REG - ConvaTec Group PLC - Annual Results
08/03/2022 07:00
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RNS Number : 9917D ConvaTec Group PLC 08 March 2022
8 March 2022
ConvaTec Group Plc
Annual Results for the twelve months ended 31 December 2021
Topline momentum, profit(1,2) growth and continued strategic progress
Pivoting to sustainable and profitable growth
· Good financial performance in 2021: strong revenue growth and broadly
stable constant currency margin resulting in attractive EPS growth -
underpinning an inaugural dividend increase
· Continued progress executing our FISBE (Focus, Innovate, Simplify,
Build, Execute) strategy:
o Strengthened the continence business, within CCC, through Cure Medical and
Patient Care Medical acquisitions and divestment of non-core lower-margin
incontinence activities
o Revenues in our top 12 markets grew 7.9% on a constant currency(1,3) basis
during 2021
o Launched innovative and differentiated Extended Wear Infusion Set in
Europe, continued progress advancing our product pipeline and introduced a new
and consistent product development/launch process across the Group. Invested
$95 million in R&D (+15%)
o Embedded Marketing Centre of Excellence ('CoE'), established Quality CoE
and began to leverage the benefits of Salesforce and Pricing CoEs which were
established in 2020
· Additional progress since the year-end with agreement to enter the
attractive Wound Biologics(4) segment with proposed acquisition of Triad Life
Sciences, expected to complete in March
FY 2021 key financial highlights
Reported results Adjusted(1) results
FY2021 FY2020 Change FY2021 FY2020 Change CC Change(3)
Revenue $2,038m $1,894m 7.6% $2,038m $1,894m 7.6% 5.8%
Operating profit/EBIT(2) $204m $211m (3.5)% $362m $350m 3.3% 5.4%
Operating profit/EBIT(2) margin 10.0% 11.1% (110)bps 17.7% 18.5% (80)bps (10)bps
Diluted earnings per share 5.8 cents 5.6 cents 3.5% 13.0 cents 12.0 cents 8.3% -
Dividend per share 5.871 cents 5.7 cents 3.0%
· Strong revenue growth: +7.6%, +5.8% on a constant currency(3) basis
and +5.3% on an organic(5) basis
o Driven by strong growth in Advanced Wound Care and Infusion Care and
modest growth in Ostomy Care and CCC (comprising of good growth in the
continence business moderated by stable performance in critical care products)
o Total revenue growth supported by the Cure Medical and Patient Care
Medical acquisitions partially offset by impact of non-core skin care and
incontinence divestments (incremental $10 million)
· Adjusted EBIT(1,2) performance improved: +3.3% and +5.4% on a
constant currency(3) basis
· Constant currency adjusted EBIT(2,3) margin of 18.4% in line with
guidance. Profitability reflected continued investment, foreign exchange and
inflationary headwinds. Adjusted(4) EBIT margin of 17.7% (2020: 18.5%).
· Reported operating profit was $204 million (2020: $211 million).
Year on year change principally reflecting foreign exchange, continued
investment, higher amortisation of acquired intangibles and acquisition and
divestiture related costs.
· Improved earnings momentum: adjusted(1) diluted EPS +8.3%. Reported
diluted EPS +3.5%
· Strengthened balance sheet: despite significant strategic
investments, leverage was reduced to 1.9x net debt(1)/adjusted EBITDA(1)
(2020: 2.0x).
· Inaugural dividend increase: Proposed final DPS of 4.154 cents to
raise FY DPS by 3.0% to 5.871 cents
2022 outlook
· For 2022, we expect to achieve sustained organic(5) revenue growth of
between 4.0-5.5%. Notwithstanding the inflationary backdrop we currently
expect constant currency adjusted(2,3) EBIT margin to increase to at least 18%
compared to 17.7% in 2021.
Karim Bitar, Chief Executive Officer, commented:
"ConvaTec's competitive position and financial performance continues to
strengthen as we successfully execute our FISBE strategy. Our performance in
2021 demonstrates we are now pivoting to sustainable and profitable growth -
with good revenue and earnings momentum. During 2021 we made significant
operational improvements and grew our portfolio through strategic M&A -
enabling us to deliver more effectively for our customers. I want to thank
all my ConvaTec colleagues for their efforts over the past 12 months enabling
us to deliver, at pace, our key initiatives despite the constantly changing
backdrop. The Board is confident in the future prospects of the Group and is
proposing an increase in the full year dividend of 3%.
"ConvaTec expects to grow revenue in line or faster than the markets in which
we operate, which are growing at approximately 4%. There is still work
ahead; however, I am confident in ConvaTec's significant growth prospects."
Group revenue
Twelve months ended 31 December
2021 2020 Reported Foreign Exchange impact Constant Currency(3) growth Organic(5) growth
$m $m growth
Revenue by Category
Advanced Wound Care 592 547 8.3% (2.8)% 5.5% 9.2%
Ostomy Care 546 526 3.9% (2.2)% 1.7% 1.7%
Continence and Critical Care 543 498 8.9% (1.0)% 7.9% 2.1%
Infusion Care 357 323 10.4% (0.8)% 9.6% 9.6%
Total 2,038 1,894 7.6% (1.8)% 5.8% 5.3%
For insight into the category performances see pages 6 to 8.
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(1) Certain financial measures in this document, including adjusted results
above, are not prepared in accordance with International Financial Reporting
Standards ("IFRS"). All adjusted measures are reconciled to the most directly
comparable measure prepared in accordance with IFRS in the Non-IFRS Financial
Information below (pages 40 to 46).
(2) Adjusted EBIT is the same as adjusted operating profit.
(3) Constant currency growth is calculated by applying the applicable prior
period average exchange rates to the Group's actual performance in the
respective period.
(4) Wound Biologics segment as defined by SmartTRAK. Includes skin
substitutes, active collagen dressings and topical drug delivery.
(5) Organic growth presents period over period growth at constant currency,
excluding M&A activities.
Contacts
Analysts & Investors Kate Postans, Vice President of Investor Relations & Corporate +44 (0) 7826 447807
Communications
ir@convatec.com
(file:///C:/Users/buchanan/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/A6XZH5E2/ir@convatec.com)
Media Buchanan: Charles Ryland / Chris 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.
(https://webcasting.buchanan.uk.com/broadcast/620f807b26d01a4c0553f8c6)
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 http://www.convatecgroup.com/investors/reports
(http://www.convatecgroup.com/investors/reports)
Forthcoming Events
AGM 12 May 2022
Technology and Innovation Review 17 May 2022
Interim Results 4 August 2022
Capital Markets Event Autumn 2022
In order to more evenly space the cadence of financial communication and
better represent management's focus on long-term sustainable growth, the Group
will replace quarterly reporting with trading updates, expected to be
published in May and in November.
Dividend Calendar
Ex-dividend date* 31 March 2022
Dividend record date* 1 April 2022
Scrip dividend election date* 27 April 2022
Dividend payment date* 19 May 2022
* subject to approval at AGM.
About ConvaTec
ConvaTec is a global medical products and technologies company focused on
solutions for the management of chronic conditions, with leading market
positions in advanced wound care, ostomy care, continence and critical care,
and infusion care. Our products provide a range of clinical and economic
benefits including infection prevention, protection of at-risk skin, improved
patient outcomes and reduced total cost of care. To learn more about ConvaTec,
please visit www.convatecgroup.com (http://www.convatecgroup.com)
Forward Looking Statements
This document includes statements that are, or may be deemed to be,
"forward-looking statements". These forward-looking statements involve known
and unknown risks and uncertainties, many of which are beyond the Group's
control. "Forward-looking statements" are sometimes identified by the use of
forward-looking terminology, including the terms "believes", "estimates",
"aims", "anticipates", "expects", "intends", "plans", "predicts", "may",
"will", "could", "shall", "risk", "targets", "forecasts", "should",
"guidance", "continues", "assumes" or "positioned" or, in each case, their
negative or other variations or comparable terminology. These forward-looking
statements include all matters that are not historical facts. They appear in a
number of places and include, but are not limited to, statements regarding the
Group's intentions, beliefs or current expectations concerning, amongst other
things, results of operations, financial condition, liquidity, prospects,
growth, strategies and dividend policy of the Group and the industry in which
it operates.
By their nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that may or may not
occur in the future. These statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company,
are inherently subject to significant business, economic and competitive
uncertainties and contingencies. As such, no assurance can be given that such
future results, including guidance provided by the Group, will be achieved;
actual events or results may differ materially as a result of risks and
uncertainties facing the Group. Such risks and uncertainties could cause
actual results to vary materially from the future results indicated,
expressed, or implied in such forward-looking statements. Forward-looking
statements are not guarantees of future performance and the actual results of
operations, financial condition and liquidity, and the development of the
industry in which the Group operates, may differ materially from those made in
or suggested by the forward-looking statements set out in this document. Past
performance of the Group cannot be relied on as a guide to future performance.
Forward-looking statements speak only as at the date of this document and the
Group and its directors, officers, employees, agents, affiliates and advisers
expressly disclaim any obligations or undertaking to release any update of, or
revisions to, any forward-looking statements in this document.
Chief Executive's Review
ConvaTec's competitive position continues to strengthen as we successfully
execute our FISBE strategy. Our performance in 2021 demonstrates that we are
now pivoting to sustainable and profitable growth as planned. Our strategic
transformation investments over the past few years have significantly enhanced
the quality of our business and position us well for future growth.
Our growth prospects are attractive
We remain excited about the growth potential of the categories in which we
operate. Our four categories are in structurally-growing chronic care
markets where there is long-term demand for our products and services. We
expect our overall market to grow at approximately 4% per annum. Through our
strategic transformation, the Group expects to grow revenue in line with or
faster than this on a sustainable basis.
Trends that are being seen in the wider healthcare markets create both
opportunities and challenges for the Group. COVID-19 has accelerated some of
these trends, notably patient-centric homecare and digitisation. We are
constantly monitoring our markets and looking to create differentiated
offerings which enable us to seize opportunities, mitigate risks and, most
importantly, deliver for our patients and customers. For example, during
2021, we continued to leverage our Home Services Group ("HSG") offering,
introduced digital apps and adopted a hybrid sales approach in Advanced Wound
Care.
The diverse set of chronic care markets we serve provide resilience and are
also synergistic, notably in areas such as: customer understanding,
biomaterial sciences, human factor design, product and clinical development
and innovation, high-quality and high-volume automated manufacturing, shared
supply chain capabilities, and common geographic presence. Consistent with
our FISBE strategy we are building capabilities in these synergistic areas and
are investing to expand capacity and increase resilience.
We are pivoting to sustainable and profitable growth
During 2021 we continued to invest, both organically and inorganically, and
further improved ConvaTec's competitive position and strengthened the business
for the future.
Shortly after I joined, in 2020, we set out our FISBE strategy and in last
year's Annual Report we highlighted our priorities for 2021 and I am pleased
to report that we have executed as planned. The scale of change within the
Group over the last few years has been significant and it is testament to the
talent and dedication of our ConvaTec colleagues that we have succeeded in
executing so many key initiatives.
We continued to invest organically during 2021. Our Technology &
Innovation function continued to strengthen and our CoEs are already gaining
traction. This coupled with operational improvement, particularly in our 12
key markets, is driving improvements in our performance.
During 2021, we built capabilities and processes in Corporate Development and
have utilised our cash for strategic acquisitions - spending a total of $114
million to strengthen our US continence business and, since the year end, we
have also announced the proposed acquisition of Triad Life Sciences, which
will enable us to enter the attractive Wound Biologics(4) segment while
leveraging our innovation and commercial capabilities.
Further details on the progress made under each pillar of our FISBE strategy
are outlined on pages 8 to 10.
Our financial performance continued to strengthen
Group reported revenue of $2,038 million (2020: $1,894 million) rose 7.6%
year-on-year. Adjusting for foreign exchange and M&A activity, revenue
grew 5.3% on an organic basis(5).
Reported operating profit was $204 million (2020: $211 million). The
year-on-year decline principally reflected the foreign exchange and
inflationary headwinds, continued strategic investment, amortisation of
acquisition intangibles and acquisition and divestiture related costs
partially offset by the positive revenue growth. Adjusted EBIT(2) rose 3.3%
to $362 million (2020: $350 million) with an adjusted EBIT(2) margin of 17.7%
(2020: 18.5%). The adverse foreign exchange translation impact was $7
million and on a constant currency basis adjusted EBIT(2,3) rose 5.4%, with
the constant currency adjusted EBIT(2,3) margin broadly flat at 18.4%, in line
with our expectations. The strong growth in revenue and productivity
improvements were offset by inflationary headwinds and the cost of continued
strategic investments to further strengthen the core capabilities within the
Group.
Adjusted net profit(1) rose 9.4% to $263 million (2020: $241 million) with the
growth in the adjusted EBIT(2) bolstered by $6 million reduction in finance
expense and $11 million reduction in adjusted tax expense.
Basic adjusted(1) EPS was 13.1 cents (2020: 12.1 cents) and the diluted
adjusted(1) EPS was 13.0 cents (2020: 12.0 cents) based on basic weighted
average ordinary shares of 2.009 billion (2020: 1.992 billion) and 2.026
billion diluted shares (2020: 2.007 billion) respectively.
Reported net profit was $118 million (2020: $113 million) generating basic
reported EPS of 5.9 cents (2020: 5.7 cents).
