Convatec Group Plc · LSE:CTEC

Convatec — FY2017 Earnings Presentation

38 slides from Convatec's earnings presentation, Feb 15, 2018

  1. Slide 1: 2017 Full Year Results

    2017 Full Year Results 15 February 2018 0

  2. Slide 2: Disclaimer

    Disclaimer THIS PRESENTATION IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES OF AMERICA, ITS TERRITORIES OR POSSESSIONS, OR TO ANY RESIDENT THEREOF OR ANY OTHER JURISDICTION WHERE SUCH DISTRIBUTION WOULD BE UNLAWFUL OR TO ANY OTHER PERSON. This pres

  3. Slide 3: 2017 Full year results

    2017 Full year results • Revised guidance1 met for both revenue and gross margin % • 2017 organic revenue growth 2.3% • Gross margin increased 10 bps to 61.0% • Supply constraints recovering to plan • MIP2 benefits in 2017 were more than offset by headwinds and cost increases • Cash flow generation

  4. Slide 4: Operations update

    Operations update What went wrong? • Death of EVP Operations in March 2017 • Some lines took longer than planned to achieve full output • Unexpected and severe hardware failures on moldable line • Insufficient safety stock coverage Current Situation • Wound supply issues resolved - now at normal lev

  5. Slide 5: Revenue growth

    Revenue growth • 2017 organic revenue growth 2.3%1, 4.1% growth CER2 - momentum returning through 2018 • Good performance from Continence & Critical Care, Infusion Devices and EMEA Wound • Ostomy strategy delivering underlying momentum in US, Latam, Japan and China • 2017 performance impacted by: •

  6. Slide 6: Margin evolution

    Margin evolution • 2017 gross margin increased 10 bps to 61.0% - 70 bps performance loss; productivity, pricing and mix - 80 bps foreign exchange gain • Adjusted gross margin goals remain vs. best in class • Five areas where we see clear opportunities • We are already taking action, building detaile

  7. Slide 7: Five areas of opportunity

    Five areas of opportunity Sourcing Supply chain Manufacturing Footprint Simplicity • Material opportunity for EBIT margin expansion in medium to long-term • $ cost-out opportunities similar in size to previous target, over medium to long-term • Validating opportunities and building plans 6

  8. Slide 8: Franchise Summaries

    Franchise Summaries ConvaTec

  9. Slide 9: Franchise summary

    Franchise summary FY 2017 Revenue ($m) CER1 Growth Advanced 578 2.6% organic Wound Care +3.0% total Ostomy Care 529 +0.8% organic2 Continence & +7.0% total 383 Critical Care +1.7% organic2 Infusion 275 5.2% organic Devices +4.1% total Total Revenue 1,765 +2.3% organic2 1. Growth at constant exchange

  10. Slide 10: Advanced wound care

    Advanced wound care Weakness from supply disruptions Q4 17 H2 17 • Continuing strong demand for AQUACEL®, foam, silver and surgical 2.3%1 1.9%1 cover dressing • Supply constraints impacted FY17 growth by c. 1 ppt • French re-imbursement cuts impacted growth by c. 1 ppt • Underperformance in US post-

  11. Slide 11: Ostomy care

    Ostomy care Supply constraints impact growth • Good underlying momentum impacted by supply constraints in H2 Q4 17 H2 17 • FY 17 growth impacted by c.2 ppts 0.3%1 -0.7%1 • Backorder fulfilment across H1 2018, lost orders • FY 17 includes c. 0.5 ppt impact from GPO contract renewal • Good performance

  12. Slide 12: Continence & critical care

    Continence & critical care Good underlying momentum - Woodbury acquisition strengthens US position Q4 17 H2 17 • Successful US launch of GentleCathTM Glide 4.6%1 4.5%1 • Expansion of me+TM platform for continence patients • FY17 growth impacted c.3.5 ppts or $13m from product rationalisation2 • Wood

  13. Slide 13: Infusion devices

    Infusion devices Customer product launches driving timing of demand Q4 17 H2 17 • Strong performance driven by market growth and partner product 6.3%1 11.3%1 launches • NeriaTM guard (‘Ulysses’) • Diabetes version launched by Medtronic in selected markets FY 17 5.2%1 • In clinical trials for non-dia

