadening customers and applications in IC - partnerships
with Beta Bionics (iLet insulin pump in the US), AbbVie and
Mitsubishi Tanabe (Parkinson's), Medtronic (780G in the US) and
Tandem (Mobi in the US)
Raising 2023 guidance to reflect growth across all categories
and acceleration in AWC
-- Expect organic revenue growth to be between 6.0-7.5% (previously 5.0-6.5%) and;
-- Adjusted operating profit margin of at least 20.5% on a
constant currency basis (previously at least 19.7%)
Karim Bitar, Chief Executive Officer, commented:
"This performance demonstrates the momentum Convatec is building
- revenue growth is accelerating and we are expanding our operating
margin, despite ongoing investments to drive future growth and the
challenging inflationary back drop. Given the strength of
performance and the encouraging outlook, particularly in AWC, we
are increasing our guidance for the full year.
"We remain focused on further strengthening the business as we
execute our FISBE 2.0 strategy. We have now pivoted to sustainable
revenue growth and are expanding our operating margin. We are
increasingly confident of delivering sustainable future growth and
an operating margin in the mid-20s."
Key financial highlights
Reported results Adjusted(3) results
H1 2023 H1 2022 Change H1 2023 H1 2022 Change CC Change(4)
Revenue $1055m $1045m 1.1% $1055m $1045m 1.1% 2.7%
Operating profit $123.4 $87.1 41.7% $214.1m $204.3m 4.8% 7.0%
Operating profit
margin 11.7% 8.3% 3.4%pts 20.3% 19.6% 0.7%pts
Diluted earnings per
share 2.7 cents 2.4 cents 12.5% 6.8 cents 6.5 cents 4.6%
Dividend per share 1.769 1.717 3.0%
========== ========== ======== ========== ========== ======== =============
-- Reported diluted EPS 2.7 cents. Adjusted(3) diluted EPS 6.8
cents up 4.6% with higher adjusted net finance expense(3) offset by
lower non-operating and tax expenses
-- Net debt(3) increased by $229 million following strategic
M&A investments, capex and working capital. Leverage was 2.5x
net debt(3) /adjusted EBITDA(3) (FY 2022: 2.1x)
-- Interim dividend of 1.769 cents declared - a 3% increase (H1 2022: 1.717 cents)
(1) Organic growth presents period over period growth at
constant currency, adjusted for: Triad Life Sciences acquisition
(Mar'22) the exit of hospital care and related industrial sales and
the reconfigured business in Russia (May'22)
(2) Triad Life Sciences was renamed Advanced Tissue Technologies
(ATT) following its acquisition in mid-March 2022. It produces
products in the Wound Biologics segment, as defined by SmartTRAK.
This segment includes skin substitutes, active collagen dressings
and topical drug delivery. ATT began to contribute to the organic
growth rate following the anniversary of the deal completion. ATT
accounted for 29% of AWC's organic growth during the first half
(3) 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 33 to 38)
(4) Constant currency growth is calculated by applying the
applicable prior period average exchange rates to the Group's
actual performance in the respective period.
Contacts
Analysts & Investors Kate Postans, Vice President of +44 (0) 7826 447807
Investor Relations & Corporate
Communications +44 (0) 7805 011046
Sheebani Chothani, Investor Relations ir@convatec.com
& Corporate Communications Manager
Buchanan: Charles Ryland / Chris
Media Lane +44 (0)207 466 5000
Investor and analyst presentation
The results presentation will be held in person at UBS, 5
Broadgate Circle, London, EC2M 2QS at 9am (UK time). The event will
be simultaneously webcast and the link can be found here .
The full text of this announcement and the presentation for the
analyst and investors meeting can be found on the 'Results, Reports
& Presentations' page of the Convatec website
www.convatecgroup.com/investors/reports .
About Convatec
Pioneering trusted medical solutions to improve the lives we
touch : Convatec is a global medical products and technologies
company, focused on solutions for the management of chronic
conditions, with leading positions in advanced wound care, ostomy
care, continence care and infusion care. With around 10,000
colleagues, we provide our products and services in almost 100
countries, united by a promise to be forever caring. Our solutions
provide a range of benefits, from infection prevention and
protection of at-risk skin, to improved patient outcomes and
reduced care costs. Group revenues in 2022 were over $2 billion.
The company is a constituent of the FTSE 100 Index (LSE:CTEC). To
learn more about Convatec, please visit
http://www.convatecgroup.com
Forward Looking Statements
This document includes certain forward-looking statements with
respect to the operations, performance and financial condition of
the Group. Forward-looking statements are generally identified by
the use of terms such as "believes", "estimates", "aims",
"anticipates", "expects", "intends", "plans", "predicts", "may",
"will", "could", "targets", continues", or their negatives or other
similar expressions. These forward-looking statements include all
matters that are not historical facts.
Forward-looking statements are necessarily based upon a number
of estimates and assumptions that, while considered reasonable by
the Company, are inherently subject to significant business,
economic and competitive uncertainties and contingencies that are
difficult to predict and many of which are outside the Group's
control. As such, no assurance can be given that such future
results, including guidance provided by the Group, will be
achieved. Forward-looking statements are not guarantees of future
performance and such uncertainties and contingencies, including the
factors set out in the "Principal Risks" section of the Strategic
Report in our Annual Report and Accounts, could cause the actual
results of operations, financial condition and liquidity, and the
development of the industry in which the Group operates, to differ
materially from the position expressed or implied in the
forward-looking statements set out in this document. Past
performance of the Group cannot be relied on as a guide to future
performance.
Forward-looking statements are based only on knowledge and
information available to the Group at the date of preparation of
this document and speak only as at the date of this document. The
Group and its directors, officers, employees, agents, affiliates
and advisers expressly disclaim any obligations to update any
forward-looking statements (except to the extent required by
applicable law or regulation).
Operating Review for the six months ended 30 June 2023
Revenue
Total Group revenue for the period was $1,055 million. Revenue
increased by 1.1 % on a reported basis following the exit of the
hospital care activities and related industrial sales in 2022. On a
constant currency basis revenue rose 2.7% . Adjusting for M&A
and business exits (see footnote 1 above) Group revenue rose 6.6%
on an organic basis.
Six months ended 30 June
H1 2023 H1 2022 Reported Foreign Constant Organic(4)
growth Exchange Currency(2) growth
/ (decline) impact growth / (decline)
$m $m
Revenue by Category
Advanced Wound
Care 338 307 10.4% (2.6)% 13.0% 8.7%
Ostomy Care 300 298 0.7% (2.4)% 3.1% 3.1%
Continence Care 221 206 7.3% (0.3)% 7.6% 7.6%
Infusion Care 186 174 7.2% (0.3)% 7.5% 7.5%
--------------------- ----------- --------- ------------- ---------- -------------------- ------------
Revenue excluding
hospital care exit 1,045 985 6.2% (1.7)% 7.9% 6.6%
Exit of hospital
care and related
industrial sales 10 (5) 60 (83.5)% n/a n/a n/a
--------------------- ----------- --------- ------------- ---------- -------------------- ------------
(1.6)
Total 1,055 1,045 1.1 % % 2.7 % 6.6 %
--------------------- ----------- --------- ------------- ---------- -------------------- ------------
(5) Relates to residual stock being sold during H1 2023
Advanced Wound Care revenue of $338 million increased 10.4% on a
reported basis or 13.0% on a constant currency basis. On an organic
basis revenue rose by 8.7%. This performance was enhanced by
Advanced Tissue Technologies (ATT), which contributed to organic
growth from April.
The business achieved strong growth in Europe and Global
Emerging Markets, especially China, where we continued to win
market share as we broadened our presence and developed robust
relationships with the hospitals. Good growth in North America was
supported by ATT in the US. InnovaMatrix(R) continued to deliver
strong momentum in the large and rapidly growing wound biologics
segment(2) . Feedback from clinicians has been positive, including
for the new InnovaBurn(R) product. ConvaFoam(TM) launched in the US
in January and the reaction from healthcare professionals has been
encouraging.
Given the strong growth year to date, significant momentum in
ATT and the positive response to ConvaFoam(TM) we now expect double
digit organic revenue growth for AWC for 2023, and expect the
category to deliver high single digit growth on an ongoing
basis.
Ostomy Care revenue of $300 million was up 0.7% on a reported
basis and increased 3.1% on a constant currency basis and organic
basis.
Sales of Convatec ostomy products grew 6.5%. The business
achieved double-digit growth in Global Emerging Markets as it
continued to win share in key markets such as China and Colombia,
supported by its Direct to Consumer and high touch service
propositions. There was a good performance in Europe although, as
expected, further planned declines in non-Convatec product sales
via HSG/Amcare(TM) UK masked this positive performance. In North
America, new patient starts remained stable and HSG continued to
grow referrals with new ostomy patients. Overall, we improved the
mix and consequently the margins.
Growth for the overall category was moderated by the inclusion
of Flexi-Seal(TM) this year, our innovative faecal management
system, which declined 9.3% as it lapped tough Covid comparatives.
We expect a recovery in Flexi-Seal(TM) during the remainder of the
year given easing comparatives and the recent sole supplier
contract win of the HealthTrust GPO.
Given this expected improvement in Flexi-Seal(TM) coupled with
good growth in Convatec ostomy products we continue to expect
mid-single digit growth for this combined category in 2023.
Continence Care revenue of $221 million rose 7.3% on a reported
basis and 7.6% on a constant currency and organic basis.
A strong operating performance was supported by higher
reimbursement pricing in the US this year and increasing share of
Convatec (Cure Medical and GentleCath(TM) ) products. We made
further progress building the commercial teams in Europe and are
beginning to develop a presence in the Global Emerging Markets.
From an innovation perspective we are on track to launch our new
and improved GentleCath(TM) Air for Women 2.0 in Q4 2023 in
France.
Based on the favourable pricing development, we expect mid to
high-single digit growth for Continence Care this year.
Infusion Care revenue of $186 million increased 7.2% on a
reported basis and 7.5% on a constant currency basis and organic
basis. This growth was primarily driven by sustained strong demand
for our innovative infusion sets for people with diabetes. It was
supported by double digit growth of our neria(TM) brand infusion
sets, for non-insulin therapies such as subcutaneous infusion of
immunoglobulins (linked to cancer and autoimmune diseases) and pain
management medications. We continue to expect Infusion Care to grow
high single digits in 2023 with further progress in H2 given
Medtronic's 780G insulin pump approval in the US, Beta Bionics iLet
bionic pancreas system launch in the US, AbbVie's Parkinson's
launch in Japan and preparations for Tandem's Mobi commercial
launch.
We remain confident our Infusion Care business can continue to
grow at high single digits on an ongoing basis. This is driven by
underlying growth in diabetes (3% p.a.) coupled with the
expectation of increased world-wide insulin pump penetration
(currently only 5% penetration) as more insulin-intensive patients
choose automated insulin delivery over multiple daily injections.
Recent data from Seagrove, an expert diabetes market research firm,
expects durable pumps to grow approximately 8% CAGR between
2023-2028 while patch & hybrid pumps are expected to grow
approximately 16% CAGR over the same period. This reflects the
importance of choice for varying patient needs across the globe
such as glycemic control, discretion, convenience and cost. Our
confidence is further underpinned by our innovation pipeline with
extended wear infusion sets, new durable pumps, such as Tandem's
discrete Mobi pump and Beta Bionic's new iLet pump, and the
potential to contribute to patch & hybrid pumps. In addition,
we expect double digit growth in areas such as Parkinson's disease
and immunoglobulin deficiency.
Historic revenue data*
* Provided to reflect revised category definitions announced in
March'23 , following the exit of hospital care.
Reported Revenue H1 2021 H2 2021 H1 2022 H2 2022 H1 2023
$m
Advanced Wound Care 294 298 307 314 338
Ostomy Care 311 304 298 285 300
Continence Care 193 211 206 220 221
Infusion Care 155 162 174 167 186
--------------------------- -------- -------- -------- -------- --------
Group 953 975 985 986 1045
--------------------------- -------- -------- -------- -------- --------
Revenue from exit of
hospital and industrial
sales 55 55 60 42 10
--------------------------- -------- -------- -------- -------- --------
Total Reported Group 1008 1030 1045 1028 1055
--------------------------- -------- -------- -------- -------- --------
Organic(4) growth/(decline) H1 2021 H2 2021 H1 2022 H2 2022 H1 2023
%
Advanced Wound Care 16.3% 3.4% 7.3% 6.3% 8.7%
Ostomy Care 5.0% (0.8)% 1.2% 2.3% 3.1 %
Continence Care 3.0% 3.1% 4.5% 5.7% 7.6 %
Infusion Care 9.7% 13.3% 13.2% 3.6% 7.5 %
----------------------------- -------- -------- -------- -------- --------
Group 7.4% 3.4% 6.4% 4.7% 6.6 %
----------------------------- -------- -------- -------- -------- --------
Executing on our FISBE strategy
The execution of our FISBE (Focus, Innovate, Simplify, Build,
Execute) strategy is progressing well.
Focus
- We continued to focus on our top 12 markets, achieving revenue
growth of 6.4% on a constant currency basis compared to 2.7%
globally. The US continues to be our largest market and grew
strongly, supported by the contribution from ATT. China, whilst
still a small part of the overall group, is a key strategic market
where we continue to strengthen our position, grow double digit and
win market share
- In July we further strengthened our Home Services Group
through the acquisition of A Better Choice Medical Supply for $27
million. The US home supplier of urinary catheters, based in
Waterford, Michigan (near Detroit) will be integrated into our HSG
business in the coming months.