The adjusted(1) cash conversion was 72% (2020: 90%). This reduction in
conversion reflects an increase in working capital, partially associated with
improving resilience, and planned higher levels of capex investment.
Reported cash conversion was 73% (2020: 99%).
Net debt (excluding lease liabilities) reduced to $881 million (2020: $891
million) this coupled with an increase in adjusted EBITDA resulted in an
improvement in the Group's net debt/adjusted EBITDA(1) ratio to 1.9x (2020:
2.0x).
Category revenue performance
Twelve months ended 31 December
2021 2020 Reported Foreign Exchange impact Constant Currency(2) growth Organic(5) growth
$m $m growth
Revenue by Category
Advanced Wound Care 592 547 8.3% (2.8)% 5.5% 9.2%
Ostomy Care 546 526 3.9% (2.2)% 1.7% 1.7%
Continence and Critical Care 543 498 8.9% (1.0)% 7.9% 2.1%
Infusion Care 357 323 10.4% (0.8)% 9.6% 9.6%
Total 2,038 1,894 7.6% (1.8)% 5.8% 5.3%
Advanced Wound Care ("AWC")
We made good strategic progress in AWC during 2021. The commercial
performance in key markets improved in all regions and the business succeeded
in driving the use of digital tools and platforms.
Revenue of $592 million rose 8.3% compared with the prior year, 5.5% on a
constant currency(3) basis. Adjusting for the disposal of the US Skin Care
products, which contributed $19 million of revenue in 2020, organic(5) growth
was 9.2%. This reflected good growth against the COVID-depressed prior year
comparative, as well as improvements in commercial execution.
During 2021, the business achieved strong growth in all regions, particularly
in the Global Emerging Markets.
The weak COVID-19 comparative was particularly pronounced in H1 when
organic(5) revenue grew 16.3%. H2 growth was a more moderate 3.4% reflecting
tougher comparatives coupled with the impact of the French reimbursement cut,
slightly weaker trends in elective surgeries and some temporary supply chain
challenges associated with COVID-19.
Our antimicrobial hydrofibre, AQUACEL(TM) Ag+ Extra(TM) brand achieved strong
growth and the ConvaMax(TM) superabsorber, launched late 2019 achieved
impressive growth, albeit off a small base. Our AQUACEL(TM) Foam Pro brand
delivered strong growth with Aquacel Foam Base also delivering good growth.
In 2022 we will focus on the following areas:
· Continuing to improve commercial execution and leveraging our
Salesforce and Marketing CoEs
· Completing the acquisition and integration of Triad Life Sciences,
conditional on regulatory approvals and customary closing conditions
· Launch of ConvaFoam at the end of 2022
Ostomy Care ("OC")
The OC business made further strategic progress during 2021. Our
commercial execution in key markets, most notably the US and the global
emerging markets, is improving and we made good progress leveraging HSG to
support more of our Ostomy and me+(TM) patients. The rationalisation
programme continued as planned and we have ceased manufacturing a further 550
SKUs during the year. Under the leadership of HSG we also restructured our
UK homecare business, AmCare, implementing new software and rationalising
activities which were unprofitable and unsustainable.
Revenue of $546 million increased 3.9% on a reported basis and 1.7% on
constant currency(3) and organic(4) bases. The planned SKU and UK contract
rationalisation reduced growth by c.100bps. During the period we achieved
continued strong growth in Latin America and APAC, while performance in North
America showed early signs of commercial improvements, with stabilisation of
new patient starts and increasing use of HSG's Ostomy service. These positive
achievements were partially offset by declines in certain markets in Europe,
notably the UK where we undertook contract rationalisation.
As expected the growth for 2021 was H1 weighted with organic(5) revenue up
3.7%. In H2 revenue was down 0.1% on an organic(5) basis, due to the planned
SKU and contract rationalisation.
Encouragingly revenue for ConvaTec Ostomy products rose 3.4% on an organic(5)
basis during 2021 whilst revenue associated with non-ConvaTec products,
distributed through HSG and AmCare, declined.
We achieved strong growth in the Natura(TM)+ two-piece in GEM and the
Esteem(TM)+ one-piece showed good growth. Accessories continued to
perform well.
In 2022 we will continue to focus on the following areas:
· Strengthening our commercial execution in our key markets, including
leveraging our sales force effectiveness, pricing and marketing CoEs
· Focus on improving our operations and gross margins via streamlining
our SKUs and technology upgrades
· Launch innovative solutions to meet the patient needs through
physical products, digital tools (in US and Poland) and enhanced services
(me+(TM) and HSG)
Continence & Critical Care ("CCC")
2021 was a year of continued encouraging progress with the position of our US
continence business strengthened by the Cure Medical and Patient Care Medical
("PCM") acquisitions, and the focus afforded from the divestment of non-core,
lower-margin incontinence activities.
Revenue of $543 million was up 8.9% on a reported basis and 7.9% on a constant
currency(3) basis. Adjusting for acquisitions and divestitures, which added
a net $29 million of incremental revenue during the period, on an organic(5)
basis CCC revenue was up 2.1%.
Our continence business continued to achieve good revenue growth of 3.1% on an
organic(5) basis to $387 million. Lower new patient starts during COVID-19
slightly diluted early performance, although rebounded well as the year
progressed. Encouragingly, the market reception to the combination of the
GentleCath products and the acquired Cure Medical portfolio was very good with
both showing strong growth.
Revenue from our critical care products was broadly flat on a constant
currency(3) basis at $156 million. This was a better performance than
anticipated with the continued presence of COVID-19 resulting in
higher-than-expected demand for ICU products during 2021.
During the year the organic(5) revenue performance of CCC slowed from 3.0% in
H1 to 1.2% in H2. Trends in critical care products turned negative in the
later part of the year as demand began to normalise, although this was not as
significant a decline as originally anticipated.
In 2022 we will focus on the following areas:
· Launching the new GentleCath Air Male compact catheter in Q2/Q3
· Expanding our continence commercial presence to Europe
· Continuing to leverage the reach of HSG to provide better service to
patients around the US
· Rationalising low-margin critical care products
Infusion Care ("IC")
IC achieved another strong performance in 2021 as we made continued strategic
progress. The business launched the highly innovative and differentiated
extended wear infusion set ('EWIS') in Europe and secured FDA clearance for
the US as well. The product delivers significant benefits for patients who
have to change their sets less frequently. The business also signed a number
of long-term contracts with customers and successfully increased capacity in
certain manufacturing lines to respond to the elevated demand.
Revenue grew 10.4% on a reported basis or 9.6% on constant currency(3) and
organic(5) bases. This was primarily driven by continued strong demand for
our innovative infusion sets used by diabetes patients, notably from Tandem
Diabetes. Revenue growth was supported by growth of other applications,
such as pain management and the treatment of Parkinson's, albeit off a small
base.
The performance during the year reflected phasing of orders from key clients
coupled with adding capacity and the EWIS launch. H1 organic(5) revenue
growth was 6.5% with a step up in growth in H2 to 12.5%.
During 2022 we will continue to focus on the following areas:
· Launching and scaling up production of EWIS for the US market
· Building further on our strong and long-term partnerships with
insulin pump manufacturers
· Continuing to invest in further developing our differentiated
diabetes offering
· Expanding the usage of infusion sets for the delivery of other
sub-cutaneous therapeutics for diseases such as Parkinson's
Delivering continued strategic progress
As we drive towards our vision of pioneering trusted medical solutions to
improve the lives we touch, we continued to execute our FISBE strategy.
Notwithstanding the persistence of the pandemic we made further strategic
progress this year.
Focus
During 2021, we strengthened our position in two of the four categories
ConvaTec is focused on. In Q1 we enhanced our US continence business (part
of CCC) with the acquisition of Cure Medical. In Q2 we enhanced our AWC
portfolio by signing a collaboration agreement with RLS Global to
commercialise the Chlorasolv(R) wound debrider as part of ConvaTec's Wound
Hygiene(TM) Protocol. Then in the second half we acquired Patient Care Medical
and divested lower-margin incontinence activities, both impacting CCC.
We also continued to focus and invest in our 12 key markets which cumulatively
delivered constant currency(3) revenue growth of 7.9%.
One of our main priorities in 2022 will be to complete the acquisition of, and
integrate, Triad Life Sciences into our AWC business. The acquisition,
announced on 28 January 2022, represents an exciting opportunity for ConvaTec
to enter the highly attractive wound biologics(4) segment, which is worth
c$1.8 billion and growing at high single digits percentage each year. The
transaction is subject to regulatory approvals and customary closing
conditions and is expected to close in March.
In 2022, we shall also focus on continuing to invest to grow our 12 key
markets, particularly the US, and will continue to evaluate potential M&A
opportunities to further strengthen the Group.
Innovate
We continued to step up our investment in innovation - increasing R&D
spend by a further 14.7% to $95 million (2020: $82 million.) This
represented 4.6% of 2021 revenue. Some of this expense related to continued
MDR spend of $14 million (2020: $14 million). Where appropriate we will
continue to increase our investment to strengthen our product pipeline and
innovation capabilities and to improve our cycle time.
During 2021, we continued to strengthen our R&D competencies, particularly
in areas such as process development, clinical and regulatory. We delivered
good momentum in the pipeline with the launch, in April, of the innovative
Extended Wear Infusion Set ("EWIS") in Europe and secured US FDA clearance.
We also made good progress with the development of the six other new products
in the pipeline. During the year we also successfully rolled out a
consistent new product development and launch process across the entire Group
(called "IDEAL"). This is expected to improve the flow and efficiency of
innovation as well as accelerating the cycle time.
Looking forward, in 2022 we shall focus on successfully launching and scaling
up three of our new products: the GC AirMale compact catheter (CCC) in Q2/Q3,
the EWIS (IC) in the US market during the year and finally ConvaFoam (AWC) at
the end of the year. Another key priority will be embedding our new Green
Design Guidelines ("GDG") and associated tools, which allow us to examine the
green credentials of potential ingredients, into our new product development
process.
Simplify
We have been migrating from a complex country-led matrix organisation to a
category-led operating model which offers closer proximity to the patient and
care givers, supported by global functional expertise.
During the year we further expanded our Global Business Services ("GBS")
centre in Lisbon, Portugal, migrating additional financial processes and
certain IT expertise.
We have also been simplifying the business from a commercial perspective and
continued to make progress with our Ostomy Care portfolio rationalisation
programme - we have ceased manufacturing a further 550 SKUs to bring the
figure to c.1800.
During 2022, we will continue to migrate finance and IT related activities
into the GBS, and commence moving certain HR activities. The Ostomy Care
rationalisation programme will continue.
Build
During 2021 we continued to develop the senior leadership team with exciting
new hires, for example, in business development, marketing and quality.
During the period we also continued to develop our CoEs. Under our
Salesforce Excellence CoE we have now rolled out a single Customer
Relationship Management ("CRM") platform across Europe and North America
providing improved insight and better targeting, and we are driving enhanced
productivity. Our Pricing CoE, which provides improved discipline on price
using data, training and tools, also delivered a good performance. Finally,
during the year we began leveraging our Marketing CoE, established a Quality
CoE and began executing our People Strategy.
During 2022 we will continue to strengthen our sales and marketing activities
with a particular focus on digital interactions. We will expand our common
CRM platform into GEM and will embed our Professional Education CoE.
Execution
Our Transformation Execution Office is now well established and during 2021 we
continued to embed the execution methodology we use to develop and monitor
major initiatives. To ensure the execution mindset pervades the organisation
we have continued our roll out of "Ability to Execute" training modules - with
77% of senior managers having already participated in the training.
As well as rolling out our IDEAL new launch process, described above, we
introduced a new Corporate Development process to identify and execute on
inorganic opportunities.
Looking forward, 2022 priorities include further integrating ESG into our
strategic planning process, delivering manufacturing scale-up projects for
Infusion Care and introducing more automation.
In total we invested $171 million in our strategic transformation in 2021,
comprising:
· $30 million of non-recurring operational investment (2020: $51
million)
· $72 million of recurring operational investment (2020: $42 million)
· An additional $4 million of costs to be excluded from adjusted EBIT
(2020: $12 million)
· $65 million of capex (2020: $26 million)
We also invested $14 million in MDR during the year (2020: $14 million).
Going forward, given the non-recurring elements will be substantially reduced,
we do not intend to disclose transformation investments separately except
where excluded from adjusted EBIT, in compliance with our Alternative
Performance Measures policy. Additional investments will be part of the
ongoing growth strategy and operational decisions of the business as we
continue to pivot to sustainable and profitable growth.
We are making progress on our ESG journey
Our approach to Environmental, Social and Governance ("ESG") aims to drive
actions that advance our vision and help us pivot to sustainable and
profitable growth, delivering better for our patients, care-givers, customers,
colleagues and the communities in which we operate. We seek to add value
through our products and services as well as through the way we operate,
whilst also engendering trust and confidence among all our stakeholders.
During 2021 we made important progress across a range of ESG topics, including
the development of our new ESG framework, 'ConvaTec Cares'. We established our
new ESG Steering Committee which includes six ConvaTec Executive Leadership
Team members. The Committee completed a wide-ranging peer review and gap
analysis, and refreshed the materiality matrix to inform and validate the new
framework. This work has culminated in the launch of a new set of ESG Targets
that articulate short, medium and long-term commitments aligned to topics and
activities, which are most material to our stakeholders and impactful on the
Group. As part of this work, we confirmed our commitment to the Science Based
Targets initiative and to reach net zero by 2045.
