REG - ConvaTec Group PLC - Annual Results
09/03/2023 07:00
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RNS Number : 3675S ConvaTec Group PLC 09 March 2023
9 March 2023
Convatec Group Plc
Annual Results for the twelve months ended 31 December 2022
Strong financial performance and continued strategic progress
· Delivered good revenue growth and positive margin expansion,
notwithstanding the challenging market backdrop
· Continued to strengthen competitive position through execution of
FISBE (Focus, Innovate, Simplify, Build, Execute) strategy, notably:
o Over 90% of revenue now derived from chronic care categories; entered the
attractive wound biologics(1) segment and exited non-core hospital care and
related sales
o Good progress with three new product launches: GentleCath™ Air for Men,
InnovaMatrix(®) and Extended Wear Infusion Sets
o Significantly advanced our simplification and productivity agenda,
reducing adjusted G&A(2) spend to 8.9% of sales (2021: 11.7%)
o Refreshed Convatec masterbrand launched, including new 'forever caring'
promise reflected in strengthened digital presence and improved packaging
o Continued progress embedding 'Convatec Cares', our Environmental, Social
& Governance (ESG) framework
Key financial highlights
Reported results Adjusted(2) results
FY 2022 FY 2021 Change FY 2022 FY 2021 Change CC Change(3)
Revenue $2,073m $2,038m 1.7% $2,073m $2,038m 1.7% 6.9%
Operating profit $207m $204m 1.8% $404m $362m 11.6% 12.2%
Operating profit margin 10.0% 10.0% - 19.5% 17.7% 1.8%pts -
Diluted earnings per share 3.1 cents 5.8 cents (46.6)% 12.6 cents 13.0 cents (3.1)% -
Dividend per share 6.047 5.871 3.0%
· Good revenue growth: reported +1.7% with significant FX headwind.
+6.9% on a constant currency(3) basis and +5.6% on an organic(4) basis
o Strong organic(4) growth in Advanced Wound Care and Infusion Care, good
organic growth in Ostomy Care and Continence & Critical Care
o There was additional revenue from the acquisition in the wound
biologics(1) segment, which was partially offset by the hospital care exit
· Adjusted operating profit(2): +11.6% and +12.2% on a constant
currency(3) basis despite significant COGS inflation of 8.6% in line with
guidance. Reported operating profit +1.8%
· Adjusted operating profit(2) margin was 19.5% (2021: 17.7%) with
price and mix improvement, G&A spend reduction and 80bps FX tailwind more
than offsetting inflation and continued organic investment in commercial
capabilities
· Adjusted(2) diluted EPS was 3.1% lower, primarily because of a
significant increase in the effective book tax rate to 23.9% (2021: 15.0%),
compared to a cash tax rate of 15.7%. Reported diluted EPS was down 46.6%
primarily owing to higher adjusting items mostly relating to the exit of
hospital care and Triad acquisition.
· Strategic investments in acquisitions, higher capex to support
future growth and increased inventory to improve resilience led to an increase
in net debt(5) of $187 million.
· Leverage(6) at year end of 2.1x (2021: 1.9x) was in line with
guidance.
· Increased final dividend of 4.330 cents proposed, giving total
dividend of 6.047 cents (2021: 5.871 cents)
2023 outlook
For 2023 we expect organic(4) revenue growth to be between 4.5 - 6%,
consistent with our medium-term target shared at our Capital Markets Event in
November.
We remain focused on expanding our operating margin by growing revenue,
improving our mix/price and delivering on our simplification and productivity
agenda. Inflation is expected to remain a significant headwind in 2023 with
COGS inflation of 5-7%. In addition we anticipate labour inflation in opex
of 5-7% which is approximately double that of 2022. On this basis, we expect
modest further improvement in the adjusted operating margin in 2023 to at
least 19.7% on a constant currency basis(3).
Karim Bitar, Chief Executive Officer, commented:
"Convatec achieved good sales growth and, despite the challenging market
backdrop, delivered positive adjusted operating margin expansion, ahead of
guidance. Over the course of the year, we continued to make progress with our
FISBE strategy, launching three new products and improving our competitive
positions. The resulting financial performance is further proof that Convatec
is pivoting to sustainable and profitable growth.
"We remain focused on executing our FISBE 2.0 strategy and are confident in
Convatec's growth prospects and ability to increase its operating margin to
the mid-20s over the medium term."
(1) Wound Biologics segment as defined by SmartTRAK. Includes skin
substitutes, active collagen dressings and topical drug delivery
(2) 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 41 to 46).
(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) Organic growth presents period over period growth at constant currency,
adjusted for: Triad Life Sciences (Mar'22), Cure Medical (Mar'21) and Patient
Care Medical (Dec'21) acquisitions; Incontinence divestment (Dec'21) and, from
31(st) May 2022, the discontinuation of hospital care, related industrial
sales and associated Russia operations.
(5) Net debt (excluding lease liabilities)
(6) Net debt(5)/adjusted EBITDA(2)
(7) Market size and growth based on aggregate of category estimates, internal
analysis and publicly available sources, including SmartTRAK and Global
Industry Analysts Inc. reports.
Contacts
Analysts & Investors Kate Postans, Vice President of Investor Relations & Corporate +44 (0) 7826 447807
Communications
Sheebani Chothani, Investor Relations & Corporate Communications Manager
+44 (0) 7805 011046
ir@convatec.com (mailto: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 The Auditorium, Chartered
Accountants' Hall, One Moorgate Place, London EC2R 6EA at 9.30am (UK time)
today. The event will be simultaneously webcast and the link can be found
here (https://stream.buchanan.uk.com/broadcast/63ed02e3355eac0afbf3f9a1) .
The full text of this announcement and the presentation for the analyst and
investors meeting can be found on the 'Results, Reports & Presentations'
page of the Convatec website www.convatecgroup.com/investors/reports
(http://www.convatecgroup.com/investors/reports) .
Forthcoming Events
AGM and Trading update (for 4 months) 18 May 2023
Interim Results 2 August 2023
Dividend calendar
Ex-dividend date* 6 April 2023
Dividend record date* 11 April 2023
Scrip dividend election date* 3 May 2023
Annual General Meeting 18 May 2023
Dividend payment date* 25 May 2023
* subject to approval at AGM.
About Convatec
Pioneering trusted medical solutions to improve the lives we touch: Convatec
is a global medical products and technologies company, focused on solutions
for the management of chronic conditions, with leading positions in advanced
wound care, ostomy care, continence and critical care, and infusion care. With
around 10,000 colleagues, we provide our products and services in almost 100
countries, united by a promise to be forever caring. Our solutions provide a
range of benefits, from infection prevention and protection of at-risk skin,
to improved patient outcomes and reduced care costs. Group revenues in 2022
were over $2 billion. The company is a constituent of the FTSE 100 Index
(LSE:CTEC). To learn more about Convatec, please visit
http://www.convatecgroup.com (http://www.convatecgroup.com)
Forward Looking Statements
This document includes certain forward-looking statements with respect to the
operations, performance and financial condition of the Group.
Forward-looking statements are generally identified by the use of terms such
as "believes", "estimates", "aims", "anticipates", "expects", "intends",
"plans", "predicts", "may", "will", "could", "targets", continues", or their
negatives or other similar expressions. These forward-looking statements
include all matters that are not historical facts.
Forward-looking statements are necessarily based upon a number of estimates
and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies that are difficult to predict and many of
which are outside the Group's control. As such, no assurance can be given that
such future results, including guidance provided by the Group, will be
achieved. Forward-looking statements are not guarantees of future performance
and such uncertainties and contingencies, including the factors set out in the
"Principal Risks" section of the Strategic Report in our Annual Report and
Accounts, could cause the actual results of operations, financial condition
and liquidity, and the development of the industry in which the Group
operates, to differ materially from the position expressed or implied in the
forward-looking statements set out in this document. Past performance of the
Group cannot be relied on as a guide to future performance.
Forward-looking statements are based only on knowledge and information
available to the Group at the date of preparation of this document and speak
only as at the date of this document. The Group and its directors, officers,
employees, agents, affiliates and advisers expressly disclaim any obligations
to update any forward-looking statements (except to the extent required by
applicable law or regulation).
Chief Executive's Review
Convatec continued to successfully execute its FISBE strategy, strengthening
its competitive position and delivering on our forever caring promise for
patients and customers. The various strategic initiatives actioned during the
period have enhanced the quality of the business and improved our financial
performance and prospects.
Attractive growth prospects
Convatec operates in the structurally-growing, attractive chronic care
markets. We focus on four categories. These have a combined market size(7) of
$14 billion p.a. and market growth rates(7) of between 4-8% p.a. We are
leaders in the categories in which we operate and expect to grow revenue in
line with or faster than each market.
We serve a diverse set of chronic care markets, producing high-volume,
high-quality consumables resulting in attractive recurring revenues. This
diversity provides resilience and synergies, notably in areas such as:
biomaterial sciences, product and clinical development, automated
manufacturing and shared supply chain capabilities. Consistent with our
FISBE strategy we have been investing in our innovation pipeline, building
mission-critical capabilities, expanding capacity and increasing our
resilience.
A chronic care focused business well positioned to deliver sustainable and
profitable growth
We continued to make progress executing our FISBE strategy, thereby
strengthening our competitive position and our ability to consistently deliver
sustainable and profitable growth.
Over the course of 2022, through acquisitions and exits, we further focused
the Group on chronic care categories - entering the fast-growing wound
biologics(1) segment while exiting our hospital care business. Our continued
focus on innovation has resulted in three new products being launched (2021:
one new launch), and the R&D function has been strengthened by an
increased emphasis on intellectual property. We continue to invest in building
core capabilities. Our Centres of Excellence (in Marketing, Pricing and
Sales) are having a positive impact which, coupled with our simplification and
productivity agenda, are driving better results.
The progress made under FISBE 1.0 has resulted in a stronger, higher-quality
business. Further details on the progress made under each pillar can be found
on pages 7 to 9. We hosted an Innovation Day on 17 May 2022 and then a
Capital Markets Event in November where we outlined our refreshed strategy,
FISBE 2.0. Details of this next stage are set out below.
We delivered a strong financial performance
Group reported revenue of $2,073 million rose 1.7% (2021: $2,038 million).
Adjusting for the significant FX headwind, revenue grew 6.9% on a constant
currency(3) basis and 5.6% on an organic(4) basis, slightly ahead of our
initial guidance.
Adjusted operating profit(2) rose 11.6% and 12.2% on a constant currency(3)
basis despite significant COGS inflation of 8.6%. Adjusted operating profit(2)
margin was 19.5% (2021: 17.7%) with mix/price, operations productivity,
significant G&A spend reduction and 80bps of foreign exchange tailwind
more than offsetting significant inflation and continued investment in
commercial capabilities.
Reported operating profit was broadly flat over the previous year, as G&A
savings were partially offset by higher operating expenses arising from
selling and distribution as well as costs related to the exit of hospital
care.
Adjusted diluted EPS(2) was down 3.1% with operating profit growth more than
offset by higher adjusted tax expenses and finance expense from higher market
interest rates.
Reported diluted EPS was down 46.6% impacted by higher adjusting items mostly
relating to the exit of hospital care and Triad acquisition.
Capital expenditure during 2022 was $144.2 million as we continued to invest
for future growth, expanding our manufacturing facilities in Infusion Care,
beginning to increase the automation at our production facilities and
developing new digital technologies to deliver enhanced customer experiences.
We were able to accelerate our plans, making good progress on several
significant projects, notably the expansion of capacity in Osted and Reynosa
for our Infusion Care business, and beginning to increase automation at our
Deeside wound care facility. We also invested in acquiring intellectual
property for our Ostomy Care accessories portfolio.
Cash conversion was 55.6% (2021: 73.0%) primarily reflecting increased capital
expenditure and the strategic decision to build inventory for resilience,
coupled with the timing of receivables. We expect phasing of some receivables
to reverse in H1 2023 while strategic capex investment and inventory will
remain elevated in 2023.
Net debt(5) increased by $187 million after the acquisition of Triad Life
Sciences ($173 million) and investment in BlueWind Medical ($31 million).
Leverage(6) was 2.1x (2021: 1.9x) in line with our guidance. We continue to
target leverage(6) of 2x over time but will be comfortable going up to c.2.5x
for appropriate M&A opportunities.
Revenue
Total Group revenue increased by 1.7% on a reported basis to $2,073 million.
There was a significant FX headwind during the period and on a constant
currency(3) basis revenue rose 6.9%. Given the largely reimbursed markets
that we serve, there is limited opportunity to pass on the significant
inflation we have seen in 2022. However, initiatives executed through our
Pricing Centre of Excellence (CoE) in collaboration with the business units
have successfully delivered positive price impact on revenue. Adjusting for
M&A and business restructuring (see footnote 4 on page 2) Group revenue
rose 5.6% on an organic(4) basis.
Twelve months ended 31 December
2022 2021 Reported growth / (decline) Foreign Exchange impact Constant Currency(3) growth Organic(4) growth
$m $m
Revenue by Category
Advanced Wound Care 621 592 4.8% (7.9)% 12.7% 6.8%
Ostomy Care 522 546 (4.5)% (7.3)% 2.8% 3.4%
Continence and Critical Care 546 543 0.6% (2.0)% 2.6% 3.6%
Infusion Care 384 357 7.5% (2.7)% 10.2% 9.8%
Total 2,073 2,038 1.7% (5.2)% 6.9% 5.6%
Advanced Wound Care (AWC)
During 2022, the business achieved strong growth in GEM and Europe which more
than offset a decline in North America where our limited position in the foam
segment and lower surgical volumes continued to weigh on performance. As a
result, the business saw overall growth across all segments globally.
Revenue of $621 million increased 4.8% on a reported basis or 12.7% on a
constant currency(3) basis. This performance reflected the acquisition of
Triad Life Sciences, now known as Advanced Tissue Technologies (ATT) which
generated $35 million of revenue. On an organic(4) basis revenue rose by 6.8%.
We made continued strategic progress in AWC during the period. In March 2022,
we strengthened our position with our entry into the wound biologics(1)
segment through the acquisition of Triad Life Sciences. Our commercial
execution continued to improve, as we leveraged our common Customer
Relationship Management (CRM) platform in North America and Europe.
ConvaFoam was cleared for launch at the end of 2022 and began the US roll out
in early 2023, which will strengthen our competitive position in the large and
rapidly growing foam segment.
In 2023 we will focus on:
· Successfully launching ConvaFoam in the US and preparing for a
European launch in 2024; driving development of ConvaVac and preparing to
launch in 2024
· Growing the InnovaMatrix(TM) platform in the US and developing
the product outside the US.
