ConvaTec Group Plc

It's really good to be with all of you today, and thank you for joining us. As you think about 2023, I think it's fair to say that Comitech delivered some really strong results, right? And I think what's also clear is that we're delivering sustainable and profitable growth. What Johnny and I would like to do today is to really spend some quality time with you and discuss with you how is it that we're being able to deliver sustainable and profitable growth And we want to do that by really looking at it through key lenses. Lens number one is from a strategic vantage point, what are we up to? And B, from a financial perspective, how are we actually delivering sustainable and profitable growth? So as you think about that, let's try to focus on the financials first. From a financial perspective, I think what's clear is that in 2023, we went ahead and accelerated our revenue growth, and that was broad-based. Second, what you'll notice is that we expanded our operating margins for a second year in a row. And thirdly, we actually saw an increase in earnings per share in free cash flow to equity. So clearly, again, strong financial performance. But when you look at our competitive position, that also strengthened. And what's particularly notable is now the strength of our pipeline. And we'll spend more time there. So as you start thinking about strong financial performance, strengthening the competitive position, and a rich and deep pipeline, that gives us confidence that we're going to go ahead and grow even faster. And so, therefore, we've gone ahead and increased our medium-term outlook on the revenue side from the historical 4% to 6% to now it being 5% to 7%. In addition, we expect to continue to go ahead and grow and expand our operating profit margins. Let's look at some data. I'm just curious, who was with us here about four years ago? Veronica was here. I remember you, Veronica. Yeah. I remember you two there. So I remember quite a few of you. But four years ago, we rolled out a new vision. And we started off with pioneering trusted medical solutions to improve the lives we touch. Right. We said we're going to be R&D driven, innovation driven, trusted medical solutions. You could rely on us. Right. Trusted solutions, device plus service plus digital solutions. And we were touching people's lives. We took it really, really personally. We were touching you physically, emotionally, and socially. And that could be your mom. It could be my dad. It could be your brother. It could be my sister. And then we rolled out a corporate strategy, FISB. Focus, innovate, simplify, build, and execute. And as we vigorously executed on that strategy and really ensured that that vision comes to life, what you see is a clear acceleration in organic revenue growth. Back in 2018, our revenues were, in essence, flat as a pancake. And what you see progressively happening is that the revenues are growing from low single digit to mid single digit to high single digit. So how did we do that? Well, the first thing we had and did was to go ahead and focus on execution, both commercial execution and execution in the area of quality and operations. We made sure that we increased our do-say ratio, right? whether that was improving targeting or improving quality. The second thing we did was to say, we are going to invest in R&D. This is an innovation-driven business. We're going to invest in commercial. And that's what depressed our margins. That was a deliberate move. But in parallel, what we did was we embarked on a simplification and productivity agenda in G&A, in quality and operations, in the area of commercial. We also proactively managed price and mixed. So, for example, on the mixed side, we exited businesses such as the skin care business and the hospital care business. Low growth, low margin businesses. But we added businesses such as Triad Life Sciences, U.S. Biotech in the biologics area. High growth, high margin business. And furthermore, what we went ahead and did was to go ahead and leverage and take advantage of operating leverage. So when you started combining this whole notion of operating leverage, price and mix, and simplification productivity, you're now starting to see the benefits in increasing operating margins. And you ought to expect that to continue moving forward. What about 2023? How did we do? What happened? I'm going to pass the baton to Johnny to answer that question.