  14. Slide 14: Continued focus on R&D and innovation

    Continued focus on R&D and innovation • R&D now reporting directly to franchise presidents • Launched 16 new products1 in 2017, including: • Advanced Wound Care - Foam LiteTM • Ostomy Care - Esteem Flex Convex, EuroTec’s Varimate strips • Continence & Critical Care – GentleCathTM for European market

  15. Slide 15: Financial Overview

    Financial Overview Frank Schulkes 14

  16. Slide 16: My initial observations

    My initial observations……. Fundamental strengths Improvement areas Attractive markets  Project management Franchise positioning  Business intelligence Cash generative Strong executive team 15

  17. Slide 17: Financial highlights

    Financial highlights FY 2017 FY 2016 Growth Comments +4.1%1 Revenues $1,765m $1,688m • Organic growth2 Q4 2.8%, H2 3.0% +2.3%2 Gross margin3 61.0% 60.9% +10 bps • -70 bps performance, +80 bps FX Opex3 % revenue 35.1% 32.9% +220 bps • H1 37%, H2 33% • Plc cost +90bps EBIT3 • Investment in go-to-marke

  18. Slide 18: FY 2016 – FY 2017 revenue bridge

    FY 2016 – FY 2017 revenue bridge Revenue (m) Organic1 growth 2.3% $1,765 $30 $8 2.6% 0.8% 1.7% 5.2% $14 $6 $15 $4 $1,688 FY 2016 Advanced Ostomy Continence & Infusion Acquisitions FX FY 2017 Wound Care Care Critical Care Devices • Reported revenue grew 4.5%, or 4.1% at CER • $7.9 million currency be

  19. Slide 19: Gross margin overview

    Gross margin overview Adjusted gross margin Performance vs. Guidance 61.0% 60.9% Guidance1 Actual Change Year-on-year Year-on-year Actual vs. movement movement guidance Foreign Gross margin +60 bps (70)bps (130)bps exchange Price (-) (-) in line Mix + neutral (-) Productivity + (-) (-) FY 2017 FY 20

  20. Slide 20: Project cost-outs were more than offset by headwinds in 2017

    Project cost-outs were more than offset by headwinds in 2017 1 Delivered • Haina labour rate Productivity • Footprint reduction Initiatives • Sourcing projects • Lean projects 2 • Plant efficiency, Haina Headwinds and • Expediting costs cost increases • Operations team investment • Wage inflation •

  21. Slide 21: Headwinds restricting margin growth in 2018

    Headwinds restricting margin growth in 2018 2018 vs. 2017 1 • Haina labour rate =/+ Delivered Productivity • Footprint reduction = Initiatives • Sourcing projects = • Lean projects + • New and existing projects + 2 • Plant efficiency, Haina + Headwinds and • Expediting costs =/+ cost increases • Ope

  22. Slide 22: Cost-out initiatives and new programs

    Cost-out initiatives and new programs • Optimise external spend and build capabilities Sourcing excellence • Design for manufacture and improved life cycle management Sourcing • Review Make vs Buy alternatives Improve cost efficiency • Bundling of orders and transportation in supply chain • Reductio

  23. Slide 23: Opex overview

    Opex overview Increases reflect organic business investments, Plc Costs and M&A Opex1,2 % of revenue Investments to support: 35.1% • Regional growth 32.9% 2.3% • Product launches 2.2% 11.4% • Ostomy patient support 9.7% 11.6% increase CER3: • M&A impact c 2 ppts / $11m 21.4% • Plc costs c. 3 ppts /

  24. Slide 24: FY 2016 – FY 2017 EBIT bridge

    FY 2016 – FY 2017 EBIT1 bridge $29m gross margin EBIT margin 28.0% 25.9% EBIT (m) $68 $472 $(39) $457 $20 $(64) FY 2016 Revenue COGS Opex FX FY 2017 EBITDA1 $508m $505m EBITDA 30.1% 28.6% margin 1 Results are adjusted unless otherwise stated. A reconciliation of reported to adjusted results is provi

  25. Slide 25: Good cash conversion and strong balance sheet

    Good cash conversion and strong balance sheet FY 2017 Pre-Tax cash flow ($m) Net debt 505 31 Dec 2017 31 Dec 2016 EBITDA1 ($m) ($m) Long-term borrowings (1,816) (1,774) Capex (83) Cash and cash equivalents 289 264 Δ NWC (32) Net Debt (1,526) (1,510) EBITDA1 505 508 Cash flow 391 Net Debt / EBITDA1 (