· Continuing to strengthen commercial execution globally
Ostomy Care (OC)
Under the new leadership of Bruno Pinheiro, our OC business continued to make
good strategic progress during 2022. He and the team increased the focus on
driving an improved experience across the continuum of care. The
highly-rated Home Services Group is helping to grow the number of new US
ostomy patients, while in Europe, during the year, we launched new digital
services to support both health care professionals and patients better.
Revenue of $522 million declined 4.5% on a reported basis but increased 2.8%
on a constant currency(3) basis and 3.4% on an organic(4) basis.
The business achieved continued strong growth in GEM, particularly in Latin
America and China, while Europe achieved a robust performance with some
pricing initiatives helping to offset the continued planned rationalisation of
lower-margin non-Convatec products at Amcare UK. In North America, new
patient starts remained stable, supported by HSG ostomy sales.
Overall, we have continued to improve our mix and expand our margins. We saw
good demand for Convatec products, for example our accessories sales saw
strong growth in 2022, following the relaunch of the Esenta brand. Across
all geographies, revenue from Convatec ostomy products grew 5.5% on an organic
basis.
In 2023 we will focus on:
· Driving new patient starts and continuing collaboration with HSG
· Improving consistency of commercial execution across the
continuum of care
· Preparing to launch Esteem 2.0 in H1 2024
Continence & Critical Care (CCC)
Revenue of $546 million rose 0.6% on a reported basis, 2.6% on a constant
currency(3) basis and 3.6% on an organic(4) basis. A good operating
performance in Continence Care was supported by contributions from the Cure
Medical and Patient Care Medical acquisitions, as well as an improving pricing
environment in North America.
Continence Care achieved revenue of $409 million in 2022, up 5.0% on an
organic(4) basis, with continued strength in new patient starts and high
customer retention. This was complemented by good demand for our Cure and
GentleCath(TM) portfolios in the US and Latin America, and our developing
presence in France and the UK following the launch of the GentleCath(TM) Air
for Men compact catheter.
During 2022 the strategic decision was taken to exit hospital care and related
industrial sales. The hospital care activities, reported as part of CCC,
generated $72 million of revenue in 2022 (2021: $79 million). From 31 May,
when we closed the Belarus factory, revenue has been excluded from organic(4)
calculations. The related industrial sales, reported as part of IC, generated
$26 million of revenue in 2022 (2021: $22 million).
Critical Care revenue of $137 million declined 1.3% on an organic(4) basis
with Flexi-Seal(TM), which remains in the Group portfolio, declining following
strong COVID-19 impacted comparatives.
In 2023 Continence Care will focus on:
· Continuing to drive US growth via
o Exceptional service,
o Both Cure Medical and GentleCath(TM) portfolios (including the new GC Air
for Men)
· Expanding in Europe and Global Emerging Markets
· Preparing to launch GentleCath(TM) Air for Women in late
2023/early 2024
From 2023 onwards, Flexi-Seal(TM) (2022 revenue: $66 million), our faecal
management system, will move from Critical Care to Ostomy Care. The
remaining industrial sales, predominantly continence related supplies for B2B
customers (2022 revenue: $17 million), will move from Infusion Care into
Continence Care. Going forward the CCC category will be renamed Continence
Care and we will restate comparatives.
Infusion Care (IC)
Our Infusion Care business continued to strengthen in 2022. To respond to
the underlying demand for automated insulin delivery systems and their
accessories, during 2022, we built additional capacity at our Osted, Denmark
and Reynosa, Mexico plants. We continued to innovate, launching our
MioAdvance Extended Wear Infusion Sets (EWIS) in the US, and are diversifying
our customer base by growing applications outside of diabetes, such as
Parkinson's.
Revenue of $384 million increased 7.5% on a reported basis, 10.2% on a
constant currency(3) basis and 9.8% on an organic(4) basis. The difference
between constant currency and organic growth was due to the impact of the
industrial sales exit. This strong growth was primarily driven by continued
demand for our infusion sets used by diabetic patients. Growth was also
supported by increasing demand for differentiated infusion sets for
alternative therapies, such as pain management, albeit off a small base.
In 2023 we will focus on:
· Scaling up production of MioAdvance EWIS
· Expanding the usage of infusion sets for the delivery of other
subcutaneous therapies, including launching with AbbVie, once regulatory
approval is received for their Parkinson's drug therapy
· Successfully launching a tailored infusion set for Tandem Mobi
once regulatory approval is received
Delivering continued strategic progress
The execution of our FISBE strategy is progressing well. We continue to make
progress in each of the five pillars as we drive towards our
vision of pioneering trusted medical solutions to improve
the lives we touch. In November, at our Capital Markets Event, we
announced that in 2023 our strategy will evolve to FISBE 2.0.
Focus
We further reshaped the business to focus on our four chronic care categories
through bolt-on acquisitions, notably the Triad Life Sciences acquisition
which gives us a foothold in the important wound biologics(1) segment. This,
coupled with the withdrawal from non-core hospital care activities and related
industrial sales, means that over 90% of our revenue now comes from chronic
care markets.
We continued to focus and invest in our 12 key markets which cumulatively
delivered constant currency(3) revenue growth of 9.6%, ahead of the overall
group growth.
Looking ahead to 2023, with FISBE 2.0, we will become even more focused on
strengthening customer loyalty in our key markets and categories, measuring
and tracking our net promoter scores. We will continue to invest in the US and
China, our most important markets and continue to evaluate appropriate bolt-on
M&A opportunities to further strengthen the business in our core
categories.
Innovate
Innovation remains at the heart of our business. We have made significant
progress advancing our pipeline and strengthened our Technology &
Innovation capabilities. The R&D expenditure for the year increased 3.7%
on a constant currency basis. On a reported basis R&D expenditure was
$92 million (2021: $95 million), and additional capital expenditure of $14
million was incurred over the period. We invested a further $10 million in
Intellectual Property licenses relating to accessories products, accounted for
as capital expenditure.
We began launching three new products during 2022, a step up from our
historical level:
- ATT's porcine placenta-derived extracellular matrix product,
InnovaMatrix(TM), in the US, which has contributed meaningfully to the growth
in AWC during 2022
- GentleCath(TM) Air for Men, our new hydrophilic compact male catheter
(utilising our proprietary FeelClean(TM) Technology), began rolling-out in
France and the UK, with plans to roll out in the US and other key markets in
2023, and has been well received
- The Extended Wear Infusion Set (EWIS), our innovative seven-day wear
technology improving value and use to customers whilst also reducing its
environmental impact, available in Europe and now the US
It is by continually refreshing our product portfolio and ensuring it is
differentiated that we can deliver sustained and profitable growth over
time.
In addition, we acquired a minority stake in BlueWind Medical Ltd, the
developer of an innovative implantable tibial neuromodulation device for the
over-active bladder segment, securing a relationship with a company developing
a proprietary and differentiated solution to treat over-active bladders in the
continence space.
We have also made progress on product sustainability as it relates to
technology & innovation, part of our wider ESG agenda. Green Design
Guidelines are an important part of our development process, and we are
systematically examining the environmental footprint of our solutions and
considering ways to reduce waste.
We are developing a much richer longer-term pipeline, as mentioned at the
Capital Markets Day, and have further visibility on product launches - for
example, we're already working on the next generation hydrofiber(®)
technology platform.
We continue to pursue our R&D without walls approach; as well as driving
organic projects we will pursue inorganic activity. We will continue
leveraging the IDEAL process, launched in 2021, and are seeking to improve
cycle time. Our goal is to more frequently refresh our portfolio to provide
an improved customer experience. This deeper and broader innovation pipeline
will underpin our growth in the future. To measure progress against this
ambition we are targeting that by the end of 2025, 30% of our revenue will be
generated from new products launched in the previous five years.
In 2023, we will continue to strengthen our product pipeline, innovation
capabilities and improve our cycle time. In AWC we began the US roll out of
ConvaFoam in January 2023, which will strengthen our competitive position in
the large foam segment. We intend to roll-out ATT's new products,
InnovaBurn(TM) and InnovaMatrix(TM) PD, for which we have already received
clearance. In CC, we will be preparing for the launch of GentleCath(TM) Air
for Women in late 2023/early 2024, ahead of schedule, whilst in IC, during
2023, we expect to launch tailored infusion sets for Tandem's new Mobi hybrid
micro-pump and for AbbVie's Parkinson's therapy, both of which are subject to
regulatory approval. The other major new products are progressing well.
The Esteem 2.0 ostomy product and AWC's ConvaVac are expected to launch in
2024.
Simplify
We made significant progress on our simplification and productivity agenda in
2022. Adjusted G&A expenditure was reduced by 22.2% to $185 million, down
16.4% on a constant currency(3) basis, or 8.9% of sales (2021: 11.7%) as
positive progress with initiatives brought forward benefits. We transitioned
more finance and IT activities to our Global Business Services (GBS) centres
in Lisbon and Bogota. 2022 was the first complete year of GBS activity and we
have started to see early benefits of standardised processes and automation,
lowering finance and IT costs. An increasing number of activities are also now
being resourced by internal talent, thus reducing spend on external
consultants. The foundations are now in place to build additional in-house
expertise to further streamline processes and reduce additional spend.
During 2022 we also initiated a review of our facilities footprint and are in
the process of closing some underutilised offices, replacing them with
flexible working alternatives which will improve our colleagues' experience.
In 2023, as part of FISBE 2.0, we will look to improve productivity further
across the organisation, reducing low value activity and driving economies of
scale. On the commercial front we will leverage the Salesforce CoE and our CRM
system more broadly across the organisation. In quality and operations, we
will increase automation and drive our continuous improvement agenda. In
G&A we will expand the scope of GBS and build more end-to-end processes.
For example, we have started our HR transformation, which will see us leverage
central processes such as payroll, training and onboarding transitioning to
GBS.
Build
We strengthened the Convatec Executive Leadership Team (CELT) during 2022.
Jonny Mason joined us as CFO of the Group during Q1, while Kjersti Grimsrud
took over leadership of our Infusion Care business and consequently Seth Segel
added Continence Care to his existing HSG responsibilities. Anne Belcher
joined the Group from GSK to lead our Global Emerging Markets business and
Bruno Pinheiro, who led our successful LATAM business before acting as Interim
President for GEM, took over Ostomy Care. John Haller joined us as EVP,
Chief Quality and Operations Officer, having previously been at Stryker
Corporation.
We developed and embedded our Pricing CoE, which in collaboration with our
business units, achieved 50 bps of pricing improvement on gross margin over
the period.
Our refreshed brand and new company promise of 'forever caring' was launched
in May. It has been well received by customers and HCPs. In the second half of
the year we rolled-out new websites and social media digital interfaces
reflecting the refreshed brand across all of our focus markets.
Our Salesforce CoE has now established a single CRM platform in North America
and Europe, and we have begun rolling it out across GEM. This is driving
enhanced salesforce productivity by increasing call rates and improving
account targeting.
Going forward we will leverage the Marketing CoE more broadly across the Group
and build new capabilities, particularly focused on customer experience and
measurement of Net Promoter Scores.
Culture is a critical element in building high performing teams and creating a
motivating work environment. Results from our latest Organisational Health
Index (OHI) survey were strong, sustaining our top performance from 2020. We
will continue to cultivate talent, recognise colleagues and focus on
Diversity, Equity & Inclusion (DE&I) and Wellbeing over the next year.
Execute
We continue to execute well on our strategic initiatives, following a
consistent methodology that identifies metrics and tracks milestones
regularly.
We delivered positive manufacturing productivity improvements in the face of
significant COGS inflation and continued to improve the resilience of the
supply chain. We are committed to sustaining our strong safety record while
improving the quality of our products and services for our customers.
Complaints per million decreased by 13% over the period.
One year on since launching 'Convatec Cares', our refreshed Environmental,
Social & Governance (ESG) approach, we have made good progress integrating
ESG practices across our business and value chain:
o Elevated ESG through our strategic planning process and engaging all
business units and functional areas on priorities, targets and commitments
o Emissions reduction: In line with our net zero commitment, we reduced
Scope 1 and Scope 2 greenhouse gas emissions by 32% in 2022. We are on track
to validate our Scope 1, 2 and 3 (near term) Science Based Targets in 2023.
Our manufacturing sites increasingly use renewable electricity, and we expect
that to reach 100% by the end of 2023
o Progress in DE&I and Wellbeing approach where now 36% of our CELT are
women, 40% of our Board are women, and we are on track to ensure 40% of our
senior management (CELT member plus their direct reports) are women by the end
of 2024
o Elevated our focus on supply chain sustainability, improving the average
EcoVadis score of our suppliers by 6.5%
o We committed more than $2 million in both product and cash donations in
2022, including a humanitarian relief response for Ukraine valued at over $1.5
million. This year, we've also committed more than $100k in response to the
earthquakes in Turkey and Syria in both product and cash donations.
We announced today a new $2 million health partnership with Partners In Health
(PIH), a leading international NGO focused on building equitable health
systems globally. The innovative partnership expands recruitment and support
of Community Health Workers and improves their training on chronic conditions.
Living in the communities where they work, Community Health Workers are
trusted neighbours who are able to provide high-quality health services. Over
three years, Convatec's support - through cash, product donation and training
- will enable PIH to reach over 250,000 children and adults, with a particular
focus on programmes in Mexico, Peru and the United States.
Dividend
The Board is pleased to recommend a 3.0% increase in the full year dividend
reflecting the improved underlying performance of the business and confidence
in its future growth prospects. This equates to a proposed final dividend of
4.330 cents to bring FY dividend to 6.047 cents (2021: 5.871 cents).
Group 2023 outlook
We are pleased with the growth we achieved in 2022 and are focused on pivoting
to sustainable and profitable growth.
We expect organic(4) revenue growth to be between 4.5 - 6%, consistent with
our medium-term target shared at our Capital Markets Event in November.
Growth will be H2 weighted because of stronger comparatives in H1 2022,
especially in Infusion Care, and because ATT will contribute to organic growth
following the anniversary of the acquisition.
The reported revenue will be impacted by the exit of hospital care and related
sales, which generated $102 million in 2022.
We remain focused on expanding our operating margin by growing revenue,
improving our mix/price and delivering on our simplification and productivity
agenda. Inflation is expected to remain a significant headwind in 2023 with
COGS inflation of 5-7%. In addition we anticipate labour inflation in opex of
5-7% which is approximately double that of 2022. On this basis, we expect
modest improvement in the adjusted operating margin in 2023 to at least 19.7%
on a constant currency(3) basis. Furthermore, our medium-term target of
mid-20s operating margin remains unchanged.