Dividend
The Board is proposing a final dividend of 4.154 cents to per share which
brings the 2021 full year dividend to 5.871 cents per share, a 3.0% increase
over the 2020 full year dividend. This level is at the top of our stated
policy of 35% to 45% of adjusted net profit and reflects the Board's
confidence in the future growth prospects, its underlying financial strength,
cash generation and liquidity.
ConvaTec Executive Leadership Team ('CELT') changes
In December we announced that Frank Schulkes will be stepping down as Chief
Financial Officer on 11 March 2022. I want to thank Frank for the important
contribution he made to the Group during his four-year tenure and for his
support and leadership during our transformation. I would also like to take
this opportunity to welcome Jonny Mason as Frank's successor. Jonny is a
seasoned CFO with an extensive track record in publicly listed and
international businesses and brings strong experience in strategic enterprise
transformation and customer orientation.
The CELT has continued to evolve following expected retirements. John
Lindskog recently retired and Kjersti Grimsrud, who previously led our
Continence Care business and has over two decades of experience in diabetes
care, has taken over to lead our Infusion Care business. Consequently, Seth
Segel has added Continence Care to his existing responsibilities for the Home
Services Group, where there is natural synergy. Supratim Bose also retired
during the period and Bruno Pinheiro, who for the last three years has been
leading our impressive LATAM business, has stepped up to act as Interim
President and COO of GEM. Finally, Adam Deutsch left the Group and Evelyn
Douglas has therefore assumed additional responsibility for legal, compliance
and Company Secretariat given her significant experience in corporate legal
roles. I would like to take this opportunity to thank John, Supratim and
Adam for their significant contribution to the Group and its transformation.
Ukraine situation
While we do not have teams in Ukraine, we do have teams in neighbouring
countries. In 2021 we had c.$45 million of revenue produced or sold in Belarus
and Russia. We are not currently experiencing any material disruption to our
operations but continue to closely monitor the evolving situation and we are
evaluating all options as we develop appropriate response plans.
2022 outlook
The fundamentals of our business are attractive. The Group is principally a
diversified chronic care business with strong brands and differentiated
products, holding leading market positions in large and structurally-growing
markets.
In 2022 we expect to achieve organic(5) revenue growth of 4.0-5.5%. We expect
continued good growth in AWC although it will reflect the relatively tougher
comparatives versus 2020. Growth in OC is expected to be similar to 2021.
In CCC, we anticipate more significant declines in Critical Care as COVID
continues to normalise and demand for ICU products falls; however this is
expected to be more than offset by improved growth in Continence Care. IC is
expected to deliver another strong year of growth ahead of the market.
We expect to improve our underlying EBIT margin. Notwithstanding the current
inflationary backdrop we expect our constant currency adjusted EBIT(2,3)
margin to increase to at least 18% compared to 17.7% in 2021.
In 2022, based on prevailing rates, we expect interest expense of c.$50-55
million and an effective tax rate of between 18-20%. We also expect capital
expenditure to be $100-120 million as we continue to add manufacturing
capacity, further increase the level of automation, continue to invest in
IT/digital and prepare to launch new products.
We are excited about the opportunities available to the Group and remain
committed to pivoting to sustainable and profitable growth. In 2021, we made
good strategic and financial progress, and we strengthened the Group's
foundations. In 2022, we will continue to focus on delivering future
sustainable revenue growth and accelerating operating profit growth. Longer
term we remain confident in our ability to continue to improve margin
progression. I look forward to updating you further later in the year.
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 and how our 2020 principal risks map to our 2021
principal risks will be set out in the Group's 2021 Annual Report and Accounts
to be published later in the month.
We are closely monitoring the evolving situation in Ukraine and the
surrounding region. We operate a sales team in Russia and we have a
manufacturing plant in Belarus that supplies products for our Critical Care
and Ostomy portfolios. In 2021 we had c.$45 million of revenue produced or
sold in Belarus and Russia. At this stage, we have not experienced any
significant disruption to our operations, but we are continuing to assess
potential impacts on our business, and are actively evaluating all options as
we develop appropriate response plans. We are fully committed to complying
with all applicable laws and regulations, including any impacts of new
sanctions relating to the situation.
The Board has reviewed the principal risks as at 31 December 2021 and made a
number of changes to reflect our assessment of their effect on the Group, our
evolving strategy and the current business environment. The principal risks
reflect the continued impact of COVID-19 on the global economy and
consequential global inflationary pressures and supply chain constraints
impacting on the Group's overall risk profile. The overall profile for the
risks set out below remains largely unchanged over the financial year in terms
of their potential impact on our ability to successfully deliver on our
strategy:
· Operational Resilience and Quality;
· Innovation and Regulatory;
· Information Systems, Security and Privacy;
· Customer and Markets;
· Legal and Compliance;
· Political and Economic Environment; and,
· Tax and Treasury.
The risk landscape, however, has changed for the following principal risks,
since the publication of the 2020 Annual Report and Accounts:
· People - has reduced in risk level following our implementation
of comprehensive flexible and hybrid-working arrangements as we adapt to the
business environment under COVID-19;
· Strategy and Change Management (formerly Change and
Transformation Execution) - has reduced in exposure as a result of delivering
the expected strategic transformation plan in 2020 and the gradual shift from
strategic transformation to continual business transformation execution
initiatives; and
· Environment and Communities (new risk) - a new principal risk
has been included to take account of our increasing focus in areas such as
long-term climate change, the impact of our activity within the communities
that we operate and the importance of sustainability within our product
portfolio.
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 presence of COVID-19 and the consequential global inflationary
pressure and supply chain constraints 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.
Principal risks continue to be appropriately mitigated and work continues to
reduce the net exposure to the business to ensure that each risk remains
within our risk appetite.
Financial review
We have continued to make good progress executing our FISBE strategy and are
demonstrating that we are pivoting to sustainable and profitable growth. Our
revenue growth has been building over the last 3 years, showing momentum, and
we have delivered adjusted operating profit growth in 2021, notwithstanding
further investment in the Group and the exogenous inflationary and foreign
exchange headwinds which contributed to a reduced adjusted operating margin %
in 2021((a)). We have continued to strategically appraise the shape of the
Group and have, during the year, strengthened our CCC business through two
acquisitions and by exiting some of the incontinence non-core activities.
Furthermore, post year-end we announced the proposed acquisition of Triad Life
Sciences which, once complete, will strengthen our AWC business. Our balance
sheet is in good shape with year-end net debt at 1.9 times 2021 adjusted
EBITDA((a)) and additionally we have strengthened our balance sheet -
diversifying our debt and extending its maturity profile through the
successful issuance of $500 million 2029 unsecured senior notes in October
2021, being the primary contributor to the repayment of $583.9 million of the
2024 bank loans during 2021.
Reported Reported Adjusted Adjusted
2021 2020 2021 2020
$m $m $m $m
Revenue 2,038.3 1,894.3 2,038.3 1,894.3
Cost of sales (915.2) (875.5) (805.0) (767.5)
Gross profit 1,123.1 1,018.8 1,233.3 1,126.8
Gross margin % 55.1% 53.8% 60.5% 59.5%
Operating expenses (919.5) (807.8) (871.6) (776.6)
Operating profit 203.6 211.0 361.7 350.2
Operating margin % 10.0% 11.1% 17.7% 18.5%
Net finance expense (43.5) (48.4) (43.5) (48.4)
Non-operating income/(expense), net (8.8) 12.1 (8.8) (4.4)
Profit before income taxes 151.3 174.7 309.4 297.4
Income tax expense (33.7) (62.2) (46.4) (56.9)
Net profit 117.6 112.5 263.0 240.5
Net profit % 5.8% 5.9% 12.9% 12.7%
Basic earnings per share (cents per share) 5.9¢ 5.7¢ 13.1¢ 12.1¢
Diluted earnings per share (cents per share) 5.8¢ 5.6¢ 13.0¢ 12.0¢
Dividend per share (cents) 5.8¢ 5.7¢
((a) )These measures are APMs and are reconciled to the appropriate
reported measures on pages 40 to 46.
The Group's Financials and Adjusted results
The Group's financial performance, measured in accordance with IFRS, is set
out in the Financial Statements and Notes thereto on pages 22 to 39 and
referred to in these Financial Statements as 'reported' measures.
The commentary in this Financial review includes discussion of the Group's
reported results and alternative performance measures ('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 on pages 40 to
46.
Constant Currency Growth (CER)
Management and the Board review revenue on a constant currency
basis which removes the effect of fluctuations in exchange rates to focus
on the underlying revenue performance. Constant currency information is
calculated by applying the applicable prior period average exchange rates to
the Group's reported revenue performance in the current period. Revenue and
the revenue growth on a constant currency basis are non-IFRS financial
measures and should not be viewed as replacements of IFRS reported revenue.
Alternative performance measures ("APMs")
In line with the Group's APM policy, included within our alternative
performance measures in 2021 are termination benefits in respect of
transformation activity of $4.3 million (2020: $12.2 million), amortisation of
acquired intangibles of $130.4 million (2020: $125.3 million), costs related
to acquisition and divestment activity of $17.8 million (2020: gain of $16.5
million), and dispute settlement of $5.6 million.
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.
For further information on Non-IFRS financial information, see pages 40 to 46.
Revenue
Group reported revenue for the year ended 31 December 2021 of $2,038.3 million
(2020: $1,894.3 million) increased 7.6% year-on-year or 5.8% on a constant
currency basis. Adjusting for the acquisitions of Cure Medical and Patient
Care Medical, and the divestment of the incontinence activities in 2021 and US
Skincare products in 2020, Group revenue grew by 5.3% on an organic constant
currency basis. The primary drivers of this organic growth performance were
the rebound in AWC, following weakness in 2020 caused by the pandemic when
there was a significant reduction in elective procedures and restricted access
to healthcare settings, coupled with continued strong growth in IC. Further
details of the Group's revenue is discussed above on pages 6 to 8.
Reported net profit
Reported operating profit was $203.6 million, a decrease of $7.4 million,
reflecting the 7.6% growth in revenue (of which 1.8% was a foreign exchange
tailwind) and an improvement in gross margin, being more than offset by an
increase in operating expenses primarily driven by higher investments in
Sales & Marketing and R&D.
Reported net finance expenses and non-operating expenses totalled $52.3
million (2020: $36.3 million). Net finance expenses reduced by $4.9 million to
$43.5 million, reflecting lower interest expenses and a reduction in the
Group's gross debt following scheduled repayments in 2021. The non-operating
expenses of $8.8 million principally relate to foreign exchange losses (2020:
$12.1 million gain principally from the disposal of the US Skincare product
line).
After income tax expense of $33.7 million (2020: $62.2 million), reported net
profit was $117.6 million (2020: $112.5 million) generating basic earnings per
share of 5.9 cents (2020: 5.7 cents)
Adjusted net profit
The 7.6% growth in revenue was accompanied by 100bps improvement in the
adjusted gross margin, with productivity gains and positive price/mix more
than offsetting inflationary headwinds, resulting in adjusted gross profit
increasing by $106.5 million (9.5%) to $1,233.3 million. However, increased
investment in Sales & Marketing and R&D and the negative impact of
foreign exchange on adjusted EBIT, plus other adverse movements in certain
costs including increase in Transformation related investments, resulted in
the adjusted operating profit increasing by only $11.5 million (3.3%) to
$361.7 million (2020: $350.2 million). As a result, adjusted EBIT margin % was
down 80bps at 17.7%.
Adjusted net profit rose 9.4% to $263.0 million (2020: $240.5 million)
supported by a $4.9 million reduction in net finance expense coupled with
$10.5 million reduction in adjusted income tax expense (which is explained
below).
Adjusted basic and diluted EPS was 13.1 cents and 13.0 cents respectively
(2020: 12.1 cents and 12.0 cents), calculated on the basic weighted average
ordinary shares of 2,009 million shares (2020: 1,992 million shares) and 2,026
million diluted shares (2020: 2,007 million) respectively.
Taxation and tax strategy
Adjusted Adjusted
2021 2020 2021 2020
$m $m $m $m
Profit before income taxes 151.3 174.7 309.4 297.4
Income tax expense (33.7) (62.2) (46.4) (56.9)
Effective tax rate 22.3% 35.6% 15.0% 19.1%
The Group's income tax expense was $33.7 million (2020: $62.2 million). The
Group's effective tax rate of 22.3% for the year was lower than the prior year
(2020: 35.6%) mainly due to the recognition of a deferred tax asset following
the acquisition of Cure Medical (in respect of previously unrecognised tax
losses in the US), lower incidence of certain minimum taxes in the US, and a
net tax benefit in the UK for additional tax reliefs claimed in respect of
prior years. These factors were partially offset by the impact of profit mix
between jurisdictions in which the Group has taxable presence and an increase
in deferred tax expense arising from an increase in the UK corporation tax
rate from 19% to 25% from 1 April 2023. For further information, see Note 4 to
the Financial Statements.
