TIDMCTEC
RNS Number : 2581R
ConvaTec Group PLC
05 March 2021
5 March 2021
ConvaTec Group Plc
Annual Results for the twelve months ended 31 December 2020
Solid growth and good strategic progress
Adjusted(1) results Statutory results
FY2020 FY2019 Change FY2020 FY2019 Change
Revenue $1,894m $1,827m 4.0%(2) $1,894m $1,827m 3.7%
EBIT(3) $350m $354m (1.1)% $211m $97m 118%
EBIT margin 18.5% 19.4% (90) bps 11.1% 5.3% 580 bps
Diluted earnings 12.0 cents 11.7 cents 2.6% 5.6 cents 0.5 cents -
per share
Dividend per share 5.7 cents 5.7 cents -
(cents)
=========== =========== ========= ========== ========== ========
FY 2020 key highlights:
-- Improved revenue growth: +3.7% reported growth and +4.0% on a constant currency(2) basis.
-- Attractive diversified portfolio providing resilience during the pandemic.
o FY20 performance driven by strong growth in Infusion Care and
Continence & Critical Care offsetting limited growth in Ostomy
Care and decline in Advanced Wound Care.
o Q4 revenue performance reflected the impact of the latest
COVID-19 resurgence late in the year. This was driven primarily by
better than expected revenues in Continence & Critical
Care.
-- Continued investment for growth: Adjusted(1) EBIT margin of
18.5% (2019: 19.4%) in line with the latest guidance.
-- Strong adjusted free cash flow(1) : $347 million (2019: $397
million) and adjusted cash conversion(1) of 90% (2019: 98%).
-- Strengthened balance sheet: Reduction in leverage to 2.0x Net
Debt/Adjusted EBITDA(1) (2019: 2.5x).
-- Proposed dividend of 3.983 cents to take FY dividend to 5.7 cents, in line with prior year.
Good operational and strategic progress as we pivot to
sustainable and profitable growth:
-- Effective response to COVID-19 - safeguarding the health and
wellbeing of our people, addressing customer needs and
strengthening our supply chain.
-- Further positive operational progress - adjusted gross
margin(1) increased from 59.0% to 59.5% or $1,127 million.
-- Continued to make good progress with our FISBE (Focus,
Innovate, Simplify, Build, Execute) strategy. Achievements in the
year include:
o Strengthening the leadership team; embedding the new operating
model; increasing investment in R&D to 4.3% of revenue (2019:
2.9%); establishing Centres of Excellence; setting up a Global
Business Services centre and disposal of the US Skincare product
line.
-- Certain transformation initiatives were proactively re-phased
given the COVID-19 backdrop - we spent $93 million on strategic
operational investments in 2020. We remain on track to deliver
$130-$150 million of gross benefits in 2021.
-- Positive outlook: We expect to see 2021 organic(4) revenue
growth of between 3-4.5% and a constant currency adjusted EBIT
margin of 18-19.5%.
Karim Bitar, Chief Executive Officer, commented:
"I am pleased with our strategic progress and how the business
performed in 2020. Against the backdrop of COVID-19 we set our new
strategic direction of travel, responded well to the needs of our
customers and improved our operational performance. In addition our
ongoing strategic transformation remains firmly on track.
"The outlook for 2021 is positive although uncertainty
surrounding COVID-19 persists. We expect to see 2021 organic(4)
revenue growth of between 3-4.5% and a constant currency adjusted
EBIT margin of 18-19.5% as we continue to invest in our
transformation, some of which was deferred from 2020, and as
COVID-suppressed costs begin to normalise.
"There is still further work ahead for the Group as we continue
to strengthen our foundations and begin to pivot to sustainable and
profitable growth, but I am confident in the inherent
attractiveness of the markets we serve and in ConvaTec's growth
prospects."
Group revenue
Twelve months ended 31 December
2020 2019 Reported Foreign Constant
Exchange Currency(2)
impact growth /
(decline)
$m $m growth
/ (decline)
------------------------- ------ ------ -------------- ----------
Revenue by Category
Advanced Wound Care 547 570 (4.0)% 0.2% (3.8)%
Ostomy Care 526 525 0.2% 1.0% 1.2%
Continence and Critical
Care 498 457 9.2% 0.1% 9.3%
Infusion Care 323 275 17.2% (0.5)% 16.7%
------------------------- ------ ------ -------------- ---------- -------------
Total 1,894 1,827 3.7% 0.3% 4.0%
------------------------- ------ ------ -------------- ---------- -------------
Constant currency growth/(decline) Q1 2020 Q2 2020 Q3 2020 Q4 2020
%
Advanced Wound Care 4.5 (13.2) (0.6) (5.1)
Ostomy Care 9.5 (2.7) 0.1 (1.1)
Continence & Critical
Care 10.9 12.0 7.2 7.4
Infusion Care 12.6 12.6 26.7 15.3
------------------------------------ -------- -------- -------- --------
Group 8.9 0.0 5.6 2.0
------------------------------------ -------- -------- -------- --------
For insight into the category performances see pages 5 to 7.
Forward Looking Statements
This document includes statements that are, or may be deemed to
be, "forward-looking statements". These forward-looking statements
involve known and unknown risks and uncertainties, many of which
are beyond the Group's control. "Forward-looking statements" are
sometimes identified by the use of forward-looking terminology,
including the terms "believes", "estimates", "aims", "anticipates",
"expects", "intends", "plans", "predicts", "may", "will", "could",
"shall", "risk", "targets", "forecasts", "should", "guidance",
"continues", "assumes" or "positioned" or, in each case, their
negative or other variations or comparable terminology. These
forward-looking statements include all matters that are not
historical facts. They appear in a number of places and include,
but are not limited to, statements regarding the Group's
intentions, beliefs or current expectations concerning, amongst
other things, results of operations, financial condition,
liquidity, prospects, growth, strategies and dividend policy of the
Group and the industry in which it operates.
By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. These
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. As such, no assurance
can be given that such future results, including guidance provided
by the Group, will be achieved; actual events or results may differ
materially as a result of risks and uncertainties facing the Group.
Such risks and uncertainties could cause actual results to vary
materially from the future results indicated, expressed, or implied
in such forward-looking statements. Forward-looking statements are
not guarantees of future performance and the actual results of
operations, financial condition and liquidity, and the development
of the industry in which the Group operates, may differ materially
from those made in or suggested by 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 speak only as at the date of this document and the Group
and its directors, officers, employees, agents, affiliates and
advisers expressly disclaim any obligations or undertaking to
release any update of, or revisions to, any forward-looking
statements in this document.
Investor and analyst presentation webcast
A webcast of the results presentation is to be broadcast at 9am
and can be found here .
Conference call details
Please find below the dial-in details to participate in the
Q&A session which will follow straight after the presentation
which is being broadcast at 9am:
United Kingdom: +44 (0)330 336 9411
United States: +1 929-477-0324
Access code: 8535951
The full text of this announcement and the presentation for the
analyst and investors meeting can be found on the 'Results, Reports
& Presentations' page of the ConvaTec website
www.convatecgroup.com/investors/reports .