Thank you, Karim. Hello, everybody. So I'm just gonna talk to the headlines of our financial performance in 2023. And then I'll talk about outlook a bit, hand back to Karim for the strategic outlook. Here are the headlines for a strong financial performance in the year. So organic revenue growth was 7.2%. As you've just heard, that represents the fifth consecutive year of accelerating growth. Operating margin improved to 20.2 basis points. That would have been 20.8 on a constant currency basis. It was 130 basis points of underlying performance improvement. And that makes 250 basis points of improvement over two years. EPS returned to growth in 2023 and grew just over 6%. And cash flow improved. Our Free cash flow to equity was $228 million, which was over double the amount of the previous year. And that represented a conversion of 83%. And this cash enabled us to invest in CapEx and in M&A, whilst keeping leverage constant at 2.1 times EBITDA. And then the board is recommending an increase in dividend of 3%. So let's get into it. From this graph, you can see that the organic sales growth was broad based across all four categories. You can see that on the top and we'll talk about each category next. The bars show each category contributed to the group's sales growth. And then on the right hand side, you can see that the major reduction to get to total sales growth was because of that exit from the low growth, low margin hospital care in 2022, which was a net reduction in sales of 91 million. So top right, the group's organic growth of 7.2% was a 3.2% growth on a constant currency basis. By category then, starting with wound care at the top here, organic growth was 9.5%. And that was benefiting from Innova Matrix contributing to organic from April last year and growing quickly throughout 2023, starting to gain share in the biologic segment in the US. And in the antimicrobial segment, we maintained our strength with our world-leading brand, Aquacell Extra AG+. and we started to improve in the foam segment as well, following the launch of Convofoam last year. So we saw strong growth in Gem, despite a slowdown in China in the second half, continued good growth in Europe, and an improved performance in the US with modest growth starting from the Convofoam launch and also the contribution of InnovaMetrics. A strong year for wound care. Ostomy care then, at the bottom of the chart, organic growth rate 4.2%, but within that, Convitec product grew 6.5%. And that's the fifth year of accelerating growth of Convitec ostomy product, as you can see on the grey bar. And remember, it's the Convitec product that drives profitability in this category. Strong growth in GEM, where we are gaining share in important markets like China, Brazil, and Colombia. Good growth in Europe, although moderated by a reduction in non-combotech product in the UK, as planned. And then in the US, we started to see some modest growth, as the home services group are helping to add new patient starts. Continence Care. Organic revenue growth 6.5%. Remember, this is predominantly a US business and we benefited from an increase in reimbursement rates in the US. The Home Services Group performed very well with excellent customer satisfaction scores, great customer retention, all based on world-class service delivery. There was an increasing share of Convotec product, both pure medical and gentle cath, within the HSG portfolio, which is good for margin. And then we strengthened our competitive position with two bolt-on acquisitions, totaling an investment of $28 million. And at the bottom is InfusionCare, organic sales growth of 8.7%. This represented continued strong growth of demand for our infusion sets for people with diabetes. And we supported, in the year, customers with three new product launches. They're listed on the slide. And our NeriaGuard platform for non-insulin therapies grew double digit. And that included AbbVie's launch of its Parkinson's treatment in Japan. strong demand for immunoglobulin therapy in Europe and also pain management medications. So move to profitability then. And you can see the graph I've already said operating margin improved 70 basis points or 130 basis points at constant currency. I'll just pick out a few items. Price added 100 basis points to margin in the year. And this was about half from the continence care reimbursement increase. And the remainder was across GEM and in other areas. Mix improved the margin by 250 basis points, which was predominantly the exit from low margin hospital care and the entry into high margin biologics within OVA matrix. Inflation on COGS in the year was an average of 6.5%. That led to a headwind of 250 basis points on margin. It was lower than the inflation the previous year at 8.6%. And we think inflation will continue to reduce into 2024 in the range of 3% to 5%. And then operations productivity improved the margin by 110%. This was from network rationalization and continuous improvement projects. And it was the same run rate as delivered in 2022. And conversely, we invested more in OPEX in R&D and in commercial expenditure to drive future growth. Roughly half of this was related to Innova Matrix and the other half was other things. And finally, on this graph, we made further progress on G&A. We're now down to 8.1% of sales. We're well on track to reach our target of 7% of sales. And then let's see after that. So altogether, this represents continued steady progress towards our target of mid-20s operating margin. Going further down the P&L chart, our net profit and our EPS returned to growth in 2023, and both grew just over 6%. That's because operating profit grew by more than financing costs increased based on an increase in market base rates. Going forward, we expect EPS to grow in double digits from here. And then a quick word