REG - Convatec Group PLC - Trading update for 10 months ended 31 October 2024

ConvaTecAnnouncement

12/11/2024 07:00

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RNS Number : 7962L  Convatec Group PLC  12 November 2024

12 November 2024

 

Trading update for the ten months ended 31 October 2024

 

Convatec upgrades FY24 guidance; on-track for double-digit EPS growth in 2024
and 2025

 

Continued strong performance since H1 24 results, with YTD organic(1) sales
growth increasing to 7.7% (7.1% reported), with broad-based growth across all
categories. Organic sales growth excluding InnovaMatrix(®) was 6.6%.

Upgrading FY24 sales and operating margin guidance

We are increasing guidance for FY24 organic sales growth to 7.25% to 8.0%
(previously 6.0%-7.0%) and for constant currency(2) adjusted operating margin
of ≥21.5% (previously ≥21.0%). Gross margin has improved from further
operations productivity and significantly lower inflation in H2, as previously
guided, and continued to improve in commercial and G&A efficiency as part
of our FISBE strategy. We are on-track to deliver double-digit growth in
adjusted EPS and free cash flow to equity in FY24.

2025 outlook

In FY25, we expect to further expand operating margin and to deliver
double-digit adjusted EPS and free cash flow to equity growth, irrespective of
the draft InnovaMatrix(®) LCD outcome. This will be driven by 5-7% organic
growth in non-InnovaMatrix(®) sales (96% of Group), based on our broadening
product portfolio, new product launches, ongoing productivity initiatives and
focused commercial execution.

 

Divisional performance

·          Advanced Wound Care (AWC) delivered high-single digit
organic growth, ahead of H1. This was driven by high growth in
InnovaMatrix(®), with particularly strong growth in indications outside the
scope of the draft Local Coverage Determination (LCD). Excluding
InnovaMatrix(®), AWC growth was mid-single digit as Aquacel(TM) Ag+ Extra
continued to perform strongly and ConvaFoam(TM) built further US momentum, and
started to launch internationally

·          Ostomy Care (OC) delivered mid-single digit organic
growth, with ongoing strength in Global Emerging Markets. Performance in North
America was again supported by new patient referrals to our Home Services
Group. The launch of Esteem Body(TM), our new one-piece soft convex product,
has seen strong customer uptake in Europe and the US

·          Continence Care (CC) delivered high-single digit organic
growth, driven by our broadening product portfolio, high customer satisfaction
scores and retention rates. Our Home Services Group in the US continued to
grow market share, with increased new patient starts. Our new hydrophilic
compact catheter, GentleCath Air(TM) for Women, started strongly in Europe and
the US, with continued encouraging customer response. We see the recently
announced catheter reimbursement code changes in the US in 2026 as an
incremental opportunity for sales and margin expansion

·          Infusion Care (IC) delivered high single-digit organic
growth. Durable insulin pump penetration is accelerating, and diversification
of our products and customers progressed well. There is strong underlying
demand for Convatec infusion sets in both diabetes and non-diabetes
treatments, and we have seen faster growth from new customers, products and
therapies

Karim Bitar, Chief Executive Officer, commented:

"Convatec has delivered faster broad-based sales growth in the second half and
operating margin is tracking materially ahead of H1, driven by strong
execution of our FISBE strategy and lower inflation. This is further evidence
that Convatec has successfully pivoted to a higher level of organic sales
growth and profitability, and we are on-track to deliver a mid-20s operating
margin in 2026 or 2027. For FY25, we expect to grow sales and operating margin
further, and to deliver another year of double-digit growth in adjusted EPS
and free cash flow to equity. This growth is driven by our clear strategy, our
strongest-ever new product pipeline and the focus on execution excellence by
our team of more than 10,000 colleagues around the world."

 

 1  Organic growth is calculated by applying the applicable prior period
average exchange rates to the Group's actual

performance in the respective period and excluding acquired and
disposed/discontinued businesses.