Innovate
- We continued to invest to strengthen our Technology &
Innovation capabilities and advance our pipeline; we increased
adjusted R&D expenditure by 9.3% to $52 million in H1 (H1 2022:
$47 million), equivalent to 4.9% of sales
- During H1 we started launching ConvaFoam(TM) in the US, which
is strengthening our competitive position in the very large and
growing foam segment. Feedback from evaluations has been
encouraging, with HCPs particularly positive about its exudate and
adhesion properties
- In April, we acquired a highly innovative anti-infective
nitric oxide technology platform with a unique natural
antimicrobial mode of action, backed by compelling scientific and
clinical data. Convatec is well positioned to commercialise this
technology across a variety of medtech device applications starting
with Advanced Wound Care, with the first product expected to be
launched in 2025
- During the period Beta Bionics launched their new iLet bionic
pancreas system and we are partnering as sole supplier of the
infusion sets
- We also have four further launches scheduled for H2:
o Extended Wear Infusion Set in US with Medtronic 780G which has
received FDA clearance
o Infusion set for new Tandem Mobi pump, cleared by the FDA in
July
o AbbVie in Japan, with Europe later this year subject to
regulatory approval
o GentleCath(TM) Air for Women 2.0 in Q4 in France
Simplify
- As part of our Plant Network Optimisation initiative, we
announced our plan to move manufacturing operations from the
EuroTec facility in Roosendaal, the Netherlands, to our larger and
more efficient site in Michalovce, Slovakia, which already
manufactures similar Ostomy products. The intended move will take
place in H2'23 and is expected to deliver savings and improved
productivity given the more integrated position of Slovakia within
the network
- Adjusted G&A reduced to 8.2% of sales (H1 2022: 9.7%),
declining 14.9% to $87 million (H1 2022: $102 million) as we
continued to transition activities to our Global Business Services
centres; improve, standardise and automate processes, build
internal expertise and consolidate our corporate office
facilities
Build
- Our Pricing Centre of Excellence (CoE), in collaboration with
our business units, achieved 110 bps of pricing improvement
- Our Salesforce CoE has continued to roll out the single CRM
platform to Global Emerging Markets and is driving enhanced
salesforce productivity by increasing call rates by 10% and
improving targeting
Execution
- Through excellent commercial execution we are winning share in
the Global Emerging Markets in both AWC and OC. Our sales in GEM
continue to grow double digit
- We made further progress with our Environmental, Social &
Governance (ESG) agenda particularly with respect to building a
business where our people can thrive. We rolled out an executive
education series to engage our senior leaders in diversity, equity
and inclusion practices. In addition, we are on track for 100%
renewable energy across all our manufacturing sites by the end of
the year
Strong financial performance
Group revenue for the period was $1,055 million. Revenue
increased by 1.1 % on a reported basis, following the exit of the
hospital care activities and related industrial sales in 2022. On a
constant currency basis revenue rose 2.7% .
Adjusted gross profit rose 4.7% to $657 million (H1 2022: $628
million). Adjusted gross profit margin increased by 220bps over the
prior year with pricing, mix and productivity benefits more than
offsetting the ongoing COGS inflation. Reported gross profit was
$592 million (H1 2022: $555 million).
Adjusted operating expenses increased 4.6% year on year on a
reported basis. Higher labour cost inflation and additional
investment in growth initiatives, such as ATT sales force expansion
and R&D investment, was partially offset by a 150 bps reduction
in G&A.
Total adjusted operating profit increased by 4.8% to $214
million (H1 2022: $204 million) or 7.0% on a constant currency
basis. The adjusted operating profit margin was 20.3% in the first
half, an increase of 70 bps versus prior year. Reported operating
profit was $123 million (H1 2022: $87 million).
Adjusted diluted EPS was up 4.6% with operating profit growth
and a lower adjusted tax and non-operating expenses partially
offset by higher finance expenses, given market interest rate rises
and higher gross debt.
Reported EPS was up 12.5% reflecting higher reported net
profit.
Cash flow and leverage
Free cash flow (pre-tax) was $70 million (H1 2022: $89 million)
during the period. The $10 million increase in adjusted EBITDA to
$262 million (H1 2022: $252 million), $3 million reduction in
one-time expenses and $5 million lower capital expenditure was
largely offset by additional investment in working capital of $124
million (H1 2022: $92 million). The increase in working capital
principally reflected higher inventory, to build resilience and
some operational stocking ahead of the EuroTec closure, summer
holidays and the new FlexiSeal(TM) GPO contract. In addition, there
was an increase in receivables due to timing of receipts,
particularly in ATT, and sales phasing.
Adjusted cash conversion (calculated by dividing free cash flow
(pre-tax) by adjusted EBITDA) was 26.8% (H1 2022: 35.5%.) The
decline in the ratio primarily reflected the decision to build
inventory and the increase in receivables.
Free cash to equity was $10 million (H1 2022: $42 million). The
$32 million decline from the prior year period principally
reflected the lower free cash flow (pre-tax) coupled with higher
interest, lease and other expenses.
The Group continued to invest inorganically - spending $57
million on the acquisition of the innovative nitric oxide platform.
A further $95 million was paid for the first year performance
related earn-out for ATT. After dividends of $88 million, net debt
increased by $229m.
The Group ended the period with gross debt, including IFRS 16
lease liabilities, of $1,465 million (31 December 2022: $1,300
million). Offsetting cash of $77 million (31 December 2022: $144
million) and excluding lease liabilities, net debt was $1,298
million (31 December 2022: $1,068 million), equivalent to 2.5x
adjusted EBITDA (31 December 2022: 2.1x adjusted EBITDA).
Dividend
The Board is declaring a 3% increase in the interim dividend to
1.769 cents per share (H1 2022: 1.717) reflecting continued
confidence in the future performance of the Group and cash
generation.
Group 2023 outlook
We are pleased with the performance we have achieved so far in
2023 and are increasing our full year guidance.
We now expect full year organic revenue growth to be 6.0-7.5%,
given the broad- based growth across all categories and
acceleration in AWC, primarily driven by ATT.
Given the strong start to the year with mix, pricing and
simplification and productivity benefits , we now expect operating
margin in 2023 to expand to at least 20.5% on a constant currency
basis.
If current spot rates were to hold for the remainder of the
year, the estimated tailwind for FY 2023 revenue would be
approximately 90bps and the impact on full year adjusted operating
margin would be approximately 60 bps of FX headwind.
We expect adjusted net finance expense for the full year to be
towards the upper end of the $70-80 million range previously
provided, given the higher debt following M&A investment and
the higher market interest rates. The adjusted book tax rate is
expected to be approximately 24%. We still expect Capex of around
$120-140 million for the full year reflecting the continued growth
and automation investments we are making across the Group. We
expect leverage at year end to be approximately 2.3x, absent any
further M&A and taking into account the anticipated inventory
reduction in the second half. Overall, at the full year, inventory
is expected to be $20-40 million higher than December 2022.
We have now pivoted to sustainable revenue growth and are
focused on driving margin expansion. We are increasingly confident
of delivering sustainable future growth and an operating margin in
the mid-20s.
Principal risks
The Board reviews and agrees our principal risks on a bi --
annual basis taking account of our risk appetite together with our
evolving strategy, current business environment and any emerging
risks that could impact the business. Our system of risk management
and internal control continues to develop and updates to the
principal risks and mitigation plans are made as required in
response to changes in our risk landscape. Details of our
enterprise risk management framework are set out in the Group's
2022 Annual Report and Accounts on pages 88 to 97.
The Board has reviewed the principal risks as of 30 June 2023,
taking into consideration the risks that existed during the first
six months of 2023 and those that it believes will have an impact
on the business over the remaining six months of the current
financial year. The principal risks have been assessed against the
context of the global inflationary pressures that are impacting all
businesses at present. The overall profile of our risks remains
consistent with the position presented in the Group's 2022 Annual
Report and Accounts. Our principal risks are set out below and
listed in order of their potential impact on our ability to
successfully deliver on our strategy:
-- Operational Resilience and Quality;
-- Information Systems, Security and Privacy;
-- Innovation and Regulatory;
-- Customer and Markets;
-- Political and Economic Environment;
-- People;
-- Legal and Compliance;
-- Strategy and change management;
-- Environment and Communities; and,
-- Tax and Treasury.
The Board assesses the overall risk profile of the Group to
ensure it is within our risk appetite. In making this assessment
the Board considered the continued upward pressure from the
macro-economic environment and broader risk landscape (including
the high levels of inflation, increasing interest rates, ongoing
supply chain challenges and the continuing impacts of the war in
Ukraine) on the business environment and any continued or
additional impact on the Group's business and principal risks,
coupled with the controls and mitigations in place to address these
challenges. In the main, as our processes and risk mitigations
further develop and mature, we have continued to manage the
challenges facing the wider business landscape and build further
resilience into our operations. Principal risks continue to be
appropriately mitigated and we work to ensure that each risk
remains within our risk appetite.
Financial Review for six months ended 30 June 2023
Group financial performance
Six months ended 30 June
--------------------------------------------
Reported Reported Adjusted(1) Adjusted(1)
2023 2022 2023 2022
$m $m $m $m
---------------------------------- -------- -------- ----------- -----------
Revenue 1,055.5 1,044.5 1,055.5 1,044.5
Gross profit 592.4 554.9 657.4 628.1
---------------------------------- -------- -------- ----------- -----------
Operating profit 123.4 87.1 214.1 204.3
---------------------------------- -------- -------- ----------- -----------
Net finance expense (45.5) (28.2) (33.9) (23.0)
---------------------------------- -------- -------- ----------- -----------
Profit before income taxes 76.0 46.1 180.4 174.3
---------------------------------- -------- -------- ----------- -----------
Income tax (expense)/benefit (20.3) 2.2 (41.5) (43.2)
---------------------------------- -------- -------- ----------- -----------
Net profit for the period 55.7 48.3 138.9 131.1
---------------------------------- -------- -------- ----------- -----------
Basic earnings per share (cents
per share) 2.7 2.4 6.8 6.5
---------------------------------- -------- -------- ----------- -----------
Diluted earnings per share (cents
per share) 2.7 2.4 6.8 6.5
---------------------------------- -------- -------- ----------- -----------
Dividend per share (cents) 1.769 1.717
---------------------------------- -------- -------- ----------- -----------
1. These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measures
prepared in accordance with IFRS in the Non-IFRS financial
information section on pages 33 to 38.
Reported and Adjusted results
The Group's financial performance measured in accordance with
IFRS (IAS 34 Interim Financial Reporting as adopted by the United
Kingdom) is set out in the Condensed Consolidated Interim Financial
Statements and Notes and is referred to in this review as
"reported".
The commentary in this review includes discussion of the Group's
reported results and alternative performance measures (or adjusted
results) ('APMs'). Management and the Board use APMs as meaningful
supplemental measures in monitoring the performance of the
business. These measures are disclosed in accordance with the ESMA
guidelines and are explained and reconciled to the most directly
comparable reported measure prepared in accordance with IFRS in the
Non-IFRS financial information section on pages 33 to 38.
The commentary includes discussion of revenue on a constant
currency basis. Constant currency removes the effect of
fluctuations in exchange rates to focus on 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 and
revenue growth on a constant currency basis are non-IFRS financial
measures and should not be viewed as a replacement of IFRS reported
revenue. Organic growth represents period-on-period growth at
constant currency, excluding acquisition and divestiture
activities.
Revenue
Group reported revenue for the six months ended 30 June 2023 of
$1,055.5 million (H1 2022: $1,044.5 million) increased 1.1%
year-on-year on a reported basis, following the exit of the
hospital care activities and related industrial sales in 2022.
Revenue increased 2.7% on a constant currency basis. Group revenue
grew by 6.6% on an organic basis, driven by strong growth in
Advanced Wound Care, Infusion Care and Continence Care and good
growth in Ostomy Care.
For more details about the category revenue performance, refer
to the Operating Review.
Reported net profit
Reported gross margin increased year-on-year from 53.1% to
56.1%, including a change in mix, following the exit of hospital
care and the growing contribution from Advanced Tissue Technologies
("ATT"). This was supported by an improvement in pricing and the
easier prior year comparators, which included higher
divestiture-related costs associated with the exit from hospital
care and industrial sales activities.
Reported operating profit was $123.4 million, an increase of
$36.3 million on the prior period. Reported operating expenses
increased slightly by $1.2 million to $469.0 million (H1 2022:
$467.8 million), with increases in selling and distribution
expenses of $17.4 million and R&D of $6.4million offset by
reductions in G&A of $8.4 million and other operating expenses
of $14.2 million.
The increase in selling and distribution costs, including higher
headcount associated with growing the business, expansion in the
acquired ATT business and higher labour inflation, was only
partially offset by the exit of hospital care. The increase in
R&D reflected the continued investment in our future pipeline
of new products and new R&D talent joining the business through
the recently acquired businesses of ATT and 30 Technology's nitric
oxide platform.
The improvement in G&A continued to reflect the Group's
focus on simplification and productivity, notably as we continued
to build internal expertise and reduce external consultancy spend
whilst also seeing the benefits of transitioning more finance and
IT activities to our Global Business Services ("GBS") centres in
Lisbon and Bogota.