Next announcement
The Group will publish its Q1 2021 trading update on the 29
April 2021.
Analysts and Investors
Kate Postans, Vice President of Investor Relations &
Corporate Communications +44 (0) 7826 447807
ir@convatec.com
Media
Buchanan: Charles Ryland / Chris Lane +44 (0)207 466 5000
Financial Calendar
Ex-dividend date* 1 April 2021
Dividend record date* 6 April 2021
Scrip dividend election date* 22 April
2021
Q1 trading update 29 April
2021
Annual General Meeting 7 May 2021
Dividend payment date* 13 May 2021
* subject to approval at AGM.
About ConvaTec
ConvaTec is a global medical products and technologies company
focused on therapies for the management of chronic conditions, with
leading market positions in advanced wound care, ostomy care,
continence and critical care, and infusion care. Our products
provide a range of clinical and economic benefits including
infection prevention, protection of at-risk skin, improved patient
outcomes and reduced total cost of care. To learn more about
ConvaTec, please visit www.convatecgroup.com
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(1) Certain financial measures in this document, including
adjusted results above, are not prepared in accordance with
International Financial Reporting Standards ("IFRS"). All adjusted
measures are reconciled to the most directly comparable measure
prepared in accordance with IFRS in the Non-IFRS Financial
Information below (pages 37 to 43).
(2) Constant currency growth is calculated by applying the
applicable prior period average exchange rates to the Group's
actual performance in the respective period.
(3 ) Adjusted EBIT is equivalent to adjusted operating profit
and reported EBIT is equivalent to reported operating profit.
(4) Organic growth presents period over period growth at
constant currency, excluding M&A activities.
Chief Executive's Review
The pandemic created both challenges and opportunities for
ConvaTec in 2020. Parts of our business were negatively impacted,
with a sharp reduction in surgeries and restricted access to
hospitals, whilst other parts benefitted as COVID-19 stimulated
incremental demand. The overall impact of COVID-19 was broadly
neutral on the topline. From a profit perspective we incurred some
additional costs owing to the pandemic although costs such as
travel and advertising and sales promotion were lower than normal
and we chose to adopt prudent cost management during a year of
uncertainty. We also made the decision to proactively re-phase
certain investments into 2021.
ConvaTec has continued to make good progress with our strategic
transformation programme. It is testament to the talent and
commitment of ConvaTec colleagues that these significant changes
and numerous initiatives were achieved whilst simultaneously
responding to the difficulties of COVID-19. In spite of the
decision to defer some investment the transformation remains on
track.
Our growth prospects are attractive
ConvaTec operates principally in attractive,
structurally-growing chronic care markets where there is long-term
demand for our products and services. Market growth rates are
expected to be approximately 4% p.a. in the medium-term.
Trends that are being seen in the wider healthcare market
include the rising influence of the patient or consumer; an
increasing shift towards the importance of homecare; technological
advancements; the entrance of new competitors; the growth in
emerging markets and increasing cost pressures on health systems.
We are assessing these trends and looking to effectively
differentiate our offering as we strive to seize the opportunities
created and mitigate any risks.
We are a medical technology solutions company serving a diverse
set of chronic care categories which provides resilience.
Importantly there are fundamental synergies across categories in
terms of: consumer orientation; material science and design; high
quality and volume manufacturing; distribution channel knowledge
and geographic presence.
To further strengthen our leadership position and achieve our
full potential we will vigorously pursue our Focus, Innovate,
Simplify, Build, Execute ('FISBE') strategy.
Our Response to COVID-19
Throughout this pandemic our priority has been to safeguard our
employees' health and wellbeing and to support and protect the
patients and care givers we serve.
In March we established a dedicated Rapid Response Team. This
forum, that I chaired and which included experts from all parts of
the Group, ensured speedy, collaborative and pragmatic
decision-making and execution. It was instrumental in helping us
adapt to the new environment we find ourselves in and to continue
to progress our strategic transformation.
The team focused on five key workstreams: our people; the supply
chain; customer interactions; financial liquidity and medical.
In the latter part of the year we transitioned from the Rapid
Response Team to a New Normal Oversight Team that has been focusing
on ensuring the Group remains well positioned for long-term,
sustainable and profitable growth.
I am proud of how the business responded to the challenges of
the pandemic. We introduced detailed processes and protocols to
protect our employees and strengthen the resilience of our supply
chain in order to respond to our customer needs and elevated levels
of demands. I have also been pleased with the agility the business
has shown as it embraced the digital interface both with our
customers and internally.
2020 Financial performance
The benefits of our portfolio serving diverse categories coupled
with strong operational performance was evident in this year's
results. Notwithstanding the significant negative impact of
COVID-19 on our largest business, Advanced Wound Care ('AWC'),
strong growth in Infusion Care ('IC') and Continence & Critical
Care ('CCC') together with limited growth in Ostomy Care ('OC')
performance enabled us to exceed our revenue guidance.
Group reported revenue of $1,894.3 million (2019: $1,827.2
million) rose 3.7% year-on-year or 4.0% on a constant currency
basis(2) . Adjusting for the disposal of the US Skincare product
line (which contributed $6.2 million in Q4 2019) and the
acquisition of Southlake Medical (which contributed $2.7 million in
2020) revenues grew 4.2% on an organic basis(4) .
The Q4 performance was stronger than anticipated, driven
principally by a further step-up in demand for critical care
products as the next wave of the pandemic was felt around the
globe.
Reported operating profit was $211.0 million (2019: $96.9
million). The adjusted operating profit for the year was $350.2
million which included adverse foreign exchange of $7.3 million.
This was broadly in line with the prior year $354.3 million, with
an adjusted operating margin of 18.5% (2019: 19.4%). The 3.7%
growth in revenue, slight improvement in gross margin, prudent
costs management and savings on travel and expenses during the
pandemic, were offset by the strategic transformation investments
of $92.5 million (2019: $52.7 million) and investment in Medical
Device Regulation ('MDR') of $14.0 million (2019: $5.2
million).
Adjusted net profit(1) rose 3.7% to $240.5 million (2019: $232.0
million) with the $25.2 million reduction in net finance expense
partially offset by $12.6 million increase in adjusted tax expense.
As anticipated the adjusted effective tax rate ('ETR') rose from
16.0% to 19.1% reflecting a change in the overall profit mix and
movements in local tax rates.
Reported net profit increased to $112.5 million (2019: $9.8
million) generating basic reported EPS of 5.7 cents (2019: 0.5
cents).
Basic adjusted EPS was 12.1 cents (2019: 11.8 cents) and the
diluted adjusted EPS was 12.0 cents (2019: 11.7 cents) based on
basic weighted average ordinary shares of 1.992 billion (2019:
1.971 billion) and 2.007 billion diluted shares (2019: 1.976
billion) respectively.
Cash flow remained robust with adjusted cash conversion at 90.3%
(2019: 97.9%). This change principally reflects higher levels of
capex investment. Reported cash conversion was 99.0% (2019:
101.0%).
