ConvaTec Group Plc

half-year 2025 ConvoTech results presentation. First, let me convey apologies from our CEO Karim, who is not feeling well today and won't be able to attend. So I am going to present his slides as well as the CFO section, and then I'll be very happy to take questions that anyone has afterwards. So the usual disclaimers apply. And the summary message for today is that we delivered a strong performance in the first half, financially and strategically, and we're on track to deliver our guidance. The highlights are on the slide. Revenue growth was, again, broad-based. Further operating margin expansion at the same rate as for the last three years. Second year of double digit EPS growth. Our product launches are progressing well. And so, as I said, we're on track to deliver guidance and that's for 2025 and for the medium term. Now these strong results in the first half demonstrate the resilience of our business model. We're not reliant on any one category or geography or product for our growth. At the core of that resilient business model is, first, that we operate in four chronic care categories. Growing structurally over time, we have strong market possessions with high levels of recurring revenue. And we expect to grow ahead of the markets consistently by virtue of our differentiated products and services. Second, we invest to develop those differentiated products and services, focusing in the fastest growing segments. and innovation is directed towards satisfying unmet customer needs, building customer loyalty and strong IP positions. We now have the richest product pipeline in the country's history and we achieved the target 30% vitality index one year early in 2024. Third, our growth is broad-based across diverse categories, geographies and products. Organic growth has accelerated in each of the last six years. We're launching 16 new products over the last three years and the next two years, which will contribute to growth across all categories. So that business model is resilient to external impacts on any individual areas. The FYSB strategy is delivering. We are investing to drive growth and that is leading to improving sales, margin and EPS. This chart shows that on each of those four key financial metrics, the first half of this year was ahead of the results of the last three years. So momentum is building and the flywheel is turning. So now I'll move on to the financial results in our usual format. And here are the highlights. Organic revenue growth was 6.8% on the basis of our guidance, which is excluding Innova Matrix, or it was 6% including Innova Matrix. Operating margin expanded by 130 basis points or by 140 basis points at constant currency. EPS growth was nearly 20%, benefiting from operating profit growth and lower financing costs. Cash conversion was in line with our expectations and similar to last year, we still expect over 80% cash conversion in FY25. Leverage improved by 0.4 turns of EBITDA to 1.9 times, and the dividend will increase by 3%, same as last year, towards the full year target payout ratio of 35 to 45%. Now sales growth was broad-based across all four categories, as you can see in the columns on the left. As previously reported, InfusionCare benefited from positive order phasing in the first half. And on the right, you can see a small contribution from M&A, an FX headwind, and in line with our guidance, we've separated out the impact of InnovaMatrix, which was down by $6 million year-on-year. Now let's look at the sales by category, starting with Advanced Wound Care, where organic growth was 4.3%, excluding Innova Matrix. Growth was strong in North America and in global emerging markets, and it's improved in Europe through the first half, supported by new products. Aquacell AG Extra, our flagship brand, continued to grow well, And the launch of Convafoam continued to build momentum, winning more than 50% of new hospital evaluations in the US and Europe. Innova Matrix sales decreased by 13% to $39 million as the uncertainty around the LCDs continued to weigh. This was in line with the guidance we gave in April when the LCDs were postponed until 2026. And we continued to make progress in generating clinical evidence for the RCTs and in developing sales in indications outside the scope of the LCDs. So then on to ostomy care, where organic growth was 4.7%. Growth was good in the US with a continuation of positive new patient starts. It was steady in Europe and we saw strong growth in GEM. The highlight of the period was the launch of Esteem Body, our new one-piece soft convex product, which had an enthusiastic response from patients and clinicians, is building sales and is now available in all of our focus markets. Growth was also supported by our updated accessories range, Essenta. In continence care, organic growth of 6.7% was driven by further volume increases in the USA, backed by our outstanding customer service and the broadening portfolio of products. We saw faster growth in sales of Convatec product relative to other manufacturers, which is now over 55% of the mix, and faster growth of hydrophilic product, which is over 60%. We grew strongly outside the USA on a small base, which again contributed over one percentage point to the category growth