on adjusting items. These are a notable feature of CombiTech statements based on our corporate history and the fundamental transformation that the business has been going through and we've had a few questions about them. The reason we make these adjustments is to be able to identify the underlying and ongoing earnings of the business. These are the difference between the reported numbers and the adjusted numbers in our statements. We follow a strict policy where we have three categories, which you can see on the table. It's one-time material fundamental restructurings, such as the exit from hospital care. It's M&A, and it's amortization of acquired intangibles. In that last category, for example, there's a very large item of over $90 million per annum of non-cash amortization, which arose from the spin-out of Combatech from Bristol-Myers Squibb. in 2008, and that will be fully amortized in 2026. So it's a very good example of why it's much better to look at the adjusted numbers if you want to follow the performance of CombiTech. Important to note that the cash impact of these adjustments, you can see this on the right, is much less than the book impact. In 2023, it was $23 million. And it's also important to note that there are no adjustments in free cash flow. So we, all of this is deducted before coming to our definitions of free cash flow to capital and free cash flow to equity. So onto cash flow. And again, you can see the bridge EBITDA was up 5%. The change in working capital was much smaller in 2023. Because it was in 2022 that we had to do a substantial inventory build to improve the resilience of the supply chain. Working capital now is at a level where we don't expect it to grow any more than sales going forward. CapEx was in line with guidance at 129 million. That's 6% of sales. We still think 5% of sales is about right ongoing, but there's a bit more catch up to do for a couple of years before we get to that level. And then after the adjusting items that I've just mentioned and FX, the operating cash conversion was 84%. And then after tax, financing and leases, free cash flow to equity, 228 million, more than double the year before, with a conversion of 83%. The dividend was $111 million of cash, but please bear in mind that in 2024, that will be more, because we've decided to stop the script dividend. And then there was $179 million of M&A across the ATT earn-out, the new nitric oxide platform that we acquired, and the bolt-on acquisitions in Continence Care. All of that led to a small increase in net debt, but leverage net debt to EBITDA was constant at 2.1 times. So as Convotec is pivoting to sustainable and profitable growth, five years of accelerating sales growth, two years of improving profitability, last year we saw EPS grow and cash improve. And we expect those two to increase in double digits going forward. we are starting to see the flywheel in effect. As that cash grows, there will be more to invest, to drive and to sustain the growth. And then our priorities for investing capital haven't changed. All whilst maintaining a prudent balance sheet with a target of two times net debt to EBITDA, we'll first of all invest organically in OPEX and CAPEX to drive growth. will continue to grow the ordinary dividend, although that will be by less than EPS until we're back within our target payout ratio range of 35 to 40%, which could be by next year. Bolt-on M&A will continue to strengthen our competitive position in our focus areas and will apply our leverage target flexibly temporarily to allow ourselves above two times for the right sort of deals and then thereafter any surplus cash would be available for return to shareholders so for 2024 then here's our guidance organic sales growth will be five to seven percent and we've increased the medium term range to the same level as well In 2024, the first half will be a bit softer than the second half, based on the visibility of the orders we've got. That'll be mostly in wound care and in infusion care. We're guiding to a further expansion of operating margin to at least 21% on a constant currency basis. and also to double-digit growth in EPS and free cash to equity. And then on the right of the slide, there are some specifics around financing, tax, and some cash items. And then I'll finish with a reminder that we are on track to deliver our mid-20s operating margin by 2026 or 2027. Over the last two years, we've expanded the margin by an average of 125 basis points a year in an inflation intensive environment. Going forward, we plan to expand it by an average of 100 basis points per annum or more. And we'll do that by continued focus on simplification and productivity in costs. In G&A, by expanding the scope of our global business services function. In operations, with more network rationalization and continuous improvement, but also seeing benefits coming through from automation and smart factory. In commercial, where we have rolled out new practices and new tools to all of our major markets now, and we'll leverage those to deliver productivity. And then the The mix, the profitability mix, will improve too as new products roll off our innovation pipeline and as we continue to increase the proportion of CombiTech manufactured and CombiTech branded product in the mix. Operating leverage will be a bigger feature as we get past the exit of hospital care and pick up a faster growth rate at 5% to 7% per annum. And then we expect the headwind from inflation to be lower than it has been over the last couple of years. So all of that adds up with our increased top-line guidance and our progress to mid-20s operating margin to support the delivery of double-digit growth in EPS and free cash flow over the next years to come. So CombiTech is definitely pivoting to sustainable and profitable growth. Thank you.