Net debt (excluding lease liabilities) reduced to $891.0 million
(2019: $1,100.3 million) resulting in an improvement in the Group's
net debt/adjusted EBITDA(1) ratio to 2.0x (2019: 2.5x).
Category revenue performance
Twelve months ended 31 December
2020 2019 Reported Foreign Exchange Constant Currency(2) Organic(4)
impact growth / (decline) growth
$m $m growth /
(decline)
--------------------- ------ ------ ------------ ----------------- --------------------- -----------
Revenue by Category
Advanced Wound
Care 547 570 (4.0)% 0.2% (3.8)% (2.7%)
Ostomy Care 526 525 0.2% 1.0% 1.2% 1.2%
Continence and
Critical Care 498 457 9.2% 0.1% 9.3% 8.7%
Infusion Care 323 275 17.2% (0.5)% 16.7% 16.7%
--------------------- ------ ------ ------------ ----------------- --------------------- -----------
Total 1,894 1,827 3.7% 0.3% 4.0% 4.2%
--------------------- ------ ------ ------------ ----------------- --------------------- -----------
Advanced Wound Care ("AWC")
Revenue of $547 million declined 4.0% compared with the prior
year or 3.8% on a constant currency basis. This decline was driven
by the significant negative COVID-19 impact of reduced elective
surgeries as well as declines in non-surgical volumes given the
reduced access to wound clinics and hospitals during the pandemic.
This year was also impacted by the disposal of the US Skincare
product line in September 2020. Organic(4) revenue growth,
adjusting for the disposal of US Skincare product line, declined
2.7% year-on-year.
The business saw growth in Latin America and certain European
and Asia Pacific markets. Declines in Europe were principally in
the UK, France and Germany. North America, where we are most
exposed to surgical, was negatively impacted by the reduction in
elective procedures, although this was partially offset by a
slightly positive performance from the chronic business in the
US.
Our AQUACEL(TM) Ag+ Extra(TM) brand delivered strong growth and
the launch of ConvaMax(TM) superabsorber in Europe was very
encouraging. Elsewhere our AQUACEL(TM) Foam Pro brand delivered
good growth, albeit off a small base.
In Q4 revenue growth was down 5.1% on a constant currency basis.
After adjusting for the disposal of US Skincare the organic(4)
decline was 1.1%.
In 2021 we will focus on the following areas:
-- Improving commercial execution in key markets including the
US, and Europe supported by Salesforce Excellence and Marketing
Centres of Excellence ('CoE').
-- Driving the use of digital tools and platforms in our customer interfaces.
-- Investing in our innovation pipeline to strengthen our product portfolio, notably in foam.
Ostomy Care ("OC")
Revenue of $526 million was broadly flat on a reported basis and
grew 1.2% year-on-year on a constant currency basis. Good growth in
both Latin America and key Asia Pacific markets such as China, were
largely offset by continuing challenges in the US and in certain
European markets. Planned contract and SKU rationalisation reduced
growth by c.90bps. The COVID-19 impact was relatively limited. In
the first wave of the pandemic we saw some stocking up by
distributors and patients although this unwound as the year
progressed.
In the US, whilst we have seen an increase in community sales,
new patient starts in the acute setting remain challenging in some
regions.
We have continued to see good growth in the Esteem(TM) + 1-piece
around the globe and have seen good growth in our 2-piece segment
in the Global Emerging Markets ('GEM'). Outside of GEM we have seen
growth in Natura (R) + although 2-piece revenues have declined
overall.
In Q4 revenue fell 1.1% on a constant currency basis, partially
driven by the rationalisation programme and relatively tough prior
year comparatives.
In 2021 we will focus on the following areas:
-- Strengthening our commercial execution in our key markets
leveraging the Sales and Marketing CoEs coupled with further
investments.
-- Leveraging our me+(TM) direct-to-consumer programmes and
collaborating with HSG to fully support those communities.
-- Continuing to streamline our SKUs and to focus on renewing our product portfolio.
Continence & Critical Care ("CCC")
Revenue of $498 million was up 9.2% on a reported basis and 9.3%
on a constant currency basis. There was a small contribution from
the Southlake Medical Supplies acquisition that was completed in
October 2019. On an organic(4) basis revenue was up 8.7%.
Within this the key driver was significant growth in our
Critical Care business. Revenues rose 17.1% on a constant currency
basis to $152 million owing to the significant demand for ICU
products during the pandemic.
Our Continence business continued to achieve good revenue growth
of 6.2% on a constant currency basis. HSG, driven by its high-touch
patient care model, continues to be the main driver of growth in
the category. Despite the complexity of moving to remote working
HSG continued to deliver an excellent service experience and grew
faster than the overall market. In addition, our GentleCath(TM)
Glide brand has been growing strongly, albeit off a relatively
small base.
In Q4 CCC revenue rose 7.4% on a constant currency basis. This
was better than expected driven by another step up in demand for
Critical Care products during the latest wave of the pandemic.
In 2021 we will focus on the following areas:
-- Continuing to leverage the reach of HSG, the largest service
provider of intermittent catheters in the US.
-- Expanding our me+(TM) platform for intermittent catheter users.
-- Continuing to invest to strengthen the product portfolio.
Infusion Care ("IC")
Revenue grew 17.2% on a reported basis or 16.7% on a constant
currency basis. This was driven by increased use of our innovative
infusion sets by diabetes patients. Some of the demand increase was
due to our customers and their patients building resilience in the
supply chain although the primary driver has been our leadership
position in serving the fast-growing "smart glycemic control"
segment of the diabetes market.
Q4 revenue rose 15.3% on a constant currency basis broadly in
line with the trends seen earlier in the year, and slightly better
than expected.
During 2021 we will focus on the following areas:
-- Sustaining our strong and long-term partnerships with insulin pump manufacturers.
-- Continuing to invest in further developing our differentiated
diabetes offering - including the launch of our new extended wear
infusion set.
-- Expanding the usage of infusion sets for the delivery of
other sub-cutaneous therapeutics for diseases such as
Parkinsons.
Pivoting to sustainable and profitable growth
This time last year I published our new vision, which
encompasses our purpose: Pioneering trusted medical solutions to
improve the lives we touch. I also communicated how we would pivot
to sustainable and profitable growth by executing our FISBE
strategy. Notwithstanding the pandemic we have made good strategic
progress this year.
Focus
W e are concentrating our efforts on key markets and categories.
During 2020 we successfully disposed of the US Skincare product
line for $29.6 million and exited 26 markets where our presence had
been subscale and not sufficiently profitable. This has reduced
commercial and supply chain complexity. We are also rationalising
elements of our product portfolio, for example, in Ostomy Care.
From a markets perspective, during 2020 we stepped up our
investment in China, a key market going forward. We embedded a new
leadership team and although we delayed expansion of the salesforce
in the early part of the pandemic, by the end of the year we had
doubled our presence in China to more than 300 employees.