The adjusted income tax expense for 2021 of $46.4 million excludes adjusted
tax items which are the $11.5 million tax benefit effect on adjusting items
relating to current year amortisation of intangible assets and termination
costs in respect of major change programmes. The adjusted income tax expense
also excludes other discrete tax items relating to $6.8 million tax benefit
following the acquisition of Cure Medical (as noted above) and a deferred tax
expense of $5.6 million for the increase in UK corporation tax rate that
applies to UK acquired intangibles (where the amortisation of these acquired
intangibles is excluded from adjusted net profit).
In 2020, the adjusted income tax expense of $56.9 million excluded $17.6
million related to the change in basis of estimation of a deferred tax asset
arising from Swiss tax reform (other discrete tax item), and a tax benefit of
$12.3 million in respect of the tax effect of amortisation of intangible
assets and the cost of termination benefits in respect of specific Group-wide
initiatives.
The adjusted effective tax rate for 2021 was 15.0% (2020: 19.1%). The decrease
of 4.1% primarily reflects the same factors affecting the reported effective
tax rate (as noted above), excluding the impact of adjusted tax items.
The adjusted effective tax rate of 15.0% was also lower than the 19.8%
estimated in the H1 2021 results due to a combination of net benefits. These
include profit mix between the jurisdictions, reliefs claimed in the second
half of 2021 in respect of a number of years where the analysis performed was
completed after the announcement of the interim results, and reassessment of
the provision for uncertain tax positions based on developments in H2 2021.
ConvaTec is a responsible business and promotes the highest standards of
compliance and ethical behaviour. Management take a responsible attitude to
tax, recognising that it affects all of our stakeholders. The Group had on
average more than 10,000 employees worldwide during 2021 and operated in over
100 countries through direct sales and local distributors. As a result, our
business activities generate a substantial amount of taxes. These include both
corporate income taxes and non-income taxes such as payroll taxes, property
taxes, VAT/Sales & Use taxes, and other taxes. In order to provide
transparency on the Group's approach to tax, the Global Tax Strategy has been
published, which is available on the corporate website
https://www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement
(https://www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement)
.
Acquisitions
As noted above, in line with our strategic transformation and consistent with
the "Focus" pillar of FISBE (see page 8), we acquired Cure Medical and Patient
Care Medical for a net consideration of $113.8 million and disposed of an
incontinence patient list in the US for $1.4 million, generating a gain of
$0.5 million. Refer to Note 6 to the Financial Statements for further details.
Post the 31 December 2021 balance sheet date, the Group announced it had
signed a definitive agreement to acquire Triad Life Sciences, subject to
obtaining the necessary regulatory approvals and other customary clearances.
This proposed acquisition, which is expected to complete in March 2022, is
another important step forward as the Group pursues its FISBE strategy and
continues its journey of pivoting to sustainable and profitable growth. It
will strengthen AWC's position in the U.S. ("Focus") and provide access to a
complementary and innovative technology platform ("Innovate") that enhances
advanced wound management and patient outcomes. Refer to Note 10 to the
Financial Statements.
Dividends
Dividends are distributed based on the realised distributable reserves of the
Company and primarily derived from the dividends received from subsidiary
companies and not based on the Group's retained earnings. The realised
distributable reserves of the Company at 31 December 2021 were $1,590.3
million (2020: $1,653.1 million). Refer to Note 5 to the Financial Statements
for further information.
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:
Currency Average rate/ Closing rate 2021 2020
USD/EUR Average 1.18 1.14
Closing 1.14 1.22
USD/GBP Average 1.38 1.28
Closing 1.35 1.37
USD/DKK Average 0.16 0.15
Closing 0.15 0.16
During 2021, revenue was predominantly USD denominated (50%). Other
significant currencies were EUR (22%), GBP (7%) and DKK (2%). The balance
comprises a basket of other currencies which, on an individual basis, were
each less than 2% of revenue.
Sources and uses of cash
Sources of cash
The Group's primary source of liquidity is net cash generated from operations.
Net cash generated from operations
2021 2020
$m $m
EBITDA((a)) 420.1 420.4
Net cash generated from operations 400.6 502.5
Net interest paid (35.5) (48.5)
Income taxes paid (59.2) (54.5)
Net cash generated from operating activities 305.9 399.5
(a) EBITDA is reconciled to the most directly comparable financial
measure prepared in accordance with IFRS in the cash conversion table on page
46.
Net cash generated from operations decreased by $101.9 million to $400.6
million during the year, mainly due to working capital movement. The increase
in working capital in the year ended 31 December 2021 is due to growth in
revenue and the associated increase in the receivables position, an increase
in inventory levels to build up resilience to serve a diverse set of chronic
care categories, payments in relation to year-end capital expenditure and
strategic project accruals and payments under the Group's employee incentive
plan. Additionally, in 2020, the net cash generated from operations was
supplemented by income from the sale of the US Skincare product line ($29.8
million).
Net cash generated from operating activities was $305.9 million (2020: $399.5
million), reflecting the decrease in net cash generated from operations. Net
interest paid decreased by $13.0 million to $35.5 million, reflecting lower
interest costs on the Group's borrowings, which was offset by an increase in
tax paid of $4.7 million due to the timing of payments on account and an
increase in tax payments in the US.
Uses of cash
Cash and cash equivalents have decreased by $102.0 million to $463.4 million
at 31 December 2021 (31 December 2020: $565.4 million). The $400.6 million of
net cash generated from operations was used to acquire Cure Medical and
Patient Care Medical for a combined net consideration of $113.8 million,
capital expenditure of $94.1 million on manufacturing lines and digital
technologies, net repayments on borrowings of $92.1 million, pay $22.0
million in lease payments and $85.8 million in dividends to shareholders. The
year-on-year increase of $22.9 million in the cash dividend payment reflects
the level of uptake of the scrip alternative as compared to the prior year.
2021 2020
$m $m
Debt servicing 149.6 142.1
Dividend paid 85.8 62.9
Acquisition of PP&E and intangible assets 94.1 86.2
Tax paid 59.2 54.5
Acquisitions, net of cash acquired 113.8 -
Purchase of own shares - 5.6
Cash flows from debt servicing includes net repayments on borrowings of $92.1
million (2020: $73.0 million), lease payments of $22.0 million (2020: $20.6
million), and net interest payments of $35.5 million (2020: $48.5 million).
Cash conversion
Cash conversion is a measure that is used to ensure value is derived from our
operations and supports our decision making for potential future
investments.
The cash conversion was 73.0% (2020: 99.0%) and adjusted cash conversion
was 71.9% (2020: 90.3%).
Adjusted((a)) Adjusted((a))
2021 2020 2021 2020
$m $m $m $m
EBITDA 420.1 420.4 464.2 445.0
Share-based payments 16.4 12.4 - -
Working capital movement (31.6) 47.8 (32.3) 42.9
(Loss)/gain on foreign exchange derivatives (4.3) 21.9 (3.9) 0.2
Capital expenditure (net) (94.1) (86.2) (94.1) (86.2)
Net cash generated from operations, net of capital expenditure 306.5 416.3 333.9 401.9
Cash conversion 73.0% 99.0% 71.9% 90.3%
Income taxes paid (59.2) (54.5) (59.2) (54.5)
Free cash flow 247.3 361.8 274.7 347.4
(a) Adjusted EBITDA, adjusted working capital and adjusted non-cash items
are explained and reconciled to the most directly comparable financial measure
prepared in accordance with IFRS in the cash conversion table on page 46.
Adjusted free cash flow is one of the four key performance indicators used to
monitor the delivery of the Group strategy. Adjusted free cash flow was $274.7
million (2020: $347.4 million) with the decrease of $72.7 million principally
reflecting the increase in working capital and capital expenditure.
The $4.3 million cash loss (2020: $21.9 million gain) from foreign exchange
derivatives is a result of hedging activity to help mitigate the impact on
underlying exposures from volatility in foreign exchange rates.
Liquidity and net debt
Borrowings and net debt
Senior notes Credit facilities Total borrowings Cash and cash equivalents Net debt Lease liabilities Interest-bearing liabilities
$m $m $m $m $m $m $m
At 1 January 2020 - (1,486.1) (1,486.1) 385.8 (1,100.3) (88.5) (1,188.8)
Repayment of borrowings - 73.0 73.0 - 73.0 - 73.0
Cash flow - - - 181.1 181.1 - 181.1
Lease movements - - - - - (0.4) (0.4)
Foreign exchange - (39.0) (39.0) (1.5) (40.5) (3.2) (43.7)
Non-cash movements - (4.3) (4.3) - (4.3) - (4.3)
As at 31 December 2020 - (1,456.4) (1,456.4) 565.4 (891.0) (92.1) (983.1)
Net proceeds of new borrowings (491.8) - (491.8) - (491.8) - (491.8)
Repayment of borrowings - 583.9 583.9 - 583.9 - 583.9
Cash flow - - - (100.5) (100.5) - (100.5)
Lease movements - - - - - (2.1) (2.1)
Foreign exchange - 26.5 26.5 (1.5) 25.0 3.7 28.7
Non-cash movements (8.2) 1.4 (6.8) - (6.8) - (6.8)
As at 31 December 2021 (500.0) (844.6) (1,344.6) 463.4 (881.2) (90.5) (971.7)
Net debt/adjusted EBITDA
At 31 December 2020 2.0x
At 31 December 2021 1.9x
In October 2021, the Group successfully secured $500 million with a debut US
bond issue - diversifying the Group's debt structure, lengthening our debt
maturity profile and reducing our refinancing risk. As part of our Group
Treasury policy, we continuously review our debt structure, seeking
opportunities to optimise profile and pricing. The $500 million bond has an
8-year tenor and priced at a coupon of 3.875%, demonstrating the attraction of
our industry and confidence in ConvaTec's ability to pivot to sustainable and
profitable growth. The proceeds were used to partially prepay existing bank
debt (with $8.2 million of issuance costs incurred and to be amortised over
the life of the senior notes), leaving the Group at 31 December 2021 with
$844.6 million (excluding unamortised fees) of bank debt maturing in October
2024 and $500.0 million of bond debt maturing in 2029. This new debt profile
will support our continued investment and growth, aligned to our FISBE
strategy.
In addition, the Group has a $200 million revolving credit facility maturing
in October 2024, which remained unutilised throughout the year and was undrawn
as at 31 December 2021, which, with cash of $463.4 million, provided the Group
with total liquidity of $663.4 million at that date. This includes $37.5
million which is held in territories where there are restrictions related to
repatriation (31 December 2020: $42.4 million).
At 31 December 2021, the Group was in compliance with all financial and
non-financial covenants associated with the Group's outstanding borrowings.
The Group has two financial covenants, being net leverage and interest cover,
each of which is defined, where applicable, within the borrowing
documentation. The table below summarises the Group's most restrictive
covenant thresholds and position as at 31 December 2021 and 2020.
Maximum covenant net leverage* Covenant net leverage* Minimum covenant interest cover* Covenant interest cover*
31 December 2021 3.50x 1.97x 3.5x 11.7x
31 December 2020 3.75x 1.93x 3.5x 10.4x
*Interest cover is adjusted EBITDA/interest expense (net) and net leverage is
net debt/adjusted EBITDA in accordance with the definitions contained in
underlying borrowing documentation and are not the same as the definitions of
these measures presented in the Adjusted Performance Measures section on page
41 and applied in the commentary in this Financial review.
At 31 December 2021, the Group had total interest-bearing liabilities,
including IFRS 16 lease liabilities, of $1,435.1 million (2020: $1,548.5
million). Offsetting cash of $463.4 million (2020: $565.4 million) and
excluding lease liabilities, net debt was $881.2 million (2020: $891.0
million), equivalent to 1.9x adjusted EBITDA (2020: 2.0x adjusted EBITDA).
For further information on borrowings see Note 7 to the Financial Statements.
Financial position
2021 2020 Change
At 31 December $m $m $m
Intangible assets and goodwill 2,058.5 2,089.6 (31.1)
Other non-current assets 504.7 498.4 6.3
Cash and cash equivalents 463.4 565.4 (102.0)
Other current assets 647.4 613.1 34.3
Total assets 3,674.0 3,766.5 (92.5)
Current liabilities (569.2) (513.2) (56.0)
Non-current liabilities (1,410.0) (1,582.6) 172.6
Equity (1,694.8) (1,670.7) (24.1)
Total equity and liabilities (3,674.0) (3,766.5) 92.5
Intangible assets and goodwill
Intangible assets and goodwill reduced by $31.1 million to $2,058.5 million
(2020: $2,089.6 million). This decrease arises primarily from the in-year
amortisation of intangible assets of $147.2 million and the net effect of
foreign exchange of $24.6 million, partially offset by increases in intangible
assets and goodwill due to the Cure Medical and Patient Care Medical
acquisitions.
Other non-current assets
Other non-current assets, including property, plant and equipment,
right-of-use assets, deferred tax assets, restricted cash and other assets
increased by $6.3 million to $504.7 million (2020: $498.4 million). The
increase primarily reflects continual investment in our manufacturing
facilities, with additions in PP&E of $70.8 million offset by depreciation
of $40.6 million. The net increase in other non-current assets includes a
$18.2 million unfavourable foreign exchange movement. Deferred tax assets
decreased by $12.5 million to $28.9 million principally due to the change in
the basis of estimating the deferred tax asset arising from the Swiss tax
reform.
Current assets excluding cash and cash equivalents
Current assets excluding cash and cash equivalents increased by $34.3 million
to $647.4 million (2020: $613.1 million), primarily driven by the net effect
of foreign exchange of $33.4 million within inventories and trade and other
receivables.