  26. Slide 26: Revenue guidance and principles

    Revenue guidance and principles 2018 Medium-term Organic1 revenue growth 2.5% to 3.0% In line with market 2018 assumptions: • Markets growing generally in line with 2017: • EMEA wound market softness • 1% pricing erosion assumed across business • Product mix neutral • Improvement in US Wound post-ac

  27. Slide 27: EBIT margin % guidance and principles

    EBIT margin % guidance and principles 2018 Medium to long-term EBIT margin % 24% - 25% Material opportunity EBIT margin % drivers 2018 assumptions: Medium to • 1% pricing erosion dilutes margin1 c. 40 bps long-term • Product mix neutral Price (-) • Modest productivity contribution to margin1 Mix +/(

  28. Slide 28: Technical guidance: 2018 and medium-term

    Technical guidance: 2018 and medium-term • Effective tax rate c.15% Tax • US tax reform has broadly neutral impact on effective tax rate assumptions Capex • 2018 in line with 2017 spend • Investment in growth and productivity Movement of US dollar on revenue and EBIT, $US weakens 1%: Foreign Currenc

  29. Slide 29: Summary and Outlook

    Summary and Outlook Paul Moraviec

  30. Slide 30: Improving structure and execution in 2018

    Improving structure and execution in 2018 Commercial Operational execution • Address US post-acute channel • Complete optimisation of Haina • Increase momentum with foam and • Develop plans for new projects Avelle • Enhance Project Management • Continue to drive successful Office Ostomy strategy 29

  31. Slide 31: Fundamentals remain

    Fundamentals remain Well positioned in large, structurally growing chronic care markets Diversified chronic care business Strong brands Differentiated products with proven clinical performance Opportunity to expand portfolio across products and geographies Strong and innovative R&D pipeline 30

  32. Slide 32: Q&A

    y Q&A waist’ = FoamLite @ Avelle” AQUACEL Convalec Dressings Gantlecath’ ers" ESTEEM © Flex Convex .

  33. Slide 33: Appendix

    Appendix

  34. Slide 34: Quarterly revenue performance

    Quarterly revenue performance Quarterly reported revenues by franchise Organic1 growth rate by franchise (%) 2016 2017 2016 2017 $m Q3 Q4 Q1 Q2 Q3 Q4 Q3 Q4 Q1 Q2 Q3 Q4 AWC 142.9 147.6 133.7 138.4 147.9 157.8 4.0 6.1 4.2 2.6 1.4 2.3 Ostomy 129.3 133.0 121.8 132.9 132.1 142.2 2.6 1.0 1.1 3.6 (1.8) 0.3

  35. Slide 35: Revenues by geography

    Revenues by geography FY2017 ($m) Reported growth Organic Growth1 Americas 898.1 +8.3% +5.6% EMEA 733.0 +0.9% (1.2)% APAC 133.5 +0.7% +0.4% Group 1,764.6 +4.5% +2.3% 1 Organic growth presents year on year growth at constant exchange rates (“CER”), excluding M&A activities 34

  36. Slide 36: 2017 reported to adjusted EBIT and EPS reconciliation

    2017 reported to adjusted EBIT and EPS reconciliation Adjustments 2017 Reported (a) (b) (c) (d) (e) (f) (g) Adjusted $m Revenue 1,764.6 — — — — — — — 1,764.6 Cost of goods sold (838.3) 126.6 22.7 0.7 — — — — (688.3) Gross profit 926.3 126.6 22.7 0.7 — — — — 1,076.3 Gross Margin % 52.5% 61.0% Selling

  37. Slide 37: 2016 reported to adjusted EBIT and EPS reconciliation

    2016 reported to adjusted EBIT and EPS reconciliation Adjustments 2016 ($MM) Reported (a) (b) (c) (d) (e) (f) (g) Adjusted Revenue 1,688.3 – – – – – – – 1,688.3 Cost of goods sold (821.0) 136.8 23.8 – – – – 0.2 (660.2) Gross profit 867.3 136.8 23.8 – – – – 0.2 1,028.1 Gross margin (%) 51.4 60.9 Sell

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ConvaTec Group — FY2017 Earnings Presentation on 6ix