Our main priority in 2021 will be to accelerate growth in our
key markets. We are investing to further grow our Chinese presence
and to enhance our commercial execution in the US. We will continue
to strengthen our competitive position by evaluating potential
partnerships and acquisitions. Meanwhile our product
rationalisation programme will continue through 2021.
Innovate
ConvaTec has historically underinvested in R&D. We are now
significantly increasing our spend in this area. 2020 R&D spend
increased by $27.4 million to 4.3% of revenue (2019: 2.9%), some of
which relates to higher MDR spend of $14.0 million (2019: $5.2
million). Going forward we see further opportunities to increase
our investment to strengthen our innovation capabilities and
improve our cycle time.
Despite the historical underinvestment we made progress during
2020 and our recent launches, such as the MiniMed(TM) Mio(TM)
Advance/Neria(TM) Guard infusion set and ConvaMax(TM)
superabsorber, have been gaining traction.
During the year Dr Divakar Ramakrishnan, who joined ConvaTec in
January 2020, created a new "Technology and Innovation" function,
reorganising the function and conducting a strategic review. This
has led to changes in the structure of the team, the augmentation
of capabilities with new key hires coupled with the creation of an
innovation centre in Boston.
During 2021 we shall focus on embedding our new leadership team
and further strengthening our capabilities. We intend to roll out a
single uniform new product development and launch process across
all categories and will progress our pipeline. Extended wear
infusion sets are expected to launch in 2021 and we will prepare
for our ConvaFoam(TM) launch in 2022. We will also continue to
progress the development of our male and female GentleCath(TM)
compact catheter offerings whilst continuing to work on refreshing
the ostomy portfolio.
Simplify
We are migrating from a complex country-led matrix organisation
to a new operating model which offers both improved proximity to
the patient and care givers supported by global functional
expertise. This new model is now being embedded across the
organisation. It is testament to the adaptability of our people
that they have adopted these changes whilst also adapting to remote
working during a pandemic.
During the year we also successfully created a new Global
Business Services ("GBS") centre in Lisbon, Portugal. Established
in May the team includes over 140 people, who have been onboarded
remotely during the pandemic. Notwithstanding these unusual
circumstances we have now successfully transitioned the majority of
our historic shared services locations into this single hub in
Lisbon together with transactional finance activity from certain
European markets and some IT service support. This newly formed
team has already identified and delivered further process
improvements, sharing best practice and driving efficiencies,
including the use of robotics.
During 2021 we will continue to migrate activities into the GBS
and embed our finance business partnering approach for optimised
insight. We will also look to streamline processes in additional
areas during the year.
Building
We are building core capabilities across the value chain. During
2020 we made four key hires to the ConvaTec Executive Leadership
team ('CELT'): in January, as well as Dr Divakar Ramakrishnan
joining as our Chief Technology Officer, we welcomed Mani Gopal as
President and Chief Operating Officer of Ostomy Care. In June
Natalia Kozmina joined as Chief Human Resources Officer and in
November Evy Douglas joined as Chief of Corporate Strategy and
Business Development. We have also strengthened the leadership team
in key areas such as quality, regulatory, marketing, medical and
product development.
In 2020 we created our Salesforce Excellence CoE and our
Marketing CoE and both are starting to roll out initiatives to
improve these capabilities across the Group.
Our latest Organisational Health Index survey, conducted in
November, showed significant improvement in our overall score.
Within this the survey suggests that our people welcomed our
investment in skills, core processes and systems. Overall
participation in learning programmes increased 300% compared to
2019.
During 2021 we will continue to strengthen our sales and
marketing activities with a particular focus on digital
interactions. We will further embed the marketing CoE, roll out our
common Customer Relationship Management ('CRM') platform more
widely and seek to strengthen our commercial performance.
Execution
Our Transformation Execution Office is now well established and
is continuing to drive a culture of execution excellence across the
organisation. The team helped develop and monitor over 100
initiatives during the year ensuring that deliverables are on track
and that people are held accountable.
Many of these initiatives have been delivered by our Global
Quality & Operations function. Examples include savings at the
facilities with initiatives on material and scrap, bringing certain
production in-house, and working with procurement to identify and
deliver savings.
In 2021 we will continue to embed the execution excellence
methodology for maximum impact. We will also increase the number of
employees who have completed our "Ability to Execute" training
module.
During the course of the year we decided to proactively re-phase
certain investments, given the pandemic and the implications for
execution and returns. We pushed forward with increased impetus in
certain areas, such as enhancing our digital capabilities, whilst
delaying spend in others to reflect the uncertain environment. In
total we invested $130.7 million in our strategic transformation in
2020, comprising of:
-- $50.6 million of non-recurring operational investment (2019: $39.4 million)
-- $41.9 million of recurring operational investment (2019: $13.3 million)
-- An additional $12.2 million of costs to be excluded from adjusted EBIT (2019: $4.3 million)
-- $26.0 million of capex (2019: $23.0 million)
We also invested $14.0 million in MDR during the year (2019:
$5.2 million).
Notwithstanding the deferral of some recurring transformation
investments into 2021 we continue to expect annual gross benefits
in 2021 of c.$130-150 million. After 2021 we do not expect to
disclose transformation investments separately as the non-recurring
elements should be largely complete. Additional investments, as we
further refine the shape of our income statement, will be part of
the ongoing operational decisions of the business as we continue to
pivot to sustainable and profitable growth.
Sustainability
We intend to become a more sustainable business and to
contribute to the global sustainability agenda, in particular
through the support this approach brings to several of the UN
Sustainable Development Goals.
In 2020 we made progress against a number of our published
sustainability targets. We are pleased with these achievements
given the pandemic, the number of leadership changes and the scale
of the transformation taking place in the business. However much
remains to be done and we go into 2021 with renewed focus in this
area.
In 2021 we are introducing a CELT-led ESG steering team which I
will lead. We will review our progress against our ESG programme,
review and revise targets and enhance our TCFD disclosures. We will
also review how sustainability can be further embedded
systematically into our R&D pipeline and associated processes.
Furthermore, in the area of quality and operations we see
opportunities to improve our environmental impact in areas such as
packaging and carbon emissions. We will focus on these
opportunities as we seek to continue to raise the bar higher.
Dividend
The Board is proposing a final dividend of 3.983 cents to per
share and therefore a 2020 full year dividend of 5.7 cents per
share, in line with the 2019 full year dividend. This is outside
our stated policy of 35% to 45% of adjusted net profit but is a
reflection of the Board's confidence in the future performance of
the Group, its underlying financial strength, realised
distributable reserves position, cash generation and liquidity.
Group 2021 outlook
The fundamentals of the business are attractive. The Group is
principally a diversified chronic care business with strong brands
and differentiated products, holding leading market positions in
large and structurally-growing markets.
In 2021 we anticipate organic revenue growth of 3-4.5%. We
expect a broadly similar growth performance in Ostomy Care to 2020
whilst Infusion Care is expected to deliver strong growth against
the tough prior year comparatives. We expect AWC to return to
growth whilst CCC will slow as the revenues for Critical Care
decline as COVID-19 recedes against the tough comparatives. The
timing and magnitude of the Critical Care and AWC movements will
depend upon the persistence of COVID-19 and how quickly access to
healthcare settings normalise.