Current liabilities
Current liabilities increased by $56.0 million to $569.2 million (2020: $513.2
million), reflecting a $58.2 million increase in the current portion of
borrowings resulting from the scheduled repayments under the Group's credit
agreement, and a $8.4 million increase in trade and other payables, primarily
due to increases in accruals for strategic projects and employee incentives.
Non-current liabilities
Non-current liabilities have reduced by $172.6 million to $1,410.0 million
(2020: $1,582.6 million). This includes a reduction in non-current borrowings
of $170.0 million, resulting from repayments of $583.9 million during the
year, and an increase in the current portion of borrowings as described above,
partially offset by $26.4 million in respect of the foreign exchange impact on
Euro denominated borrowings and the net proceeds from the $500 million senior
notes issued.
Going concern
As discussed above, the overall financial performance of the business has
remained robust with a strong liquidity position maintained throughout the
year and access to committed funding through to October 2024, of which $200
million has remained undrawn throughout the year. In preparing the Group's
Viability statement, the Board-approved strategic plan was used as a
foundation, overlaid with the forecasts and maximum consideration for the
proposed acquisition of Triad Life Sciences and severe but plausible downside
scenarios linked to the Group's principal and potential emerging risks,
including supply chain disruption (incorporating the effect of climate
change), delivery of transformation initiatives, and customer and markets,
applied against the strategic plan. Brexit was not considered a significant
risk for the Group and therefore, is not included in the scenarios. After the
application of these scenarios, and before mitigations to address them, the
Group is forecast to maintain a strong liquidity position and to operate
comfortably within the debt covenants. A reverse stress test, before
mitigation, was also considered but the conditions of the reverse stress test
were considered implausible given that a reduction of >$177 million EBITDA
would be required in 2022 to create conditions which may lead to a potential
covenant breach and substantially higher reductions in profitability in
subsequent years.
In relation to going concern, given available cash resources, forecast
performance for the next 18 months, including covenant compliance, the going
concern assumption has been adopted in the preparation of the Financial
Statements. In reaching this conclusion and given the economic uncertainty
that has been created by the pandemic, the Board applied the same severe but
plausible scenarios utilised in the preparation of the Viability statement.
Under each scenario, the Group retained significant liquidity and covenant
headroom throughout the going concern period i.e., 12 months from the date of
this report.
Impairment of goodwill and other intangible assets
We regularly review our trading performance to establish whether there were
any triggers that would require an impairment review of goodwill or other
intangible assets. As part of the review, we have determined that the ongoing
transformation programme and the further embedding of the new operating model
during the year has triggered a change in CGU groups categorisation, and we
have identified new CGU groups. The annual CGU impairment review was conducted
on the new and former CGU groups and, taking into consideration our future
forecasts and reasonably possible scenarios, significant headroom remained in
the carrying value of all CGUs in comparison to the sensitised recoverable
value. No impairment has been recognised. In addition, management considered
the severe but plausible downside scenarios used in the Viability assessment
and, again, headroom remained on the carrying value of all CGUs.
Financial control environment
With a substantial number of office-based employees continuing to work from
home during the year, including within the finance community, we continued to
monitor closely the financial and IT general control environment.
The Group uses a single system for the self-certification of global financial
controls across all markets. The self-certification process continued
throughout the year with no deterioration in response rates, which remained
high. The Global Financial Controls team, acting as the second line of
defence, investigates all notified control failures to ensure that there is no
risk of material financial misstatement. Where issues were identified the
financial controls team would give focused support and training to ensure
adherence with global standards. In addition, internal audit reviews continued
to be completed, reviewing our financial internal controls as part of their
audit programme. No control failures were identified during the year that
posed a risk of a material financial misstatement.
As the finance activity transitioned to our Global Business Services
facilities in Lisbon and Bogota continues to embed, detailed analysis of
segregation of duty activities continues, controls documentation has been
prepared, and subsequent operation of those controls reviewed to ensure that
the control environment continues to improve.
A review of the operation of IT general controls was conducted on a regular
basis during the year by the IT governance risk and compliance team and no
weaknesses were identified that would give rise to a risk of material
financial misstatement.
Consolidated Income Statement
For the year ended 31 December 2021
2021 2020
Notes $m $m
Revenue 2 2,038.3 1,894.3
Cost of sales (915.2) (875.5)
Gross profit 1,123.1 1,018.8
Selling and distribution expenses (539.7) (463.3)
General and administrative expenses (285.3) (262.1)
Research and development expenses (94.5) (82.4)
Operating profit 203.6 211.0
Finance income 0.8 1.9
Finance expense (44.3) (50.3)
Non-operating (expense)/income, net 3 (8.8) 12.1
Profit before income taxes 151.3 174.7
Income tax expense 4 (33.7) (62.2)
Net profit 117.6 112.5
Earnings per share
Basic earnings per share (cents per share) 5.9¢ 5.7¢
Diluted earnings per share (cents per share) 5.8¢ 5.6¢
All amounts are attributable to shareholders of the Group and wholly derived
from continuing operations.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2021
2021 2020
Notes $m $m
Net profit 117.6 112.5
Other comprehensive income
Items that will not be reclassified subsequently to the Consolidated Income
Statement
Remeasurement of defined benefit pension plans 3.2 (0.4)
Change in pension asset restriction 1.3 5.0
Income tax relating to items that will not be reclassified 0.1 0.2
Items that may be reclassified subsequently to the Consolidated Income
Statement
Exchange differences on translation of foreign operations (29.6) 53.0
Effective portion of changes in fair value of cash flow hedges 8 (5.1) (6.7)
Changes in fair value of cash flow hedges reclassified to the Consolidated 8 5.7 (0.2)
Income Statement
Costs of hedging 8 (0.4) (0.1)
Income tax in respect of items that may be reclassified (0.9) 1.7
Other comprehensive (expense)/income (25.7) 52.5
Total comprehensive income 91.9 165.0
All amounts are attributable to shareholders of the Group and wholly derived
from continuing operations.
Consolidated Statement of Financial Position
As at 31 December 2021
2021 2020
Notes $m $m
Assets
Non-current assets
Property, plant and equipment 366.7 352.2
Right-of-use assets 83.6 85.8
Intangible assets and goodwill 2,058.5 2,089.6
Deferred tax assets 28.9 41.4
Restricted cash 13.6 5.7
Other non-current receivables 11.9 13.3
2,563.2 2,588.0
Current assets
Inventories 308.8 297.1
Trade and other receivables 323.5 307.9
Derivative financial assets 8 15.1 8.1
Cash and cash equivalents 463.4 565.4
1,110.8 1,178.5
Total assets 3,674.0 3,766.5
Equity and liabilities
Current liabilities
Trade and other payables 342.5 334.1
Borrowings 7 144.8 86.6
Lease liabilities 19.7 19.8
Current tax payable 45.5 55.6
Derivative financial liabilities 8 11.7 7.7
Provisions 5.0 9.4
569.2 513.2
Non-current liabilities
Borrowings 7 1,199.8 1,369.8
Lease liabilities 70.8 72.3
Deferred tax liabilities 87.2 101.4
Provisions 1.7 1.5
Derivative financial liabilities 8 2.9 7.7
Other non-current payables 47.6 29.9
1,410.0 1,582.6
Total liabilities 1,979.2 2,095.8
Net assets 1,694.8 1,670.7
Equity
Share capital 247.0 245.5
Share premium 142.3 115.3
Own shares (2.2) (6.7)
Retained deficit (842.0) (845.3)
Merger reserve 2,098.9 2,098.9
Cumulative translation reserve (75.7) (46.1)
Other reserves 126.5 109.1
Total equity 1,694.8 1,670.7
Total equity and liabilities 3,674.0 3,766.5
Consolidated Statement of Changes in Equity
For the year ended 31 December 2021
Share capital Share premium Own shares Retained deficit Merger reserve Cumulative translation reserve Other reserves Total
Notes $m $m $m $m $m $m $m $m
At 1 January 2020 242.9 70.7 (10.8) (847.7) 2,098.9 (99.1) 106.1 1,561.0
Net profit - - - 112.5 - - - 112.5
Other comprehensive income:
Foreign currency translation adjustment, net of tax - - - - - 53.0 - 53.0
Remeasurement of defined benefit pension plans, net of tax - - - - - - (0.2) (0.2)
Change in pension asset restriction - - - - - - 5.0 5.0
Changes in fair value of cash flow hedges, net of tax - - - - - - (5.3) (5.3)
Other comprehensive income - - - - - 53.0 (0.5) 52.5
Total comprehensive income - - - 112.5 - 53.0 (0.5) 165.0
Dividends paid 5 - - - (62.9) - - - (62.9)
Scrip dividend 5 2.6 44.6 - (47.2) - - - -
Share-based payments - - - - - - 12.4 12.4
Share awards vested - - 9.7 - - - (9.7) -
Excess deferred tax benefit from share-based payments - - - - - - 0.8 0.8
Purchase of own shares - - (5.6) - - - - (5.6)
At 31 December 2020 245.5 115.3 (6.7) (845.3) 2,098.9 (46.1) 109.1 1,670.7
Net profit - - - 117.6 - - - 117.6
Other comprehensive income:
Foreign currency translation adjustment, net of tax - - - - - (29.6) - (29.6)
Remeasurement of defined benefit pension plans, net of tax - - - - - - 3.3 3.3
Change in pension asset restriction - - - - - - 1.3 1.3
Changes in fair value of cash flow hedges, net of tax - - - - - - (0.7) (0.7)
Other comprehensive (expense)/income - - - - - (29.6) 3.9 (25.7)
Total comprehensive income - - - 117.6 - (29.6) 3.9 91.9
Dividends paid 5 - - - (85.8) - - - (85.8)
Scrip dividend 5 1.5 27.0 - (28.5) - - - -
Share-based payments - - - - - - 16.4 16.4
Share awards vested - - 4.5 - - - (3.5) 1.0
Excess deferred tax benefit from share-based payments - - - - - - 0.6 0.6
At 31 December 2021 247.0 142.3 (2.2) (842.0) 2,098.9 (75.7) 126.5 1,694.8
Consolidated Statement of Cash Flows
For the year ended 31 December 2021
2021 2020
Notes $m $m
Cash flows from operating activities
Net profit 117.6 112.5
Adjustments for
Depreciation of property, plant and equipment 40.6 38.5
Depreciation of right-of-use assets 22.8 22.4
Amortisation 147.2 136.8
Income tax expense 4 33.7 62.2
Non-operating expense, net 4.5 9.8
Finance costs, net 43.5 48.4
Share-based payments 16.4 12.4
Impairment/write-off of intangible assets 2.9 1.8
Impairment/write-off of property, plant and equipment 3.0 9.9
Change in assets and liabilities:
Inventories (19.6) (5.3)
Trade and other receivables (29.4) 6.5
Other non-current receivables 1.1 (4.1)
Restricted cash (8.4) (2.1)
Trade and other payables 10.7 47.5
Other non-current payables 14.0 5.3
Net cash generated from operations 400.6 502.5
Interest received 0.8 1.9
Interest paid (36.3) (50.4)
Income taxes paid (59.2) (54.5)
Net cash generated from operating activities 305.9 399.5
Cash flows from investing activities
Acquisition of property, plant and equipment and intangible assets (94.1) (86.2)
Proceeds from sale of property, plant and equipment and other assets - 0.1
Acquisitions, net of cash acquired 6 (113.8) -
Proceeds from divestiture 1.4 29.8
Net cash used in investing activities (206.5) (56.3)
Cash flows from financing activities
Repayment of borrowings (583.9) (73.0)
Proceeds from borrowings 491.8 -
Payment of lease liabilities (22.0) (20.6)
Purchase of own shares - (5.6)
Dividends paid 5 (85.8) (62.9)
Net cash used in financing activities (199.9) (162.1)
Net change in cash and cash equivalents (100.5) 181.1
Cash and cash equivalents at beginning of the year 565.4 385.8
Effect of exchange rate changes on cash and cash equivalents (1.5) (1.5)
Cash and cash equivalents at end of the year 463.4 565.4
1. Basis of preparation
1.1 General information
ConvaTec Group
Plc (the "Company") is a company incorporated in the United Kingdom under the Companies Act of
2006
with its registered office situated in England and Wales. The Company's
registered office is 3 Forbury Place, 23 Forbury Road, Reading, RG1 3JH,
United Kingdom.
The Company and its subsidiaries (collectively, the "Group")
are a global medical products and technologies group focused on
therapies for the management of chronic conditions, with leading market
positions in advanced wound
care, ostomy care, continence and critical care and infusion care.
The announcement is based on the Group's Consolidated
Financial Statements which are prepared in accordance with United
Kingdom adopted international accounting standards.
The Financial Statements are presented in US dollars ("USD"),
reflecting the profile of the Company and its
subsidiaries' (collectively, the "Group") revenue and operating profit, which are primarily generated in US
dollars and US
dollar-linked currencies. All values are rounded to $0.1
million except where otherwise indicated.
The financial information set out in this announcement does
not constitute the Group's statutory accounts for the years ended 31
December 2021 and 2020
but is derived from those accounts. Statutory accounts for 2020
have been delivered to the Registrar of Companies and those for 2021
will be delivered following the Company's Annual General Meeting. The
auditor's reports on the 2021 and 2020
accounts were unqualified, did not draw attention to any matters by
way of emphasis
without qualifying their report and did not contain a statement under section 498(2)
or (3) of the Companies Act 2006.