Other operating expenses were nil during the period (H1 2022:
$14.2 million), with the prior period costs primarily relating to
the exit from hospital care and related industrial sales
activities.
Reported net finance expenses increased by $17.3 million to
$45.5 million in the six months to 30 June 2023 (H1 2022: $28.2
million), reflecting an additional $10.9 million of net finance
expenses due to a combination of higher market interest rates and
increase in average net debt, and $6.4 million for the unwind of
discount relating to the contingent consideration arising from the
acquisitions of Cure Medical in 2021, Triad Life Sciences in 2022
and 30 Technology's nitric oxide platform in 2023.
Reported non-operating expenses decreased by $10.9 million to
$1.9 million (H1 2022: $12.8 million) and principally consisted of
a remeasurement charge of $2.1 million (H1 2022: $5.8 million) in
the period relating to the contingent consideration payable in
respect of the Group's acquisitions, plus foreign exchange gains of
$0.1 million (H1 2022: $7.0 million loss).
The reported income tax expense for the six months ended 30 June
2023 was $20.3 million (H1 2022: $2.2 million benefit) and this is
explained further in the Taxation and Tax strategy section below.
After income tax expense of $20.3 million (H1 2022: $2.2 million
benefit), the reported net profit was $55.7 million (H1 2022: $48.3
million). The basic reported earnings per share rose 12.5% to 2.7
cents (H1 2022: 2.4 cents), reflecting the reported net profit
divided by 2,036,308,534 ordinary shares (H1 2022: 2,018,377,510
ordinary shares).
Adjusted net profit
Adjusted gross profit increased by 4.7% to $657.4 million (H1
2022: $628.1 million). The adjusted gross margin increased
year-on-year from 60.1% to 62.3%, driven by mix, pricing and
productivity benefits, partially offset by cost inflation.
The Group achieved adjusted operating profit of $214.1 million
(H1 2022: $204.3 million), delivering a further adjusted operating
margin expansion to 20.3% (H1 2022: 19.6%), despite ongoing
inflationary headwinds and continued investments for growth.
Increases in adjusted selling and distribution expenses of $30.3
million, primarily driven by higher headcount, and adjusted R&D
of $4.4million, were partially offset by reductions in adjusted
G&A of $15.2 million, resulting in a net increase of $19.5
million in adjusted operating expenses. A reconciliation between
reported and adjusted operating expenses is provided in the
Non-IFRS financial information section.
Adjusted G&A as a percentage of revenue was 8.2% (H1 2022:
9.7%).
Adjusted net profit increased 5.9% to $138.9 million (H1 2022:
$131.1 million). The increases in operating expenses (as explained
in the reported net profit section) and finance costs due to higher
market interest rates, were more than offset by strong gross margin
improvements, a reduction in non-operating expenses and a $1.7
million decrease in adjusted income tax expense (which is explained
below).
Adjusted basic and diluted adjusted EPS at 30 June 2023
increased by 4.6% to 6.8 cents and 6.8 cents respectively (H1 2022:
6.5 cents and 6.5 cents), reflecting the higher adjusted net profit
of $138.9 million (H1 2022: $131.1million) divided by 2,036,308,534
basic ordinary shares and 2,049,996,858 diluted ordinary shares
respectively (H1 2022: 2,018,377,510 basic ordinary shares and
2,031,279,646 diluted ordinary shares).
Taxation and tax strategy
Six months ended 30 June
------------------------------------
2023 2022
Effective Effective
$m tax rate $m tax rate
-------------------------------------- ------ --------- ------ ---------
Reported income tax (expense)/benefit (20.3) 26.7% 2.2 (4.8%)
Tax effect of adjustments (21.2) (25.7)
Other discrete tax items - (19.7)
-------------------------------------- ------ ------
Adjusted income tax expense (41.5) 23.0% (43.2) 24.8%
-------------------------------------- ------ ------
The Group's reported income tax expense for the six months ended
30 June 2023 was $20.3 million (H1 2022: $2.2 million benefit). The
increase in the reported effective tax rate is mainly driven by the
decrease in tax benefit on deferred tax recognition in 2022 on
previously unrecognised US losses, partially offset by lower tax
expense due to profit mix between jurisdictions with different tax
rates.
The adjusted effective rate of 23.0% for the six months ended 30
June 2023 (H1 2022: 24.8%) is after reflecting the tax impact of
items treated as adjusting items (further details can be found in
the Reconciliation of reported earnings to adjusted earnings table
in the Non-IFRS financial information section on page 35). The
decrease in adjusted effective tax rate was principally driven by
deferred tax benefit on previously unrecognised tax losses and the
profit mix between jurisdictions with different tax rates.
Alternative performance measures (APMs)
In line with the Group's APM policy, the following adjustments
were made to derive adjusted operating profit and adjusted profit
before tax.
Six months ended 30 June
------------------------------ ------------------------------------------------------
Non-operating
Operating profit Finance expense expense
2023 2022 2023 2022 2023 2022
$m $m $m $m $m $m
------------------------------ -------- -------- -------- ------- ------ -------
Reported 123.4 87.1 (45.5) (28.2) (1.9) (12.8)
Amortisation of acquired
intangibles 67.0 67.4 - - - -
Acquisitions and divestitures 9.9 41.7 11.6 5.2 2.1 5.8
Termination benefits and
related costs 3.5 6.7 - - - -
Other adjusting items 10.3 - - - - -
Impairment of assets - 1.4 - - - -
------------------------------ -------- -------- -------- ------- ------ -------
Adjusted 214.1 204.3 (33.9) (23.0) 0.2 (7.0)
------------------------------ -------- -------- -------- ------- ------ -------
In line with Group's APM policy, adjustments made to derive
adjusted operating profit for the six months ended 30 June 2023
included the amortisation of acquired intangibles of $67.0 million
(H1 2022: $67.4 million), of which $46.4 million (H1 2022: $47.3
million) resulted from intangible assets arising from the spin-out
from Bristol-Myers Squibb in 2008 and will be fully amortised by
December 2026.
Acquisition and divestiture costs were $9.9 million (H1 2022:
$41.7 million), of which $2.2 million principally related to the
exit from the hospital care and industrial sales activities and
$7.7 million primarily related to the acquisition of 30
Technology's nitric oxide platform and the remaining inventory fair
value release in respect of the Triad acquisition.
Terminations costs of $3.5 million were in respect of
transformation projects and primarily due to the planned closure of
the EuroTec factory in the Netherlands. Other adjusting items of
$10.3 million were in respect of two ongoing programmes; our plant
network optimisation as announced in the May Trading Update and the
facilities optimisation programme.
The adjustment of $11.6 million made to derive adjusted finance
expenses for the six months ended 30 June 2023 wholly related to
the discount unwind in respect of contingent consideration payable
on the Starlight, Triad Life Sciences and Cure Medical
acquisitions.
Adjustments made to derive adjusted non-operating expenses for
the six months ended 30 June 2023 related to remeasurement charges
of $2.1 million in respect of the contingent consideration payable
on the Triad Life Sciences acquisition.
Of the total of $104.4 million of adjusting items, $88.0 million
were non-cash items. For further information on Non-IFRS financial
information, see pages 33 to 38.
The Board, through the Audit and Risk Committee, continuously
reviews the Group's APM policy to ensure that it remains
appropriate and represents the way in which the performance of the
Group is managed.
Strategic progress
The Group continued to explore and execute opportunities to
strengthen its competitive position in its four key categories and
top markets. During 2023, this included the acquisition of a highly
innovative nitric oxide technology platform and our plant network
optimisation to move manufacturing operations from the EuroTec
facility in Roosendaal, the Netherlands, to our larger site in
Michalovce, Slovakia.
The Group continued to strengthen its product pipeline, with
ConvaFoam(TM) launching in the US in January. Initial feedback from
clinical evaluations has been strong.
We are on track for further new product and customer launches in
2023 and 2024, including:
-- The Group is the sole supplier to Beta Bionics for the iLet
Bionic Pancreas which received FDA 510(k) clearance in May and is
set for commercial launch in the US in H2 2023
-- Extended Wear Infusion Set in US with Medtronic 780G which received FDA clearance in June
-- Tailored infusion set for Tandem's new Mobi pump in the US
which received FDA clearance in July
-- neria(TM) guard infusion set for AbbVie's ABBV-951
Parkinson's disease therapy, which launched in Japan in H2, with
Europe later this year subject to regulatory approval
-- GentleCath(TM) Air for Women 2.0 in Q4 2023
-- Esteem Body(TM) to be launched by Q1 2024 in the US
Acquisitions
On 18 April 2023, the Group completed its acquisition of
Starlight Science Limited (Starlight), a UK-based R&D company.
The acquisition of Starlight included the highly innovative
anti-infective nitric-oxide technology platform, which complements
the Group's Advanced Wound Care portfolio and has potential
applications across the Group's other categories. In addition to
the initial consideration of $56.7 million (GBP45.3 million), the
sellers may earn contingent consideration up to a maximum of $163.9
million (GBP131.0 million), in the form of (i) milestone payment of
$58.8 million (GBP47.0 million) due upon regulatory clearances in
the US and Europe; and (ii) earnout payments based on sales of
products over the lifetime of the acquired patents, with the
maximum earnout capped at $105.1 million (GBP84.0 million). Refer
to Note 5 - Acquisitions in the Condensed Consolidated Finance
Statements for further details.
During the period, the Group paid $94.7 million in respect of
contingent consideration associated with sales performance during
the first-year post-completion of the Triad Life Sciences
acquisition. Based on the latest available information, the
discounted fair value of the remaining contingent consideration as
at 30 June 2023 was $47.5 million (31 December 2022: $130.8
million). This is due to be paid by 2024, subject to achieving
specified measures under the Merger Agreement. Refer to Note 5 -
Acquisitions in the Condensed Consolidated Finance Statements for
further details.
The Group has contingent consideration of up to $10.0 million in
respect of the Cure Medical acquisition in 2021, which is based
upon post-acquisition performance targets and due to be paid by
2024. The discounted fair value of the contingent consideration as
at 30 June 2023 was $9.5 million (31 December 2022: $9.2
million).
Dividends
Dividends are distributed based on the realised distributable
reserves of the parent company, Convatec Group Plc ("the Company"),
which are primarily derived from dividends received from subsidiary
companies and are not based directly on the Group's retained
earnings. The realised distributable reserves of the Company at 30
June 2023 were $1,455.1 million (31 December 2022: $1,562.9
million). The factors considered by the Board that may influence
the proposed dividend are disclosed in Note 4 - Dividends in the
Condensed Consolidated Financial Statements.
The Board has decided to increase the interim 2023 dividend by
3% to 1.769 cents per share. Our stated policy is a pay-out ratio
of 35% to 45% of adjusted net profit but this is interpreted
flexibly over time to reflect the underlying performance of the
business. The decision to increase the dividend reflects the good
progress on pivoting to sustainable and profitable growth and
confidence in the Group's future prospects.
Cash Flow and Net Debt
Adjusted Adjusted
2023 2022
$m $m
--------- ---------
EBITDA(1) 261.5 251.7
Working capital movement(1) (124.2) (92.4)
(Loss)/gain on foreign exchange derivatives (1.9) 3.4
Adjusting items(2) (6.7) (9.2)
Capital expenditure (58.7) (64.1)
Free cash flow (pre-tax) (1,3) 70.0 89.4
Tax paid (16.2) (19.1)
Free cash to capital (1,3) 53.8 70.3
Net interest paid (28.4) (21.9)
Payment of lease liabilities (11.2) (10.4)
Other(4) (4.5) 3.8
Free cash to equity (1,3) 9.7 41.8
Dividends(5) (87.7) (58.9)
Acquisitions(6) (151.4) (178.9)
Movement in net debt (229.4) (196.0)
Net debt(1) at 1 January (excluding lease liabilities) (1,068.1) (881.2)
Net debt(1) at 30 June (excluding lease liabilities) (1,297.5) (1,077.2)
========= =========
1. These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measure
prepared in accordance with IFRS in the Non-IFRS financial
information section on pages 33 to 38.
2. Details of adjusting items are provided in the adjusting
items cash movement table in the Non-IFRS financial information
section.
3. The cash flow measures have also been simplified. 'Net cash
for cash conversion' has been renamed 'Free cash flow (pre-tax)'
and 'Free cash flow (post-tax)' has been renamed 'Free cash to
capital'. In addition, a new measure has been introduced, 'Free
cash to equity' (as defined in the table above). The Directors
consider that these changes result in consistency of cash flow
measures and provide improved definition, clarity and insight
4. Other consisted of financing fees amortisation $1.4 million
(H1 2022: $2.0 million), net FX loss on cash and borrowings of $3.6
million (H1 2022: $5.8 million gain) and proceeds from PPE sales of
$0.5 million (H1 2022: nil).
5. Dividend cash payments of $87.7 million were made to
shareholders in the period in respect of the 2022 final dividend.
This represented 94.9% of total dividends declared in the period,
with the remaining 5.1% electing to settle via scrip dividends.
6. Acquisition payments of $151.4 million consisted of the
initial consideration payment of $56.7 million in respect of the
acquisition of Starlight and $94.7 million in respect of the Year 1
earn out associated with the 2022 acquisition of Triad Life
Sciences.