Constant currency adjusted EBIT margin in 2021 is expected to be
between 18% and 19.5%, including c.$35 million of non-recurring
transformation investment , c.$75 million of recurring
transformation investment and c.$15 million of costs related to the
ongoing implementation of MDR. In addition, we expect c.$10-15
million in termination expenses associated with the strategic
transformation, these will be excluded from our non-IFRS financial
measures in line with our policy.
In 2021, based on prevailing rates, we expect interest expense
of c.$40-45 million and an effective tax rate of between 18-20%. We
also expect to increase capital expenditure to $100-120 million as
we add further manufacturing capacity, gradually increase the level
of automation, continue to invest in IT/digital and prepare for the
launch of new products.
We are excited about the opportunities available to the Group
and remain committed to our transformation to pivot to sustainable
and profitable growth. We have made good progress stabilising the
business in 2020 and strengthening its foundations. We will focus
on accelerating future revenue and operating profit growth. I look
forward to updating you further later in the year.
UK withdrawal from the European Union ("Brexit")
As highlighted in previous disclosures our Brexit taskforce had
actively prepared, with external advisory support, for a variety of
scenarios including a "No-Deal" scenario. Arrangements were in
place to ensure that adequate inventory levels were maintained in
key locations, registrations completed for dedicated shipping lanes
available to medical device companies, internal financial systems
requirements defined, and appropriate regulatory changes considered
and implemented. Aside from some delays in shipping and elevated
freight costs, no significant issues have been identified in the
first two months of trading.
Principal risks
Our principal risks, as disclosed in our 2019 Annual Report and
Accounts, other than in respect of the impacts of COVID-19, remain
largely unchanged as at 31 December 2020 as to their potential
effect on our ability to successfully deliver our strategy. The
risk landscape, however, has become more challenging in light of
the pandemic and the consequential emerging longer-term economic
and social implications. The Board has considered the impact of
COVID-19 on the Group's business and principal risks, the
additional controls and mitigations required to address these
challenges and prioritised the principal risks accordingly.
As a result of COVID-19 the risk profile of three of our
principal risks (Global Operations and Supply Chain, Pricing and
Reimbursement and Information Security) listed below has altered.
In addition, the Tax and Treasury principal risk profile has
changed as a result of the evolving global tax regulation
environment. A summary of the principal risks and how COVID-19 has
changed their profile is provided below:
-- Global Operations and Supply Chain - Effective and
sustainable manufacturing operations rely on our resilience and
ability to respond to events across our business and supply chain.
The risk profile has increased as a result of COVID-19 including
internal (manufacturing plant hygiene) and external (supply chain
and logistics partner resilience) factors. In response, COVID-19
secure manufacturing protocols have been implemented and we perform
ongoing assessments and review of our supply chain partners'
COVID-19 risk exposure.
-- Change and Transformation - The scale of our transformation
programme is significant and successful delivery relies on robust
change management processes, investment and people
capabilities.
-- Pricing and Reimbursement - Growth and value in our markets
rely on our product and future innovation pipeline meeting customer
demands and a competitive pricing strategy. The risk profile has
increased, as a result of COVID-19, following the deterioration in
the overall global economic outlook and the resultant potential
emerging impact to healthcare systems, customers and competitors as
they adapt to the new economic context. In response, executive
reviews focus on driving manufacturing cost efficiencies and on
R&D and technology innovation, a market access CoE is being
created to focus on reimbursement and the sales force and
commercial team engagement model is evolving to improve access
during COVID-19 in the short-term and to focus on digital
interaction in the long-term.
-- Information Security - Failure to ensure that our systems,
data management and related controls supporting our global business
are effective, available, and integral and secure, including those
of our third-party partners. The risk profile has increased
following a general rise in illegal cyber security activity across
businesses globally during 2020 due to COVID-19 and the switch to a
broader home-working environment for our colleagues. As a result,
the Board and the CELT-led Cyber Steering Committee regularly
reviewed cyber-security including the results of regular testing,
evaluation and improvement made to our infrastructure in relation
to cyber-attacks.
-- Product Innovation and Intellectual Property - Failure to
invest in and develop safe, effective, profitable long-life
products to meet market needs and fill unmet medical needs, respond
to disruptive new technologies or maintain sufficient IP
protection.
-- People (formerly Leadership Talent) - Failure to secure and
retain the right level of capability and capacity, particularly in
our senior management, develop a talent pipeline and successfully
manage transformation and/or effects of high business
disruption.
-- Quality and Regulatory - We are subject to oversight by a
number of regulatory jurisdictions that continue to implement
significant obligations and scrutinise how we operate.
-- Legal and Compliance - Our business is subject to a complex
environment of laws and regulations across multiple
jurisdictions.
-- Geopolitical (formerly Brexit) - Our global operations and
markets are affected by changes in the rapidly evolving and
constantly changing international political climate, particularly
in relation to tariff structure changes, national healthcare
reforms, regulatory reforms or other trade limiting actions. We
continue to monitor the post-Brexit environment and other
geopolitical agreement processes taking into consideration
interdependencies with COVID-19.
-- Tax and Treasury (formerly Macroeconomic and Foreign
Exchange) - Our business operates across multiple jurisdictions
with complex and evolving tax laws and regulations and manufactures
and operates across markets with multiple currencies. Our financial
performance and price competitiveness are dependent on the
management of exposure to the effects of COVID-19 on the existing
economic environment. We are currently in a stable financial
position, including cash flow and liquidity, despite the
environment. In response to the evolving tax environment, the
global tax team monitors changes in tax laws and regulations and
advises the business on changes to obligations and requirements and
external experts are engaged to support and enhance internal team
capabilities.
-- Forecasting and Market Conditions - Our ability to identify,
react and plan effectively to changes in market conditions,
customer demand or any perceived lack of demand visibility on a
timely basis drives optimal decision making, performance and
results.
Financial review
Notwithstanding the COVID-19 pandemic, we delivered a solid
financial performance.
Our diversified product and service portfolio, strong market
positions and robust balance sheet created a strong foundation
during the pandemic from which we delivered our solid financial
performance. We grew the business and our cash generation remained
strong which has enabled us to invest in our transformation
programme, service our debt and maintain our dividend. Despite the
challenges we faced in 2020, we continued with our finance
transformation, including successfully establishing our Global
Business Services hub in Lisbon and we continued to monitor and
strengthen our financial control environment and further build out
our business intelligence capabilities. We are confident in the
future profitable growth of our business which is reflected in our
outlook and guidance.