Based on current interest rates, we expect adjusted net finance expense for
the full year to be $70-80 million. The cash tax rate for the year is
expected to be around 19%, while the adjusted book tax rate is expected to be
approximately 25%. Capex will remain elevated at around $120-140 million for
the full year reflecting the continued growth investments we are making across
the Group and we intend to increase inventory by c.$20 million to further
strengthen supply chain resilience.
We are confident about the future prospects for the Group as we continue to
pivot to sustainable and profitable growth.
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 will be set out in the Group's 2022
Annual Report and Accounts to be published later in the month.
The Board has reviewed the principal risks as at 31 December 2022 and made a
number of changes to reflect our assessment of their movement from those
identified in 2021, the effect on the Group, our evolving strategy and the
current business environment. The principal risks have been assessed against
the context of the global inflationary cost pressures that are continuing to
impact all businesses at present. 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;
· Information Systems, Security and Privacy;
· Customer and Markets;
· Legal and Compliance;
· Strategy and Change Management;
· Environment and Communities; and,
· Tax and Treasury.
The risk landscape, however, has changed for the following principal risks,
since the publication of the 2021 Annual Report and Accounts:
· Innovation and Regulatory ‐ has reduced in risk level following
the delivery of three key new products, the increased robustness of our
development pipeline and the continued delivery of the EU-MDR compliance
programme.
· Political and Economic Environment - has been elevated reflecting
the continuing global inflationary pressure challenges on all aspects of the
business cost base, as well as ongoing global supply chain constraints.
· People - has increased as we see rising cost of living pressures
for our workforce and increased competition for talent across our markets,
which could impact our ability to attract, recruit and retain key talent and
skills.
The Board assesses the overall risk profile of the Group to ensure it is
within our risk appetite. In making this assessment the Board considered the
continued upward pressure from the macro-economic environment and broader risk
landscape (including the ongoing supply chain and commercial impact of the war
in Ukraine and the fallout from the pandemic) on the business environment and
any continued or additional impact on the Group's business and principal
risks, coupled with the controls and mitigations in place to address these
challenges. In the main, as our processes and risk mitigations further develop
and mature, we have continued to manage the challenges facing the wider
business landscape and build further resilience into our operations. Principal
risks continue to be appropriately mitigated and work continues to reduce the
net exposure to the business to ensure that each risk remains within our risk
appetite.
Financial review
We made good progress in 2022 in executing or FISBE strategy and demonstrated
that we are pivoting to sustainable and profitable growth. Revenue grew by
1.7% on a reported basis and 6.9% on a constant currency basis. We delivered
an adjusted operating profit margin of 19.5%, representing expansion of 180bps
over the previous year with mix/price, operations productivity, significant
G&A spend reduction and 80bps of foreign exchange tailwind more than
offsetting significant inflation and continued investment in commercial
capabilities.
Adjusted basic earnings per share reduced year-on year primarily due to
adjusted operating profit growth being more than offset by increases in
adjusted net finance, non-operating and income tax expenses. These are
explained in further detail on page 13.
The competitive position of the Group was further strengthened during the
year, entering the attractive wound biologics(1) segment through our
acquisition of Triad Life Sciences whilst exiting the lower-margin and
lower-growth hospital care and industrial sales activities. We also made good
progress with our simplification and productivity initiatives, most notably
reducing G&A spend in the year.
In November 2022, we successfully refinanced our bank facilities with $1.2
billion committed for five years at slightly improved margins over base rates
compared to the previous facilities. The Group's $500.0 million senior
unsecured notes remain in place and are committed until 2029. The Group's
financial prospects are attractive, and we have confidence in our ability,
over the medium term, to deliver sustainable annual mid-single-digit organic
revenue growth and to expand our adjusted operating profit margin into the
mid-20s.
1. Wound biologics segment as defined by SmartTRAK. Includes
skin substitutes, active collagen dressings and topical drug delivery.
Reported 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 21 to 40 and
referred to in this Annual Report as "reported" measures.
The commentary in this Financial review includes discussion of the Group's
reported results and alternative performance measures (or adjusted measures)
('APMs'). Management and the Board use APMs as meaningful measures in
monitoring the underlying 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 measures prepared in
accordance with IFRS on pages 41 to 46.
Constant Currency Growth
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.
Group financial performance
Reported Reported Adjusted(1) Adjusted(1)
2022 2021 2022 2021
$m $m $m $m
Revenue 2,072.5 2,038.3 2,072.5 2,038.3
Gross profit 1,103.9 1,123.1 1,245.6 1,233.3
Operating profit 207.3 203.6 403.7 361.7
Profit before income taxes 81.9 151.3 337.6 309.4
Net profit 62.9 117.6 256.8 263.0
Basic earnings per share (cents per share) 3.1¢ 5.9¢ 12.7¢ 13.1¢
Diluted earnings per share (cents per share) 3.1¢ 5.8¢ 12.6¢ 13.0¢
Dividend per share (cents) 6.047¢ 5.871¢
1. These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measures prepared in
accordance with IFRS on pages 41 to 46.
Revenue
Group revenue for the year ended 31 December 2022 of $2,072.5 million (2021:
$2,038.3 million) increased 1.7% year-on-year on a reported basis or 6.9% on a
constant currency basis.
The Group experienced significant foreign exchange headwinds of 5.2% on its
reported revenue growth. The majority of the Group's 2022 revenue was
denominated in US Dollar (52%), however there are other significant currencies
in which revenue is denominated, notably EUR (20%), GBP (6%) and DKK (2%).
These currencies depreciated significantly against the US Dollar during the
year.
Adjusting for the foreign exchange headwind and acquisition and
divestiture-related activities(1), Group revenue grew by 5.6% on an organic
basis. This was driven by continued strong growth in Advanced Wound Care and
Infusion Care, with good growth seen in Ostomy Care and Continence &
Critical Care. Given the largely reimbursed markets that we serve, there was
limited opportunity to pass on the significant inflation we have seen in 2022.
However, initiatives executed through our Pricing Centre of Excellence have
successfully delivered positive price impact on revenue. Further detail of the
Group's revenue is discussed above on pages 5 to 6.
1. Acquisitions were Triad Life Sciences in 2022
and Cure Medical and Patient Care Medical in 2021. Divestiture-related
activities in 2022 were the discontinuation of hospital care, related
industrial sales and associated Russia operations , whilst in 2021 it was the
divestment of incontinence activities.
Revenue impact of strategic exits during 2022
The strategic exit of hospital care and industrial sales will impact revenues
as we move into 2023. The table below shows the 2022 revenue attributable to
these activities. The ongoing activities are more focused on higher-margin and
higher-growth chronic-care categories.
2022 reported Impact(1) 2022 revenue from ongoing activities
$m $m $m
Advanced Wound Care 620.7 - 620.7
Ostomy Care 522.1 (4.9) 517.2
Continence & Critical Care 546.3 (71.8) 474.5
Infusion Care 383.4 (25.6) 357.8
Total 2,072.5 (102.3) 1,970.2
1. Sales related to discontinuation from hospital care,
related industrial sales and associated Russia operations.
Reported net profit
Reported operating profit was $207.3 million, an increase of $3.7 million to
the prior year. Reported gross margin decreased year-on-year from 55.1% to
53.3%, driven by inflationary headwinds on raw materials and freight. The
reported gross margin was also impacted by increases in one-time divestiture
and termination costs (primarily relating to the exit from hospital care and
industrial sales activities) of $21.4 million and the release of the fair
value uplift of inventory arising from the acquisition of Triad Life Sciences
of $8.7 million. These were partly offset by foreign exchange tailwinds and
mix/price benefits.
Reported operating expenses decreased by $22.9 million, which was primarily
due to a reduction of $70.4 million in general and administrative expenses
partly offset by increases in selling and distribution expenses of $36.2
million and other operating expenses of $13.8 million. The improvement in
G&A reflected the Group's increasing focus on simplifying its global
processes and improving productivity. The increase in selling and distribution
expenses was primarily driven by increases in headcount associated with higher
revenue, the inclusion of acquired businesses and inflationary impacts on
distribution costs. Other operating expenses of $13.8 million (2021: nil)
largely reflected impairments arising from the exit from hospital care and
related industrial sales activities in 2022.
Reported net finance costs and non-operating expenses totalled $125.4 million
(2021: $52.3 million). Reported net finance costs increased by $24.2 million
to $67.7 million, reflecting an additional $8.6 million of net finance
expenses and $15.6 million (2021: nil) for the unwind of discount relating to
the contingent consideration arising from the acquisitions of Cure Medical in
2021 and Triad Life Sciences in 2022. Reported non-operating expenses of $57.7
million (2021: $8.8 million) principally arose from the remeasurement charges
in the year relating to the contingent consideration payable in respect of the
Cure Medical and Triad Life Sciences acquisitions of $29.5 million (2021:
nil), foreign exchange losses of $14.2 million (2021: loss of $9.3 million),
the recycling of cumulative translation losses from reserves following the
closure activities associated with the hospital care and industrial sales exit
of $12.2 million (2021: nil) and a loss on divestiture related activities of
$2.0 million (2021: $0.5 million gain).
After income tax expense of $19.0 million (2021: $33.7 million), reported net
profit was $62.9 million (2021: $117.6 million) generating basic earnings per
share of 3.1 cents (2021: 5.9 cents).
Adjusted net profit
Adjusted gross profit increased by 1.0% to $1,245.6 million (2021: $1,233.3
million). The adjusted gross margin of 60.1% was broadly flat to the previous
year (2021: 60.5%), with the significant inflationary pressures on both raw
materials and freight costs partly offset by foreign exchange tailwinds and
mix/price benefits.
The Group achieved adjusted operating profit of $403.7 million (2021: $361.7
million) with an adjusted operating profit margin of 19.5% (2021: 17.7%).
There was a decrease in operating expenses in the year, with adjusted G&A
reduced by $52.8 million, to 8.9% of revenue (2021: 11.7%). This was partially
offset by an increase of $25.7 million in adjusted selling and distribution
expenses.
Adjusted net profit fell 2.4% to $256.8 million (2021: $263.0 million) given
the $8.6 million increase in adjusted net finance expense from higher market
interest rates coupled with a $34.4 million increase in the adjusted income
tax expense (which is explained below).
Adjusted basic and diluted EPS were 12.7 cents and 12.6 cents respectively
(2021: 13.1 cents and 13.0 cents), calculated on the basic weighted average
ordinary shares of 2,024 million shares (2021: 2,009 million shares) and 2,040
million diluted shares (2021: 2,026 million) respectively.
Taxation and tax strategy
Reported Reported Adjusted(1) Adjusted(1)
2022 2021 2022 2021
$m $m $m $m
Profit before income taxes 81.9 151.3 337.6 309.4
Income tax expense (19.0) (33.7) (80.8) (46.4)
Effective tax rate 23.2% 22.3% 23.9% 15.0%
1. These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measure prepared in
accordance with IFRS on pages 41 to 46.
The Group's reported income tax expense was $19.0 million (2021: $33.7
million). The Group's reported effective tax rate of 23.2% for the year was
higher than the prior year (2021: 22.3%) mainly due to the increase in US tax
expenses following the acquisition of Triad Life Sciences and non-deductible
contingent consideration relating to the acquisition of both Triad Life
Sciences and Cure Medical, partially offset by the recognition of deferred tax
assets for previously unrecognised tax losses of $20.1 million in the US
(2021: $6.8 million related to recognition of deferred tax assets following
the acquisition of Cure Medical). For further information, see Note 6 - Income
taxes to the Financial Statements.
After adjusting items, the adjusted effective tax rate was 23.9% (2021:
15.0%). The increase in adjusted effective tax rate was principally driven by
the non-cash deferred tax expenses due to the utilisation of US Federal tax
losses which are now fully recognised as deferred tax assets following the
acquisition of Triad Life Sciences, based on stronger future taxable
profitability forecasts, and the impact of profit mix between jurisdictions in
which the Group has a taxable presence. The adjusted effective tax rate of
23.9% was in line with guidance provided in the interim results for the period
ended 30 June 2022.
In 2021, the adjusted effective tax rate of 15.0% was principally because of
the lower incidence of 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 a taxable presence. Strategy has been published, which is
available on the corporate website
(www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement).
Convatec is a responsible business and promotes the highest standards of
compliance and ethical behaviour. Management takes 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 2022 and operated in over
100 countries through direct sales and local distributors. As a result, our
business activities generated a substantial amount of taxes. These included
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
(www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement
(http://www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement)
).
Alternative performance measures ("APMs")
In line with the Group's APM policy, the following adjustments were made to
derive adjusted operating profit and adjusted profit before tax.
Operating profit Finance expense Non-operating expense
$'m $'m $'m
2022 2021 2022 2021 2022 2021
Reported 207.3 203.6 (67.7) (43.5) (57.7) (8.8)
Amortisation of acquired intangibles 131.3 130.4 - - - -
Acquisitions and divestitures 56.6 17.8 15.6 - 43.7 -
Termination benefits and related costs 7.1 4.3 - - - -
Impairment of assets 1.4 - - - - -
Litigation expenses - 5.6 - - - -
Adjusted 403.7 361.7 (52.1) (43.5) (14.0) (8.8)
Adjustments made to derive adjusted operating profit in 2022 included the
amortisation of acquired intangibles of $131.3 million (2021: $130.4 million),
of which $93.0 million (2021: $96.8 million) resulted from intangible assets
arising from the spin-out from Bristol-Myers Squibb in 2008 and will be fully
amortised by December 2026, divestiture-related costs of $39.7 million
principally related to the exit from the hospital care and industrial sales
activities and acquisition-related costs of $16.9 million primarily related to
the acquisition of Triad Life Sciences. Termination costs of $7.1 million were
in respect of the exit from hospital care and industrial sales activities and
an impairment charge of $1.4 million related to a legacy acquisition-related
customer relationship asset.
In 2021, acquisition and divestiture costs of $17.8 million related to
potential and actual strategic transactions which were executed, aborted or
in-flight and sought to improve the strategic positioning on the Group.
Termination costs of $4.3 million were in respect of the Group's
Transformation Initiative whilst litigation expenses of $5.6 million related
to a one-off claim that was also settled in 2021.
The adjustment of $15.6 million made to derive adjusted finance expenses in
2022 wholly related to the discount unwind in respect of the contingent
consideration payable on the Triad Life Sciences and Cure Medical
acquisitions.
Adjustments made to derive adjusted non-operating expenses in 2022 included
remeasurement charges of $29.5 million in respect of the contingent
consideration payable on the Triad Life Sciences and Cure Medical acquisitions
and divestiture-related costs of $14.2 million principally related to
cumulative translation adjustments and a loss on disposal from the exit of the
hospital care and industrial sales activities.