rate. And then infusion care, where organic growth was 14.1%. As we guided in February, infusion care benefited from positive order phasing in H1. Growth in H2 will be lower. But that said, the start to the year was ahead of expectations and has led us to increase our guidance for 2025 to double digit growth. There was continued strong demand in diabetes across long-standing and newer customers as the penetration of automated insulin delivery over multiple daily injections is increasing. And outside diabetes, growth was very strong, led by infusion sets for AbbVie's Parkinson's treatment, Our other therapies now represent mid-teens of infusion care revenue, up from about 10% that we have previously reported, and the scope to grow further as a share of the category. We've got a strong position in infusion care, with increasing diversity across new customers and products gives us confidence that we can sustain high single-digit growth for years to come. So let's move on to profitability. Operating margin expanded by 130 points or 140 points in constant currency in line with progress of the last few years. In this period, there were significant mix effects. The faster growth in infusion care, which has lower gross margin but lower operating cost ratio, And the sales decline in Innova Matrix, which has higher gross margin and higher operating cost ratio, led to a negative mix in the gross margin and a positive mix in the operating costs, highlighted on the chart there, which offset each other and had no impact on operating margin. Gross margin declined by 60 basis points, but without that mix effect, it would have increased slightly. Price and productivity combined contributed 40 and 110 basis points respectively, excuse me. And inflation was 3%. As expected, a headwind of 110 basis points, and we expect it to continue at that level through the second half of the year. Operating costs, in addition to the mix effect, there were further benefits from our simplification and productivity programs, which also delivered more improvement in the G and A ratio, down 50 basis points to 7% of sales. This rate of progress in margin, we'd expect to be roughly the same in the second half of the year. Now onto the bottom of the P&L. EPS increased 19% in the first half, benefiting from an increase in operating profit and a reduction in financing costs. That's shown on the left. This was a reverse of the effect last year when EPS was flat in the first half because of increasing financing costs. But it finished the year in double digit growth Finance costs have now stabilized. We're expecting them to be roughly flat in the second half of the year. That's in the middle column. So EPS is on track for double digit growth for the second year in a row in line with our guidance. Cash conversion was in line with expectations and similar to last year at 60% operating and 35% equity. The components of cash flow, which you can see on the chart, were also a similar shape to last year, and we're on track for equity cash conversion of over 80% for the full year. Net debt increased by $107 million, but leverage reduced to 1.9 times. So following the strong first half, we are confident of delivering our full year guidance, which is unchanged on the four key metrics set out on the chart. In the detail, the guidance for growth of infusion care has increased to double digit, and the guidance for finance costs has reduced by $5 million, with all other items remaining the same. So this is the fifth consecutive year of delivering sales growth within our target range. The fourth consecutive year of operating margin expansion towards the target of mid 20s. And the second consecutive year of double digit EPS growth. These financial results are starting to compound. So now let's move on to the strategic update. Convitec is well positioned to deliver that compound growth in top line earnings and cash because of our leading positions in attractive and growing markets, the resilient business model that I described at the start of the presentation, and the pivot to sustainable and profitable growth that has been delivered through the FYSB strategy. The growth delivered has been broad-based. This chart shows the progress over the last three years with each category contributing. There is strength and resilience in the broad-based portfolio. The individual contributions to growth will change from period to period, but the diversified portfolio keeps delivering. We have been delivering this growth across the four categories, which you can see at the top of the chart, through changes in the reimbursement landscape. Reimbursement dynamics are an expected part of our business. We plan for them. We focus on delivering value for patients, payers and healthcare professionals. And we believe that in the end, product efficacy always wins. We've developed strong competencies to work continuously in this area of reimbursement across our centres of excellence at the bottom of the chart, which manage pricing, market access and reimbursement, medical and regulatory. Here in the middle of the chart are some examples of recent or current areas of work. In wound care, we're developing combiniocs and generating clinical evidence to demonstrate its strong, unique