Reported Reported Adjusted Adjusted
2020 2019 2020 2019
$m $m $m $m
--------------------------------------- -------- -------- -------- --------
Revenue 1,894.3 1,827.2 1,894.3 1,827.2
Cost of sales (875.5) (871.6) (767.5) (749.0)
--------------------------------------- -------- -------- -------- --------
Gross profit 1,018.8 955.6 1,126.8 1,078.2
--------------------------------------- -------- -------- -------- --------
Gross margin % 53.8% 52.3% 59.5% 59.0%
Selling and distribution expenses(a) (463.3) (458.9) (462.6) (457.2)
General and administrative expenses(a) (262.1) (240.5) (232.8) (212.6)
Research and development expenses (82.4) (53.8) (81.2) (53.8)
Other operating expenses - (105.5) - (0.3)
--------------------------------------- -------- -------- -------- --------
Operating profit 211.0 96.9 350.2 354.3
--------------------------------------- -------- -------- -------- --------
Operating margin % 11.1% 5.3% 18.5% 19.4%
Finance income 1.9 7.8 1.9 7.8
Finance expense (50.3) (81.4) (50.3) (81.4)
Non-operating income/(expense),
net 12.1 (4.4) (4.4) (4.4)
--------------------------------------- -------- -------- -------- --------
Profit before income taxes 174.7 18.9 297.4 276.3
Income tax expense (62.2) (9.1) (56.9) (44.3)
--------------------------------------- -------- -------- -------- --------
Net profit 112.5 9.8 240.5 232.0
--------------------------------------- -------- -------- -------- --------
Net profit % 5.9% 0.5% 12.7% 12.7%
Basic earnings per share (cents
per share) 5.7c 0.5c 12.1c 11.8c
Diluted earnings per share (cents
per share) 5.6c 0.5c 12.0c 11.7c
Dividend per share (cents) 5.7 5.7
--------------------------------------- -------- -------- -------- --------
(a) Following a review of cost allocations, general and
administrative expenses of $30.5 million (2019: $25.9 million),
principally relating to employee costs and insurance, have been
reclassified to selling and distribution expenses to better reflect
the nature of the costs. The comparatives have been restated to
reflect the revised classification.
Reported and Adjusted results
The Group's reported financial performance, measured in
accordance with IFRS, is set out in the Financial Statements and
selected Notes thereto on pages 21 to 36.
The commentary in this Financial review includes discussion of
reported and alternative performance measures ('APMs'). Management
uses APMs as a meaningful supplement to reported measures. These
measures are disclosed in accordance with the ESMA guidelines and
are explained and reconciled to the most directly comparable
measure prepared in accordance with IFRS on pages 37 to 43.
Constant Currency Growth (CER)
The Group reviews revenue on a constant currency basis which
removes the effect of fluctuations in exchange rates to focus on
the underlying revenue performance. Constant currency information
is calculated by applying the applicable prior period average
exchange rates to the Group's revenue performance in the respective
period. Revenue growth on a constant currency basis is a non-IFRS
financial measure and should not be viewed as a replacement of IFRS
reported revenue.
Revenue
Details of the Group's revenue is discussed above on pages 5 to
7.
Reported net profit
Notwithstanding the COVID-19 pandemic, the Group delivered a
solid financial performance in 2020, as highlighted in the table
above.
Reported operating profit was $211.0 million, an increase of
$114.1 million reflecting the 3.7% growth in revenue, improvement
in gross margin, reduction in impairment charges of $105.5 million,
a decrease in amortisation of $15.1 million and the 2019 effect of
CEO buy-out costs of $6.2 million partially offset by the increased
investment in transformation of $47.7 million and increased MDR of
$8.8 million and a rise in employee incentives.
Reported finance and non-operating expenses were $36.3 million
(2019: $78.0 million). Finance costs reduced by $25.2 million to
$48.4 million, reflecting lower interest costs since the October
2019 refinancing and, in 2019, the write-off of fees related to the
previous credit agreement. There was a non-operating credit of
$12.1 million, reflecting the $16.5 million profit on disposal of
the US Skincare product line partially offset by non-operating
expenses, principally foreign exchange, remaining flat at $4.4
million.
The reported tax charge in the year was $62.2 million (2019:
$9.1 million), which reflects the increase in the Group's reported
profit before tax and movement in the deferred tax asset relating
to the Swiss tax reform.
Consequently, reported net profit increased to $112.5 million
(2019: $9.8 million) generating basic reported earnings per share
of 5.7 cents (2019: 0.5 cents).
Adjusted net profit
The Group delivered adjusted operating profit in line with the
prior year at $350.2 million (2019: $354.3 million) with an
adjusted operating margin of 18.5% (2019: 19.4%). The 3.7% growth
in revenue, improvement in the gross margin, prudent cost
management and savings on travel and expenses during the pandemic,
were offset by the strategic transformation investments of $92.5
million (2019: $52.7 million) and investment in MDR of $14.0
million (2019: $5.2 million) plus the impact of $7.3 million of
adverse foreign exchange movements.
Adjusted net profit rose 3.7% to $240.5 million (2019: $232.0
million) with the $25.2 million reduction in net finance expense
partially offset by $12.6 million increase in adjusted tax expense.
As anticipated, the adjusted effective tax rate ("ETR") rose from
16.0% to 19.1%.
Basic adjusted EPS was 12.1 cents (2019: 11.8 cents) and diluted
adjusted EPS was 12.0 cents (2019: 11.7 cents) based on basic
weighted average ordinary shares of 1.992 billion shares (2019:
1.971 billion shares) and 2.007 billion diluted shares (2019: 1.976
billion) respectively.
Taxation and tax strategy
Reported Reported Adjusted Adjusted
2020 2019 2020 2019
$m $m $m $m
---------------------------- -------- -------- -------- --------
Profit before taxation 174.7 18.9 297.4 276.3
Income tax expense (62.2) (9.1) (56.9) (44.3)
Effective tax rate 35.6% 48.1% 19.1% 16.0%
---------------------------- -------- -------- -------- --------
2020 2019
$m $m
---------------------------- -------- -------- -------- --------
Reported income tax expense (62.2) (9.1)
Tax effect of adjustments (12.3) (12.2)
Other discrete tax items 17.6 (23.0)
---------------------------- -------- -------- -------- --------
Adjusted income tax expense (56.9) (44.3)
---------------------------- -------- -------- -------- --------
The Group's reported tax charge for the year was $62.2 million
(2019: $9.1 million) and is based on tax rates applicable in
various jurisdictions across the world in which the Group operates.
The principal movement relates to the change in basis of estimate
of the deferred tax asset arising from Swiss tax reform which
created a current year charge (other discrete tax item) of $17.6
million (2019: credit of $23.0 million). For further information
see Note 4 to the Financial Statements.
The adjusted income tax charge for 2020 was $56.9 million (2019:
$44.3 million), reflecting a 3.1% increase in the adjusted
effective tax rate to 19.1% (2019: 16.0%), broadly in line with our
expectations. The adjusted income tax expense of $56.9 million
excludes the deferred tax expense of $17.6 million (as noted above)
and a tax benefit of $12.3 million (2019: $12.2 million) relating
to the tax effect of amortisation on pre-2018 intangible assets and
the cost of termination benefits relating to specific Group-wide
initiatives.