Of the total of $255.7 million of adjusting items in the year, $244.6 million
were non-cash items. For further information on Non-IFRS financial
information, see pages 41 to 46.
The Board, through the Audit and Risk Committee, continuously reviews the
Group's APM policy to ensure that it remains appropriate and represents the
way in which the performance of the Group is managed.
Strategic transformation
During 2022, the Group completed the first phase of its FISBE strategy ('FISBE
1.0'), a global multi-year transformation programme which commenced in 2019.
FISBE 1.0 started to position the Group for sustainable and profitable growth
and in 2022, we saw improved organic revenue growth performance and adjusted
operating profit margin growth. Transformation costs associated with FISBE
1.0, treated as an adjusting item, were minimal in 2022 (2021: $4.3 million).
FISBE 1.0 strengthened the Group, with the business becoming more focused on
chronic care, developing a deeper and broader innovation pipeline, notably
delivering three new product launches during 2022, and improving commercial
and operational execution, for example the significant reduction in complaints
per million across the past three years.
The Group has explored and executed acquisitions and divestitures to
strengthen the strategic positioning of the Group and increase its focus on
the four key categories. During 2022, this included the acquisition of Triad
Life Sciences, the equity investment in the preference shares of BlueWind
Medical Ltd (BlueWind Medical), the strategic decision to withdraw from
hospital care activities and related industrial sales as announced on 12 May
2022 and other potential transactions. Further details are provided in Note 8
- Investment in financial assets, Note 9 - Acquisitions, Note 10 -
Divestitures and the Non-IFRS financial information section to the Financial
Statements.
As announced at the Capital Markets Event on 17 November 2022, following the
completion of FISBE 1.0, our strategy is now evolving to deliver the pivot
('FISBE 2.0'). This is discussed further on pages 7 to 9. Medium-term targets
associated with FISBE 2.0 include delivering sustainable mid-single-digit
organic revenue growth per annum and expanding the adjusted operating margin
into the mid-20s. This is to be delivered through simplification and
productivity initiatives, improving the product margin mix and operating
leverage. Furthermore, there may be potential M&A opportunities to
further strengthen the Group. The outcome of delivering on these targets will
be sustainable and profitable growth with double-digit adjusted EPS and
adjusted free cash flow compound annual growth over the medium term.
Acquisitions and investments
As noted above, in line with our strategic transformation and consistent with
the "Focus" pillar of FISBE (see page 7), we acquired Triad Life Sciences, a
US based medical device company on 14 March 2022 for an initial consideration
of $125.3 million. The acquisition of Triad Life Sciences strengthens the
Group's Advanced Wound Care position in the US, securing access to a
complementary and innovative technology platform that enhances advanced wound
management and patient outcomes. In addition to the initial consideration,
there is further contingent consideration payable of up to $325.0 million,
based on the achievement of two short-term milestones (totalling $50.0
million) and sales performance during the first two years post-completion
(maximum earnout of $275.0 million based on stretching financial performance
over the period). The two short-term milestones were successfully achieved in
2022, resulting in $50.0 million being paid during the year. Based on the
latest available information, the discounted fair value of the remaining
contingent consideration as at 31 December 2022 was $130.8 million. Refer to
Note 9 - Acquisitions to the Financial Statements for further details.
Management have identified that reasonably possible changes in certain key
assumptions and forecasts may cause the calculated fair value of the
contingent consideration to vary materially within the next financial year and
accordingly, management have deemed this to be a key estimate. See Note 1.2 -
Critical accounting judgements and key sources of estimation uncertainty to
the Financial Statements for further details.
The Group also has contingent consideration of up to $10.0 million in respect
of the acquisition of Cure Medical in 2021, which is based upon
post-acquisition performance targets and due to be paid within three years of
the acquisition date. Based on the latest available information, the
discounted fair value of the remaining contingent consideration as at 31
December 2022 was $9.2 million (2021: $3.1 million).
On 9 May 2022, the Group invested $30.7 million in preference shares of
BlueWind Medical, inclusive of transaction costs. This represents an
investment into an innovative technology in the large and growing overactive
bladder market, related to the Continence space. Refer to Note 8 - Investment
in financial assets to the Financial Statements for further details.
Strategic decision to exit from hospital care and industrial sales
On 12 May 2022, it was announced that the Group would be withdrawing from its
hospital care activities and related industrial sales during the remainder of
2022. The withdrawal from these lower-margin and lower-growth activities is
consistent with the Group's FISBE strategy, with the Group focusing on
higher-growth chronic care markets with higher margins and higher levels of
recurring revenue.
The manufacturing plant in Belarus which produced hospital care goods ceased
manufacturing on 31 May 2022 alongside the discontinuation of associated
Russia activities. The remainder of the hospital care and industrial sales
activities were mostly phased out in the second half of 2022. The majority of
the exit and closure activities have been completed at the end of the year,
with minimal residual sales expected in 2023. Further details are provided in
Note 10 - Divestitures to the Financial Statements.
Dividends
Dividends are distributed based on the distributable reserves of the Company,
which are primarily derived from the dividends received from subsidiary
companies and are not based directly on the Group's retained earnings. The
distributable reserves of the Company at 31 December 2022 were $1,562.9
million (2021: $1,590.3 million).
The Board declared an interim dividend of 1.717 cents per share in August 2022
and has recommended a final 2022 dividend of 4.330 cents per share, which
would bring the full year dividend to 6.047 cents per share (2021: 5.871 cents
per share), an increase of 3% and a pay-out ratio when compared to adjusted
net profit of 48%. Our stated policy is a pay-out ratio of 35% to 45% of
adjusted net profit but this is interpreted flexibly over time to reflect the
underlying performance of the business and the Board's confidence in its
future growth prospects.
Refer to Note 7 - Dividends to the Financial Statements for further
information.
Sources of cash and free cash flow
Sources of cash
One of the Group's primary sources of cash is net cash generated from
operations.
Net cash generated from operations Reported Reported
2022 2021
$m $m
EBITDA(1) 432.0 420.1
Share based payments 16.7 16.4
Working capital movement (62.5) (31.6)
(Loss) on foreign exchange derivatives (1.7) (4.3)
Net cash generated from operations 384.5 400.6
1. EBITDA is reconciled to the most directly comparable
financial measure prepared in accordance with IFRS in the cash conversion
table on page 45.
Reported net cash generated from operations decreased by $16.1 million to
$384.5 million during the year, mainly due to working capital movements. The
increase in working capital in the year ended 31 December 2022 was driven by
increased inventory levels of $36.3 million to build resilience across the
Group and increases in trade and other receivables of $63.6 million due to
sales phasing and the timing of receipts. This was partially offset by
increases in trade and other payables of $40.7 million primarily due to the
increase in derivative financial liabilities as a result of the mark to market
("MTM") valuations at the year end and an increase in restructuring
provisions.
Free cash flow
Adjusted free cash flow (post-tax), is one of the four key financial
performance indicators we use to monitor the delivery of our strategy.
Reported Reported Adjusted(2) Adjusted(2)
2022 2021 2022 2021
$m $m $m $m
EBITDA 432.0 420.1 500.0 464.2
Share-based payments 16.7 16.4 - -
Working capital movement (62.5) (31.6) (98.6) (32.3)
(Loss) on foreign exchange derivatives (1.7) (4.3) (1.7) (3.9)
Capital expenditure (net) (144.2) (94.1) (144.2) (94.1)
Net cash generated from operations, net of capital expenditure 240.3 306.5 255.5 333.9
Cash conversion 55.6% 73.0% 51.1% 71.9%
Income taxes paid (52.9) (59.2) (52.9) (59.2)
Free cash flow (post tax) 187.4 247.3 202.6 274.7
2. Adjusted free cash flow, 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 45.
Adjusted free cash flow (post-tax), was $202.6 million (2021: $274.7 million).
The $35.8 million increase in adjusted EBITDA, primarily driven by a reduction
in adjusted operating costs (see commentary in Adjusted net profit section),
was more than offset by the $50.1 million increase in capital programmes as
well as the increase in working capital.
Cash conversion was 55.6% (2021: 73.0%) and adjusted cash conversion was 51.1%
(2021: 71.9%). The decline in the ratio in 2022 primarily reflected the
strategic decision to increase capital expenditure and build inventory for
resilience, coupled with the timing of receipts from customers.
The $1.7 million loss (2021: $4.3 million loss) from foreign exchange
derivatives was a result of hedging activity to help mitigate the impact on
underlying exposures from volatility in foreign exchange rates.
Liquidity and net debt
Net debt bridge
Reported Adjusted
2022 2022
$m $m
Net debt(2) at 1 January (881.2) (881.2)
EBITDA(1,3) 432.0 500.0
Working capital(3) & FX on derivatives (64.2) (100.3)
Capital expenditure (144.2) (144.2)
Acquisitions and divestitures (173.4) (173.4)
Investment in financial assets (30.7) (30.7)
Debt servicing (77.2) (77.2)
Tax & others(3) (41.1) (73.0)
Dividends (88.1) (88.1)
Net debt(2) at 31 December (1,068.1) (1,068.1)
1. Reported and Adjusted EBITDA are reconciled to the most
directly comparable financial measure prepared in accordance with IFRS in the
cash conversion table on page 45 and reconciliation of earnings to adjusted
earnings table on page 43 respectively.
2. Net debt is calculated as the carrying value of current and
non-current borrowings, net of cash and cash equivalents and excluding lease
liabilities.
3. EBITDA, working capital and tax & others are on an
adjusted basis. The reported numbers are disclosed above commented on further
below.
Adjusted EBITDA was $500.0 million and excludes $39.2 million in respect of
working capital movements arising from acquisitions and divestitures,
primarily driven by the Triad Life Sciences acquisition and the exit from
hospital care and related industrial sales during the year. Other items
excluded to derive adjusted EBITDA were $5.0 million of acquisition and
divestiture expenses, $10.2 million of termination costs and $16.7 million of
share-based payments, offset by a decrease in termination accruals of $3.1
million. These numbers can be seen within the non-IFRS financial information
section on pages 45 to 46.
Adjusted working capital & FX on derivatives of $100.3 million included
the $39.2 million working capital movement arising from acquisitions and
divestitures as explained above. A reconciliation of adjusted working capital
to reported working capital is shown in the Non-IFRS financial information
section on page 46.
The Group continued to make significant investments to strengthen and grow the
business such as expanding the manufacturing facilities in its Infusion Care
business, adding more automation to our production lines and developing new
digital technologies to deliver enhanced customer experiences. Consequently,
capital expenditure during 2022 was $144.2 million.
The Group made several strategic investments in 2022 to strengthen its
competitive position, including the acquisition of Triad Life Sciences for an
initial consideration of $123.3 million and two additional payments totalling
$50.0 million for the successful achievement of two milestones in 2022 in
relation to that acquisition. The Group also made a $30.7 million equity
investment in BlueWind Medical, inclusive of transaction costs.
Debt servicing payments of $77.2 million are comprised of net interest
payments of $49.9 million, lease payments of $20.7 million and the
amortisation of financing fees of $6.6 million.
Tax & others of $73.0 million, on an adjusted basis, consisted of income
taxes paid of $52.9 million, foreign exchange on cash and cash equivalents of
$15.9 million, $5.0 million of acquisition and divestiture expenses and $10.2
million of termination costs, offset by foreign exchange on borrowings of
$11.0 million. Excluding $5.0 million of acquisition and divestiture expenses,
$10.2 million of termination costs and $16.7 million of share-based payments,
tax & others, on a reported basis, was $41.1 million.
Dividend cash payments of $88.1 million were made to shareholders in the year.
This represented 78.2% of total dividends declared in the year, with the
remaining 21.8% electing to settle via scrip dividends.
Borrowings and net debt 2022 2021
$m $m
Senior notes(1) (493.1) (492.1)
Credit facilities(1) (718.8) (852.5)
Cash and cash equivalents 143.8 463.4
Net debt (excluding leases) (1,068.1) (881.2)
Lease liabilities (88.3) (90.5)
Interest bearing liabilities net of cash (1,156.4) (971.7)
Net debt (excluding leases)/adjusted EBITDA
At 31 December 2.1x 1.9x
1. Senior notes of $493.1 million (2021: $492.1 million) are
stated net of financing fees of $6.9 million (2021: $7.9 million). Credit
facilities of $718.8 million (2021: $852.5 million) are stated net of
financing fees of $8.4 million (2021: $5.4 million).
As at 31 December 2022, the Group's cash and cash equivalents were $143.8
million (31 December 2021: $463.4 million) and the debt outstanding on
borrowings was $1,211.9 million (31 December 2021: $1,344.6 million).
The Group successfully refinanced its bank facilities in November 2022, with
$1.2 billion committed for five years at slightly improved margins over base
rates compared to the previous facilities, comprising a multicurrency
revolving credit facility of $950.0 million and a term loan of $250.0 million,
both with maturity in November 2027. The Group's $500.0 million senior
unsecured notes, issued in October 2021, remain in place with maturity in
October 2029.
As at 31 December 2022, $472.8 million of the multicurrency revolving credit
facility remained undrawn. This, combined with cash of $143.8 million,
provided the Group with total liquidity of $616.6 million at 31 December 2022
(31 December 2021: $663.4 million). Of this, $19.2 million was held in
territories where there are restrictions related to repatriation (31 December
2021: $37.5 million).
At 31 December 2022, the Group had total interest-bearing liabilities,
including IFRS 16 lease liabilities, of $1,300.2 million (2021: $1,435.1
million). Offsetting cash of $143.8 million (2021: $463.4 million) and
excluding lease liabilities, net debt was $1,068.1 million (2021: $881.2
million), equivalent to 2.1x adjusted EBITDA (2021: 1.9x adjusted EBITDA),
with the increase primarily driven by strategic investments such as the
acquisition of Triad Life Sciences, equity investment in BlueWind Medical and
increased investment in capital expenditure.
For further information on borrowings see Note 11 - Borrowings to the
Financial Statements.
Covenants
At 31 December 2022, the Group was in compliance with all financial and
non-financial covenants associated with the Group's outstanding debt.
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 2022 and 2021.
Maximum covenant net leverage(2) Covenant net leverage(2) Minimum covenant interest cover(2) Covenant interest cover(2)
31 December 2022 3.50x 2.28x 3.5x 9.9x
31 December 2021 3.50x 1.97x 3.5x 11.7x
2. Net leverage is net debt/adjusted EBITDA and interest cover
is adjusted EBITDA/interest expense (net) 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 pages 41 to 46 and applied in the commentary in this Financial
review.