efficacy and to secure reimbursement based on its high value to the healthcare system. We're also generating clinical evidence for Inova Matrix to secure long-term coverage and access to the private payer market in the US. In ostomy care, we're launching Esteem Body, soft convexity one-piece at a higher reimbursement rate based on improved efficacy, and we're developing the two-piece equivalent as well. On the other hand, we'll be providing feedback on the recently proposed competitive bidding process. More on that in a moment. And in continence care, we're developing the portfolio of Convitec manufactured and hydrophilic products to be best positioned to serve customers and to be best positioned for whatever changes there are in reimbursement. In infusion care, the recent developments in our product portfolio, in extended wear for diabetes and NeriaGard for Parkinson's, they attract higher pricing reflecting their improved value to customers and patients. The message is that we're working in an evolving reimbursement landscape all the time. With our resilient business model, our diverse base of growth, we expect to deliver sustainably 5% to 7% organic revenue growth and double-digit EPS growth through the reimbursement dynamics that arise. So let's look at the two most recent developments. First, in wound care, there is uncertainty about the potential implementation of the LCDs next January. and CMS has just announced a potential price of $125 per square centimeter for all skin substitutes. For consultation, this price is much lower than most products are currently reimbursed at, including ours. It would have significant implications for the structure of the segment, especially for the more expensive human tissue products. Exposed to this change is approximately 3% of group revenue, and if it's implemented as drafted, we expect the impact could be a headwind of about 1-2% of group revenue in 2026. Now there's a long way to go before this is implemented, a lot of moving parts and there could very well be changes to the draft proposal, as there were to the initial draft LCDs. We're focusing on strengthening our position and we're confident of the long-term growth opportunity irrespective of any short-term volatility. InnovaMatrix works. Product efficacy is the most important factor leading to market share. Our clinical evidence is good and it's increasing and ours is an advantageous position for supply and on cost of goods. If this proposal happens, as currently drafted, it would have a far greater impact on higher cost players, presenting a volume opportunity for us. So second then on the right in ostomy care and continence care, CMS has just announced the proposal to change rules to enable a competitive bidding process in these areas. This too is in consultation and may face changes before any implementation. 7% of our group revenue is directly exposed to this potential change, being the reimbursement to 180 from Medicare. there is an additional 2% of sales to other distributors, which we estimate are also reimbursed by Medicare. But the impact of any CBP on that indirect revenue would be much less. So if implemented as drafted, which it might not be, we would expect a net headwind of 1% to 2% of revenue in 2027 or later. And you get to that 2% using an average price reduction delivered across previous CBPs of 30% on the 7% of revenue. And the range down to 1% is because of the volume gain opportunity that there would be. We're in a strong position for whatever changes arise. And therefore here too, we are confident of the long-term growth opportunity, whatever the short-term volatility. We are an integrated distributor and manufacturer with the leading position of the largest and loyal customer base, a strong and broadening portfolio of products There are approximately 3,000 distributors which are reimbursed by Medicare for these products currently. And CMS has indicated that under a competitive bidding process, it might expect seven or eight for each category, not 3,000. So if this proposal is implemented as drafted, there would be far fewer players and there will be an opportunity for us to gain volume. So to summarise on reimbursement, these dynamics have always been a feature of the healthcare market and will continue to be so. These recent consultations are not extraordinary. In 2025, we have a similar headwind from InnovaMatrix of just over 1% and we will still deliver within our target sales growth and double digit EPS growth. we set our guidance assuming that such reimbursement dynamics will arise. We'd not expect these recent announcements to knock us off track from delivering our medium term targets of sustainable growth. Now let's take a quick look at the focus areas for each category. starting with AWC. So on this chart, you see the four segments of wound care that we focus on and the structural growth rates in each. The middle row shows the key and new products in each segment. On the left, Aquacell AG Extra is our market leading flagship brand, which continues to perform well. The other products are all new. This is the richest pipeline of new products we believe of any competitor in wound care. Our focus currently in wound care is to continue driving the success of AquaCell, to build