ConvaTec is a responsible business and promotes the highest
standards of compliance and ethical behaviour. We take a
responsible attitude to tax, recognising that it affects all of our
stakeholders. We had on average more than 9,600 employees worldwide
during 2020 and, operated in over 100 countries through direct
sales and local distributors, our business activities generate a
substantial amount of taxes. These include both corporate income
taxes and non-income taxes such as payroll taxes, property taxes,
VAT/Sales & Use taxes, and other taxes. In order to provide
transparency on our approach to tax, we have published our Global
Tax Strategy, which is available on our corporate website at
https://convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement/
Disposals
In line with our strategic transformation and consistent with
the "Focus" pillar of FISBE (see page 7), we disposed of the trade
and assets of the US Skincare product line on 25 September 2020,
for a net consideration of $29.6 million, generating a profit on
disposal of $16.5 million. Prior to disposal the business had
contributed $19.2 million of revenue to the 2020 reported results.
For further information see Note 6 to the Financial Statements.
Alternative performance measures ("APMs")
In line with our APM policy, included within our adjusted
performance measures in 2020 are termination benefits related to
our transformation activity of $12.2 million (2019: $5.8 million),
amortisation of pre-acquisition intangibles of $125.3 million
(2019: $140.2 million) and the profit on disposal of the US
Skincare product line of $16.5 million. In 2019, the Group also
treated CEO buy-out costs of $6.2 million and the impairment of
certain finite-lived intangible assets related to our product
portfolio of $105.2 million as adjusting items.
The Board, through the Audit and Risk Committee, continuously
reviews the Group's APM policy to ensure that it remains
appropriate and represents the way in which the performance of the
Group is managed. Since 2018, the Group has made two small
acquisitions, each for a consideration of less than $15 million,
for which the amortisation charge on acquisition intangibles was
immaterial. Given the Group's strategy to be more active and to
pursue larger acquisitions which strengthen our position in key
geographies and/or business categories or which provide access to
new technology, we believe that a refinement and clarification of
the policy is required under which the Group will adjust for
amortisation of intangible assets in relation to future
acquisitions together with associated acquisition-related expenses.
This refinement better reflects the underlying performance of the
business and aids year-on-year comparability.
For further information on Non-IFRS financial information see
pages 37 to 43.
Foreign exchange
The following table summarises the exchange rates used for the
translation of currencies into US dollars that have the most
significant impact on the Group results:
Average
rate/ Closing
Currency rate 2020 2019
--------- --------------- ---- ----
EUR/USD Average 1.14 1.12
Closing 1.22 1.12
------------------------- ---- ----
GBP/USD Average 1.28 1.28
Closing 1.37 1.33
------------------------- ---- ----
DKK/USD Average 0.15 0.15
Closing 0.16 0.15
------------------------- ---- ----
During 2020, our revenue was predominantly USD denominated
(50%). Other significant currencies were EUR (23%), GBP (8%) and
DKK (2%). The balance comprises a basket of other currencies which,
on an individual basis, were each less than 2% of revenue.
Sources and uses of cash
Sources of cash
The Group's primary source of liquidity is net cash generated
from operations (see cash flow statement on page 25). We operate in
the chronic care market for which the nature of the Group's product
offerings has resulted in consistent and robust recurring cash
inflows.
Net cash generated from operations
2020 2019 2018 2017 2016
----------------------------------- ----- ----- ----- ----- -----
Net cash generated from operations
($m) 502.5 486.8 449.1 420.0 384.5
Net cash generated from operations
/ revenue (%) 26.5% 26.6% 24.5% 23.8% 22.8%
----------------------------------- ----- ----- ----- ----- -----
Reported Reported
2020 2019
$m $m
--------------------------------------------- -------- --------
EBITDA(a) 420.4 421.0
--------------------------------------------- -------- --------
Net cash generated from operations 502.5 486.8
Net interest paid (48.5) (48.0)
Tax paid (54.5) (37.0)
--------------------------------------------- -------- --------
Net cash generated from operating activities 399.5 401.8
--------------------------------------------- -------- --------
(a) EBITDA is explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS in
the cash conversion table on page 39.
Net cash generated from operating activities was $399.5 million
and $401.8 million in 2020 and 2019, respectively. The decrease of
$2.3 million primarily reflects the $17.5 million increase in tax
paid principally offset by a $15.7 million increase in cash from
operations. Working capital decreased by $47.8 million (2019: $51.6
million) and was offset by a $21.9 million gain on foreign exchange
derivatives.
Despite the impact of COVID-19, our cash collection remained
strong resulting in a decrease in receivables of $6.5 million.
Higher inventory to meet the predicted elevated short-term demand
in Critical Care products together with appropriate planning for
Brexit increased our year-end inventory position, generated a
working capital outflow of $5.3 million. The increase in trade and
other payables of $47.5 million reflects an increase in employee
incentive accruals, an increase in the vacation accrual (owing to
COVID-19) coupled with the phasing of spend on certain capital
expenditure, transformation and innovation programmes.
The $21.9 million of cash gains from foreign exchange
derivatives is a result of increased volatility in foreign exchange
rates in 2020 and greater use of foreign exchange contracts to
mitigate the associated risks.
In 20 20, the net cash generated from operating activities was
supplemented by income from the sale of our US Skincare product
line ($29.8 million).
Uses of cash
The $502.5 million net cash generated from operations and $29.8
million proceeds from the sale of the US Skincare product line,
were used to service our debt, including repayment of $73.0 million
of our external borrowings, invest $86.2 million of capital
expenditure in our manufacturing lines, digital technologies and
the purchase of product-related licences, $54.5 million of tax
payments, purchase $5.6 million of ConvaTec shares for the future
vesting of our employee share incentive plans, and pay $62.9
million in dividends to shareholders. The year-on-year reduction of
$17.0 million in the cash dividend payment reflects the uptake of
the scrip alternative.
Significant cash outflows ($m)
2020 2019
$m $m
------------------------------------------ ----- -----
Debt servicing 142.1 206.6
Dividend paid 62.9 79.9
Acquisition of PP&E and intangible assets 86.2 61.4
Tax paid 54.5 37.0
Acquisitions, net of cash acquired - 12.3
Purchase of own shares 5.6 14.0
------------------------------------------ ----- -----
Cash flows from debt servicing includes net repayments on
borrowings of $73.0 million (2019: $137.7 million), lease payments
of $20.6 million (2019: $20.9 million), and net interest payments
of $48.5 million (2019: $48.0 million).
Cash conversion
Cash conversion is a measure we use to ensure we derive value
from our operations and supports our decision making for potential
future investments.
Our reported cash conversion was 99.0% (2019: 101.0%) and
adjusted cash conversion was 90.3% (2019: 97.9%).