Thanks, Johnny. So let's go ahead and shift gears now and really focus on strategically how are we going ahead and improving and strengthening our business. So you're all familiar now with our FISB strategy. And I think what's clear is that today we've got a business where over 90% of our revenues are being generated in the chronic care space. So you should be thinking about diseases like diabetes, diseases like cancer. autoimmune diseases like multiple sclerosis or Crohn's disease. I don't wish these upon anybody to be clear, but what I'm trying to highlight to you is that from a strategic vantage point, they're large, they're growing, and it creates a sticky business model. What's also notable is that from a focus perspective, we've identified four categories and 12 geographies that we're focused on. And we've invested disproportionately in these four categories and 12 geographies. And so you see us growing in these 12 geographies even faster than the entire enterprise. The whole enterprise is growing at about 7%, and we actually grew over 8% in these geographies. On the innovation front, we're also making a lot of progress. Today, about 27% of our revenues are being generated from new products that were launched in the last five years. As you think about that, that bodes very well in terms of sustaining growth, and we're going to drive that number even higher and more aggressively, and I'll talk to you about that in a second. But beyond that, we're also very, very focused on capturing economic surplus. And so our IP strategy and execution is very important. Historically, we might have filed single-digit numbers of patents per year. Today, we find ourselves filing patents 80 or more per annum, and that bodes well. Not only are we more focused, not only are we more innovative, but we've simplified our organization in the enterprise. We went ahead and built out global business services with centers in Lisbon, in Bogota, and now also in Kuala Lumpur in Malaysia. So we've taken basic processes like purchase to pay or record to report and we've standardized them and we've automated those. And what that's done in essence is to drive down how much we're spending on GNA. And so we would have spent about 12% of sales on GNA and now we're spending closer to 8% on GNA and there's room for further improvement. Beyond that, we haven't limited our efforts on simplification and productivity to GNA. So we focused on quality operations there. We've gone ahead and optimized our network. If we had facilities that were not at scale or competitive, we exited. We did that in Belarus. We did that last year in the Netherlands. In addition, because we're making high volume, high quality consumables, hundreds of millions, right, hundreds of millions, we're investing heavily in automation. So in our five major factories, we've invested in automated packaging lines, automated production lines, and this improves both quality and efficiency. Capabilities. We've built new capabilities. A very good example is our pricing center of excellence, where we think through strategic pricing and tactical pricing. It's four years in a row now that you've seen price go up, right? In 2023, we increased price, and that benefited us to the tune of $150 basis points in terms of gross margin. But there are other capabilities that we built. A good example would be in the area of clinical. As we strengthen R&D, we focused on product development, process development, clinical development, and regulatory. But specifically in clinical, we find ourselves now where we're running our own randomized clinical trials. That would not have been the case several years ago. We've got observational studies being carried out. And you might say, why is that important? It's important because as we gather and develop the scientific data. We can then provide it to our medical teams and our commercial teams so they can engage with healthcare providers, with doctors and nurses, and highlight to them the features and benefits of using our products and services. It makes for a much more meaningful discussion. And you position yourself as an innovator. And then what about execution? We're very focused on improving our do-say ratio. When it comes to targeting and making sure that the majority of your call frequency is focused on your key accounts, we further improve that by 20%. And similarly, in the area of quality, we measure the complaints per million that we have. And we're driving a quality improvement agenda there. We analyze literally these complaints. How many of them are coming from a design issue? How many of them are coming because of how we produce the product? How many of them are coming because the consumer is having difficulty understanding how to use our product? And then we tackle that proactively. And so we further lowered the complaints per million by an additional 20%. So clearly the FISB strategy is delivering. So let's focus on the pipeline. So when you look at this chart, what's very evident is that right now we're in the midst of launching eight new products. And they're across all four categories. And what's exciting is that the initial reaction in terms of uptake, has been encouraging and is positive. Above and beyond these eight new products, we plan on launching a further seven new products. So we're going to find ourselves in roughly 24 max 36 months having launched 15 new products. I mentioned here earlier the vitality index. We have committed to making sure that at least 30% of our revenues are generated from new products. I'm confident to tell you that we will achieve that goal, right? So as you think about the pipeline, that's what's giving us confidence that we'll be able to sustain our revenue growth and further go ahead and drive the business. But let's shift gears now and