EBITDA
Adjusted EBITDA increased by $9.8 million, largely driven by the
increase in reported operating profit of $36.3 million (as
explained in the net profit commentary) and a $10.4 million
reduction in impairment charges (which was higher in the prior
period due to the hospital care exit), being offset by reductions
in adjusting items of $14.9 million. A reconciliation of EBITDA to
adjusted EBITDA is provided in the Non-IFRS financial information
section.
Free cash flow (pre-tax)
Free cash flow (pre-tax) decreased by $19.4 million, with the
increase in EBITDA and reduction in capital expenditure being more
than offset by the increase in working capital.
The Group invested $58.7 million in capital expenditure to
further strengthen our manufacturing lines and digital
technologies.
The increase in adjusted working capital in the period ended 30
June 2023 was primarily driven by increased inventory levels of
$67.8 million and increases in trade and other receivables of $35.1
million. Increased inventory levels reflected strategic decisions
to build resilience of raw materials across the Group and the
planned stocking of finished goods for expected facility shutdowns,
new contract wins and the launch of ConvaFoam (TM) . Increases in
trade and other receivables reflected sales phasing and the timing
of receipts.
Cash conversion was 29.1% (H1 2022: 41.4%) and adjusted cash
conversion was 26.8% (H1 2022: 35.5%). Further details are provided
in the Non-IFRS financial information section. The decline in the
ratio primarily reflected the strategic decision to build inventory
for resilience, coupled with sales phasing and timing of receipts
from customers.
Free cash to equity
Free cash to equity reduced by $32.1 million. This was driven by
a reduction in free cash flow (pre-tax) of $19.4 million as
explained above, higher finance cost payments of $6.5 million due
to a combination of higher market interest rates and increase in
average net debt and a $8.3 million movement in other, primarily
due to net adverse foreign exchange movements on cash and cash
equivalents and borrowings.
Borrowings and net debt
31 December
30 June 2023 2022
$m $m
------------------------------------------------ ------------ -----------
Borrowings 1,374.0 1,211.9
Lease liabilities 91.1 88.3
------------------------------------------------ ------------ -----------
Total borrowings including lease liabilities 1,465.1 1,300.2
Cash and cash equivalents (76.5) (143.8)
------------------------------------------------ ------------ -----------
Total borrowings including lease liabilities,
net of cash 1,388.6 1,156.4
------------------------------------------------ ------------ -----------
Net debt (excluding lease liabilities) 1,297.5 1,068.1
------------------------------------------------ ------------ -----------
Net debt (excluding lease liabilities)/adjusted
EBITDA (1) 2.5 2.1
------------------------------------------------ ------------ -----------
1. Net debt excludes lease liabilities and adjusted EBITDA for
the twelve months to 30 June 2023 has been used in this
calculation.
As at 30 June 2023, the Group's cash and cash equivalents were
$76.5 million (31 December 2022: $143.8 million) and the debt
outstanding on borrowings was $1,374.0 million (31 December 2022:
$1,211.9 million).
The Group's banking facilities comprise of a multicurrency
revolving credit facility of $950.0 million and a term loan of
$250.0 million, both with maturity in November 2027. The Group's
$500.0 million senior unsecured notes, issued in October 2021,
remain in place with maturity in October 2029.
As at 30 June 2023, $312.0 million of the multicurrency
revolving credit facility remained undrawn (31 December 2022:
$472.8 million). This, combined with cash of $76.5 million (31
December 2022: $143.8 million), provided the Group with total
liquidity of $388.5 million at 30 June 2023 (31 December 2022:
$616.6 million). Of this, $20.8 million was held in territories
where there are restrictions related to repatriation (31 December
2022: $19.2 million).
The Group ended the period with total borrowings, including IFRS
16 lease liabilities, of $1,465.1 million (31 December 2022:
$1,300.2 million). Offsetting cash of $76.5 million (31 December
2022: $143.8 million) and excluding lease liabilities, net debt was
$1,297.5 million (31 December 2022: $1,068.1 million), equivalent
to 2.5x adjusted EBITDA (31 December 2022: 2.1x adjusted EBITDA),
with the increase being driven by strategic investments such as the
acquisition of Starlight, the Triad earn out payment and continued
investment in inventory and capital expenditure.
Covenants
At 30 June 2023, the Group was in compliance with all financial
and non-financial covenants associated with the Group's outstanding
debt.
Condensed Consolidated Interim Financial Statements
Condensed Consolidated Income Statement
Six months ended
30 June
------------------------
2023 2022
Notes $m $m
------------------------------------------- ----- ----------- -----------
(unaudited) (unaudited)
Revenue 2 1,055.5 1,044.5
Cost of sales (463.1) (489.6)
------------------------------------------- ----- ----------- -----------
Gross profit 592.4 554.9
------------------------------------------- ----- ----------- -----------
Selling and distribution expenses (304.7) (287.3)
General and administrative expenses (110.7) (119.1)
Research and development expenses (53.6) (47.2)
Other operating expenses - (14.2)
------------------------------------------- ----- ----------- -----------
Operating profit 123.4 87.1
------------------------------------------- ----- ----------- -----------
Finance income 2.2 0.7
Finance expense (47.7) (28.9)
Non-operating expense, net (1.9) (12.8)
------------------------------------------- ----- ----------- -----------
Profit before income taxes 76.0 46.1
Income tax (expense)/benefit 3 (20.3) 2.2
------------------------------------------- ----- ----------- -----------
Net profit for the period 55.7 48.3
------------------------------------------- ----- ----------- -----------
Earnings per share
Basic earnings per share (cents per share) 2.7c 2.4c
Diluted earnings per share (cents per
share) 2.7c 2.4c
------------------------------------------- ----- ----------- -----------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Condensed Consolidated Statement of Comprehensive Income
Six months ended
30 June
------------------------
2023 2022
Notes $m $m
------------------------------------------------- ------ ----------- -----------
(unaudited) (unaudited)
Profit for the period 55.7 48.3
Other comprehensive income/(expense)
Items that will not be reclassified subsequently
to the Consolidated Income Statement:
Fair value movements on equity investments (8.7) -
Items that may be reclassified subsequently
to the Consolidated Income Statement:
Foreign currency translation, net of tax 49.6 (110.8)
Effective portion of changes in fair value
of cash flow hedges - (7.7)
Costs of hedging - 0.2
Changes in fair value of cash flow hedges
reclassified to the Consolidated Income
Statement (1.1) 10.2
Income tax relating to items that may
be reclassified (0.1) (0.9)
--------------------------------------------------------- ----------- -----------
Other comprehensive income/(expense) 39.7 (109.0)
--------------------------------------------------------- ----------- -----------
Total comprehensive income/(expense) 95.4 (60.7)
--------------------------------------------------------- ----------- -----------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Condensed Consolidated Statement of Financial Position
30 June 31 December
2023 2022
Notes $m $m
--------------------------------- ----- ----------- -----------
(unaudited) (audited)
Assets
Non-current assets
Property, plant and equipment 432.8 400.4
Right-of-use assets 80.2 79.4
Intangible assets and goodwill 2,260.1 2,149.5
Investment in financial assets 22.0 30.7
Deferred tax assets 27.7 26.6
Derivative financial assets 7 0.5 0.2
Restricted cash 6.8 7.3
Other non-current receivables 9.9 8.6
--------------------------------- ----- ----------- -----------
2,840.0 2,702.7
--------------------------------- ----- ----------- -----------
Current assets
Inventories 407.5 336.9
Trade and other receivables 404.0 364.0
Derivative financial assets 7 11.0 26.4
Restricted cash 13.7 18.2
Cash and cash equivalents 76.5 143.8
--------------------------------- ----- ----------- -----------
912.7 889.3
--------------------------------- ----- ----------- -----------
Total assets 3,752.7 3,592.0
--------------------------------- ----- ----------- -----------
Equity and liabilities
Current liabilities
Trade and other payables 342.3 346.6
Lease liabilities 20.6 20.3
Current tax payable 36.7 33.5
Derivative financial liabilities 7 9.6 32.5
Provisions 8 128.3 100.2
--------------------------------- ----- ----------- -----------
537.5 533.1
--------------------------------- ----- ----------- -----------
Non-current liabilities
Borrowings 6 1,374.0 1,211.9
Lease liabilities 70.5 68.0
Deferred tax liabilities 97.9 83.2
Provisions 8 15.7 53.1
Derivative financial liabilities 7 - 0.3
Other non-current liabilities 31.4 32.7
--------------------------------- ----- ----------- -----------
1,589.5 1,449.2
--------------------------------- ----- ----------- -----------
Total liabilities 2,127.0 1,982.3
--------------------------------- ----- ----------- -----------
Net assets 1,625.7 1,609.7
--------------------------------- ----- ----------- -----------
Equity
Share capital 250.9 250.7
Share premium 170.2 165.7
Own shares (0.7) (1.5)
Retained deficit (928.9) (892.2)
Merger reserve 2,098.9 2,098.9
Cumulative translation reserve (127.5) (177.1)
Other reserves 162.8 165.2
--------------------------------- ----- ----------- -----------
Total equity 1,625.7 1,609.7
--------------------------------- ----- ----------- -----------
Total equity and liabilities 3,752.7 3,592.0
--------------------------------- ----- ----------- -----------
Condensed Consolidated Statement of Changes in Equity
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 2023
(audited) 250.7 165.7 (1.5) (892.2) 2,098.9 (177.1) 165.2 1,609.7
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Profit for the
period - - - 55.7 - - - 55.7
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
income/(expense):
Foreign currency
translation adjustment,
net of tax - - - - - 49.6 - 49.6
Changes in fair
value of cash flow
hedges, net of
tax - - - - - - (1.2) (1.2)
Change in fair
value of equity
investments - - - - - - (8.7) (8.7)
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
income/(expense) - - - - - 49.6 (9.9) 39.7
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Total comprehensive
income/ (expense) - - - 55.7 - 49.6 (9.9) 95.4
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Dividends paid 4 - - - (87.7) - - - (87.7)
Scrip dividend 4 0.2 4.5 - (4.7) - - - -
Share-based payments - - - - - - 7.4 7.4
Share awards vested - - 0.8 - - - 0.1 0.9
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
At 30 June 2023
(unaudited) 250.9 170.2 (0.7) (928.9) 2,098.9 (127.5) 162.8 1,625.7
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
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 2022
(audited) 247.0 142.3 (2.2) (842.0) 2,098.9 (75.7) 126.5 1,694.8
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Profit for the
period - - - 48.3 - - - 48.3
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
(expense)/income:
Foreign currency
translation adjustment,
net of tax - - - - - (110.8) - (110.8)
Changes in fair
value of cash flow
hedges, net of
tax - - - - - - 1.8 1.8
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Other comprehensive
(expense)/income - - - - - (110.8) 1.8 (109.0)
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Total comprehensive
(expense)/income - - - 48.3 - (110.8) 1.8 (60.7)
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Dividends paid 4 - - - (58.9) - - - (58.9)
Scrip dividend 4 0.9 18.0 - (18.9) - - - -
Allotment of shares
to Employee Benefit
Trust 2.6 - (2.6) - - - - -
Share-based payments - - - - - - 8.1 8.1
Share awards vested - - 2.6 - - - (2.5) 0.1
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
At 30 June 2022
(unaudited) 250.5 160.3 (2.2) (871.5) 2,098.9 (186.5) 133.9 1,583.4
------------------------- ----- -------- -------- ------- -------- -------- ------------ --------- -------
Condensed Consolidated Statement of Cash Flows
Six months ended 30 June
--------------------------
2023 2022
Notes $m $m
---------------------------------------------- ----- ------------ ------------
Cash flows from operating activities (unaudited) (unaudited)
Profit for the period 55.7 48.3
Adjustments for
Depreciation of property, plant and equipment 18.3 20.0
Depreciation of right-of-use assets 11.4 11.0
Amortisation of intangible assets 76.4 75.6
Income tax expense/(benefit) 3 20.3 (2.2)
Non-operating expense, net - 16.2
Finance costs, net 45.5 28.2
Share-based payments 7.5 8.2
Impairment/write-off of intangible assets - 5.6
Impairment/write-off of right-of-use assets 1.9 -
Impairment/write-off of property, plant and
equipment 1.9 8.6
Change in assets and liabilities:
Inventories (63.5) (21.6)
Trade and other receivables (35.1) (32.3)
Derivative financial assets 13.9 (6.8)
Other non-current receivables (0.3) 3.3
Restricted cash 5.0 (13.5)
Trade and other payables (5.1) (10.4)
Derivative financial liabilities (22.9) 10.2
Other non-current payables (2.2) 5.1
---------------------------------------------- ----- ------------ ------------
Net cash generated from operations 128.7 153.5
Interest received 2.2 0.7
Interest paid (30.6) (22.6)
Income taxes paid (16.2) (19.1)
---------------------------------------------- ----- ------------ ------------
Net cash generated from operating activities 84.1 112.5
---------------------------------------------- ----- ------------ ------------
Cash flows from investing activities
Acquisition of property, plant and equipment
and intangible assets (58.7) (64.1)
Acquisitions, net of cash acquired 5 (56.7) (123.2)
Proceeds from sale of property, plant and
equipment and other assets 0.5 -
Payment of contingent consideration arising
from acquisitions 5 (94.7) (25.0)
Investment in financial assets - (30.7)
---------------------------------------------- ----- ------------ ------------
Net cash used in investing activities (209.6) (243.0)
---------------------------------------------- ----- ------------ ------------
Cash flows from financing activities
Proceeds from borrowings 6 158.7 15.5
Payment of lease liabilities (11.2) (10.4)
Dividends paid 4 (87.7) (58.9)
---------------------------------------------- ----- ------------ ------------
Net cash generated from/(used in) financing
activities 59.8 (53.8)
---------------------------------------------- ----- ------------ ------------
Net change in cash and cash equivalents (65.7) (184.3)
Cash and cash equivalents at beginning of
the period 143.8 463.4
Effect of exchange rate changes on cash
and cash equivalents (1.6) (7.5)
---------------------------------------------- ----- ------------ ------------
Cash and cash equivalents at end of the
period 76.5 271.6
---------------------------------------------- ----- ------------ ------------
1. Basis of preparation and accounting standards
Convatec Group Plc (the "Company") is a public limited company
incorporated in the United Kingdom. The accompanying unaudited
Condensed Consolidated Interim Financial Statements of the Company
and its subsidiaries (the "Group") for the six months ended 30 June
2023 have been prepared in accordance with the Disclosure and
Transparency Rules of the Financial Conduct Authority and with IAS
34 Interim Financial Reporting as adopted by the United Kingdom.
The Group has prepared the financial statements on the basis that
it will continue to operate as a going concern. The Directors
consider that there are no material uncertainties that may cast
significant doubt over this assumption. They have formed a
judgement that there is a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future, and not less than 12 months from the end of the
reporting period.