2 Reported FY24 operating margin is likely to be c.70bps lower than constant
currency operating margin due to adverse

foreign exchange movements (previous guidance c.60bps lower)

 

Strategic progress

·          New product innovation has accelerated, with a broadening
pipeline across our chronic care markets. In AWC, the win-rate for
ConvaFoam(TM) evaluations in the US was very good (over 50%) and we are
launching across Europe. In OC, Esteem Body(TM) continued to perform strongly
across markets including Italy, the US, Czech Republic and Poland. In CC,
GentleCath Air(TM) for Women continued to build sales in European markets and
the US. In IC, customer launch activity in diabetes continued to yield strong
demand for our innovative infusion sets. Outside of diabetes, AbbVie's
Parkinson's therapy is progressing well in Japan and key European countries
leading to high demand for Convatec's Neria(TM) guard infusion sets. AbbVie
also announced FDA approval in the US in October 2024, which will drive
further demand for infusion sets

·          Our simplification and productivity initiatives continued
to progress well, with operational productivity increasing during 2024. In
Global Quality & Operations, having closed our EuroTec facility in the
Netherlands in H1 24, we continue to optimise our plant network for scale and
efficiency with the closure announced of our small Herlev site in Denmark
later this year. We continued to increase automation in our facilities across
the Group. In commercial areas, we created an integrated global Marketing and
Sales Centre of Excellence and further rationalised our use of agencies
globally. We are encouraged by the potential for AI to drive productivity
improvements in areas such as customer service and translation. In addition we
delivered further G&A savings by expanding the scope of our Global
Business Services centres in Finance, IT and HR

·          Investing for growth: since H1 24, we have made a small
homecare acquisition in France for an up-front payment of c.€13m, which will
start to build our direct-to-consumer capabilities in CC and OC. Group
research and development investment was in line with our expectations as we
continued to launch new products to grow market share.

 

InnovaMatrix(®) update

InnovaMatrix(®), the first-ever porcine placental-derived extra-cellular
matrix for treatment of chronic, surgical and trauma wounds, continued to
perform very well, including winning new customers.

InnovaMatrix(®) YTD sales growth was c.40%, which increased the Group's
organic sales growth by 1.1%. We expect overall FY24 InnovaMatrix(®) sales of
c.$100m, and we have delivered faster growth in indications and channels
outside the scope of the LCDs. These indications now represent over 25% of YTD
InnovaMatrix(®) sales (FY23: c.20%).

InnovaMatrix(®) is an excellent product which is delivering strong real-world
results for patients and is trusted by clinicians. We continue to believe
InnovaMatrix(®) should be included in Medicare coverage for VLU and DFU
treatment. We will publish further real-world evidence imminently.

However, we recognise there is a risk InnovaMatrix(®) may not be included in
Medicare coverage lists in a final LCD, which could be issued in either 2024
or 2025. This could have a financial impact in FY25. The extent of any impact
would depend on the timing of the announcement, the duration of any transition
period and what amendments to the draft LCD are included. We have initiated
randomised controlled trials
(https://www.convatecgroup.com/media/press-releases/2024/convatec_update_on_innovamatrix_ac_clinical_data_second_randomised_controlled_trial_authorised/)
in DFU and VLU and are on track to report in 2026.

Therefore, we believe that any exclusion of InnovaMatrix(®) from Medicare
coverage would be temporary, and on successful delivery of additional clinical
data we would expect to achieve full Medicare coverage and expanded private
payer coverage.

Irrespective of any InnovaMatrix(®) LCD outcome, in FY25, we expect the Group
to further expand adjusted operating margin and deliver double-digit growth in
adjusted EPS and free cash flow to equity. We also remain confident that
InnovaMatrix(®) has a significant role to play in helping drive our
medium-term performance.

 

Continence Care - background information relating to recent catheter code
changes

Three new US reimbursement codes are being introduced from 2026 for
hydrophilic catheters. Convatec has been a leader in the growth of hydrophilic
catheters, which now represent over 60% of our US sales, versus market
penetration of c.40%. We expect hydrophilic catheter penetration will continue
to increase, and Convatec's catheter sales and margins will grow.