really focus on category by category what's happening. Mooncare, terrific business. We compete in three key segments. In the first segment, the antimicrobial segment, we're the world leader. We have about a 30% share of markets. We've got the leading brand, AquaCell AG Extra. It really is the gold standard, and it's growing double digit. But what's coming behind that? Well, what's coming behind that is that we're developing a loon dressing leveraging the nitric oxide technology platform that we acquired from 30 Technologies last year. And that bodes very, very well. We're excited about the antimicrobial properties of the nitric oxide platform that potentially We may also see that the speed of healing has gone ahead and increased. So we're very, very excited about this. B, in the foam segment, which is a large segment, where historically we did not have this competitive product offering, we launched ConvaFoam. We launched that last year in the United States. And we're getting positive reactions from a clinical vantage point where healthcare providers are telling us, wow, we've noticed the better adhesion properties. We've noticed the better exudate absorption properties. And so we have to run evaluations, literally where we go into a hospital and we're assessed vis-a-vis what's currently being used. And in over half the times, we're being selected and being told, yes, we want to move forward with ConvaFoam. That's an important signal. Now, what's even more exciting is that ConvaFoam will be launching here in 2024 in Europe and so soon be available in key markets, including the UK. And then lastly, the biologic segments. It's a very large segment. It's growing very rapidly. We've got a highly differentiated product offering in NovaMatrix AC, our porcine placenta-based biologic, which is used to treat very difficult-to-treat wounds, such as diabetic foot ulcers. And it's performing very well clinically. In fact, we've now been able to go ahead and secure our presence on the formulary with key GPOs and IDNs, such as Vizion and Premier. And moving forward, we're developing new formulations and new indications, such as InovaBurn. So fundamentally, we see our advanced wound care business being able to grow high single digits moving forward. What about ostomy care? This is a really neat area, right? This was probably one of the more challenging businesses that we had four years ago. So what's happened here? Johnny highlighted this to you. We're actually growing Convitec product by 6%. That's what we did last year, right? And the reality is that we've basically focused on three key levers. The first one is commercial execution. The second one is all about quality. And the third one is all about renewing the portfolio. On commercial execution, what did we do? We focused on making sure that the frequency with which we spend time with major cancer centers around the world, whether it's MD Anderson in Houston or the Royal Marsden here in London, right? We've increased our presence there. That's really important by about 30%. But in addition, in key markets like the United States, we're collaborating as one team with the home service group. And so as a patient moves from the acute setting or a hospital setting right post-surgery, they're going to go back home. And we've got world-class service in the home service group that historically would have only done continence care. but now is also doing ostomy care. That's a new phenomenon for us at Cometech. We've only been doing that for about three years, and we're getting some really good results. We're growing revenues there by 15% per year and expect further growth. On the quality side, we focused actually on going ahead and improving the quality of our products. So we've reduced the complaints per million by 10%. And in addition, tried to improve the quality of our service. So for example, we run literally ostomy care clinics in Latin America. in places like Brazil and Colombia. And we provide world-class service there. So by improving quality, that's also helping our business. And then lastly, we're looking to renew our portfolio. So the first thing we did was to rationalize our SKUs by about 40%, right? From about 2,400 down to 1,500. Why did we do that? These were low-margin, pretty dated products, right? But at the same time, We now are in the midst of launching new products in large and rapidly growing segments, such as the soft convex segment and the accessory segment. Let's go ahead and double click and understand what are we doing on the new product front. This is really exciting. For the first time in about 10 years, Combatech has developed and is launching a new product in ostomy care. It's Esteem Body. So what is Esteem Body? The steam body fundamentally takes the great adhesive properties that we've always had at Combatech. We've been known for the fact that we don't cause leakage. We don't go ahead and cause skin irritation. But frankly, our pouches, right, have not been sufficiently discreet, okay? And so now we've got a new pouch shaped as an 8, which is a lot more discreet, a lot higher quality, and that figure 8 has some key benefits, such as avoiding bulging, right? So we're very excited about this. We've already started launching this product in Italy, okay, here in Europe, and we plan on expanding the launch to other key European markets and the U.S. in this calendar year, okay? Now, let me give you a little more insight on this. It's important to note that we're going to be making the product ourselves. And why do I highlight that? We're using high-speed automated lines, right? What this does is it ensures quality but also efficiency, and that efficiency translates into helping improve our margins. I'm going to share with you now a video to give you a little more insight about the product.