Group financial position
2022 2021 Change
At 31 December $m $m $m
Intangible assets and goodwill 2,149.5 2,058.5 91.0
Other non-current assets 553.2 504.7 48.5
Cash and cash equivalents 143.8 463.4 (319.6)
Other current assets 745.5 647.4 98.1
Total assets 3,592.0 3,674.0 (82.0)
Current liabilities (533.1) (569.2) 36.1
Non-current liabilities (1,449.2) (1,410.0) (39.2)
Equity (1,609.7) (1,694.8) 85.1
Total equity and liabilities (3,592.0) (3,674.0) 82.0
Intangible assets and goodwill
Intangible assets and goodwill increased by $91.0 million to $2,149.5 million
(2021: $2,058.5 million). This was primarily due to intangible assets and
goodwill arising from the Triad Life Sciences acquisition of $284.7 million
combined with intangible asset additions of $44.6 million, partially offset by
the in-year amortisation of intangible assets of $147.4 million, the net
effect of foreign exchange of $84.7 million and an impairment charge of $5.7
million against 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. During 2022, there was an
impairment of $4.3 million relating to a product related intangible asset
which has been phased out as part of the hospital care exit. There was also a
$1.4 million impairment relating to a legacy acquisition-related customer
relationship intangible asset as part of the rationalisation of activities in
the portfolio.
The annual Cash Generating Unit ("CGU") impairment review was conducted on the
CGU groups and, taking into consideration our future forecasts and reasonably
possible scenarios, significant headroom remained in the carrying value of all
CGU groups in comparison to the sensitised recoverable value. No impairment
was recognised against goodwill or indefinite lived intangible assets during
the year. In addition, management considered the severe but plausible downside
scenarios used in the Viability assessment and headroom remained on the
carrying value of all CGU groups.
Other non-current assets
Other non-current assets, including property, plant and equipment
("PP&E"), right-of-use assets ("ROU assets"), investment in financial
assets, deferred tax assets, restricted cash and other assets increased by
$48.5 million to $553.2 million (2021: $504.7 million). The increase reflected
the continued investment in our manufacturing facilities, with additions in
PP&E of $100.0 million offset by depreciation of $39.7 million, the net
effect of foreign exchange of $17.9 million and impairments of $7.4 million.
Included within other non-current assets was the investment made in May 2022
in the preference shares of BlueWind Medical. This was held at fair value of
$30.7 million, which has not changed since the date of investment. Restricted
cash reduced by $6.3 million primarily due to the reclassification to current
assets whilst ROU assets have reduced by $4.2 million.
Current assets excluding cash and cash equivalents
Current assets, excluding cash and cash equivalents, increased by $98.1
million to $745.5 million (2021: $647.4 million), driven by increases in trade
and other receivables of $40.5 million, inventory of $28.1 million and
restricted cash of $17.8 million. The increase in trade and other receivables,
net of foreign exchange effects of $17.2 million, was mainly due to sales
phasing and the timing of receipts whilst the increase in inventories, net of
foreign exchange effects of $19.0 million, was largely attributable to the
ramp-up of inventory in order to build resilience across the Group.
Restricted cash increased by $17.8 million to $18.2 million, driven by escrow
amounts arising from the acquisition of Triad Life Sciences in 2022 and the
reclassification of escrow amounts arising from the acquisitions of Cure
Medical and Patient Care Medical in 2021 from non-current assets to current
assets.
Current liabilities
Current liabilities decreased by $36.1 million to $533.1 million (2021: $569.2
million), reflecting a $144.8 million decrease in the current portion of
borrowings as a result of a change in profile of the Group's borrowings under
the new credit facilities, largely offset by a $95.2 million increase in
provisions largely driven by the contingent consideration payable on the Triad
Life Sciences acquisition and an increase of $20.8 million in derivative
financial liabilities, due to movements in the MTM valuations at the year
end.
Non-current liabilities
Non-current liabilities increased by $39.2 million to $1,449.2 million (2021:
$1,410.0 million). This included an increase in non-current borrowings of
$12.1 million, resulting from a change in profile of the Group's borrowings
under the new credit facilities and an increase in provisions of $51.4 million
driven by the contingent consideration payable on the Triad Life Sciences and
Cure Medical acquisitions. This was partially offset by a reduction in other
non-current liabilities primarily due to a reduction in the Group's pension
obligations and the reclassification of escrow amounts from non-current
liabilities to current liabilities.
Going concern
In preparing their assessment of going concern, the Directors considered
available cash resources, access to committed funding, financial performance
and forecast performance, including continued implementation of the FISBE
strategy, together with the Group's financial covenant compliance requirements
and principal risks and uncertainties.
Management also applied the same severe but plausible downside 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. A reverse
stress test, before mitigation, was also considered to demonstrate what
reduction in revenue would be required in the next 12 months to create
conditions which may lead to a potential covenant breach. For a breach of
covenants to occur in the next 12 months, before mitigation, the Group would
need to experience a sustained revenue reduction of more than 10% across all
categories and markets. This was considered implausible given the Group's
strong global market position, diversified portfolio of products and the
mitigations available to the Board and management.
Accordingly, the Directors continue to adopt the going concern basis in
preparing the Financial Statements.
Financial control environment
The Group continues to closely monitor the financial & IT general control
environment, using a single system for the self-certification of effectiveness
of key financial controls across our operations globally. The response rate
remained high throughout the year. The Global Financial Controls (GFC) team,
acting as the second line of defence, monitors responses and reviews all
notified control failures to ensure that there is no risk of material
financial misstatement. Focused support and training is given to Global
Business Services (GBS) and market finance teams to review controls and ensure
that the control framework continues to operate effectively. A similar
self-certification process is operated by the IT governance, risk &
compliance team for IT controls covering cyber, privacy and financial
systems.
The global financial control framework was refreshed in 2022 to increase focus
on material risk, with the introduction of a less resource-intensive framework
for the smaller operating entities, and additional controls to address new
risk areas identified. The control frameworks will continue to evolve to
respond to the development of corporate governance requirements in the UK.
Independent assurance on these control frameworks is provided by the Internal
Audit team, with a review of the global financial controls and the IT general
controls performed in the year, in addition to sample testing carried out by
the GFC and IT Governance teams and reviews of financial controls of specific
markets and GBS.
Consolidated Income Statement
For the year ended 31 December 2022
2022 2021
Notes $m $m
Revenue 2 2,072.5 2,038.3
Cost of sales (968.6) (915.2)
Gross profit 1,103.9 1,123.1
Selling and distribution expenses (575.9) (539.7)
General and administrative expenses (214.9) (285.3)
Research and development expenses (92.0) (94.5)
Other operating expenses 3 (13.8) -
Operating profit 207.3 203.6
Finance income 4 5.5 0.8
Finance expense 4 (73.2) (44.3)
Non-operating expense, net 5 (57.7) (8.8)
Profit before income taxes 81.9 151.3
Income tax expense 6 (19.0) (33.7)
Net profit 62.9 117.6
Earnings per share
Basic earnings per share (cents per share) 3.1¢ 5.9¢
Diluted earnings per share (cents per share) 3.1¢ 5.8¢
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 2022
2022 2021
Notes $m $m
Net profit 62.9 117.6
Other comprehensive (expense)/income
Items that will not be reclassified subsequently to the Consolidated Income
Statement
Remeasurement of defined benefit pension plans, net of tax 8.4 3.3
Change in pension asset restriction - 1.3
Items that may be reclassified subsequently to the Consolidated Income
Statement
Foreign currency translation, net of tax (113.6) (29.6)
Realisation of cumulative translation adjustments 12.2 -
Effective portion of changes in fair value of cash flow hedges 12 (7.7) (5.1)
Changes in fair value of cash flow hedges reclassified to the Consolidated 12 16.5 5.7
Income Statement
Costs of hedging 12 (1.1) (0.4)
Income tax in respect of items that may be reclassified 2.4 (0.9)
Other comprehensive expense (82.9) (25.7)
Total comprehensive (expense)/income (20.0) 91.9
All amounts are attributable to shareholders of the Group and wholly derived
from continuing operations.
Consolidated Statement of Financial Position
As at 31 December 2022
2022 2021
Notes $m $m
Assets
Non-current assets
Property, plant and equipment 400.4 366.7
Right-of-use assets 79.4 83.6
Intangible assets and goodwill 2,149.5 2,058.5
Investment in financial assets 8 30.7 -
Deferred tax assets 26.6 28.9
Derivative financial assets 12 0.2 -
Restricted cash 7.3 13.6
Other non-current receivables 8.6 11.9
2,702.7 2,563.2
Current assets
Inventories 336.9 308.8
Trade and other receivables 364.0 323.5
Derivative financial assets 12 26.4 15.1
Restricted cash 18.2 -
Cash and cash equivalents 143.8 463.4
889.3 1,110.8
Total assets 3,592.0 3,674.0
Equity and liabilities
Current liabilities
Trade and other payables 346.6 342.5
Borrowings 11 - 144.8
Lease liabilities 20.3 19.7
Current tax payable 33.5 45.5
Derivative financial liabilities 12 32.5 11.7
Provisions 13 100.2 5.0
533.1 569.2
Non-current liabilities
Borrowings 11 1,211.9 1,199.8
Lease liabilities 68.0 70.8
Deferred tax liabilities 83.2 87.2
Provisions 13 53.1 1.7
Derivative financial liabilities 12 0.3 2.9
Other non-current liabilities 32.7 47.6
1,449.2 1,410.0
Total liabilities 1,982.3 1,979.2
Net assets 1,609.7 1,694.8
Equity
Share capital 250.7 247.0
Share premium 165.7 142.3
Own shares (1.5) (2.2)
Retained deficit (892.2) (842.0)
Merger reserve 2,098.9 2,098.9
Cumulative translation reserve (177.1) (75.7)
Other reserves 165.2 126.5
Total equity 1,609.7 1,694.8
Total equity and liabilities 3,592.0 3,674.0
Consolidated Statement of Changes in Equity
For the year ended 31 December 2022
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 2021 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 7 - - - (85.8) - - - (85.8)
Scrip dividend 7 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
Net profit - - - 62.9 - - - 62.9
Other comprehensive (expense)/income:
Foreign currency translation adjustment, net of tax - - - - - (113.6) - (113.6)
Realisation of cumulative translation adjustments - - - - - 12.2 - 12.2
Remeasurement of defined benefit pension plans, net of tax - - - - - - 8.4 8.4
Changes in fair value of cash flow hedges, net of tax - - - - - - 10.1 10.1
Other comprehensive (expense)/income - - - - - (101.4) 18.5 (82.9)
Total comprehensive income - - - 62.9 - (101.4) 18.5 (20.0)
Dividends paid 7 - - - (88.1) - - - (88.1)
Scrip dividend 7 1.1 23.4 - (24.5) - - - -
Allotment of shares to Employee Benefit Trust 2.6 - (2.6) - - - - -
Share-based payments - - - - - - 16.6 16.6
Share awards vested - - 3.3 - - - 2.9 6.2
Excess deferred tax benefit from share-based payments - - - - - - 0.2 0.2
Transfer between reserves - - - (0.5) - - 0.5 -
At 31 December 2022 250.7 165.7 (1.5) (892.2) 2,098.9 (177.1) 165.2 1,609.7
Consolidated Statement of Cash Flows
For the year ended 31 December 2022
2022 2021
Notes $m $m
Cash flows from operating activities
Net profit 62.9 117.6
Adjustments for
Depreciation of property, plant and equipment 39.7 40.6
Depreciation of right-of-use assets 22.1 22.8
Amortisation of intangible assets 147.4 147.2
Income tax 6 19.0 33.7
Non-operating expense, net 5 56.0 4.5
Finance costs, net 4 67.7 43.5
Share-based payments 16.7 16.4
Impairment/write-off of intangible assets 6.3 2.9
Impairment/write-off of property, plant and equipment 9.2 3.0
Change in assets and liabilities:
Inventories (36.3) (19.6)
Trade and other receivables (63.6) (29.4)
Other non-current receivables 3.0 1.1
Restricted cash (11.8) (8.4)
Trade and other payables 40.7 10.7
Other non-current payables 5.5 14.0
Net cash generated from operations 384.5 400.6
Interest received 5.5 0.8
Interest paid (55.4) (36.3)
Income taxes paid (52.9) (59.2)
Net cash generated from operating activities 281.7 305.9
Cash flows from investing activities
Acquisition of property, plant and equipment and intangible assets (144.2) (94.1)
Acquisitions, net of cash acquired 9 (123.3) (113.8)
Payment of contingent consideration arising from acquisitions 9 (50.0) -
Net cash (outflow)/inflow arising from divestitures 10 (0.1) 1.4
Investment in financial assets 8 (30.7) -
Net cash used in investing activities (348.3) (206.5)
Cash flows from financing activities
Repayment of borrowings 11 (842.5) (583.9)
Proceeds from borrowings 11 714.2 491.8
Payment of lease liabilities (20.7) (22.0)
Dividends paid 7 (88.1) (85.8)
Net cash used in financing activities (237.1) (199.9)
Net change in cash and cash equivalents (303.7) (100.5)
Cash and cash equivalents at beginning of the year 463.4 565.4
Effect of exchange rate changes on cash and cash equivalents (15.9) (1.5)
Cash and cash equivalents at end of the year 143.8 463.4
1. Basis of preparation
1.1 General information
Convatec Group Plc (the "Company") is a public limited company incorporated in
the United Kingdom under the Companies Act of 2006. 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 have been prepared in accordance with United Kingdom adopted
international accounting standards and International Financial Reporting
Standards ("IFRS") as issued by the International Accounting Standards Board
(IASB).
The Financial Statements are presented in US dollars ("USD"), reflecting the
profile of the Group's revenue and operating profit, which are primarily
generated in US dollars and US dollar-linked currencies. All values are
rounded to $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 year ended 31 December 2022 and 2021 but is
derived from those accounts. Statutory accounts for 2021 have been delivered
to the Registrar of Companies and those for 2022 will be delivered following
the Company's Annual General Meeting. The auditor's reports on the 2022 and
2021 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 have been identified.
A key estimate has been identified in relation to the valuation of the
contingent consideration related to the acquisition of Triad Life Sciences
Inc.
The Group's Audit and Risk Committee has reviewed, discussed, and challenged
management on identification and, where appropriate, the determination of its
critical accounting judgements and key estimates.
Valuation of the contingent consideration in relation to the acquisition of
Triad Life Sciences
The contingent consideration is based on both specified post-acquisition
financial and non-financial performance targets as defined by the Merger
Agreement. The contingent consideration is fair valued at the date of
acquisition with key inputs including a weighted probability of different
scenarios and revenue projections based on internal forecasts, discounted
using an appropriate discount rate that reflects the relative risk of the
investment as well as the time value of money.