The Condensed Consolidated Interim Financial Statements should
be read in conjunction with the 2022 Convatec Group Plc Annual
Report and Accounts, which were prepared in accordance with the
United Kingdom adopted international accounting standards.
These Condensed Consolidated Interim Financial Statements and
the comparatives are unaudited, except where otherwise indicated,
and do not constitute statutory financial statements. The statutory
financial statements for the Group in respect of the year ended 31
December 2022 have been reported on by the Group's auditor and
delivered to the Registrar of Companies. The audit report on those
accounts was (i) unqualified, (ii) did not include a reference to
any matters to which the auditor drew attention by way of emphasis
without qualifying their report, and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act
2006.
The auditors have carried out a review of the Condensed
Consolidated Interim Financial Statements in accordance with the
guidance contained in ISRE (UK and Ireland) 2410 'Review of Interim
Financial Information Performance by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom.
The Condensed Consolidated Interim Financial Statements are
presented in US dollars (USD), reflecting the profile of the
Group's revenue and operating profit, which are primarily generated
in US dollars and US dollar-linked currencies. All values are
rounded to the nearest $0.1 million except where otherwise
indicated.
The Condensed Consolidated Interim Financial Statements for the
six months ended 30 June 2023 were approved by the Board on 1
August 2023.
New standards and interpretations applied for the first time
The accounting policies adopted by the Group in preparation of
these Condensed Consolidated Interim Financial Statements are
consistent with those set out in the 2022 Annual Report and
Accounts, except for the adoption of new standards effective as of
1 January 2023. The Group has not early adopted any standard,
interpretation or amendment that has been issued but is not yet
effective.
On 1 January 2023, the Group adopted the new IFRS 17 Insurance
Contracts standard and the four amendments, Definition of
Accounting Estimates - Amendments to IAS 8, Disclosure of
Accounting Policies - Amendments to IAS 1, IFRS Practice Statement
2, Deferred Tax related to Assets and Liabilities arising from a
Single Transaction - Amendments to IAS 12, and International Tax
Reform - Pillar Two Model Rules - Amendments to IAS 12, and the
annual improvements to the IFRS standards 2018-2020. The adoptions
had no material impact on the Group's Condensed Consolidated
Interim Financial Statements.
New standards and interpretations not yet applied
There were no new or revised IFRSs, amendments or
interpretations in issue but not yet effective that are potentially
material for the Group and which have not yet been applied.
Going concern
In preparing their assessment of going concern, the Directors
have considered available cash resources, financial actual and
forecast performance, including strategy delivery, together with
the Group's financial covenant compliance requirements and
principal risks and uncertainties. The Group's liquidity remained
strong as management continues to monitor its liquidity
requirements to ensure there is sufficient cash to meet operational
needs and maintain adequate headroom.
The Board has reviewed the downside scenarios as disclosed in
the 2022 Annual Report and Accounts and has concluded that these
scenarios remain aligned to the Group's principal risks and
continue to adequately reflect the financial risk of downside
events and circumstances during the going concern period. Under
each scenario the Group retains significant liquidity and covenant
headroom throughout the going concern period.
The Board has carried out reverse stress test against the
forecast base case to determine the performance levels that would
result in a breach of covenants and considered a breach to be
implausible given the Group's strong global market position and
diversified portfolio of products and the mitigations available to
the Board and management, which include minimising capital
expenditure to critical requirements and reducing levels of
discretionary spend.
Accordingly, at the time of approving these Condensed
Consolidated Interim Financial Statements, the Directors have a
reasonable expectation that the Group will have adequate liquid
resources to meet their respective liabilities as they become due
and will be able to sustain its business model, strategy and
operations and remain solvent for a period of at least 12 months
from 1 August 2023.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of the Condensed Consolidated Interim Financial
Statements requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and
the reported value of assets and liabilities, income and expense.
Actual results may differ from these estimates or judgements of
likely outcome. Management regularly reviews, and revises as
necessary, the accounting judgements that significantly impact the
amounts recognised in the Condensed Consolidated Interim Financial
Statements and the sources of estimation uncertainty that are
considered to be "key estimates" due to their potential to give
rise to material adjustments in the Group's Consolidated Financial
Statements within the next financial year.
In preparing the Condensed Consolidated Interim Financial
Statements, no critical accounting judgements have been identified,
which is consistent with the Consolidated Financial Statements for
the year ended 31 December 2022.
Valuation of the contingent consideration in relation to the
acquisition of Triad
The valuation of the contingent consideration in relation to the
acquisition of Triad in 2022 has been identified as a key estimate.
The contingent consideration is based on both specified
post-acquisition financial and non-financial performance targets as
defined by the purchase agreement. Management have identified that
reasonably possible changes in certain key assumptions and
forecasts may cause the calculated fair value of the contingent
consideration to vary materially within the next financial
year.
The contingent consideration is fair valued at each reporting
period with key inputs including a weighted probability of
different scenarios and revenue projections based on internal
forecasts, discounted using appropriate discount rates. Actual
revenue results may differ from estimates, leading to a change in
the fair value of the contingent consideration. Management have
determined that the potential range of discounted outcomes within
the next financial year is between nil and $153.8 million, from a
maximum undiscounted contingent consideration of $180.3 million.
The estimated discounted fair value of the remaining contingent
consideration payable as at 30 June 2023 was $47.5 million.
The timing and amount of future contingent elements of
consideration is therefore considered a key source of estimation
uncertainty. Refer to Note 5 - Acquisitions for more
information.
2. Segment information
The Board considers the Group's business to be a single segment entity
engaged in the development, manufacture and sale of medical products
and technologies. R&D, manufacturing and central support functions
are managed globally for the Group. Revenues are managed both on
a category and geographic basis. This note presents the performance
and activities of the Group as a single segment.
During the period to 30 June 2023, management reassessed its
Chief Operating Decision Maker (CODM) and determined that the Chief
Executive Officer is no longer the Group's CODM and that Convatec's
Executive Leadership Team (CELT) is the function that allocates
resources and evaluates the Group's global product portfolios on a
revenue basis and evaluates profitability and associated investment
on an enterprise-wide basis due to shared infrastructures and
support functions between the categories. Financial information in
respect of revenues provided to the CELT for decision-making
purposes is made on both a category and geographic basis. Resources
are allocated on a Group-wide basis, with a focus on both category
and the key markets but primarily based on the merits of individual
proposals. The change in CODM does not impact the Group's single
segment assessment.
Revenue by category
The following table sets out the Group's revenue by
category:
Six months ended
30 June
------------------
2023 2022(1)
$m $m
------------------------------------- -------- --------
Advanced Wound Care 338.5 306.7
Ostomy Care 300.0 298.0
Continence Care 220.7 205.7
Infusion Care 186.3 173.8
------------------------------------- -------- --------
Revenue excluding hospital care exit 1,045.5 984.2
Revenue from hospital care exit 10.0 60.3
------------------------------------- -------- --------
Total 1,055.5 1,044.5
------------------------------------- -------- --------
1. Following the exit of hospital care in 2022, effective from 1
January 2023, Flexi-Seal(TM) , our faecal management system, moved
from Continence & Critical Care to Ostomy Care. The remaining
industrial sales, predominantly continence-related supplies for B2B
customers moved from Infusion Care to Continence Care. Continence
& Critical Care has been renamed to Continence Care. The H1
2022 comparatives have been re-presented to reflect these changes
and to separately disclose revenue associated with the hospital
care exit.
Revenue by geography
The following table sets out the Group's revenue by regional
geographic market in which third-party customers are located:
Six months ended
30 June
------------------
2023 2022
$m $m
---------------------- -------- --------
North America 572.5 527.0
Europe 327.8 363.7
Rest of World ("RoW") 155.2 153.8
---------------------- -------- --------
Total 1,055.5 1,044.5
---------------------- -------- --------
3. Income taxes
The Group's income tax expense is accrued using the tax rate that
would be applicable to expected annual total earnings (i.e. the estimated
average annual effective income tax rate applied to the profit before
tax).
The tax charge for the six months ended 30 June 2023 has been
calculated by applying the effective rate of tax which is expected
to apply to the Group for the year ending 31 December 2023 using
rates substantively enacted as at 30 June 2023.
For the six months ended 30 June 2023, the Group recorded an
income tax expense of $20.3 million (30 June 2022: $2.2 million
benefit). The Group's reported effective tax rate for the period
ended 30 June 2023 was an expense of 26.7% as compared with a
benefit of 4.8% for the period ended 30 June 2022. The current year
tax expense includes the effect of non-deductible
acquisition-related costs. The prior year benefit included a net
tax benefit in respect of previously unrecognised tax losses in the
US, which was partially offset by the tax expense on the
utilisation of US Federal tax losses that were fully recognised as
a deferred tax asset following the acquisition of Triad.
The Group continues to believe it has made adequate provision
for uncertain tax positions on open issues in accordance with IFRIC
23 Uncertainty over Income Tax Treatments. The ultimate liability
for such matters may vary from the amounts provided and is
dependent upon the outcome of discussions with relevant tax
authorities or, where applicable, appeal proceedings.
The Group continues to monitor tax reforms driven by the OECD's
BEPS Pillar 1 and 2 project to reform international taxation rules.
The Group's assessment of the potential tax impact to the Group
based on OECD model rules and draft legislations available in
jurisdictions which the Group operates in, remains unchanged to the
position as at 31 December 2022 (Refer to Note 6.2 within the 2022
Annual Report and Accounts). Since then, the UK has substantively
enacted the legislation to implement the Pillar 2 rules as from 1
January 2024. The Group will reassess the tax impact once new
legislation becomes available in other jurisdictions which the
Group operates in, particularly those expected in the next six
months. This has no impact on the Group's result for the six months
ended 30 June 2023. The Group has applied the temporary exception
as detailed in the IASB announcement "International Tax
Reform-Pillar Two Model Rules", which amended IAS 12 Income Taxes,
and therefore has not recognised nor disclosed information about
deferred tax assets and liabilities related to Pillar 2 income
taxes.
4. Dividends
The Board ensures that adequate realised distributable reserves are
available in the Company in order to meet proposed shareholder dividends,
and the purchase of shares for employee share scheme incentives.
The Company principally derives distributable reserves from dividends
received from subsidiary companies.
In determining the level of dividend in the year, the Board considers
the following factors and risks that may influence the proposed dividend:
- The underlying performance of the business;
- The Board's confidence in the Group's future growth prospects;
- Availability of realised distributable reserves;
- Available cash resources and commitments;
- Strategic opportunities and investments, in line with the Group's
strategic plan; and
- Principal risks of the Group.
The Board paid the 2022 final dividend in May 2023. In declaring
the 2023 interim dividend, the Board has taken into consideration
balancing the return to shareholders, the potential impact on other
stakeholders and the additional investment in transformation in the
period. The Board reviewed the financial strength of the Group, the
Group's dividend policy together with s172 considerations and has
reviewed the realised distributable reserves position of the Company
and the forecast cash generation of the Group for the next two years
from the date of the dividend payment.
Dividends paid and proposed were as follows:
Settled
in Settled
Total cash via scrip
---------------- ---------------- --------------
pence cents No of scrip
per share per share $m $m $m shares issued
---------------------- ---------------- ---------------- ------------------ ------- ---------- --------------
Final dividend 2021 3.161 4.154 77.8 58.9 18.9 7,192,010
Interim dividend 2022 1.410 1.717 34.8 29.2 5.6 2,107,103
---------------------- ---------------- ---------------- ------------------ ------- ---------- --------------
Paid in 2022 4.571 5.871 112.6 88.1 24.5 9,299,113
---------------------- ---------------- ---------------- ------------------ ------- ---------- --------------
Final dividend 2022 3.657 4.330 92.4 87.7 4.7 1,717,549
---------------------- ---------------- ---------------- ------------------ ------- ---------- --------------
Paid in 2023 to date 3.657 4.330 92.4 87.7 4.7 1,717,549
---------------------- ---------------- ---------------- ------------------ ------- ---------- --------------
Interim dividend 2023
proposed 1.380 1.769 36.2
---------------------- ---------------- ---------------- ------------------ ------- ---------- --------------
The Company operates a scrip dividend scheme allowing
shareholders to elect to receive their dividend in the form of new
fully paid ordinary shares. For any particular dividend, the
Directors may decide whether or not to make the scrip offer
available.