1.2 Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements, in conformity with adopted IFRS,
requires management to make judgements, estimates and assumptions that affect
the application of accounting policies and the reported value of assets and
liabilities, income and expense. Actual results may differ from these
estimates or judgements of likely outcome. Management regularly reviews, and
revises as necessary, the accounting judgements that significantly impact the
amounts recognised in the Consolidated Financial Statements and the sources of
estimation uncertainty that are considered to be "key estimates" due to their
potential to give rise to material adjustments in the Group's Consolidated
Financial Statements within the next financial year.
Considerations for the identification of critical accounting judgements and
key estimates
A detailed assessment was performed by management of the potential impact on
each balance sheet caption and associated accounting estimates and judgements
at each reporting date during the year. In preparing the Consolidated
Financial Statements, no critical accounting judgements or key sources of
estimation uncertainty have been identified from this assessment.
The Group's Audit and Risk Committee has reviewed, discussed, and challenged
management on the determination of its critical accounting judgements and key
estimates.
Recognition of deferred tax assets in respect of unused US tax losses
The Group had unused US tax losses at 31 December 2021. IAS 12 Income taxes,
states that when an entity has a history of recent losses, the entity
recognises a deferred tax asset arising from unused tax losses only to the
extent that the entity has sufficient taxable temporary differences or there
is convincing other evidence that sufficient taxable profit will be available
against which the unused tax losses can be utilised by the entity. Given the
history of US tax losses, management assessed the future profitability of its
US operations over the next three years, taking into account known significant
contracts, organic and inorganic strategic growth initiatives, and any cost
reduction transformation programmes, and concluded that there is insufficient
evidence that there will be short term future taxable profit in the US against
which these losses can be utilised. Accordingly, the unused US tax losses have
not been recognised as a deferred tax asset at 31 December 2021 except to the
extent that there are suitable offsetting taxable temporary differences.
Based on the strategic plan for the US, management also concluded that the
recognition of a further deferred tax asset on unused US tax losses is
unlikely to be subject to a material adjustment in the next 12 months. In the
interim results for the six months ended 30 June 2021, the recognition of
deferred tax assets in relation to unused US tax losses was identified as a
key source of estimation uncertainty but following further information and
clarification in respect of the impact of the Group's transformation programme
on the US taxable profits, management concluded that this is no longer a key
source of estimation uncertainty.
1.3 Accounting standards
New standards and interpretations applied for the first time
On 1 January 2021, the Group adopted the IASB issued Amendments to IFRS 16 -
COVID 19-Related Rent Concessions.
On 1 January 2021, the Group adopted the IASB issued Amendments to IFRS 4,
IFRS 7, IAS 39, IFRS 9, and IFRS 16 - Interest rate benchmark reform (phase
2). The amendment to IFRS 9 provides relief from applying specific hedge
accounting and financial instrument derecognition requirements directly
affected by interbank offered rate (IBOR) reform. By applying the practical
expedient, the Group will not be required to discontinue its hedging
relationships as a result of changes in reference rates due to the IBOR
reform. The amendment to IFRS 7 required additional disclosure explaining the
nature and extent of risk related to the reform and the progress of the
transition.
In March 2021, the IFRS Interpretations Committee (IFRIC) published the second
agenda decision on the accounting for Software-as-a-Service (SaaS)
arrangement, clarifying the accounting for configuration and customisation
costs incurred in implementing SaaS.
The adoption during the year of the amendments and interpretations has not had
a material impact on the Consolidated Financial Statements.
New standards and interpretations not yet applied
IFRS 17 - Insurance contracts (effective from 1 January 2023) is ultimately
intended to replace IFRS 4. It sets out the requirements that a company should
apply in reporting information about insurance contracts it issues and
reinsurance contracts it holds. The Group believes that the adoption of IFRS
17 will not have a significant impact on the Consolidated Financial
Statements.
Other interpretations and amendments
In addition to these issued standards, there are a number of other
interpretations, amendments and annual improvement project recommendations
that have been issued but not yet effective that have not yet been adopted by
the Group because application is not yet mandatory, or they are not relevant
for the Group.
2. Revenue and segmental information
The Board considers the Group's business to be a single segment entity engaged
in the development, manufacture and sale of medical products and technologies.
R&D, manufacturing and central support functions are managed globally for
the Group. Revenues are managed both on a category and regional basis. This
note presents the performance and activities of the Group as a single segment.
Pages 6 to 8 of the Chief Executive's Review provide further detail of
category revenue.
The Group's CEO, who is the Group's Chief Operating Decision Maker, evaluates
the Group's global product portfolios on a revenue basis and evaluates
profitability and associated investment on an enterprise-wide basis due to
shared geographic infrastructures and support functions between the
categories. Financial information in respect of revenues provided to the CEO
for decision-making purposes is made on both a category and geographic basis.
Resources are allocated on a Group-wide basis, with a focus on both category
and the key markets but allocations are primarily based on the merits of the
individual proposals.
Revenue by category
The Group generates revenue across four major product categories.
The following table sets out the Group's revenue for the year ended 31
December by category:
2021 2020
$m $m
Advanced Wound Care 592.3 546.8
Ostomy Care 546.5 525.9
Continence and Critical Care 542.9 498.6
Infusion Care 356.6 323.0
Total 2,038.3 1,894.3
Geographic information
Geographic markets((a)())
The following table sets out the Group's revenue in each regional geographic
market in which customers are located:
2021 2020
$m $m
Europe 741.6 709.8
North America 1,022.1 944.9
RoW 274.6 239.6
2,038.3 1,894.3
(a) During the year ended 31 December 2021, the geographical revenue
information provided to the Group's CEO was changed to better reflect the way
in which the Group now manages its operations. The change was driven by the
ongoing transformation initiatives and aligns with the current management and
reporting structure. The change in reporting structure took effect during the
year ended 31 December 2021. The 31 December 2020 comparative revenue
information has been re-presented to reflect this change. Europe includes
Russia and formerly EMEA comprised Europe (including Russia), the Middle East
and Africa. North America comprises United States and Canada, and formerly
Americas comprised the United States, Canada, Latin and South America. Rest of
World ("RoW") comprises all countries in Asia Pacific, Latin America
(including Mexico and the Caribbean), South America, the Middle East
(including Turkey) and Africa.
3. Non-operating (expense)/income, net
Non-operating (expense)/income, net was as follows:
2021 2020
Notes $m $m
Foreign exchange gain/(loss)((a)) 4.3 (26.3)
(Loss)/gain on foreign exchange forward contracts 8 (9.7) 21.7
(Loss)/gain on foreign exchange cash flow hedges 8 (3.9) 0.2
Gain on divestiture 0.5 16.5
Non-operating (expense)/income, net (8.8) 12.1
(a) The foreign exchange gains in 2021 primarily relate to the
foreign exchange impact on intercompany transactions, including loans
transacted in non-functional currencies. The Group uses foreign exchange
forward contracts to manage these exposures in accordance with the Group's
foreign exchange risk management policy.
4. Income taxes
The note below sets out the current and deferred tax charges, which together
comprise the total tax expense in the Consolidated Income Statement.
4.1 Taxation
The Group's income tax expense is the sum of the total current and deferred
tax expense.
2021 2020
$m $m
Current tax
UK corporation tax 0.8 0.4
Overseas taxation 46.8 54.9
Adjustment to prior years (4.3) (0.6)
Total current tax expense 43.3 54.7
Deferred tax
Origination and reversal of temporary differences (13.3) (13.8)
Change in tax rates 4.4 2.5
Adjustment to prior years (0.7) 1.2
Change in basis of estimate for Swiss deferred tax asset - 17.6
Total deferred tax (benefit)/expense (9.6) 7.5
Income tax expense 33.7 62.2
In 2021, the deferred tax adjustment to prior years primarily relates to a net
tax benefit in the UK for additional tax reliefs claimed in respect of a
number of years following the completion of a detailed analysis performed in
2021.
The change in tax rates mainly relates to the revaluation of the net deferred
tax liability in the UK following the enactment of Finance Act 2021 on 10 June
2021, which increases the UK corporation tax rate from 19.0% to 25.0% from 1
April 2023. This resulted in a tax expense of $4.8 million. In 2020 the change
in tax rates mainly relates to the revaluation of the net deferred tax
liability in the UK from 17.0% to 19.0% following the reversal of the change
in corporation tax rate originally due to come into effect from 1 April 2020.
The Group's deferred tax expense in the year ended 31 December 2020 was mainly
influenced by the deferred tax expense of $17.6 million arising from the
change in the basis of estimate of the deferred tax asset arising upon the
Swiss tax reform.
The basis for the deferred tax asset due to the Swiss tax reform remained
unchanged in 2021 following formal agreement with the Swiss tax authorities
during the year.
4.2 Reconciliation of effective tax rate
The effective tax rate for the year ended 31 December 2021 was 22.3%, compared
with 35.6% for the year ended 31 December 2020.
Tax reconciliation to UK statutory rate
The table below reconciles the Group's profit before income taxes at the UK
statutory rate to the Group's total income tax expense:
2021 2020
$m $m
Profit before income taxes 151.3 174.7
Profit before income taxes multiplied by rate of corporation tax in the UK of 28.7 33.2
19.0% (2020: 19.0%)
Difference between UK and overseas tax rates((a)) 4.0 2.4
Deferred tax impact for increase in UK tax rate 4.8 2.4
Non-deductible/non-taxable items 1.3 3.4
Movement in unrecognised losses and other assets (6.9) 1.8
Movement on provision for uncertain tax positions (0.3) (0.5)
Deferred tax impact of the Swiss tax reform - 17.6
Other((b)) 2.1 1.9
Income tax expense and effective tax rate 33.7 22.3% 62.2 35.6%
(a) This includes changes in tax rates based on substantively
enacted legislation across various tax jurisdictions as of 31 December.
(b) Includes tax on amortisation of indefinite-lived intangibles and
taxes on unremitted earnings.
The Group's income tax expense includes a $6.8 million tax benefit due to the
recognition of deferred tax assets following the acquisition of Cure Medical
in respect of previously unrecognised tax losses in the US and $3.0 million
tax expense due to the derecognition of deferred tax asset for pre-2017 losses
in the UK where its utilisation is not probable in the foreseeable future (in
'Movement in unrecognised losses and other assets'). Refer to Note 6 for the
acquisition accounting of Cure Medical.
The Group has worldwide operations and therefore is subject to several factors
that may affect future tax charges, principally the levels and mix of
profitability in different tax jurisdictions, transfer pricing regulations,
tax rates imposed and tax regime reforms.
The calculation of the Group's tax expense involves a degree of estimation and
judgements in respect of certain items for which the tax treatment cannot be
finally determined until resolution has been reached with the relevant tax
authority, specifically in relation to open tax and transfer pricing matters.
Due to the high volume of intercompany transactions, the Group's evolving
business model and the increasing complexity in interaction between multiple
tax laws and regulations, transfer pricing is an area of significant risk,
requiring judgement in determining the appropriate allocation of profits
between jurisdictions. The Group assessed the impact of ongoing changes to the
Group's operating model, the supporting documentation for the tax and transfer
pricing positions, existing tax authority challenges and the likelihood of new
challenges by tax authorities. In line with the requirements of IFRIC 23,
Uncertainty over Income Tax Treatments, the Group has provided for uncertain
tax positions in respect of transfer pricing positions and withholding tax
liabilities. The net decrease in provisions during 2021 was driven by the
reassessment of estimates and, settlement and expiry of open tax issues in
various jurisdictions. Where open issues exist, the ultimate liability for
such matters may vary from the amounts provided and is dependent upon the
outcome of discussions with the relevant tax authorities or, where applicable,
appeal proceedings. Accordingly, settlement and expiry of open tax issues
could have a significant impact on future tax charges.
The Group is monitoring tax reforms driven by the OECD's project to address
the tax challenges arising from the digitalisation of the economy. The Group
is analysing whether the tax impact of the project to the Group will be
material following the issuance of detailed guidance for Pillar 2 by the OECD
on 20 December 2021 and expected new legislation in the jurisdictions in which
the Group operates once it becomes available. This has no impact on the
Group's results for 2021.
5. Dividends
Dividends paid and proposed were as follows:
pence per share cents per share Total Settled in Settled via scrip No of scrip shares issued
cash
$m $m $m
Final dividend 2019 3.095 3.983 75.8 38.0 37.8 16,991,621
Interim dividend 2020 1.306 1.717 34.3 24.9 9.4 3,841,666
Paid in 2020 4.401 5.700 110.1 62.9 47.2 20,833,287
Final dividend 2020 2.845 3.983 79.7 53.6 26.1 9,475,532
Interim dividend 2021 1.229 1.717 34.6 32.2 2.4 750,265
Paid in 2021 4.074 5.700 114.3 85.8 28.5 10,225,797
Final dividend 2021 proposed 3.161 4.154 83.7
The Company operates a scrip dividend scheme allowing shareholders to elect to
receive their dividends in the form of new fully paid ordinary shares. For any
particular dividend, the Directors may decide whether or not to make the scrip
offer available.
