ConvaTec earnings slide as it ramps up transformation programme
Convatec Group
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ConvaTec reported a 3.5% fall in group reported revenue in its first half on Thursday, to $888.9m (£733.7m), but said the figure was flat on an organic basis.
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The FTSE 250 medical technology company said that, excluding the one-off rebate provision taken in the first quarter of $8.9m to revise the estimate of the distributor rebates accrual, growth in the first half was 1.0% on an organic basis in the six months ended 30 June.
It said its second quarter saw an “improving” revenue trend, with positive organic revenue growth across all franchises, and group growth of 2.1%.
ConvaTec explained that its transformation Initiative was on track, with the three-year, $150m programme expected to bring gross benefits of between $130m and $150m per annum by 2021.
That programme carried a $14m cost in the first half, with the board saying the “operational excellence programme” delivered net positive productivity in the period, with benefits “more than offsetting” inflation and depreciation.
The firm’s reported operating profit totalled $93.6m for the six months, which was 23.3% lower year-on-year, reflecting the one-off rebate provision as well as foreign exchange, plus investment in commercial areas and regions, and the transformation initiative.
Adjusted operating profit was down 18.8% at $165.2m, which ConvaTec put down to the same drivers, adding that its adjusted EBIT margin declined as expected to 18.6% from 22.1% a year ago.
The interim dividend of 1.717 cents was maintained by the board.
Its leverage stood at 2.6x net debt-to-EBITDA, with adjusted cash conversion standing at 89.8%, compared to 75.2% for the same period last year.
ConvaTec maintained its guidance for the full year, with organic revenue growth of between 1.0% and 2.5% anticipated, and an adjusted EBIT margin of between 18% and 20%, including around $40m transformation initiative and $10m of medical device regulation costs.
“All of our franchises delivered organic revenue growth in the second quarter, indicating positive progress against our performance improvement plans,” said ConvaTec executive chairman Rick Anderson.
“There is more work to do, but we are well positioned to deliver on our objectives for the full year and consequently our revenue and adjusted EBIT margin guidance is maintained.
“Throughout the second half of the year, our priority remains improving execution.”
Anderson said he also looked forward to welcoming Karim Bitar as the company’s new chief executive officer on 30 September.
He added that the company expected to see further revenue growth for the group in the second half.
“A key focus area is our US wound business, where a more targeted and effective salesforce is already showing encouraging signs.
“Ostomy is continuing to deliver a slow but steady recovery, and within continence and critical care our Home Distribution Group (HDG) continues to outgrow the market in the US, albeit at a lower rate.
“Infusion devices saw strong orders from customers in the second quarter.”
ConvaTec’s transformation initiative made “good progress” in many areas, Anderson explained, but he added there was “much more to do.''
“Launched in February, we invested $14m in the first half to establish the programme, identify opportunities and begin execution of the first wave of projects, with detailed tracking of key milestones and weekly reviews by the executive team.
“Our transformation office provides a model to embed more discipline and better execution into the business: initial progress is encouraging and a ‘ConvaTec Way’ is emerging.”
The board said it expected a “significant” increase in transformation spend in the second half, in line with previous guidance of $40m spend for the year, as more projects moved from planning into execution.
“We will continue to ‘forward invest’ for growth and efficiency, to enable us to capture more opportunities for value creation over the medium to long term for all our stakeholders.”