The proposed interim dividend for 2023, to be distributed on 28
September 2023 to shareholders registered at the close of business
on 18 August 2023 is based upon the issued and fully paid share
capital as at 30 June 2023. The dividend will be declared in US
dollars and will be paid in Sterling at the chosen exchange rate of
$1.282/GBP1.00 determined on 1 August 2023. A scrip dividend
alternative will be offered allowing shareholders to elect by 7
September 2023 to receive their dividend in the form of new
ordinary shares.
5. Acquisitions
Starlight Science Limited (Starlight)
Description of the transaction
On 18 April 2023, the Group completed its acquisition of 100% of
the share capital of Starlight Science Limited (Starlight), a
UK-based company that was owned by 30 Technology Limited. The
business acquisition of Starlight included the anti-infective
nitric-oxide technology platform and new product pipeline, which
complements the Group's Advanced Wound Care portfolio and
strengthens the Group's ability to provide best-in-class solutions
for patients.
The total undiscounted maximum consideration is $220.6 million
(GBP176.3 million). In addition to the initial consideration of
$56.7 million (GBP45.3 million), the sellers may earn contingent
consideration up to a maximum of $163.9 million (GBP131.0 million),
in the form of (i) milestone payment of $58.8 million (GBP47.0
million) due upon regulatory clearances in the US and Europe; and
(ii) earnout payments based on sales of products over the lifetime
of the acquired patents, with the maximum earnout capped at $105.1
million (GBP84.0 million).
The discounted fair value of the contingent consideration at the
date of acquisition was $66.3 million. Following completion of
acquisition accounting, any changes in the fair value of the
contingent consideration will be recorded in the Condensed
Consolidated Income Statement in accordance with the Group's
accounting policies.
Assets acquired and liabilities assumed
The transaction meets the definition of a business combination
and has been accounted for under the acquisition method of
accounting. The following table summarises the provisional fair
values of the assets acquired and liabilities assumed as of the
acquisition date:
$m
Provisional
--------------------------------------------------------- -----------
Non-current assets
Property, plant and equipment 0.4
Right-of-use assets 1.3
Intangible assets - product related 113.3
Current assets
Trade and other receivables 0.1
--------------------------------------------------------- -----------
Total assets acquired 115.1
Current liabilities
Trade and other payables (0.1)
Lease liabilities (0.2)
Non-current liabilities
Lease liabilities (1.1)
Deferred tax liabilities (12.5)
--------------------------------------------------------- -----------
Total liabilities assumed (13.9)
--------------------------------------------------------- -----------
Net assets acquired 101.2
--------------------------------------------------------- -----------
Goodwill 21.8
--------------------------------------------------------- -----------
Total 123.0
--------------------------------------------------------- -----------
Initial cash consideration 56.7
Contingent consideration 66.3
--------------------------------------------------------- -----------
Total consideration 123.0
--------------------------------------------------------- -----------
Analysis of cash outflow in the Condensed Consolidated $m
Statement of Cash Flows
--------------------------------------------------------- -----------
Initial cash consideration 56.7
--------------------------------------------------------- -----------
Net cash outflow from acquisitions, net of cash acquired 56.7
--------------------------------------------------------- -----------
The fair values of the assets acquired and liabilities assumed
remain provisional as at 30 June 2023 due to the proximity of the
acquisition to the date of approval of the Condensed Consolidated
Financial Statements. The Group will finalise these amounts as it
obtains the information necessary to complete the measurement
process. Any changes resulting from facts and circumstances that
existed as of the acquisition date may result in retrospective
adjustments to the provisional amounts recognised at the
acquisition date. The Group will finalise these amounts no later
than one year from the acquisition date.
The goodwill recorded, which is partially deductible for tax
purposes, represents the cost savings, operating synergies and
future growth opportunities expected to result from combining the
operations of Starlight with those of the Group. The Starlight
acquisition is included in the Advanced Wound Care CGU group.
The carrying value of the Group's goodwill increased to $1,271.6
million at 30 June 2023 (31 December 2022: $1,224.6 million) as a
result of the acquisition of Starlight ($21.8 million) and foreign
exchange movements ($25.2 million).
Acquisition-related costs
The Group incurred $5.0 million of acquisition-related costs
directly related to the Starlight acquisition in the period to 30
June 2023, primarily related to advisors' fees. These
acquisition-related costs have been recognised in general and
administrative expenses in the Condensed Consolidated Income
Statement.
Revenue and profit
As Starlight is in a pre-commercial state, there is no revenue
to date. The loss for the period from the acquisition date to 30
June 2023 was $0.5 million, before recognising acquisition-related
intangible asset amortisation charge of $1.9 million. If the
acquisition had been completed at 1 January 2023, reported Group
revenue would not have changed and the Group profit for the period
would have been $0.6 million lower for the six month period to 30
June 2023, before recognising acquisition-related intangible asset
amortisation additional charge of $1.9 million.
Triad Life Sciences
On 14 March 2022, the Group completed its acquisition of 100% of
the share capital of Triad Life Sciences.
Fair value of contingent consideration at reporting date
The discounted fair value of the remaining contingent
consideration at 30 June 2023 was $47.5 million (31 December 2022:
$130.8 million). During the period, $94.7 million was paid in
respect of the Year 1 Earn out, as calculated in accordance with
the terms of the Merger Agreement.
Management reviewed the fair value of the remaining contingent
consideration, based on the most recent Board approved strategic
plan and forecast information. Consequently, the discounted fair
value of the remaining contingent consideration in respect of the
Year 2 Earn out was increased to $47.5 million, with a
remeasurement charge of $2.1 million being recognised in
non-operating expenses in the Condensed Consolidated Income
Statement.
The amount of discount unwind recognised in the Condensed
Consolidated Income Statement during the period was $3.5 million
and shown within finance expenses. Refer to Note 8 - Provisions for
the movement in the contingent consideration during the period.
This is due to be paid within three years of the acquisition
date, subject to achieving the specified targets. Any changes in
fair value at each reporting date will be recorded in the
Consolidated Income Statement in accordance with the Group's
accounting policy. Management have determined that the potential
range of discounted outcomes is between $nil and $153.8 million,
from a maximum undiscounted contingent consideration of $180.3
million.
Fair value inventory uplift
As part of the initial acquisition accounting, a $10.2 million
fair value uplift was applied to the carrying value of inventory
held at the acquisition date, of which $8.7 million was expensed in
the year ended 31 December 2022. The fair value adjustment related
to work-in-progress and finished goods and was calculated as the
estimated selling price less costs to complete and sell the
inventory, associated margins on these activities, and holding
costs.
During the period ended 30 June 2023, the remaining $1.5 million
was expensed to cost of goods sold in the Condensed Consolidated
Income Statement.
Cure Medical
On 15 March 2021, the Group acquired 100% of the share capital
of Cure Medical.
Fair value of contingent consideration at reporting dates
As at 31 December 2022, the Group had provided for the maximum
contingent consideration of $10.0 million, which was discounted to
$9.2 million. Management have reviewed the expectation of the
contingent consideration based on the most recent Board-approved
strategic plan and forecast information and the forecast financial
performance is expected to exceed original expectations.
The discounted fair value of the contingent consideration as at
30 June 2023 was $9.5 million. The amount of discount unwind
recognised within finance expenses in the Condensed Consolidated
Income Statement during the period was $0.3 million.
6. Borrowings
The Group's sources of borrowing for funding and liquidity purposes
derive from senior notes and credit facilities, including a committee
revolving credit facility.
The Group's consolidated borrowings were as follows:
30 June 31 December
2023 2022
Year of
maturity Face value Face value
----------
Currency $m $m
---------------------------------- -------------- ---------- ---------- -----------
Revolving Credit Facility(1) Multicurrency 2027 638.0 477.2
Term Loan USD 2027 250.0 250.0
Senior Notes USD 2029 500.0 500.0
---------------------------------- -------------- ---------- ---------- -----------
Interest-bearing borrowings 1,388.0 1,227.2
Financing fees(2) (14.0) (15.3)
-------------------------------------------------------------- ---------- -----------
Carrying value of borrowings 1,374.0 1,211.9
-------------------------------------------------------------- ---------- -----------
Current portion of borrowings - -
Non-current portion of borrowings 1,374.0 1,211.9
-------------------------------------------------------------- ---------- -----------
1. Included within the Revolving Credit Facility as at 30 June
2023 was EUR105.0 million ($114.5 million), representing 18% of RCF
debt denominated in Euros and 82% denominated in US dollars. As at
31 December 2022, this was EUR145.0 million ($155.2million),
representing 32.5% of RCF debt denominated in Euros and 67.5%
denominated in US dollars.
2. Financing fees of $14.0 million (31 December 2022: $15.3
million) related to the remaining unamortised fees incurred on the
credit facilities and senior notes.
Credit facilities
The Group's credit facility for $1.2 billion comprises of a
$250.0 million term loan and a $950.0 million multicurrency
revolving credit facility, both committed for a five-year term. As
at 30 June 2023, the term loan was fully drawn and $638.0 million
of the revolving credit facility was drawn, with $312.0 million
undrawn.
The principal financial covenants are based on a permitted net
debt to covenant-adjusted EBITDA(1) ratio and interest cover test
as defined in the credit facilities agreement. Testing is required
on a semi-annual basis, at June and December, based on the last 12
months' financial performance. At 30 June 2023, the permitted net
debt to covenant-adjusted EBITDA(1) ratio was a maximum of 3.50
times and the interest cover a minimum of 3.50 times, terms as
defined by the credit facilities agreement. In accordance with the
credit facilities agreement, the net debt to covenant-adjusted
EBITDA(1) ratio can increase to a maximum 4.00 times for permitted
acquisitions or investments.
Senior notes
Unsecured senior notes of $500.0 million are subject to an
interest cover financial covenant as defined in the indentures
which is a minimum of 2.0 times, with testing required annually at
31 December on the last 12 calendar months' financial
performances.
Financial covenants
The Group was in compliance with all financial and non-financial
covenants at 30 June 2023, with significant available headroom on
the financial covenants (in excess of $380.0 million debt headroom
on the net debt to covenant-adjusted EBITDA(1) ).
Borrowings measured at fair value
The senior notes are listed and their fair value at 30 June 2023
of $437.6 million (31 December 2022: $430.8 million) has been
obtained from quoted market data and therefore categorised as a
Level 1 measurement in the fair value hierarchy under IFRS 13 Fair
Value Measurements. For the Group's other borrowings, the fair
value is based on discounted cash flows using a current borrowing
rate and is categorised as a Level 2 measurement. As at 30 June
2023, the estimated fair value of the Group's other borrowings was
$926.9 million (31 December 2022: $762.4 million).
(1.) Covenant-adjusted EBITDA is calculated based on terms as
defined in the credit facilities agreement. This is different to
adjusted EBITDA, which is an alternative performance measure
(APM).
7. Financial instruments
A derivative financial instrument is a contract that derives its
value from the performance of an underlying variable, such as foreign
exchange rates or interest rates. The Group uses derivative financial
instruments to manage foreign exchange and interest rate risk arising
from its operations and financing. Derivative financial instruments
used by the Group are foreign exchange forwards and interest rate
swaps.
The Group utilises interest rate swap agreements, designated as cash
flow hedges, to manage its exposure to variability in expected future
cash outflows attributable to the changes in interest rates on the
Group's committed borrowing facilities.
Financial instruments are classified as Level 1, Level 2, or
Level 3 in the fair value hierarchy in accordance with IFRS 13 Fair
Value Measurements, based upon the degree to which the fair value
movements are observable. Level 1 fair value measures are defined
as those with quoted (unadjusted) market prices in active markets
for identical assets or liabilities. 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). Level 3 fair value measurements are
defined as those derived from significant unobservable inputs. The
only instrument classified as Level 1 are the senior notes, given
the availability of quoted market price (Note 6 - Borrowings). The
Group's derivative financial instruments, discussed below, are
classified as Level 2, and the Group's equity investment in
preference shares, together with contingent consideration arising
on business combinations (Note 5 - Acquisitions), are classified as
Level 3.
The Group holds interest rate swap agreements to fix a
proportion of variable interest on US dollar-denominated debt, in
accordance with the Group's risk management policy. The interest
rate swaps are designated as hedging instruments in a cash flow
hedging relationship.
In accordance with Group policy, the Group uses forward foreign
exchange contracts, designated as cash flow hedges, to hedge
certain forecast third-party foreign currency transactions for up
to one year. When a commitment is entered into, a layered approach
is taken when hedging the currency exposure, ensuring that no more
than 100% of the transaction exposure is covered. The currencies
hedged by forward foreign exchange contracts are US dollars, Swiss
francs, Pound sterling, Danish krone and Japanese yen.
The Group further utilises foreign exchange contracts and swaps
classified as fair value through profit or loss (FVTPL) to manage
short-term foreign exchange exposure.