Actual revenue results may differ from estimates, leading to a change in the
fair value of the contingent consideration. Management has identified that
reasonably possible changes in certain key assumptions and forecasts may cause
the calculated fair value of the contingent consideration to vary materially
within the next financial year. The maximum undiscounted contingent
consideration payable under the Merger Agreement was $325.0 million, of which
$50.0 million was paid during the year following successful attainment of the
two short-term milestones. The estimated discounted fair value of the
remaining contingent consideration as at 31 December 2022 was $130.8 million.
Management has determined that the reasonable potential range of discounted
outcomes within the next financial year is between $85.2 million and $230.8
million, compared to a maximum remaining undiscounted contingent consideration
of $275.0 million.
The timing and amount of future contingent elements of consideration is
therefore considered a key source of estimation uncertainty. Refer to Note 9 -
Acquisitions for more information.
1.3 Accounting standards
New standards, interpretations and amendments applied for the first time
On 1 January 2022, the Group adopted the following amendments which are
mandatorily effective for the period beginning 1 January 2022:
· Onerous Contracts - Cost of Fulfilling a Contract (Amendments to
IAS 37);
· Property, Plant and Equipment: Proceeds before Intended Use
(Amendments to IAS 16);
· Annual Improvements to IFRS Standards 2018-2020 (Amendments to
IFRS 1, IFRS 9, IFRS 16 and IAS 41); and
· References to Conceptional Framework (Amendments to IFRS 3).
The adoption during the year of the amendments and interpretations has not had
a material impact on the Consolidated Financial Statements.
Apart from these changes, the accounting policies set out in the Notes have
been applied consistently to both years presented in these Consolidated
Financial Statements.
New standards, interpretations and amendments not yet effective
There are a number of standards, amendments to standards and interpretations
which have been issued by the IASB that are effective in future accounting
periods that the Group has decided not to adopt early.
The following amendments are effective for the period beginning 1 January
2023:
· Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS
Practice Statement 2);
· Definition of Accounting Estimates (Amendments to IAS 8); and
· Deferred Tax Related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12).
The following amendments are effective for the period beginning 1 January
2024:
· IFRS 16 Leases (Amendment - Liability in a Sale and Leaseback);
· IAS 1 Presentation of Financial Statements (Amendment -
Classification of Liabilities as Current or Non-current); and
· IAS 1 Presentation of Financial Statements (Amendment -
Non-current liabilities with Covenants)
The Group is currently assessing the impact of these new accounting standards
and amendments and does not believe these will have a material impact on the
Group.
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.
· 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.
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, services and
technologies. R&D, manufacturing and central support functions are managed
globally for the Group, supporting all categories of sales. 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 5 to 6 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 infrastructures and support functions between the categories and
geographies. 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 key categories
and the key markets. The allocations are based on the relative merits of the
individual proposals across the Group.
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:
2022 2021
$m $m
Advanced Wound Care 620.7 592.3
Ostomy Care 522.1 546.5
Continence & Critical Care 546.3 542.9
Infusion Care 383.4 356.6
Total 2,072.5 2,038.3
From 2023 onwards, Flexi-Seal(TM) (2022 revenue: $65.8 million), our faecal
management system, will move from Continence & Critical Care to Ostomy
Care. The remaining industrial sales, predominantly continence-related
supplies for B2B customers (2022 revenue: $16.7 million) will move from
Infusion Care into Continence Care. Going forward, the Continence &
Critical Care category will be renamed Continence Care.
Geographic information
Geographic markets
The following table sets out the Group's revenue by geographic market in which
third-party customers are located:
2022 2021
$m $m
Europe 688.6 741.6
North America 1,090.3 1,022.1
RoW(1) 293.6 274.6
Total 2,072.5 2,038.3
1. 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. Other operating expenses
Other operating expenses were as follows:
2022 2021
$m $m
Exit and divestiture-related activities 12.4 -
Impairment of other intangible assets 1.4 -
13.8 -
As a result of the exit from hospital care and industrial sales-related
activities and disposal of a foreign subsidiary, impairments of $8.1 million
to property, plant and equipment and $4.3 million to intangible assets have
been recognised during the period. See Note 10 - Divestitures for further
details. The impairment of other intangible assets relates to a legacy
acquisition-related customer relationship asset which was impaired as part of
the rationalisation of activities in the portfolio.
4. Finance income and expense
Finance expenses arise from interest on the Group's borrowings and lease
liabilities and unwind of discount on contingent consideration payable on
acquisitions. Finance income arises from interest earned on investment of
surplus cash.
Finance costs, net for the year ended 31 December were as follows:
2022 2021
$m $m
Finance income
Interest income on cash and cash equivalents 5.5 0.8
Total finance income 5.5 0.8
Finance expense
Interest expense on borrowings (46.4) (29.2)
Other financing-related fees(1) (8.2) (8.1)
Interest expense on interest rate derivatives (1.4) (3.8)
Interest expense on lease liabilities (3.3) (3.8)
Capitalised interest(2) 2.0 0.6
Unwinding of discount(3) (15.6) -
Other finance costs (0.3) -
Total finance expense (73.2) (44.3)
Finance costs, net (67.7) (43.5)
1. Other financing-related fees include the amortisation of
deferred financing fees associated with the multicurrency revolving credit
facilities, term loan facilities and senior notes. This also includes $2.7
million of deferred financing fees related to the early termination of the
Group's previous credit agreement.
2. Capitalised interest was calculated using the Group's
weighted average interest rate over the year of 3.4% (2021: 2.0%).
3. The unwinding of discount is in respect of the contingent
consideration payable in relation to the Triad Life Sciences and Cure Medical
acquisitions. Refer to Note 9 - Acquisitions.
5. Non-operating (expense)/income, net
Non-operating (expense)/income, net was as follows:
2022 2021
Notes $m $m
Net foreign exchange (loss)/gain(1) (13.5) 4.3
Realisation of cumulative translation adjustments 10 (12.2) -
Gain/(loss) on foreign exchange forward contracts 12 15.8 (9.7)
Loss on foreign exchange cash flow hedges 12 (16.5) (3.9)
Change in contingent consideration(2) 9 (29.5) -
(Loss)/gain on divestiture 10 (2.0) 0.5
Other non-operating income 0.2 -
Non-operating expense, net(3) (57.7) (8.8)
1. The foreign exchange losses in 2022 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.
2. The $29.5 million expense relates to the change in fair value
of the contingent consideration for the Cure Medical ($5.8 million) and Triad
Life Sciences ($23.7 million) acquisitions as described in Note 9 -
Acquisitions.
3. Of the total net non-operating expense, $1.7 million (2021:
$4.3 million) relates to mark-to-market derivatives, the cash flow impact of
which have been shown within the changes in working capital section of the
Consolidated Statement of Cash Flows.
6. 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.
6.1 Taxation
The Group's income tax expense is the sum of the total current and deferred
tax expense.
2022 2021
$m $m
Current tax
UK corporation tax - 0.8
Overseas taxation 46.8 46.8
Adjustment to prior years (2.0) (4.3)
Total current tax expense 44.8 43.3
Deferred tax
Origination and reversal of temporary differences (3.7) (6.5)
Change in tax rates (3.2) 4.4
Adjustment to prior years 1.2 (0.7)
Benefit from previously unrecognised tax losses (20.1) (6.8)
Total deferred tax benefit (25.8) (9.6)
Income tax expense 19.0 33.7
In 2022, the deferred tax movement included a benefit of $20.1 million in
respect of the recognition of previously unrecognised tax losses in the US
following the acquisition of Triad Life Sciences.
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,
which increases the UK corporation tax rate from 19.0% to 25.0% from 1 April
2023.
The Group's deferred tax benefit in the year ended 31 December 2021 was mainly
influenced by the deferred tax benefit of $6.8 million for the recognition of
deferred tax assets following the acquisition of Cure Medical LLC ("Cure
Medical") in respect of previously unrecognised tax losses in the US.
6.2 Reconciliation of effective tax rate
The effective tax rate for the year ended 31 December 2022 was 23.2%, as
compared with 22.3% for the year ended 31 December 2021.
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:
2022 2021
$m $m
Profit before income taxes 81.9 151.3
Profit before income taxes multiplied by rate of corporation tax in the UK of 15.6 28.7
19.0% (2021: 19.0%)
Difference between UK and overseas tax rates(1) 3.0 4.0
Deferred tax impact for increase in UK tax rate - 4.8
Non-deductible/non-taxable items 14.4 1.3
Movement in unrecognised tax losses and other assets 1.0 (0.1)
Recognition of previously unrecognised US deferred tax assets (20.1) (6.8)
Movement in provision for uncertain tax positions 2.5 (0.3)
Other(2) 2.6 2.1
Income tax expense and effective tax rate 19.0 23.2% 33.7 22.3%
1. This includes changes in tax rates based on substantively
enacted legislation across various tax jurisdictions as of 31 December.
2. Includes tax on amortisation of indefinite-lived intangibles
and taxes on unremitted earnings.
The Group's income tax expense includes a $20.1 million tax benefit due to the
recognition of deferred tax assets following the acquisition of Triad in
respect of previously unrecognised tax losses in the US, and the $9.5 million
effect of non-deductible contingent consideration on the acquisition of both
Triad Life Sciences and Cure Medical. Refer to Note 9 - Acquisitions for the
acquisition accounting of Triad Life Sciences.
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 requires 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 increase
in provisions during 2022 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 expenses.
The Group is monitoring tax reforms driven by the OECD's project to address
the tax challenges arising from the digitalisation of the economy, including
Global Anti-Base Erosion Model Rules (Pillar Two). The Group has analysed the
tax impact of the project to the Group based on OECD model rules issued on 20
December 2021 and draft legislations available in jurisdictions in which the
Group operates in and expect the tax impact to be not material in the
foreseeable future. The Group will reassess the tax impact once new
legislation becomes available. This has no impact on the Group's result for
2022.
7. 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 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 3.161 4.154 77.8 58.9 18.9 7,192,010
Interim dividend 2022 1.410 1.717 34.8 29.2 5.6 2,107,103
Paid in 2022 4.571 5.871 112.6 88.1 24.5 9,299,113
Final dividend 2022 proposed 3.657 4.330 88.5
The final dividend proposed for 2022, to be distributed on 25 May 2023 to
shareholders on the register at the close of business on 11 April 2023, is
based upon the issued and fully paid share capital as at 31 December 2022 and
is subject to shareholder approval at the Annual General Meeting on 18 May
2023. The dividend will be declared in US dollars and will be paid in Sterling
at the chosen exchange rate of $1.184/£1.00 determined on 8 March 2023.
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. A scrip dividend alternative will be offered allowing
shareholders to elect by 3 May 2023 to receive their dividend in the form of
new ordinary shares.
The interim and final dividends for 2022 give a total dividend for the year of
6.047 cents per share, an increase of 3.0% over the prior year (2021: 5.871
cents per share).
8. Investment in financial assets
On 9 May 2022, the Group invested $30.0 million in preference shares of
BlueWind Medical Limited (BlueWind Medical). BlueWind Medical is developing an
implantable tibial neuromodulation device, for the treatment of urge
incontinence and urinary urgency. This represents an investment into an
innovative technology in the large and growing overactive bladder market,
related to the Continence space.
In line with IFRS 9 Financial Instruments, the investment met the definition
of an equity instrument, and the Group has made an irrevocable election on
initial recognition to measure the investment at FVOCI. The Group considers
this investment to be strategic in nature and it is not held for trading.
In line with IFRS 13 Fair value measurement, this investment has been
classified as Level 3 in the fair value hierarchy as its measurement is
derived from significant unobservable inputs. As at the date of the
transaction, the equity investment was recorded at its cost of investment
which approximates to fair value plus transaction costs of $0.7 million.
As at 31 December 2022, the fair value of the investment has been remeasured
and remained at $30.7 million. No dividends were recognised during the year.
9. Acquisitions
During the year to 31 December 2022, the Group completed the acquisition of
Triad Life Sciences Inc (Triad Life Sciences), a US-based medical device
company.
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. This note also provides details of any fair value changes
identified post-acquisition in respect of previous acquisitions that the Group
has completed.
Triad Life Sciences Inc
Description of the transaction
On 14 March 2022, the Group completed its acquisition of 100% of the share
capital of Triad Life Sciences Inc. The acquisition of Triad strengthens the
Group's Advanced Wound Care position in the US, securing access to a
complementary and innovative technology platform that enhances advanced wound
management and patient outcomes.
In addition to the initial consideration of $125.3 million, the sellers may
earn contingent consideration up to a maximum of $325.0 million, in the form
of (i) two additional payments of $25.0 million each relating to short-term
milestones; and (ii) two earnout payments conditional on performance during
year 1 and year 2 post completion, with the maximum earnout for these two
payments totalling $275.0 million based on stretching financial performance
over the period.
The discounted fair value of the contingent consideration at the date of
acquisition was $141.8 million, of which $25.0 million was paid in April 2022
and a further $25.0 million paid in October 2022 following attainment of the
first and second short-term milestones. The earnout payments are due to be
paid within three years of the acquisition date, subject to achieving the
specified targets.
Following completion of the initial acquisition accounting, any changes in the
fair value of the contingent consideration at each reporting date will be
recorded in the Consolidated Income Statement in accordance with the Group's
accounting policies. This is explained further on in this note.
Assets acquired and liabilities assumed
The transaction meets the definition of a business combination and has been
accounted for under the acquisition method of accounting. The following table
summarises the provisional fair values of the assets acquired and liabilities
assumed as of the acquisition date:
Triad Life Sciences
Provisional
$m
Non-current assets
Property, plant & equipment 0.5
Right-of-use assets 2.2
Intangible assets - Product-related 154.8
Current assets
Trade and other receivables 4.7
Inventories 10.8
Cash and cash equivalents 15.9
Total assets acquired 188.9
Non-current liabilities
Lease liabilities (2.7)
Deferred tax liabilities (32.3)
Current liabilities
Trade and other payables (2.6)
Lease liabilities (0.2)
Total liabilities assumed (37.8)
Net assets acquired 151.1
Goodwill 129.9
Total 281.0
Initial cash consideration 125.3
Deferred purchase consideration paid into escrow(1) 13.8
Working capital adjustment(2) 0.1
Contingent consideration 141.8
Total consideration 281.0
Provisional
Analysis of cash outflow in the Consolidated Statement of Cash Flows $m
Initial cash consideration 125.3
Deferred purchase consideration paid into escrow(1) 13.8
Cash and cash equivalents acquired (15.9)
Working capital adjustment(2) 0.1
Net cash outflow from acquisitions, net of cash acquired 123.3
1. $13.8 million was paid on closing into escrow as security and
indemnity by the seller for its obligations under the Merger Agreement. $1.3
million was released in December 2022 to the sellers following agreement of
the closing statement. It is expected that the remaining balance will be
released within the next 12 months subject to the terms of the Merger
Agreement.