on the launch of ConvaFoam, to begin launching ConvaNiox and ConvaFibre this year, and ConvaVac next year, and to deliver further clinical evidence of the efficacy of these products, especially in ovometrics. In ostomy care, this chart shows the segments we compete in and their respective growth rates. In the middle of the chart are our main products in each segment, existing and new, and the innovation is focused in the fastest growing segments. Our focus is on driving the Esteem Body launch, building on the good momentum we have in GEM with our existing product portfolio, further developing the Essenta accessories range, and filling the main remaining gap in our product portfolio with Natura Body in 2027. Incontinence care. Here we're showing the category by geographic region. We've got a strong presence in the US, the number one home care brand, 180 Medical, with over 40% share. But we're small in Europe and GEM. In the middle, you see our existing and new products, in particular, the GC Air brand, using our hydrophilic, feel clean technology, and the value brand, Cure. Our focus is on maintaining our outstanding customer satisfaction and loyalty scores in the US to develop our market leading position. Growing the penetration of Convitec and hydrophilic products and building our services and product presence in Europe and GEM to grow quickly from a small base. And then in infusion care, we show the diabetes segment and other therapies. In diabetes, the number of insulin-intensive people using pumps is still very small, at about 6% of the potential total. The growth in pump use is accelerating, driven by innovation in pumps and monitors. In therapies outside diabetes, pump usage is growing quickly. for pain management, for immunoglobulin deficiency and especially for Parkinson's, led by AbbVie's new ViaLev therapy. Our infusion set technology can support a wide range of different types of pumps. Our focus in this category is working with customers to innovate. meeting the growing demand for our infusion sets with great service and diversifying our customer and product base. So I hope that summary update of our strategic agenda by category is helpful in demonstrating the breadth and diversity of Convitec's current and future growth. So let me finish with a recap. We have a resilient business model based on leading positions in growing markets. Diversity of growth across our categories, geographies and products, all underpinned by a strong pipeline of new product innovation. The first half saw strong delivery from that business model, financially and strategically, including good progress on product pipeline, colleague engagement, and customer loyalty. We are on track to deliver our financial guidance for 2025 and for the medium term. Thanks very much. I'll now be happy to take any questions. Oh, wow. David, are you gonna help compare the questions?

There we go. It's Graham from UBS. Thanks, guys. Just two questions for me. So firstly, on the wound acceleration through the year, should we expect that to get to mid to high single digits once you get ConvaNiox? And does ConvaNiox launch a bit differently to ConvaFoam, so maybe faster? And the second question then is on CBP, which is you've given us the revenue potential outlook. I suppose on the cost side, is it feasible that you can switch more products to your own brand, which would presumably help gross margins? And is there much OPEX change in the business model in case studies where you've gone to CBP elsewhere?

Okay, thank you. Wound care, first of all... The acceleration in sales growth, we do expect to build through this year. But we're aiming for mid-single digits growth in 2025 for wound care. Convaniocs won't have a material impact in 2025. You asked if ConvaNiox would launch differently from ConvaFoam. Well, to a certain extent it will, because it's effectively a new category in our minds. In ConvaFoam, we are updating, replacing existing foams with a superior product. But in ConvaNiox, there's nothing like it out there. Combinauts, we wouldn't expect to build quickly. Let's not get carried away. It'll build steadily and slowly, but for a long time in our mind. Once the new products are all launched, because we got five of them in wound care, we do see wound care being a high single digit business in the medium term, but not this year. And then on CBP, what is the opportunity if that happens? And I do want to emphasize it's early days. We, can we replace, can we sell more of our own product? I think that was one of the questions. Yes, we can, and we already are doing. There's been a steady increase in the proportion of Convitec manufactured product because our product portfolio is getting better. Remember, in 180 Medical, the emphasis is what does the customer want? It's about customer loyalty, driving that retention, driving the growth in volume of customers. And as we get better products and as our portfolio expands, one would expect naturally for more of the products to be CombiTech that are sold. So I would expect that trend to continue, maybe accelerate a bit. operating costs are variable as they are in all of our categories. So we will adjust accordingly, but our emphasis will be on driving that growth long-term. Do you wanna?