Cash flow hedges
The fair values are based on market values of equivalent
instruments. The following table presents the Group's outstanding
interest rate swaps, which are designated as cash flow hedges, at
30 June 2023 and 31 December 2022 respectively:
30 June 2023 31 December 2022
-------------------------- --------------------------
Fair value(1) Fair value(1)
Notional assets Notional assets
amount / (liabilities) amount / (liabilities)
---------- ---------
Effective Maturity
date date $m $m $m $m
----------------------------- ---------- --------- -------- ---------------- -------- ----------------
3 Month LIBOR Float
to Fixed Interest Rate 24 Jan 24 Jan
Swap 2020 2023 - - 275.0 2.0
6 Month term SOFR Float
to Fixed Interest Rate 23 Jan 23 Jan
Swap 2023 2024 90.0 0.4 90.0 0.2
6 Month term SOFR Float
to Fixed Interest Rate 23 Jan 23 July
Swap 2023 2024 40.0 0.3 40.0 -
6 Month term SOFR Float
to Fixed Interest Rate 23 Jan 23 Jan
Swap 2023 2025 50.0 0.2 50.0 (0.3)
----------------------------- ---------- --------- -------- ---------------- -------- ----------------
Disclosed as:
----------------------------- ---------- --------- -------- ---------------- -------- ----------------
Non-current derivative
financial asset 0.5 0.2
Current derivative financial
asset 0.4 2.0
Non-current derivative
financial liability - (0.3)
Current derivative financial - -
liability
---------------------------------------------------- -------- ---------------- -------- ----------------
1. The fair values of the interest rate swaps are shown in
current derivative financial liabilities in the Condensed
Consolidated Statement of Financial Position. There is no
ineffectiveness recognised in the Condensed Consolidated Income
Statement.
Foreign exchange forward contracts
The following table presents the Group's outstanding foreign
exchange forward contracts valued at FVTPL and foreign currency
forward contracts designated as cash flow hedges, which form part
of current derivative financial assets and current derivative
financial liabilities:
30 June 2023 31 December 2022
-------------------------- --------------------------
Fair
value Fair value
Notional assets Notional assets
amount / (liabilities) amount / (liabilities)
------------
Term $m $m $m $m
-------------------------------------- ------------ -------- ---------------- -------- ----------------
Foreign exchange contracts designated
as FVTPL <= 3 months 571.2 7.9 996.6 21.3
Foreign currency forward exchange
contracts designated as cash flow <= 12
hedges months 119.7 2.7 72.7 3.1
-------------------------------------- ------------ -------- ---------------- -------- ----------------
Derivative financial assets 690.9 10.6 1,069.3 24.4
---------------------------------------------------- -------- ---------------- -------- ----------------
Foreign exchange contracts designated
as FVTPL <= 3 months 468.7 (7.9) 703.7 (30.2)
Foreign currency forward exchange
contracts designated as cash flow <= 12
hedges months 76.7 (1.7) 132.8 (2.3)
-------------------------------------- ------------ -------- ---------------- -------- ----------------
Derivative financial liabilities 545.4 (9.6) 836.5 (32.5)
---------------------------------------------------- -------- ---------------- -------- ----------------
8. Provisions
A provision is an obligation recognised when there is uncertainty
over the timing or amount that will be paid. Provisions held by
the Group are primarily in respect of restructuring, dilapidations,
legal liabilities and contingent consideration relating to acquisitions.
The movements in provisions are as follows:
Contingent
Dilapidations Restructuring Legal consideration Total
$m $m $m $m $m
------------------------- ------------- ------------- ----- -------------- ------
1 January 2023 2.8 10.3 0.2 140.0 153.3
Contingent consideration
from acquisitions - - - 66.3 66.3
Charged/(released)
to the income statement 0.6 8.3 0.1 2.1 11.1
Utilised (1.2) (3.6) - (94.7) (99.5)
Discount unwind - - - 11.6 11.6
Foreign exchange - 0.2 - 1.0 1.2
------------------------- ------------- ------------- ----- -------------- ------
30 June 2023 2.2 15.2 0.3 126.3 144.0
------------------------- ------------- ------------- ----- -------------- ------
Current provision - 15.2 - 113.1 128.3
Non-current provision(1) 2.2 - 0.3 13.2 15.7
------------------------- ------------- ------------- ----- -------------- ------
1. The expected timings of the payment of contingence
considerations are disclosed in Note 5 - Acquisitions. The timing
for other non-current provisions is undefined.
Dilapidation provisions
Dilapidation provisions are in respect of contractual
obligations, on the expiry of a lease, to return leased properties
in the condition which is specified in the individual leases.
Restructuring provisions
Restructuring provisions related mainly to the exit from
low-margin hospital care and industrial sales activities announced
in 2022, the move and integration of the EuroTec facility in
Netherlands to our Slovakia plant as part of the transformation
journey, and the facilities optimisation programme. All
restructuring provisions are supported by detailed plans and a
valid expectation has been raised in those affected as required by
the Group's accounting policy.
Legal provision
Legal provision of $0.3 million is in respect of ongoing cases.
Legal issues are often subject to uncertainties over the timing and
the final amounts of any settlement.
Contingent consideration
Contingent consideration arising from business combinations is
fair valued on acquisition and at each reporting period.
As a result of the acquisition of Starlight on 18 April 2023,
the sellers may earn contingent consideration as described in Note
5 - Acquisitions. The discounted fair value of the contingent
consideration at the date of acquisition was $66.3 million. During
the period to 30 June 2023, $2.0 million of discount unwind was
recognised in the Condensed Consolidated Income Statement.
As at 30 June 2023, the discounted fair value of the contingent
consideration payable in respect of the Triad Life Sciences
acquisition was $47.5 million, with an increase of $2.1 million
arising from management's view that the latest available financials
are expected to exceed original expectations and the unwind of
discount of $9.3 million during the period, partly offset by the
payments of $94.7 million to the sellers following completion of
the first earnout period.
As at 30 June 2023, the discounted fair value of the contingent
consideration payable in respect of the Cure Medical acquisition
was $9.5 million, and it remained at the maximum amount payable
based on latest available financials. During the period to 30 June
2023, $0.3 million of discount unwind was recognised in the
Condensed Consolidated Income Statement. Refer to Note 5 -
Acquisitions for further details.
9. Foreign exchange
The following table summarises the exchange rates used for the
translation of currencies into US dollars that have the most
significant impact on the Group results:
Six months ended Year ended
30 June 31 December
--------------- ------------------ ------------
Average
rate/ Closing
Currency rate 2023 2022 2022
--------- --------------- -------- -------- ------------
USD/EUR Average 1.08 1.09 1.05
Closing 1.09 1.05 1.07
------------------------- -------- -------- ------------
USD/GBP Average 1.23 1.30 1.24
Closing 1.27 1.22 1.20
------------------------- -------- -------- ------------
USD/DKK Average 0.15 0.15 0.14
Closing 0.15 0.14 0.14
------------------------- -------- -------- ------------
10. Commitments and contingencies
Capital commitments
At 30 June 2023, the Group had non-cancellable commitments for
the purchase of property, plant and equipment, capitalised software
and development of $21.7 million (31 December 2022: $39.3
million).
Contingent liabilities
There are no contingent liabilities recognised as at 30 June
2023 and 31 December 2022.
11. Subsequent events
The Group has evaluated subsequent events through to 1 August
2023, the date the Condensed Consolidated Interim Financial
Statements were approved by the Board of Directors.
On 5 July 2023, the Group completed the acquisition of 100% of
share capital of A Better Choice Medical Supply LLC, a US-based
intermittent catheter provider, for upfront cash consideration of
$26.5 million. Further disclosures have not been provided as the
initial accounting for the business combination was incomplete due
to the proximity of acquisition date to the date the Condensed
Consolidated Interim Financial Statements were authorised for
issue.
On 1 August 2023, the Board declared an interim dividend to be
distributed on 28 September 2023. Refer to Note 4 - Dividends for
further details.
Non-IFRS financial information
Non-IFRS financial information or alternative performance
measures (APMs) are those measures used by management on a
day-to-day basis in their assessment of profit and performance and
comparison between periods. The adjustments applied to IFRS
measures reflect the effect of certain cash and non-cash items that
the Board believes distort the understanding of the quality of
earnings and cashflows as, by their size or nature, they are not
considered part of the core operations of the business. Adjusted
measures also form the basis for performance measures for
remuneration, e.g., adjusted operating profit.
It should be noted that the Group's APMs may not be comparable
to other similarly titled measures used by other companies and
should not be considered in isolation or as a substitute for the
equivalent measures calculated and presented in accordance with
IFRS.
In determining whether an item should be presented as an
allowable adjustment to IFRS measures, the Group considers items
which are significant either because of their size or their nature
and arise from events that are not considered part of the core
operations of the business. These tend to be one-off events but may
still cross more than one accounting period. Recurring items may be
considered in respect of the amortisation of acquisition related
intangibles assets in order to provide comparability between peer
groups where such assets may have been internally generated and
therefore, are not reflected on that company's balance sheet with a
resulting amortisation charge. If an item meets at least one of
these criteria, the Board, through the Audit and Risk Committee,
then exercises judgement as to whether the item should be
classified as an allowable adjustment to IFRS performance
measures.
Adjustments to derive adjusted operating profit, excluding the
impact of tax, for the six months ended 30 June 2023 and 2022
include following costs:
-- Amortisation of intangible assets in respect of material
acquisitions ($67.0 million and $67.4 million respectively).
-- Costs incurred in respect of acquisition activities ($21.4
million and $21.2 million respectively).
-- Costs incurred in respect of divestiture activities in
respect of the exit from hospital care business and related
industrial sales activities ($2.2 million and $31.5 million
respectively).
-- Termination benefits in respect of the Group's restructuring
programme and exit from hospital care and related industrial sales
activities ($3.5 million and $6.7 million respectively).
-- Other adjusting items ($10.3 million and nil respectively).
-- Impairment of assets (nil and $1.4 million respectively).
The tax effect of the adjustments is reflected in the adjusted
tax expense to remove the tax impact from adjusted net profit and
adjusted earnings per share.
Adjusted EBITDA, which is used to calculate the metric of
adjusted cash conversion and adjusted working capital, is
calculated by adding back share-based payments to adjusted EBIT,
together with the annual depreciation and amortisation charge.
Amortisation of acquisition-related intangible assets
The Group's strategy is to grow both organically and through
acquisition, with acquisitions targeted to strengthen our position
in key geographies and/or business categories or which provide
access to new technology. The nature of the businesses acquired
includes the acquisition of significant intangible assets, which
are required to be amortised. The Board and management regard the
amortisation as a distortion to the quality of earnings and it has
no cash implications in the year. The amortisation also distorts
comparability with peer groups where such assets may have been
internally generated and, therefore, not reflected on their balance
sheet. Amortisation of acquisition-related intangible assets is, by
its nature, a recurring adjustment.
Acquisition-related activities
Costs directly related to potential and actual strategic
transactions which have been executed, aborted or are in-flight and
which would improve the strategic positioning of the Group are
deemed adjusting items.
Acquisition-related costs relate to deal costs, integration
costs and earn-out adjustments including discounting impact which
are incurred directly as a result of the Group undertaking or
pursuing an acquisition. Deal costs are wholly attributable to the
deal, including legal fees, due diligence fees, bankers'
fees/commissions and other direct costs incurred as a result of the
actual or potential transaction. Integration costs are wholly
attributable to the integration of the target and based on
integration plans presented at the point of acquisition, including
the cost of retention of key people where this is in excess of
normal compensation, redundancy of target staff and early lease
termination payments.
Adjusted measures in relation to acquisitions also include
aborted deal costs.
Divestiture-related activities
Divesture-related activities comprise of the gains or losses
resulting from disposal of assets or divestment of business as a
result of a sale, major business change or restructuring programme.
These include write-down of non-current assets, provisions to
recognise inventories at realisable value, provisions for costs of
exiting contracts and associated legal fees, and any other directly
attributable costs. Any income from the ultimate disposal of a
business or subsidiary is included in the gain or loss. Adjusted
measures in relation to divestiture also include aborted deal
costs.
Impairment of assets
Impairments, write-offs and gains and losses from defined
programmes and where the Group considers the circumstances of such
event are not reflective of normal business trading performance or
when transactions relate to acquisition-related intangible assets
where the amortisation is already excluded from the calculation of
adjusted measures.
Termination benefits and related costs
Termination benefits and other related costs arise from
Group-wide initiatives to reduce the ongoing cost base and improve
efficiency in the business, including divestitures from
non-strategic activities. The Board considers each project
individually to determine whether its size and nature warrants
separate disclosure. Qualifying items are limited to termination
benefits (including retention) without condition of continuing
employment in respect of major Group-wide change programmes. Where
discrete qualifying items are identified these costs are
highlighted and excluded from the calculation of adjusted measures.
Due to their nature, these adjusted costs may span more than one
year.
Other adjusting items
Other adjusting items costs relate to initiatives which are part
of the Group's strategy to improve productivity in the business and
optimise cash outflow. The Board considers each project
individually to determine whether its size and nature warrants
separate disclosure. Qualifying items are limited to directly
attributable costs of the initiatives and any realignment costs.
Due to the nature of the initiatives, these adjusted costs may span
more than one year.