This market development is positive for Convatec for two key reasons. First,
we sell twice as many Convatec non-hydrophilic catheters to other distributors
as we buy from other manufacturers (only c.15% of catheter sales). The mix
impact of these changes on margin would be neutral to positive.

Second, Convatec continues to expand its hydrophilic catheter product
portfolio, based on its differentiated FeelClean Technology(TM), which has an
FDA superiority claim(3) for comfort and less stickiness. Therefore, we expect
the proportion of Convatec-manufactured catheters to continue to increase
(currently over 50% of sales), resulting in higher sales and margin.

 

Technical guidance

 

·          Based on FX rates to date and spot for the remainder of
the year, the foreign exchange headwind to 2024 adjusted operating margin is
~70bps (10bps higher than H1 24)

·          FY24 guidance on interest expense, tax rate and debt
leverage is unchanged:

o  FY24 Interest guidance remains in the upper half of the $75-85 million
range

o  Adjusted book tax rate remains at c.24% (cash tax ~18%)

·          Double-digit FY24 adjusted EPS growth is underpinned by a
significant acceleration in H2 versus H1, helped by H2 financing costs being
flat YoY

·          Strong balance sheet, underpinned by good cash
generation. Year-end net debt/adjusted EBITDA leverage expected to be
approximately 2.0x

o  FY24 capex guidance remains $120-140 million

o  FY24 cash adjusting items remains ~$20 million

·          To satisfy awards granted under Convatec's employee share
plans, we intend to fund the Trustees of the Employee Benefit Trust to
purchase up to 15 million Convatec shares per annum. Previously, such awards
have been met by newly issued shares

 

Conference call details

Karim Bitar, Chief Executive Officer, and Jonny Mason, Chief Financial
Officer, will host a conference call for analysts and investors to discuss the
trading update at 8:30am UK time on 12 November. Please register for the
webcast using this link
(https://urldefense.com/v3/__https:/www.investis-live.com/convatec/6728bf6c642e91000e2ed125/vdyg__;!!H_q-o1I4kFo!g6MIJQMtBoZgUCAacSKpunEgJ6RyxaOKHVFcB6FsukWdwEmAjaLis0QroCHwkvh1lW4IZBlX6FD12yitnZaM_ixxB60fk8iM$)
. To ask a question on the call, please use the dial-in details shown below:

 

·          UK Wide: +44 20 3936 2999

·          Global dial-in numbers: List
(https://urldefense.com/v3/__https:/www.netroadshow.com/events/global-numbers?confId=73545__;!!H_q-o1I4kFo!g6MIJQMtBoZgUCAacSKpunEgJ6RyxaOKHVFcB6FsukWdwEmAjaLis0QroCHwkvh1lW4IZBlX6FD12yitnZaM_ixxB90BQ1N7$)

·          Access code: 388622

 

 

3 FDA K213283 https://www.accessdata.fda.gov/cdrh_docs/pdf21/K213283.pdf
(https://www.accessdata.fda.gov/cdrh_docs/pdf21/K213283.pdf) (Established in
2022)

 

Contacts

 Analysts & Investors      David Phillips,                                     +44 (0) 7909 324994

                           Vice President, Investor Relations & Treasury
                           Sheebani Chothani                                   +44 (0) 7805 011046

                           Director, Investor Relations                        ir@convatec.com (mailto:ir@convatec.com)
 Media                     Burson Buchanan                                     +44 (0) 207 466 5000

                           Chris Lane / Charles Ryland

About Convatec

Pioneering trusted medical solutions to improve the lives we touch: Convatec
is a global medical products and technologies company, focused on solutions
for the management of chronic conditions, with leading positions in advanced
wound care, ostomy care, continence care, and infusion care. With around
10,000 colleagues, we provide our products and services in almost 100
countries, united by a promise to be forever caring. Our solutions provide a
range of benefits, from infection prevention and protection of at-risk skin,
to improved patient outcomes and reduced care costs. Convatec revenues in 2023
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).

LEI number - 213800LS272L4FIDOH92.

 

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