2. This is the Group's calculation of the working capital
adjustment and forms part of the initial consideration. The final amount was
determined in accordance with the terms of the Merger Agreement and this was
finalised and paid by the reporting date.
The fair values of the assets acquired and liabilities assumed are provisional
at 31 December 2022. The Group will finalise these amounts as it obtains the
information necessary to complete the measurement process. Any changes
resulting from facts and circumstances that existed as of the acquisition date
may result in retrospective adjustments to the provisional amounts recognised
at the acquisition date. The Group will finalise these amounts no later than
one year from the acquisition date.
As part of the acquisition accounting, a $10.2 million fair value adjustment
was applied to the carrying value of inventory held at the acquisition date.
The fair value adjustment relates to work-in-progress and finished goods and
was calculated as the estimated selling price less costs to complete and sell
the inventory, associated margins on these activities, and holding costs. As
at 31 December 2022, $8.7 million has been expensed to cost of goods sold in
the Consolidated Income Statement as these have been sold. The remaining fair
value uplift of $1.5 million is expected to be released over the next 6 to 12
months, in line with forecast revenues.
The fair value of trade and other receivables amounts to $4.7 million, with a
gross contractual amount of $7.0 million. At the acquisition date, the Group's
best estimate of the contractual cash flows expected not to be collected
amounts to $2.3 million.
The goodwill recorded, which is not deductible for tax purposes, represents
the cost savings, operating synergies and future growth opportunities expected
to result from combining the operations of Triad with those of the Group. The
Triad acquisition is included in the Advanced Wound Care CGU group.
Fair value of contingent consideration at reporting date
The two short term milestones were achieved and paid during the year ended 31
December 2022. As at 31 December 2022, management reviewed the fair value of
the remaining contingent consideration since the acquisition date, based on
the most recent Board approved strategic plan and forecast information.
Consequently, the discounted fair value of the remaining contingent
consideration was increased by $23.7 million since the amount recognised at 30
June 2022, and was recognised in non-operating expenses in the Consolidated
Income Statement (see Note 5 - Non-operating (expense)/income, net). The
amount of discount unwind recognised in the Consolidated Income Statement
during 2022 was $15.3 million and shown within finance expenses (see Note 4 -
Finance income and expense). The discounted fair value of the remaining
contingent consideration as at 31 December 2022 was $130.8 million. Refer to
Note 13 - Provisions for the movement in the contingent consideration during
the year.
Management have determined that the potential range of discounted outcomes
within the next financial year is between $85.2 million and $230.8 million,
from a maximum undiscounted contingent consideration of $275.0 million.
Acquisition-related costs
The Group incurred $2.4 million of acquisition-related costs directly related
to the Triad acquisition in the year ended 31 December 2022, primarily in
respect of legal and advisers' fees. The acquisition-related costs have been
recognised in general and administrative expenses in the Consolidated Income
Statement.
Revenue and profit
The revenue of Triad for the period from the acquisition date to 31 December
2022 was $34.8 million and net profit for the period was $5.8 million, before
recognising acquisition-related intangible asset amortisation charge of $9.2
million and the inventory fair value uplift release of $8.7 million. If the
acquisition had been completed on 1 January 2022, reported Group revenue would
have been $4.4 million higher and Group profit for the year would have been
$0.9 million lower, before recognising acquisition-related intangible asset
amortisation charges of $2.0 million.
Cure Medical LLC ("Cure Medical")
On 15 March 2021, the Group acquired 100% of the share capital of Cure
Medical.
During 2022, management reviewed the expectation of the contingent
consideration based on the most recent Board-approved strategic plan and
forecast information. The Cure Medical business has outperformed its
performance targets to date and forecast financial performance was expected to
exceed the original expectations. Consequently, the discounted fair value of
the contingent consideration has been revised from $3.1 million to $8.9
million during the year and the remeasurement charge of $5.8 million has been
recognised in non-operating expenses in the Consolidated Income Statement (see
Note 5 - Non-operating (expense)/income, net). The amount of discount unwind
recognised in the Consolidated Income Statement during 2022 was $0.3 million
and shown within finance expenses (see Note 4 - Finance income and expense).
The discounted fair value of the contingent consideration as at 31 December
2022 was $9.2 million. Refer to Note 13 - Provisions for the movement in the
contingent consideration during the year.
This is due to be paid within three years of the acquisition date, subject to
the terms of the Share Purchase Agreement.
10. Divestitures
During the year ended 31 December 2022, the Group withdrew from its hospital
care activities and related industrial sales.
Exit from hospital care and industrial sales activities
On 12 May 2022, following a strategic review, it was announced that the Group
would be withdrawing from its hospital care activities and related industrial
sales during 2022. This does not represent a separate major line of business
or component of the Group.
As a result of the exit from the hospital care and industrial sales
activities, the Group recognised impairment losses in the year ended 31
December 2022 in relation to the following:
- $8.1 million was recognised, within other operating expenses, as
an impairment to property, plant and equipment, primarily in relation to
manufacturing equipment in Belarus and Slovakia.
- $4.3 million was recognised, within other operating expenses, as
an impairment to product-related intangible assets.
- $13.4 million was recognised, within cost of sales, in relation
to the write-off of inventories and provision for those which are not expected
to be sold.
In addition, the Group recognised $7.3 million of severance costs, of which
$1.2 million remains as a provision as at 31 December 2022, and also
recognised a $6.9 million provision in relation to contract exit costs.
Management will review this at each reporting period. The Group incurred $6.7
million of divestiture-related costs in relation to legal fees and closing
down of manufacturing site costs. The majority of the exit and closure
activities have been completed at the end of the year, with minimal costs
expected in 2023.
As part of the exit from all hospital care and related industrial sales
activities, a subsidiary was sold during the year. The cumulative amount of
exchange losses of $12.2 million recognised in Other Comprehensive Income
relating to those operations, and a loss on disposal of $2.0 million, have
been recognised in the Consolidated Income Statement as non-operating
expenses. All costs associated with the exit have been classified as an
adjusting item in accordance with our Alternative Performance Measures policy.
11. Borrowings
The Group's sources of borrowing for funding and liquidity purposes derive
from senior notes and credit facilities including a committed revolving credit
facility.
In November 2022, the Group refinanced its bank facilities with $1.2 billion
committed for a 5-year term. The Group's 2029 unsecured senior notes of $500.0
million remain in place.
The Group's borrowings as at 31 December were as follows:
2022 2021
Year of Face value Face value
Currency maturity $m $m
Revolving Credit Facility(1) USD/Euro 2027 477.2 -
Term Loan USD 2027 250.0 -
Senior Notes USD 2029 500.0 500.0
Revolving Credit Facility Multicurrency 2024 - -
Term Loan Facility A(2) USD/Euro 2024 - 461.2
Term Loan Facility B(3) USD/Euro 2024 - 396.7
Interest-bearing borrowings 1,227.2 1,357.9
Financing fees(4) (15.3) (13.3)
Total carrying value of borrowings 1,211.9 1,344.6
Current portion of borrowings - 144.8
Non-current portion of borrowings 1,211.9 1,199.8
1. Included within the Revolving Credit Facility was €145.0
million ($155.2 million) at 31 December 2022 (2021: nil), representing 32.5%
of RCF debt denominated in Euros and 67.5% denominated in US dollars.
2. Included within Term Loan Facility A as at 31 December 2021 was
€78.4 million ($89.2 million) representing 19% of the loan denominated in
Euros and 81% denominated in US dollars.
3. Included within Term Loan Facility B as at 31 December 2021 was
€67.5 million ($76.7 million), representing 19% of the loan denominated in
Euros and 81% denominated in US dollars.
4. Financing fees of $15.3 million (2021: $13.3 million) related
to the remaining unamortised fees incurred on the credit facilities of $8.4
million (2021: $5.4 million) and on the senior notes of $6.9 million (2021:
$7.9 million).
Credit facilities
The credit facilities held by the Group are committed and available for the
refinancing of certain existing financial indebtedness and general corporate
purposes. On 15 November 2022, the Group refinanced its credit facilities. The
original facilities, maturing in October 2024 and, consisting of two five-year
multicurrency term loans totalling $1.5 billion and an undrawn $200.0 million
multicurrency revolving credit facility, were settled and extinguished
respectively on refinancing. During the year and until the refinancing
activity, $27.5 million (2021: $88.4 million) was repaid in accordance with
the repayment schedule for the original facilities.
The new credit facility for $1.2 billion comprises of a $250.0 million term
loan and a $950.0 million multicurrency revolving credit facility, both
committed for a five-year term. As at 31 December 2022, the term loan was
fully drawn and $477.2 million of the revolving credit facility was drawn,
with $472.8 million undrawn.
Transaction costs directly attributable to the refinancing have been
capitalised and are amortised over the term of the facility using the
effective interest rate method. Unamortised deferred financing fees of $2.7
million associated with the previous credit agreement have been written off to
the Consolidated Income Statement in 2022 (refer to Note 4 - Finance income
and expense).
The principal financial covenants are based on a permitted net debt to
covenant-adjusted EBITDA(1) ratio and interest cover test as defined in the
credit facilities agreement. Testing is required on a semi-annual basis, at
June and December, based on the last 12 months' financial performance. At 31
December 2022, the permitted net debt to covenant-adjusted EBITDA(1) ratio was
a maximum of 3.50 times and the interest cover a minimum of 3.50 times, terms
as defined by the credit facilities agreement. In accordance with the credit
facilities agreement, the net debt to covenant-adjusted EBITDA(1) ratio can
increase to a maximum 4.00 times for permitted acquisitions or investments.
Senior notes
Unsecured senior notes of $500.0 million 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. The Group's
refinancing activity did not affect the senior notes.
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.
Financial covenants
The Group was in compliance with all financial and non-financial covenants at
31 December 2022, with significant available headroom on the financial
covenants (in excess of $588 million debt headroom on net debt to
covenant-adjusted EBITDA(1)).
Excluding the impact of interest rate swaps, the weighted average interest
rate on borrowings for the year ended 31 December 2022 was 3.4% (2021: 2.0%).
The increase in the weighted average interest rate was due to rising
underlying reference base rates on debt with floating rates and a full year of
interest on the senior notes issued in 2021.
1. Covenant-adjusted EBITDA is calculated based on terms as
defined in the credit facilities agreement. This is different to adjusted
EBITDA, which is an alternative performance measure ("APM") as disclosed on
pages 41 to 46.
Borrowings not measured at fair value
The senior notes are listed and their fair value at 31 December 2022 of $430.8
million (2021: $507.7 million) has been obtained from quoted market data and
therefore categorised as a Level 1 measurement in the fair value hierarchy
under IFRS 13, Fair Value Measurements. For the Group's other borrowings, the
fair value is based on discounted cash flows using a current borrowing rate
and is categorised as a Level 2 measurement. At 31 December 2022, the
estimated fair value of the Group's other borrowings was $762.4 million (2021:
$847.3 million).
12. Financial instruments
A derivative financial instrument is a contract that derives its value from
the performance of an underlying variable, such as foreign exchange rates or
interest rates. The Group uses derivative financial instruments to manage
foreign exchange and interest rate risk arising from its operations and
financing. Derivative financial instruments used by the Group are foreign
exchange forwards and interest rate swaps.
The Group utilises interest rate swap agreements, designated as cash flow
hedges, to manage its exposure to variability in expected future cash outflows
attributable to the changes in interest rates on the Group's committed
borrowing facilities.
Financial instruments are classified as Level 1, Level 2 or Level 3 in the
fair value hierarchy in accordance with IFRS 13, Fair Value Measurements,
based upon the degree to which the fair value movements are observable. The
only instrument classified as Level 1 are the senior notes, given the
availability of quoted market price (Note 11 - Borrowings). The Group's
derivative financial instruments, discussed below, are classified as Level 2,
and the Group's equity investment in preference shares is classified as Level
3 (Note 8 - Investment in financial assets). 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. When a commitment is entered into a
layered approach is taken when hedging the currency exposure, ensuring that no
more than 100% of the transaction exposure is covered. The currencies hedged
by forward foreign exchange contracts are US dollars, Swiss francs, Pound
sterling, Danish krone and Japanese yen.
The Group further utilises foreign exchange contracts and swaps classified as
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 were designated as cash flow hedges at 31 December:
2022 2021
Effective date Maturity date Notional amount Fair value(1) Notional amount Fair value(1)
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 2.0 275.0 (2.9)
6 Month term SOFR Float to Fixed Interest Rate Swap 23 Jan 2023 23 Jan 2024 90.0 0.2 - -
6 Month term SOFR Float to Fixed Interest Rate Swap 23 Jan 2023 23 July 2024 40.0 - - -
6 Month term SOFR Float to Fixed Interest Rate Swap 23 Jan 2023 23 Jan 2025 50.0 (0.3) - -
1. The fair values of the interest rate swaps were disclosed in
non-current derivative financial liabilities in the Consolidated Statement of
Financial Position. There was 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:
2022 2021
Term Notional amount Fair value assets/ (liabilities) Notional amount Fair value assets/ (liabilities)
$m $m $m $m
Foreign exchange contracts ≤ 3 months 996.6 21.3 864.6 14.5
Foreign currency forward exchange contracts designated as cash flow hedges ≤ 12 months 72.7 3.1 40.8 0.6
Derivative financial assets 1,069.3 24.4 905.4 15.1
Foreign exchange contracts ≤ 3 months 703.7 (30.2) 695.9 (6.5)
Foreign currency forward exchange contracts designated as cash flow hedges ≤ 12 months 132.8 (2.3) 130.2 (5.2)
Derivative financial liabilities 836.5 (32.5) 826.1 (11.7)
During the year ended 31 December 2022, the Group realised a net gain of $15.8
million (2021: $9.7 million loss) on foreign exchange forward contracts
designated as FVTPL in Note 5 - Non-operating (expenses)income, 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:
2022 2021
$m $m
Recognised in other comprehensive income:
Effective portion of changes in fair value of cash flow hedges:
Interest rate swaps 3.3 (1.0)
Foreign currency forward exchange contracts designated as cash flow hedges (11.0) (4.1)
Changes in fair value of cash flow hedges reclassified to the Consolidated 16.5 5.7
Income Statement
Cost of hedging (1.1) (0.4)
Total 7.7 0.2
13. Provisions
A provision is an obligation recognised when there is uncertainty over the
timing or amount that will be paid. Provisions held by the Group are primarily
in respect of restructuring, decommissioning, dilapidations, legal liabilities
and contingent consideration relating to acquisitions.