The final dividend proposed for 2021, to be distributed on 19 May 2022 to
shareholders registered at the close of business on 1 April 2022, is based
upon the issued and fully paid share capital as at 31 December 2021 and is
subject to shareholder approval at the Annual General Meeting on 12 May 2022.
The dividend will be declared in US dollars and will be paid in Sterling at
the chosen exchange rate of $1.314/£1.00 determined on 7 March 2022. A scrip
dividend alternative will be offered allowing shareholders to elect by 27
April 2022 to receive their dividend in the form of new ordinary shares.
The interim and final dividends for 2021 give a total dividend for the year of
5.871 cents per share (2020: 5.700 cents per share).
6. Acquisitions
During the year, the Group completed the acquisitions of
(i) 100% of the share capital of Cure Medical LLC ("Cure
Medical"), a manufacturer and distributer of intermittent catheters based in
California.
(ii) the business of Respiratory Solutions, LLC, which
trades under the name "Patient Care Medical", a US distributor and service
company focused on disposable, intermittent catheters in the US market.
This note provides details of the transaction and the acquisition accounting
that has been recorded to reflect the fair value of assets acquired and
liabilities assumed as well as the intangible assets and goodwill recognised
upon acquisition.
On 15 March 2021, the Group acquired 100% of the share capital of Cure Medical
for net cash consideration of $84.7 million. This consisted of $85.1 million
cash, of which $4.9 million was deferred consideration and was paid into
escrow, net of cash acquired of $0.7 million and a $0.4 million working
capital adjustment. Cure Medical, based in California, manufactures and
distributes intermittent catheters, and operates in the Continence category.
The acquisition of Cure Medical allows the Group to better serve the US
intermittent catheter market, improving and expanding relationships with
patients, caregivers and partners.
In addition to the initial consideration, the sellers may earn contingent
consideration of up to $10.0 million based upon post-acquisition performance
targets included in the Share Purchase Agreement. The fair value of contingent
consideration at the date of acquisition was $3.1 million, which is due to be
paid within three years of the acquisition date. Following completion of
acquisition accounting, any changes in the fair value of contingent
consideration will be recorded in the Consolidated Income Statement in
accordance with the Group's accounting policies. There were no movements from
the date of acquisition to 31 December 2021.
On 1 December 2021, the Group acquired the business of Respiratory Solutions,
LLC, which trades under the name Patient Care Medical. Patient Care Medical is
a US distributor and service company focused on disposable, intermittent
catheters in the US market and operates in the Continence category. The
consideration for the acquisition was $29.1 million which included $6.0
million of deferred consideration paid into escrow.
Assets acquired and liabilities assumed
The transactions meet the definition of business combinations and have been
accounted for under the acquisition method of accounting. The following table
summarises the provisional fair values of the assets acquired and the
liabilities assumed as at the acquisition dates.
Cure Medical Patient Care Medical Total
Provisional Provisional Provisional
$m $m $m
Non-current assets
Right-of-use assets - 0.7 0.7
Intangible assets - Customer relationships and non-compete 28.9 4.3 33.2
agreements
Intangible assets - Trade names 4.2 0.4 4.6
Intangible assets - Product-related 4.9 - 4.9
Current assets
Trade and other receivables 2.1 - 2.1
Inventories 8.0 - 8.0
Cash and cash equivalents 0.7 - 0.7
Total assets acquired 48.8 5.4 54.2
Non-current liabilities
Deferred tax liabilities (9.4) - (9.4)
Current liabilities
Trade and other payables (5.5) - (5.5)
Lease liabilities - (0.7) (0.7)
Total liabilities assumed (14.9) (0.7) (15.6)
Net assets acquired 33.9 4.7 38.6
Goodwill 54.6 24.4 79.0
Total 88.5 29.1 117.6
Initial cash consideration 80.9 23.1 104.0
Working capital adjustment (0.4) - (0.4)
Deferred purchase consideration paid into escrow((a)) 4.9 6.0 10.9
Contingent consideration 3.1 - 3.1
Total consideration 88.5 29.1 117.6
Analysis of cash outflow reflected in the Consolidated Statement of Cash Flows
Cure Medical Patient Care Medical Total
Provisional Provisional Provisional
$m $m $m
Initial cash consideration 80.9 23.1 104.0
Deferred purchase consideration paid into escrow((a)) 4.9 6.0 10.9
Cash and cash equivalents (0.7) - (0.7)
Working capital adjustment (0.4) - (0.4)
Net cash outflow from acquisitions, net of cash acquired 84.7 29.1 113.8
(a) On the acquisition of Cure Medical, $4.9 million was paid on closing
into escrow as security for due and punctual fulfilment by the seller of its
obligations under the Share Purchase Agreement. The escrow account will be
maintained for three years from the acquisition date, of which (i) $0.8
million was released in July 2021, (ii) $0.4 million will be released after 12
months, (iii) $2.8 million will be released after two years, and (iv) the
remaining amount will be released after three years. On the acquisition of
Patient Care Medical, $6.0 million was paid into escrow as security for any
unrecorded liabilities. If no additional liabilities are payable, $3.0 million
of the escrow is payable to the vendors on 1 July 2023 and $3.0 million is
payable on 1 December 2024.
The fair values of the assets acquired and liabilities assumed are provisional
at 31 December 2021. The Group will finalise these amounts no later than one
year from the acquisition date.
Acquisition-related costs
The Group incurred $2.9 million of acquisition-related costs in the year ended
31 December 2021, primarily in respect of legal and due diligence expenses.
These acquisition-related costs have been recognised in general and
administrative expenses in the Consolidated Income Statement.
Revenue and profit
The revenue of Cure Medical for the period from the acquisition date to 31
December 2021 was $29.3 million and profit before tax for the period was $1.4
million, after recognising intangible asset amortisation in respect of the
acquisition of $2.9 million. If the acquisition had been completed on 1
January 2021, reported Group revenue would have been $6.7 million higher and
profit before tax for the year would have been $0.6 million higher.
The revenue of Patient Care Medical for the period from the acquisition date
to 31 December 2021 was $1.0 million and profit before tax for the period was
immaterial. If the acquisition had been completed on 1 January 2021, reported
Group revenue would have been $10.7 million higher and profit before tax for
the year would have been $1.2 million higher, after recognising intangible
asset amortisation in respect of the acquisition of $0.7 million.
7. Borrowings
The Group's sources of borrowing for funding and liquidity purposes derive
from senior notes and drawn credit facilities including a committed revolving
credit facility.
In October 2021, the Group issued unsecured senior notes of $500 million in
accordance with Rule 144A and Regulations S (under the Securities Act) and
used the proceeds to prepay a portion of the drawings against the credit
facilities.
The Group's borrowings as at 31 December were as follows:
2021 2020
Year of Face value Face value
Currency maturity $m $m
Revolving Credit Facility Multicurrency 2024 - -
Senior Notes USD 2029 500.0 -
Term Loan Facility A((a)) USD/Euro 2024 461.2 560.1
Term Loan Facility B((b)) USD/Euro 2024 396.7 908.2
Interest-bearing borrowings 1,357.9 1,468.3
Financing fees (13.3) (11.9)
Carrying value of borrowings 1,344.6 1,456.4
Less: current portion of borrowings 144.8 86.6
Non-current borrowings 1,199.8 1,369.8
(a) Included within Term Loan Facility A is €78.4 million ($89.2
million), and €140.4 million ($171.6 million) at 31 December 2021 and 2020
respectively. This represents 19% (2020: 31%) denominated in Euros and 81%
(2020: 69%) denominated in US dollars.
(b) Included within Term Loan Facility B is €67.5 million ($76.7
million), and €227.8 million ($278.2 million) at 31 December 2021 and 2020
respectively, denominated in Euros. This represents 19% (2020: 31%)
denominated in Euros and 81% (2019: 69%) denominated in US dollars.
Financial Covenants
The Group was in compliance with all financial and non-financial covenants in
the credit agreement at 31 December 2021, with significant available headroom
on the financial covenants (in excess of $700.0 million debt headroom on net
debt to adjusted EBITDA).
Senior notes
Unsecured senior notes of $500.0 million were issued on 7 October 2021 with a
maturity date of 15 October 2029 at a coupon rate of 3.875% per annum, payable
semi-annually and, except for certain options redemption conditions, is not
redeemable at the issuer's option prior to 7 October 2024. Issue proceeds were
used to prepay a portion of the drawings against credit facilities and the
existing share pledges securing the credit facilities were released.
The senior notes are subject to a financial covenant which is an interest
cover test (minimum of 2 times) as defined in the indenture. Testing is
required annually based on the last 12 calendar months' financial performance.
Borrowings not measured at fair value
The senior notes are listed and their fair value of $507.7 million at 31
December 2021 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 are
categorised as a Level 2 measurement. At 31 December 2021, the estimated fair
value of the Group's other borrowings was $847.3 million (2020: $1,473.7
million).
8. Financial instruments
A derivative financial instrument is a contract that derives its value from
the performance of an underlying variable, such as foreign exchange rates or
interest rates. The Group uses derivative financial instruments to manage
foreign exchange and interest rate risk arising from its operations and
financing. Derivative financial instruments used by the Group are foreign
exchange forwards (including non-deliverables) and interest rate swaps.
The Group utilises interest rate swap agreements, designated as cash flow
hedges, to manage its exposure to variability in expected future cash outflows
attributable to the changes in interest rates on the Group's borrowing
facilities.
Financial instruments are classified as Level 1 or Level 2 in the fair value
hierarchy in accordance with IFRS 13, Fair Value Measurements, based upon the
degree to which the fair value movements are observable. The only instrument
classified as Level 1 are the senior notes, given the availability of quoted
market prices. Level 2 fair value measurements are defined as those derived
from inputs other than quoted prices that are observable for the asset or
liability, either directly (prices from third parties) or indirectly (derived
from third-party prices).
The 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 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 at 31
December. The following table presents the Group's outstanding interest rate
swaps, which are designated as cash flow hedges at 31 December:
2021 2020
Effective date Maturity date Notional amount Fair value((a)) Notional amount Fair value((a))
assets / (liabilities) assets/
(liabilities)
$m $m $m $m
3 Month LIBOR Float to Fixed Interest Rate Swap 24 Jan 2020 24 Jan 2023 275.0 (2.9) 275.0 (7.7)
(a) The fair values of the interest rate swaps are disclosed
in non-current derivative financial liabilities in the Consolidated Statement
of Financial Position. There is no ineffectiveness recognised in the
Consolidated Income Statement.
Foreign exchange forward contracts
The following table presents the Group's outstanding foreign exchange forward
contracts valued at FVTPL and foreign currency forward contracts designated as
cash flow hedges, disclosed in current derivative financial assets and
liabilities at 31 December:
2021 2020
Notional amount Fair value asset/ Notional amount Fair value asset/
(liabilities) (liabilities)
Term $m $m $m $m
Foreign exchange contracts ≤ 3 months 864.6 14.5 512.5 6.4
Foreign currency forward exchange contracts designed as cash flow hedges ≤ 12 months 40.8 0.6 98.3 1.7
Derivative financial assets 905.4 15.1 610.8 8.1
Foreign exchange contracts ≤ 3 months 695.9 (6.5) 355.3 (7.7)
Foreign currency forward exchange contracts designed as cash flow hedges ≤ 12 months 130.2 (5.2) - -
Derivative financial liabilities 826.1 (11.7) 355.3 (7.7)
During the year ended 31 December 2021, the Group realised a net loss of $9.7
million (2020: $21.7 million gain) on foreign exchange forward contracts
designated as FVTPL in non-operating income/expenses, net, in the Consolidated
Income Statement.
Impact of hedging on other comprehensive income
The following table presents the impact of hedging on other comprehensive
income:
2021 2020
$m $m
Recognised in other comprehensive income:
Effective portion of changes in fair value of cash flow hedges:
Interest rate swaps (1.0) (8.5)
Foreign currency forward exchange contracts designated as (4.1) 1.8
cash flow hedges
Changes in fair value of cash flow hedges reclassified to the Consolidated 5.7 (0.2)
Income Statement
Costs of hedging (0.4) (0.1)
Total 0.2 (7.0)
9. Commitments and contingent liabilities
Capital commitments
At 31 December 2021, the Group had non-cancellable commitments for the
purchase of property, plant and equipment, capitalised software and
development of $32.1 million (2020: $29.6 million).
Contingent liabilities
Following a mutually amicable settlement, ConvaTec Inc and Scapa Tapes North
America LLC and Scapa Group plc dismissed their claims against each other in
relation to the previous pending litigation between the companies.
There are no contingent liabilities recognised as at 31 December 2021.
10. Subsequent events
The Group has evaluated subsequent events through to 7 March 2022, the date
the Consolidated Financial Statements were approved by the Board of Directors.
On 28 January 2022, the Group announced that it has entered into an agreement
to acquire Triad Life Sciences Inc ("Triad"), a US-based medical device
company that develops biologically-derived innovative products to address
clinical needs in surgical wounds, chronic wounds and burns. The transaction,
which is subject to regulatory approvals and other customary conditions, is
expected to be completed by 31 March 2022. The initial consideration is $125
million with two potential additional payments of $25 million each dependent
on meeting short-term milestones. The acquisition cost is expected to be
funded through existing cash resources. There are also two potential earnout
payments conditional on performance during the first two years
post-completion, with a maximum earnout of $275 million payable based on
stretching financial performance over the period. Directly attributable
acquisition costs of $0.5 million have been recognised in general and
administrative expenses in the Consolidated Income Statement in the year ended
31 December 2021.
Details of the proposed final dividend are disclosed in Note 5 - Dividends.