Reconciliation of reported earnings to adjusted earnings for the
six months ended 30 June 2023 and 2022
Profit
for
Gross Operating Operating Finance Non-operating the
Revenue profit costs profit expense expense PBT Taxation period
Six months ended $m $m $m $m $m $m $m $m $m
30 June 2023
--------------------- ------- ------ --------- --------- ------- ------------- ----- -------- --------
As reported 1,055.5 592.4 (469.0) 123.4 (45.5) (1.9) 76.0 (20.3) 55.7
Amortisation of
acquired intangibles - 56.1 10.9 67.0 - - 67.0 (16.0) 51.0
Acquisition-related
costs - 1.5 6.2 7.7 11.6 2.1 21.4 (1.2) 20.2
Divestiture-related
costs - 2.7 (0.5) 2.2 - - 2.2 (0.5) 1.7
Termination benefits
and related costs - 2.2 1.3 3.5 - - 3.5 (0.9) 2.6
Other adjusting
items - 2.5 7.8 10.3 - - 10.3 (2.6) 7.7
--------------------- ------- ------ --------- --------- ------- ------------- ----- -------- --------
Total adjustments
including
tax effect - 65.0 25.7 90.7 11.6 2.1 104.4 (21.2) 83.2
Adjusted 1,055.5 657.4 (443.3) 214.1 (33.9) 0.2 180.4 (41.5) 138.9
--------------------- ------- ------ --------- --------- ------- ------------- ----- -------- --------
Software and R&D
amortisation 9.4
Impairment/write-off
of assets 0.8
Depreciation 29.7
Share-based payments 7.5
--------------------- ------- ------ --------- ---------
Adjusted EBITDA 261.5
--------------------- ------- ------ --------- ---------
Profit
for
Gross Operating Operating Finance Non-operating the
Revenue profit costs profit expense expense PBT Taxation period
Six months ended $m $m $m $m $m $m $m $m $m
30 June 2022
--------------------- ------- ------ --------- --------- ------- ------------- ----- -------- ------
As reported 1,044.5 554.9 (467.8) 87.1 (28.2) (12.8) 46.1 2.2 48.3
Amortisation of
acquired intangibles - 56.9 10.5 67.4 - - 67.4 (15.0) 52.4
Acquisition-related
costs - 4.0 6.2 10.2 5.2 5.8 21.2 (1.6) 19.6
Divestiture-related
costs 7.6 23.9 31.5 - - 31.5 (7.5) 24.0
Impairment of assets - 1.4 1.4 - - 1.4 - 1.4
Termination benefits
and
other related costs - 4.7 2.0 6.7 - - 6.7 (1.6) 5.1
--------------------- ------- ------ --------- --------- ------- ------------- ----- -------- ------
Total adjustments
and
their tax effect - 73.2 44.0 117.2 5.2 5.8 128.2 (25.7) 102.5
Other discrete tax
items - - - - - - - (19.7) (19.7)
--------------------- ------- ------ --------- --------- ------- ------------- ----- -------- ------
Adjusted 1,044.5 628.1 (423.8) 204.3 (23.0) (7.0) 174.3 (43.2) 131.1
--------------------- ------- ------ --------- --------- ------- ------------- ----- -------- ------
Software and R&D
amortisation 8.2
Depreciation 31.0
Share-based payments 8.2
--------------------- ------- ------ --------- ---------
Adjusted EBITDA 251.7
------------------------------------------------- ---------
Within the amortisation of acquired intangibles for the six
months period to 30 June 2023 of $67.0 million, $46.4 million
related to intangible assets arising from the spin-out from
Bristol-Myers Squibb in 2008. The carrying amount of these
intangible assets at 30 June 2023 was $289.5 million, and will be
fully amortised by 31 December 2026.
Acquisition-related costs of $21.4 million are mainly related to
actual strategic transactions which have been executed and which
seek to improve the strategic positioning of the Group, and $0.4
million of aborted deal costs. Deal and integration costs of $5.0
million were incurred during the period on the acquisition of
Starlight in April 2023. Also included in acquisition-related costs
are $2.1 million of remeasurement charge on contingent
consideration, $11.6 million of discounting unwind and $1.5 million
release of inventory fair value uplift in respect of the Triad
acquisition. The net cash impact in relation to acquisition-related
costs was $5.1 million in the period.
Divestiture-related costs of $2.2 million are directly related
to the phased exit from the low margin hospital care business and
industrial sales portfolio and included the write-off of
inventories. The majority of the costs of the exit were incurred in
2022, with minimal costs in 2023. The net cash impact in relation
to this was $0.2 million in the period.
Termination benefits and other related costs of $3.5 million are
primarily in respect of the severance costs from the Group's
restructuring activities. The net cash impact of these costs was
$1.1 million in the period.
Other adjusting items of $10.3 million are in relation to the
Group's initiatives to improve productivity in the business and
optimise cash outflow, including the move and integration of the
EuroTec facility in Netherlands to our Slovakia plant and the
facilities optimisation programme. The net cash impact of these
costs was $0.3 million in the period.
There are no discrete tax items during the period. In the six
months to 30 June 2022, other discrete tax items relate to the tax
benefit of $19.7 million resulting from recognition of deferred tax
following the acquisition of Triad.
Reconciliation of operating costs to adjusted operating costs
for the six months ended 30 June 2023 and 2022
Six months ended 30 June
----------------------------------------------------------------------------------
2023 2022
----------------------------------- ---------------------------------------------
S&D(1) G&A(2) R&D(3) Operating S&D(1) G&A(2) R&D(3) Other(4) Operating
costs costs
$m $m $m $m $m $m $m $m $m
---------------------- ------- ------- ------ --------- ------- ------- ------ -------- ---------
As reported (304.7) (110.7) (53.6) (469.0) (287.3) (119.1) (47.2) (14.2) (467.8)
Amortisation of
acquired intangibles - 9.0 1.9 10.9 - 10.5 - - 10.5
Acquisition-related
costs - 6.3 - 6.3 - 6.2 - - 6.2
Divestiture-related
costs (0.5) - - (0.5) 10.7 0.4 - 12.8 23.9
Impairment of assets - - - - - - - 1.4 1.4
Termination benefits
and related costs - 1.2 0.1 1.3 1.7 0.3 - - 2.0
Other adjusting
items - 7.7 - 7.7 - - - - -
---------------------- ------- ------- ------ --------- ------- ------- ------ -------- ---------
Adjusted (305.2) (86.5) (51.6) (443.3) (274.9) (101.7) (47.2) - (423.8)
---------------------- ------- ------- ------ --------- ------- ------- ------ -------- ---------
1. "S&D" represents selling and distribution expenses.
2. "G&A" represents general and administrative expenses.
3. "R&D" represents research and development expenses.
4. "Other" relates to the impairment of assets from the Group's
withdrawal from the hospital care and industrial sales
portfolio.
Reconciliation of basic and diluted earnings per share to
adjusted earnings per share for the six months ended 30 June 2023
and 2022
Six months ended 30 June
Adjusted Adjusted
2023 2023 2022 2022
$m $m $m $m
Net profit for the period attributable
to the shareholders of the
Group 55.7 138.9 48.3 131.1
Number Number
Basic weighted average ordinary
shares in issue 2,036,308,534 2,018,377,510
Diluted weighted average ordinary
shares in issue 2,049,996,858 2,031,279,646
cents per cents per cents per cents per
share share share share
Basic earnings per share 2.7 6.8 2.4 6.5
Diluted earnings per share 2.7 6.8 2.4 6.5
Free cash flow (pre-tax), free cash to capital and free cash to
equity measures for the six months ended 30 June 2023 and 30 June
2022
Six months ended
30 June
2023 2022
$m $m
Operating profit 123.4 87.1
Depreciation of property, plant and equipment 18.3 20.0
Depreciation of right-of-use assets 11.4 11.0
Amortisation of intangible assets 76.4 75.6
Impairment/write-off of property, plant and equipment
and intangible assets 3.8 14.2
Share-based payments 7.5 8.2
EBITDA(1) 240.8 216.1
Non-cash items
Working capital movement (110.2) (66.0)
(Loss)/gain on foreign exchange derivatives (1.9) 3.4
Net cash generated from operations 128.7 153.5
Acquisitions of property, plant and equipment and
intangible assets (58.7) (64.1)
Free cash flow (pre-tax) 70.0 89.4
Tax paid (16.2) (19.1)
Free cash to capital 53.8 70.3
Net interest paid (28.4) (21.9)
Payment of lease liabilities (11.2) (10.4)
Financing fee amortisation (1.4) (2.0)
Foreign exchange impact on cash (1.6) (7.5)
Foreign exchange impact on borrowings (2.0) 13.3
Proceeds on sale of property, plant and equipment 0.5 -
Free cash to equity 9.7 41.8
1. During the period, EBITDA was redefined to exclude
share-based payment charges (non-cash item) of $7.5 million (H1
2022: $8.2 million) and bring it in line with adjusted EBITDA.
Consequently, the prior period comparative has been restated by
$8.2 million.
Reconciliation of Adjusted EBITDA, Adjusted working capital
movement and Adjusting items cash movement (to calculate Adjusted
cash conversion)
Six months ended
30 June
2023 2022
$m $m
EBITDA(1) 240.8 216.1
Acquisition & divestiture related activities 9.9 28.9
Termination benefits and other related costs 3.5 6.7
Other adjusting items 7.3 -
Adjusted EBITDA 261.5 251.7
Working capital movement (110.2) (66.0)
Increase in termination benefits (2.4) (0.7)
Increase in respect of acquisitions & divestitures (4.6) (25.7)
Increase in respect of other adjusting items (7.0) -
Adjusted working capital movement (124.2) (92.4)
Adjusting items cash movement:
Acquisition & divestitures adjustments (5.3) (2.6)
Termination benefits and related costs adjustments (1.1) (6.6)
Other adjusting items (0.3) -
Total adjusting items(2) (6.7) (9.2)
(Loss)/gain on foreign exchange derivatives (1.9) 3.4
Acquisitions of property, plant and equipment
and intangible assets (58.7) (64.1)
Free cash flow (pre-tax) 70.0 89.4
Cash conversion (Free cash flow (pre-tax)/EBITDA) 29.1% 41.4%
Adjusted cash conversion (Free cash flow (pre-tax)/Adjusted
EBITDA) 26.8% 35.5%
1. During the period, EBITDA was redefined to exclude
share-based payment charges (non-cash item) of $7.5 million (H1
2022: $8.2 million) and bring it in line with adjusted EBITDA.
2. These are the cash flow impacts to the adjusted items shown
in the reconciliation of earnings to adjusted earnings tables on
page 35.
Net debt
Net debt is calculated as the carrying value of current and
non-current borrowings, net of cash and cash equivalents and
excluding lease liabilities.
30 June 31 December
2023 2022
$m $m
Borrowings 1,374.0 1,211.9
Lease liabilities 91.1 88.3
-----------
Total borrowings including lease liabilities 1,465.1 1,300.2
Cash and cash equivalents (76.5) (143.8)
Total borrowings including lease liabilities,
net of cash 1,388.6 1,156.4
Net debt (excluding lease liabilities) 1,297.5 1,068.1
Net debt (excluding lease liabilities)/adjusted
EBITDA(1) 2.5 2.1
1. Adjusted EBITDA for the 12 months to 30 June 2023 has been
used in this calculation.
Directors' Responsibilities Statement
The Directors confirm that to the best of their knowledge:
-- The Condensed Consolidated Financial Statements have been
prepared in accordance with IAS 34 as adopted by the United
Kingdom; and
-- The interim management report includes a fair review of the information required by:
a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first
six months of the financial year and their impact on the Condensed
Consolidated Financial Statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
b. DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
The composition of the Board of Directors of Convatec Group plc
has not changed since reported in the 2022 Annual Report and
Accounts. A list of current Directors is maintained on our
corporate website ( www.convatecgroup.com ).
By order of the Board:
Karim Bitar Chief Executive Officer 1 August 2023
Jonny Mason Chief Financial Officer 1
August 2023 INDEPENDENT REVIEW REPORT TO CONVATEC GROUP PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2023 which comprises the Condensed
Consolidated Income Statement, the Condensed Consolidated Statement
of Comprehensive Income, the Condensed Consolidated Statement of
Financial Position, the Condensed Consolidated Statement of Changes
in Equity, the Condensed Consolidated Statement of Cash Flows and
related notes 1 to 11.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2023, is not prepared, in all material respects, in accordance
with United Kingdom adopted International Accounting Standard 34
and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410 "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council for use in the
United Kingdom (ISRE (UK) 2410). A review of interim financial
information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures. A review is substantially
less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not
enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit.
Accordingly, we do not express an audit opinion.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with United Kingdom adopted
international accounting standards. The condensed set of financial
statements included in this half-yearly financial report has been
prepared in accordance with United Kingdom adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
Conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This Conclusion is based on the review procedures performed in
accordance with ISRE (UK) 2410; however future events or conditions
may cause the entity to cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly
financial report in accordance with the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
In preparing the half-yearly financial report, the directors are
responsible for assessing the group's ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the company or to cease
operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial
information
In reviewing the half-yearly financial report, we are
responsible for expressing to the company a conclusion on the
condensed set of financial statements in the half-yearly financial
report. Our Conclusion, including our Conclusion Relating to Going
Concern, are based on procedures that are less extensive than audit
procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the company in accordance with
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Deloitte LLP
Statutory Auditor
London, United Kingdom
1 August 2023
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