The movements in provisions are as follows:
Decommissioning and dilapidations Restructuring Legal Contingent consideration Total
$m $m $m $m $m
1 January 2022 1.2 5.0 0.5 - 6.7
Contingent consideration from acquisitions - - - 141.8 141.8
Charged to income statement 1.7 15.7 (0.3) 29.5 46.6
Utilised - (10.4) - (50.0) (60.4)
Discount unwinding - - - 15.6 15.6
Reclassification from trade and other payables(1) - - - 3.1 3.1
Foreign exchange (0.1) - - - (0.1)
31 December 2022 2.8 10.3 0.2 140.0 153.3
Current - 10.3 - 89.9 100.2
Non-current(2) 2.8 - 0.2 50.1 53.1
1. During the year ended 31 December 2022, $3.1 million was
reclassified from trade and other payables in relation to the Cure Medical
acquisition to better reflect the estimation uncertainty of the contingent
consideration.
2. The expected timings of the payment of the contingent consideration
are disclosed in Note 9 - Acquisitions. The timing for other non-current
provisions is undefined.
Decommissioning and dilapidation provisions
Decommissioning provisions represent the estimated costs of dismantling and
removing PP&E and restoring the site on which it was located. Dilapidation
provisions are in respect of contractual obligations, on the expiry of a
lease, to return leased properties in the condition which is specified in the
individual leases.
Restructuring provisions
Restructuring provisions are mainly related to the exit from the low margin
hospital care and industrial sales portfolio. Further details are provided in
Note 10 - Divestitures. All restructuring provisions are supported by detailed
plans and a valid expectation has been raised in those affected as required by
the Group's accounting policy.
Legal provision
Legal provision of $0.2 million is in respect of an ongoing case. Legal issues
are often subject to uncertainties over the timing and the final amounts of
any settlement.
Contingent consideration
Contingent consideration arising from business combinations is fair valued on
acquisition and at each reporting period.
As at 31 December 2022, the discounted fair value of the contingent
consideration payable in respect of the Cure Medical acquisition was $9.2
million (2021: $3.1 million) with an increase of $5.8 million arising as a
result of good performance to date, together with the latest financial
forecasts, and the unwind of discount of $0.3 million during the year. This
has been charged to the Consolidated Income Statement.
As at 31 December 2022, the discounted fair value of the contingent
consideration payable in respect of the Triad acquisition was $130.8 million,
with the movements since the acquisition date fair value of $141.8 million
being a combination of an increase of $23.7 million arising from management's
view that the latest available financials are expected to exceed original
expectations and the unwind of discount of $15.3 million during the year,
partly offset by the payments of $50.0 million to the sellers following
successful attainment of the two short-term milestones per the Merger
Agreement. Further detail is provided in Note 9 - Acquisitions.
14. Commitments and contingencies
Capital commitments
At 31 December 2022, the Group had non-cancellable commitments for the
purchase of property, plant and equipment, capitalised software and
development of $39.3 million (2021: $32.1 million).
Contingent liabilities
There are no contingent liabilities recognised as at 31 December 2022 and 31
December 2021.
15. Subsequent events
The Group has evaluated subsequent events through to 8 March 2023, the date
the Consolidated Financial Statements were approved by the Board of Directors.
Details of the proposed final dividend are disclosed in Note 7 - Dividends.
16. Responsibility statement of the directors on the Annual Report
The Responsibility Statement below has been prepared in connection with the
2022 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 which have been prepared in
accordance with United Kingdom adopted international accounting standards and
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board (IASB), 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 8
March 2023 and is signed on its behalf by:
Karim
Bitar
Jonny Mason
Chief Executive Officer Chief
Financial Officer
8 March
2023
8 March 2023
Non-IFRS financial information
Non-IFRS financial information or alternative performance measures ("APMs")
are those measures used by management on a day-to-day basis in their
assessment of profit and performance and comparison between periods. The
adjustments applied to IFRS measures reflect the effect of certain cash and
non-cash items that the Board believes distort the understanding of the
quality of earnings and cashflows as, by their size or nature, they are not
considered part of the core operations of the business. Adjusted measures also
form the basis for performance measures for remuneration, e.g. adjusted
operating profit. For further information see pages 42 to 46.
The APMs used include adjusted gross profit, adjusted general &
administrative expenses, adjusted selling and distribution expenses, adjusted
operating profit, EBITDA, adjusted EBITDA, adjusted net finance expenses,
adjusted non-operating expenses, 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 43 to 46. 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 operating profit, excluding the impact of tax,
for the years ended 31 December 2022 and 2021 include the following costs:
- Amortisation of intangible assets in respect of material acquisitions
($131.3 million and $130.4 million respectively).
- Costs incurred in respect of acquisition and divestiture activities
($56.6 million and $17.8 million respectively).
- Impairment of intangible assets from material acquisitions ($1.4
million and $nil respectively).
- Termination costs in respect of the Group's transformation programme
and exit from hospital care business and related industrial sales activities
($7.1 million and $4.3 million respectively).
- Litigation expenses arising on matters deemed outside the ordinary
course of business ($nil and $5.6 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 operating profit, together with the annual
depreciation, amortisation charge and impairment/write-off of assets not
already removed within the adjusted operating profit.
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.
Acquisition-related activities
Costs directly related to potential and actual strategic transactions which
have been executed, aborted or are in-flight and which would improve the
strategic positioning of the Group are deemed adjusting items.
Acquisition-related costs relate to deal costs, integration costs and earn-out
adjustments including discounting impact which are incurred directly as a
result of the Group undertaking or pursuing an acquisition. Deal costs are
wholly attributable to the deal, including legal fees, due diligence fees,
bankers' fees/commissions and other direct costs incurred as a result of the
actual or potential transaction. Integration costs are wholly attributable to
the integration of the target and based on integration plans presented at the
point of acquisition, including the cost of retention of key people where this
is in excess of normal compensation, redundancy of target staff and early
lease termination payments.
Adjusted measures in relation to acquisition also include aborted deal costs.
Divestiture-related activities
Divestiture-related activities comprise the gains or losses resulting from
disposal of assets or divestment of a business as a result of a sale, major
business change or restructuring programme. These include write-down of
non-current assets, provisions to recognise inventories at realisable value,
provisions for costs of exiting contracts and associated legal fees, and any
other directly attributable costs. Any income from the ultimate disposal of a
business or subsidiary is included in the gain or loss.
Adjusted measures in relation to divestiture also include aborted deal costs.
Impairment of assets
Impairments, write-offs and gains and losses from defined programmes and where
the Group considers the circumstances of such event are not reflective of
normal business trading performance or when transactions relate to
acquisition-related intangible assets where the amortisation is already
excluded from the calculation of adjusted measures.
Termination benefits and related costs
Termination benefits and other related costs arise from Group-wide initiatives
to reduce the ongoing cost base and improve efficiency in the business,
including divestitures from non-strategic activities. The Board considers each
project individually to determine whether its size and nature warrants
separate disclosure. Qualifying items are limited to termination benefits
(including retention) without condition of continuing employment in respect of
major Group-wide change programmes. Where discrete qualifying items are
identified these costs are highlighted and excluded from the calculation of
adjusted measures. Due to their nature, these adjusted costs may span more
than one year. 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 2022 and 2021
Year ended 31 December 2022 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 2,072.5 1,103.9 (896.6) 207.3 (67.7) (57.7) 81.9 (19.0) 62.9
Amortisation of acquired intangibles - 111.6 19.7 131.3 - - 131.3 (29.2) 102.1
Acquisition related costs - 8.7 8.2 16.9 15.6 29.5 62.0 (3.5) 58.5
Divestiture related costs - 16.6 23.1 39.7 - 14.2 53.9 (7.8) 46.1
Termination benefits and related costs - 4.8 2.3 7.1 - - 7.1 (1.2) 5.9
Impairment of assets - - 1.4 1.4 - - 1.4 - 1.4
Total adjustments including tax effect - 141.7 54.7 196.4 15.6 43.7 255.7 (41.7) 214.0
Other discrete tax items - - - - - - - (20.1) (20.1)
Adjusted 2,072.5 1,245.6 (841.9) 403.7 (52.1) (14.0) 337.6 (80.8) 256.8
Software and R&D amortisation 16.1
Depreciation 61.8
Impairment/write-off of assets 1.7
Share-based payments 16.7
Adjusted EBITDA 500.0
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 including 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
Included within the amortisation of acquired intangibles of $131.3 million
(2021: $130.4 million), $93.0 million (2021: $96.8 million) related to
intangible assets arising from the spin-out from Bristol-Myers Squibb in 2008.
The carrying amount of these intangible assets at 31 December 2022 was $330.2
million and will be fully amortised by 31 December 2026.
Acquisition-related costs of $62.0 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 majority of acquisition-related costs are in respect of the Triad
acquisition, which included $2.4 million of legal and adviser's fees, $23.7
million of remeasurement charge on contingent consideration, $15.3 million of
discounting unwind and $8.7 million of inventory fair value uplift release.
The net cash impact in relation to acquisition-related costs was $2.9 million.
Divestiture-related costs of $53.9 million are mainly related to the phased
exit from the low margin hospital care business and industrial sales
portfolio, and include the impairment of intangible assets and property, plant
and equipment, write-off of inventories, and contract exit costs (refer to
Note 10 - Divestitures). The net cash impact in relation to
divestiture-related costs was $2.1 million.
Termination benefits and related costs of $7.1 million, pre-tax, are primarily
in respect of the severance costs from the Group's withdrawal from its
hospital care and industrial sales portfolio. The net cash impact of these
costs was $10.3 million.
Of the total net cash impact of $15.3 million as presented above, $4.2 million
related to accruals recorded in the prior year.
Impairment of assets of $1.4 million relates to a legacy acquisition-related
customer relationship asset which was impaired as part of rationalisation of
activities in the portfolio.
Other discrete tax items in 2022 relate to the tax benefit from the
recognition of deferred tax assets following the acquisition of Triad Life
Sciences. In 2021, other discrete tax items related 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 on UK-acquired
intangibles as a result of the increase in the UK corporation tax rate from 1
April 2023.
Reconciliation of operating costs to adjusted operating costs for the years
ended 31 December 2022 and 31 December 2021
2022 2021
S&D(1) G&A(2) R&D(3) Other(4) Operating costs S&D(1) G&A(2) R&D(3) Operating costs
$m $m $m $m $m $m $m $m $m
As reported (575.9) (214.9) (92.0) (13.8) (896.6) (539.7) (285.3) (94.5) (919.5)
Amortisation of acquired intangibles - 19.7 - - 19.7 - 20.9 - 20.9
Acquisitions and divestitures 9.0 9.9 - 12.4 31.3 0.5 17.3 - 17.8
Impairment of assets - - - 1.4 1.4 - - - -
Termination benefits and related costs 2.0 0.3 - - 2.3 - 3.7 (0.1) 3.6
Litigation expenses - - - - - - 5.6 - 5.6
Adjusted (564.9) (185.0) (92.0) (0.0) (841.9) (539.2) (237.8) (94.6) (871.6)
1. "S&D" represents selling and distribution expenses.
2. "G&A" represents general and administrative expenses.
3. "R&D" represents research and development expenses.
4. "Other" relates to the impairment of assets from the
Group's withdrawal from hospital care and industrial sales portfolio and
impairment of product-related intangible assets from previous acquisition.
Reconciliation of income tax expense to adjusted income tax expense
2022 2021
$m $m
Income tax expense (19.0) (33.7)
Tax effect of adjustments (41.7) (11.5)
Other discrete tax items(1) (20.1) (1.2)
Adjusted income tax expense (80.8) (46.4)
1. 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 2022 and 31 December 2021
2022 Adjusted 2022 2021 Adjusted 2021
$m $m $m $m
Net profit attributable to the shareholders of the Group 62.9 256.8 117.6 263.0
Number Number
Basic weighted average ordinary shares in issue 2,023,839,657 2,008,923,797
Diluted weighted average ordinary shares in issue 2,040,247,468 2,026,340,345
Cents per share Cents per share Cents per share Cents per share
Basic earnings per share 3.1 12.7 5.9 13.1
Diluted earnings per share 3.1 12.6 5.8 13.0
Cash conversion for the years ended 31 December 2022 and 31 December 2021
2022 2021
$m $m
Operating profit 207.3 203.6
Depreciation of property, plant and equipment 39.7 40.6
Depreciation of right-of-use assets 22.1 22.8
Amortisation of intangible assets 147.4 147.2
Impairment/write-off of intangible assets and property, plant and equipment 15.5 5.9
EBITDA 432.0 420.1
Non-cash items
Share-based payments 16.7 16.4
Working capital movement (62.5) (31.6)
Loss on foreign exchange derivatives (1.7) (4.3)
Net cash generated from operations 384.5 400.6
Acquisition of property, plant and equipment and intangibles assets (144.2) (94.1)
Net cash for cash conversion 240.3 306.5
Income taxes paid (52.9) (59.2)
Free cash flow (post-tax) 187.4 247.3
Reconciliation of adjusted net cash and adjusted free cash flow (to calculate
adjusted cash conversion)
2022 2021
$m $m
Net cash for cash conversion 240.3 306.5
Non-operating (gain)/loss on foreign exchange forward contracts - 0.4
Acquisitions and divestitures adjustments 5.0 13.0
Termination benefits and related costs adjustments 10.2 8.4
Litigation costs adjustments - 5.6
Adjusted net cash for cash conversion 255.5 333.9
Income taxes paid (52.9) (59.2)
Adjusted free cash flow (post-tax) 202.6 274.7
EBITDA 432.0 420.1
Adjusted EBITDA 500.0 464.2
Cash conversion 55.6% 73.0%
Adjusted cash conversion 51.1% 71.9%
Reconciliation of adjusted working capital
2022 2021
$m $m
Working capital movement(1) (62.5) (31.6)
Decrease in termination benefits(2) 3.1 4.1
Increase in respect of acquisitions and divestitures(2) (39.2) (4.8)
Adjusted working capital movement (98.6) (32.3)
1. Working capital movement is the change in assets and liabilities
total within the Consolidated Statement of Cash Flows on page 25.
2. These are the cash flow impacts to the adjusted items shown in the
reconciliation of earnings to adjusted earnings table on page 43.
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.
2022 2021
$m $m
Borrowings 1,211.9 1,344.6
Lease liabilities 88.3 90.5
Interest-bearing liabilities 1,300.2 1,435.1
Cash and cash equivalents (143.8) (463.4)
Interest-bearing liabilities net of cash 1,156.4 971.7
Net debt (excluding lease liabilities) 1,068.1 881.2
Net debt (excluding lease liabilities)/adjusted EBITDA 2.1 1.9
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