11. Responsibility statement of the directors on the Annual Report
The Responsibility Statement below has been prepared in connection with the
2021 Annual Report. Certain parts thereof are not included within this
announcement.
We confirm to the best of our knowledge:
· The Financial Statements, prepared in accordance with United Kingdom
adopted international accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit and loss of the Company and
the undertakings included in the consolidation taken as a whole;
· The Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties they face; and
· The Annual Report and Financial Statements, taken as a whole, are
fair, balanced and understandable and provide the information necessary to
assess the Group's and Company's performance, business model and strategy.
This Responsibility Statement was approved by the Board of Directors on 7
March 2022 and is signed on its behalf by:
Karim
Bitar
Frank Schulkes
Chief Executive
Officer
Chief Financial Officer
7 March
2022
7 March 2022
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 EBIT.
The APMs used include adjusted gross profit, adjusted research and development
expenses, adjusted operating profit ("adjusted EBIT"), EBITDA, adjusted
EBITDA, adjusted net profit, adjusted earnings per share, adjusted working
capital, adjusted cash conversion, adjusted free cash flow and net debt.
Reconciliations for these adjusted measures determined under IFRS are shown on
pages 41 to 47. The definitions of adjusted measures are as calculated within
the reconciliation tables.
It should be noted that the Group's APMs may not be comparable to other
similarly titled measures used by other companies and should not be considered
in isolation or as a substitute for the equivalent measures calculated and
presented in accordance with IFRS.
In determining whether an item should be presented as an allowable adjustment
to IFRS measures, the Group considers items which are significant either
because of their size or their nature and arise from events that are not
considered part of the core operations of the business. These tend to be
one-off events but may still cross more than one accounting period. Recurring
items may be considered in respect of the amortisation of acquisition related
intangibles assets in order to provide comparability between peer groups where
such assets may have been internally generated and therefore, are not
reflected on that company's balance sheet with a resulting amortisation
charge.
If an item meets at least one of these criteria, the Board, through the Audit
and Risk Committee, then exercises judgement as to whether the item should be
classified as an allowable adjustment to IFRS performance measures.
Adjustments to derive adjusted EBIT (also referred to as adjusted operating
profit), excluding the impact of tax, for the years ended 31 December 2021 and
2020 include the following costs or credits:
- Amortisation of intangible assets in respect of material
acquisitions ($130.4 million and $125.3 million respectively).
- Costs and gains incurred in respect of acquisition and divestiture
activities (costs of $17.8 million and a gain of $16.5 million respectively).
- Termination costs in respect of the Group's transformation
programme ($4.3 million and $12.2 million respectively).
- Litigation expenses arising on matters deemed outside the ordinary
course of business ($5.6 million and $nil 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 larger acquisitions being targeted to strengthen our position in
key geographies and/or business categories or which provide access to new
technology. The nature of the businesses acquired includes the acquisition of
significant intangible assets, which are required to be amortised. The Board
and management regard the amortisation as a distortion to the quality of
earnings and it has no cash implications in the year. The amortisation also
distorts comparability with peer groups where such assets may have been
internally generated and, therefore, not reflected on their balance sheet.
Amortisation of acquisition-related intangible assets is, by its nature, a
recurring adjustment.
Acquisitions and divestitures
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 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.
Divesture-related activities comprise of the gain or loss and any directly
attributable transaction costs resulting from the preparation for disposal or
completed disposal of a business during the year.
Adjusted measures in relation to acquisitions and divestitures will also
include aborted deal costs.
Impairment of assets
Impairments, write-offs and gains and losses from the disposal of fixed assets
are adjusted when management consider the circumstances surrounding the event
are not reflective of the core business or when the transactions are in
respect of acquisition-related intangible assets, in line with the eligibility
criteria referred above.
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. The
Board considers each project individually to determine whether its size and
nature warrants separate disclosure. Qualifying items are limited to
termination benefits (including retention) without condition of continuing
employment in respect of major Group-wide change programmes. Where discrete
qualifying items are identified these costs are highlighted and excluded from
the calculation of adjusted measures. Due to their nature, these adjusted
costs may span more than one year. Restructuring costs not related to
termination benefits are reported in the normal course of business and are not
adjusted.
Litigation expenses
Litigation expenses may arise from the ongoing defence or pursuit of claims
against or for the Group or the settlement of claims. The Board considers each
litigation claim individually to determine whether the financial consequences
were due to a major incident or uncontrollable factors which distort IFRS
measures and determine if adjusting for the expense would aid the user in
understanding the Group's performance in that year and comparative periods.
Reconciliation of earnings to adjusted earnings for the years ended 31
December 2021 and 2020
Year ended 31 December 2021 Revenue Gross profit Operating costs Operating profit Finance expense, net Non-operating expense, net PBT Income tax Net profit
$m $m $m $m $m $m $m $m $m
As reported 2,038.3 1,123.1 (919.5) 203.6 (43.5) (8.8) 151.3 (33.7) 117.6
Amortisation of acquired intangibles - 109.5 20.9 130.4 - - 130.4 (10.8) 119.6
Acquisitions and divestitures - - 17.8 17.8 - - 17.8 - 17.8
Termination benefits and related costs - 0.7 3.6 4.3 - - 4.3 (0.7) 3.6
Litigation expenses - - 5.6 5.6 - - 5.6 - 5.6
Total adjustments and their tax effect - 110.2 47.9 158.1 - - 158.1 (11.5) 146.6
Other discrete tax items - - - - - - - (1.2) (1.2)
Adjusted 2,038.3 1,233.3 (871.6) 361.7 (43.5) (8.8) 309.4 (46.4) 263.0
Software and R&D amortisation 13.7
Amortisation of immaterial acquired intangibles 3.1
Depreciation 63.4
Impairment/write-off of assets 5.9
Share-based payments 16.4
Adjusted EBITDA 464.2
Year ended 31 December 2020 Revenue Gross profit Operating costs Operating profit Finance expense, net Non-operating expense, net PBT Income tax Net profit
$m $m $m $m $m $m $m $m $m
As reported 1,894.3 1,018.8 (807.8) 211.0 (48.4) 12.1 174.7 (62.2) 112.5
Amortisation of pre-2018 acquisition intangibles - 106.7 18.6 125.3 - - 125.3 (10.2) 115.1
Divestitures - - - - - (16.5) (16.5) - (16.5)
Impairment of assets - - 1.7 1.7 - - 1.7 - 1.7
Termination benefits and other related costs - 1.3 10.9 12.2 - - 12.2 (2.1) 10.1
Total adjustments and their tax effect - 108.0 31.2 139.2 - (16.5) 122.7 (12.3) 110.4
Other discrete tax items - - - - - - - 17.6 17.6
Adjusted((a)) 1,894.3 1,126.8 (776.6) 350.2 (48.4) (4.4) 297.4 (56.9) 240.5
Software and R&D amortisation 9.4
Amortisation of immaterial acquired intangibles 2.1
Depreciation 60.9
Impairment/write-off of assets 10.0
Share-based payments 12.4
Adjusted EBITDA 445.0
Acquisition and divestiture costs of $17.8 million (2020: gain of $16.5
million) are directly related to potential and actual strategic transactions
which have been executed, aborted or are in-flight and which seek to improve
the strategic positioning of the Group. The net cash impact in relation to
these costs was $13.0 million (2020: $29.8 million inflow).
Termination benefits and other related costs of $4.3 million (2020: $12.2
million), pre-tax, are in respect of the Transformation Initiative, a global
multi-year transformation programme which commenced in 2019 and simplifies the
way in which the business operates. The net cash impact of these costs was
$8.4 million (2020: $7.3 million). It is currently expected that no more than
$8.0 million of severance and associated retention costs will be incurred in
the year ending 31 December 2022, when the programme will effectively be
complete. No termination benefits or related costs recognised by the Group are
related to COVID-19.
Litigation expenses relate to a one-off claim settled in the period with an
adjusted net cash impact in relation to this settlement of $5.6 million.
Other discrete tax items in 2021 relate to the tax benefit of $6.8 million
resulting from the recognition of deferred tax following the acquisition of
Cure Medical, partially offset by a tax expense of $5.6 million relating to
the revaluation of deferred tax liabilities related to UK acquisition
intangibles as a result of the increase in the UK corporation tax rate from 1
April 2023. In 2020, other discrete tax items arose following a reassessment
of the estimate of the deferred tax asset recognised in the prior year related
to the Swiss tax reform.
Reconciliation of operating costs to adjusted operating costs for the years
ended 31 December 2021 and 31 December 2020
2021 2020
S&D((a)) G&A((b)) R&D((c)) Operating costs S&D((a)) G&A((b)) R&D((c)) Operating costs
$m $m $m $m $m $m $m $m
As reported (539.7) (285.3) (94.5) (919.5) (463.3) (262.1) (82.4) (807.8)
Amortisation of acquired intangibles - 20.9 - 20.9 - 18.6 - 18.6
Acquisitions and divestitures 0.5 17.3 17.8 - - - -
Impairment of assets - - - - - 1.7 - 1.7
Termination benefits and other related costs - 3.7 (0.1) 3.6 0.7 9.0 1.2 10.9
Litigation expenses - 5.6 - 5.6 - - - -
Adjusted (539.2) (237.8) (94.6) (871.6) (462.6) (232.8) (81.2) (776.6)
(a) "S&D" represents selling and distribution expenses.
(b) "G&A" represents general and administrative expenses.
(c) "R&D" represents research and development expenses.
Reconciliation of income tax expense to adjusted income tax expense
2021 2020
$m $m
Income tax expense (33.7) (62.2)
Tax effect of adjustments (11.5) (12.3)
Other discrete tax items (1.2) 17.6
Adjusted income tax expense (46.4) (56.9)
Other discrete tax items - see note above in respect of adjustments to profit.
Reconciliation of basic and diluted earnings per share to adjusted earnings
per share for the years ended 31 December 2021 and 31 December 2020
2021 Adjusted 2021 2020 Adjusted 2020
$m $m $m $m
Net profit attributable to the shareholders of the Group 117.6 263.0 112.5 240.5
Number Number
Basic weighted average ordinary shares in issue 2,008,923,797 1,991,596,105
Diluted weighted average ordinary shares in issue 2,026,340,345 2,006,590,463
cents per share cents per share cents per share cents per share
Basic earnings per share 5.9 13.1 5.7 12.1
Diluted earnings per share 5.8 13.0 5.6 12.0
Cash conversion for the years ended 31 December 2021 and 31 December 2020
2021 2020
$m $m
Operating profit/EBIT 203.6 211.0
Depreciation of property, plant and equipment 40.6 38.5
Depreciation of right-of-use assets 22.8 22.4
Amortisation of intangible assets 147.2 136.8
Impairment/write-off of intangible assets and property, plant and equipment 5.9 11.7
EBITDA 420.1 420.4
Non-cash items
Share-based payments 16.4 12.4
Working capital movement (31.6) 47.8
(Loss)/gain on foreign exchange derivatives (4.3) 21.9
Net cash generated from operations 400.6 502.5
Acquisition of property, plant and equipment and intangible assets (94.1) (86.2)
Net cash for cash conversion 306.5 416.3
Income taxes paid (59.2) (54.5)
Free cash flow 247.3 361.8
Reconciliation of Adjusted net cash and Adjusted free cash flow (to calculate
Adjusted cash conversion)
2021 2020
$m $m
Net cash for cash conversion 306.5 416.3
Non-operating loss/(gain) on foreign exchange forward contracts 0.4 (21.7)
Acquisitions and divestitures adjustments 13.0 -
Termination benefits and related costs adjustments 8.4 7.3
Litigation costs adjustments 5.6 -
Adjusted net cash for cash conversion 333.9 401.9
Income taxes paid (59.2) (54.5)
Adjusted free cash flow 274.7 347.4
EBITDA 420.1 420.4
Adjusted EBITDA 464.2 445.0
Cash conversion 73.0% 99.0%
Adjusted cash conversion 71.9% 90.3%
Reconciliation of Adjusted working capital
2021 2020
$m $m
Working capital movement ((a)) (31.6) 47.8
Decrease/(increase) in termination benefits ((b)) 4.1 (4.9)
(Increase)/decrease in respect of acquisitions and divestitures ((b)) (4.8) -
Adjusted working capital movement (32.3) 42.9
(a) Working capital movement is the change in assets and
liabilities total within the Consolidated Statement of Cash Flows on page 26.
(b) These are the cash flow impacts to the adjusted items shown in
the reconciliation of earnings to adjusted earnings table on page 42.
Net debt
Net debt is calculated as the carrying value of current and non-current
borrowings on the face of the Consolidated Statement of Financial Position,
net of cash and cash equivalents and excluding lease liabilities.
2021 2020
$m $m
Borrowings 1,344.6 1,456.4
Lease liabilities 90.5 92.1
Total carrying value of borrowings 1,435.1 1,548.5
Cash and cash equivalents (463.4) (565.4)
Net debt (including lease liabilities) 971.7 983.1
Net debt 881.2 891.0
Net debt/adjusted EBITDA 1.9 2.0
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