Reported Reported Adjusted(a) Adjusted(a)
2020 2019 2020 2019
$m $m $m $m
------------------------------------- -------- -------- ----------- -----------
EBITDA 420.4 421.0 445.0 443.1
Add: non-cash items 12.4 14.2 - -
Working capital 47.8 51.6 42.9 52.1
Gain on foreign exchange derivatives 21.9 - 0.2 -
Capital expenditure (86.2) (61.4) (86.2) (61.4)
------------------------------------- -------- -------- ----------- -----------
Net cash generated from operations,
net of capital expenditure 416.3 425.4 401.9 433.8
------------------------------------- -------- -------- ----------- -----------
Cash conversion 99.0% 101.0% 90.3% 97.9%
------------------------------------- -------- -------- ----------- -----------
Tax paid (54.5) (37.0) (54.5) (37.0)
------------------------------------- -------- -------- ----------- -----------
Free cash flow 361.8 388.4 347.4 396.8
------------------------------------- -------- -------- ----------- -----------
(a) Adjusted EBITDA, adjusted working capital and adjusted
non-cash items are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS in
the cash conversion table on page 42.
Adjusted free cash flow is one of the four key performance
indicators we use to monitor the delivery of our strategy. Adjusted
free cash flow was $347.4 million (2019: $396.8 million),
principally reflecting our increased investment in capital
expenditure and cash tax paid.
Liquidity and net debt
Borrowings and net debt
2020 2019
---------------------------------------- ----------------------------------------
Cash and Cash and
Borrowings cash equivalents Net debt Borrowings cash equivalents Net debt
$m $m $m $m $m $m
---------------------------- ---------- ----------------- --------- ---------- ----------------- ---------
At 1 January (1,486.1) 385.8 (1,100.3) (1,620.8) 315.6 (1,305.2)
Net cash inflow - 181.1 181.1 - 76.5 76.5
Net repayment of borrowings 73.0 - 73.0 137.7 - 137.7
Foreign exchange (39.0) (1.5) (40.5) 11.5 (6.3) 5.2
Non-cash movement (4.3) - (4.3) (14.5) - (14.5)
---------------------------- ---------- ----------------- --------- ---------- ----------------- ---------
At 31 December (1,456.4) 565.4 (891.0) (1,486.1) 385.8 (1,100.3)
---------------------------- ---------- ----------------- --------- ---------- ----------------- ---------
Lease liabilities (92.1) (88.5)
---------------------------- ---------- ----------------- --------- ---------- ----------------- ---------
At 31 December (983.1) (1,188.8)
---------------------------- ---------- ----------------- --------- ---------- ----------------- ---------
Net debt/adjusted EBITDA 2.0x 2.5x
---------------------------- ---------- ----------------- --------- ---------- ----------------- ---------
As at 31 December 2020, the Group's cash and cash equivalents
were $565.4 million (2019: $385.8 million) and the debt outstanding
on our borrowings was $1,456.4 million (2019: $1,486.1 million).
Borrowings reflect two five-year multi-currency committed loan
facilities - a $900 million non-amortising debt facility and a $600
million amortising debt facility. In addition, the Group has a $200
million undrawn revolving credit facility. All three facilities
expire in October 2024. During the year, the Group made the first
scheduled repayment on the amortising loan of $45.0 million
together with an additional payment of $28.0 million on Euro
denominated borrowings triggered by the movement in the Euro to USD
exchange rate exceeding 5%.
The $200 million revolving credit facility remained unutilised
throughout the year and was undrawn as at 31 December 20 20, which,
with cash of $565.4 million, provided the Group with total
liquidity of $765.4 million at that date.
At 31 December 2020, the Group was in compliance with all
financial and non-financial covenants associated with the Group's
outstanding debt. The Group has two financial covenants, being net
debt/adjusted EBITDA and interest cover, each of which is defined
by the debt facilities. The table below summarises the Group's
covenant position versus maximum net debt/adjusted EBITDA and
minimum interest cover permitted by the debt facilities as at 31
December 2020 and 2019.
Maximum covenant Covenant net Covenant
net debt/adjusted debt/adjusted Minimum covenant interest
EBITDA* EBITDA* interest cover* cover*
31 December 2020 3.75x 1.93x 3.5x 10.4x
------------------- --------------- ----------------- ----------
31 December 2019 4.0x 2.48x 3.5x 6.5x
------------------- --------------- ----------------- ----------
* For the purposes of the debt facilities, interest cover is
adjusted EBITDA/interest expense (net). Net debt, adjusted EBITDA
and interest expense (net) are adjusted measures as defined by the
facilities documentation and not in accordance with the definitions
of these measures presented in the Adjusted Performance Measures
section on page 42 and applied in the commentary in this Financial
review.
The Group ended the year with total interest-bearing
liabilities, including IFRS 16 lease liabilities, of $1,548.5
million (2019: $1,574.6 million). Offsetting cash of $565.4 million
(2019: $385.8 million) and excluding lease liabilities, net debt
was $891.0 million (2019: $1,100.3 million), equivalent to 2.0x
adjusted EBITDA (2019: 2.5x adjusted EBITDA).
For further information on our borrowings see Note 7 to the
Financial Statements.
Financial position
2020 2019 Change Change
At 31 December $m $m $m %
------------------------------- --------- --------- ------- ------
Intangible assets and goodwill 2,089.6 2,166.9 (77.3) (3.6)%
Other non-current assets 498.4 474.6 23.8 5.0%
Cash and cash equivalents 565.4 385.8 179.6 46.6%
Current assets excluding cash
and cash equivalents 613.1 582.5 30.6 5.3%
------------------------------- --------- --------- ------- ------
Total assets 3,766.5 3,609.8 156.7 4.3%
------------------------------- --------- --------- ------- ------
Current liabilities (513.2) (397.3) (115.9) 29.2%
Non-current liabilities (1,582.6) (1,651.5) 68.9 (4.2)%
Total equity (1,670.7) (1,561.0) (109.7) 7.0%
------------------------------- --------- --------- ------- ------
Net equity and liabilities (3,766.5) (3,609.8) (156.7) 4.3%
------------------------------- --------- --------- ------- ------
Intangible assets and goodwill
Intangible assets and goodwill reduced by $77.3 million to
$2,089.6 million (2019: $2,166.9 million). This reflects decreases
arising primarily from the in-year amortisation of intangible
assets of $136.8 million partially offset by the net effect of
foreign exchange of $42.7 million and additions of $25.1 million.
Additions primarily arose from the accelerated investment in our
digital capabilities under our transformation programme.
Other non-current assets
Other non-current assets, including property, plant and
equipment, right-of-use assets, deferred tax assets, restricted
cash, pension and other assets increased by $23.8 million to $498.4
million (2019: $474.6 million). The increase primarily reflects
continual investment in our manufacturing lines, with additions in
PP&E of $64.5 million offset by depreciation of $38.5 million.
Right-of-use assets remained in line with the prior year with $22.9
million new leases recognised offset by depreciation of $22.4
million. The net increase in other non-current assets also includes
a $19.9 million favourable foreign exchange movement. Deferred tax
assets decreased by $13.6 million to $41.4 million principally due
to the change in the basis of estimating the deferred tax asset
arising from the Swiss tax reform.
Current assets excluding cash and cash equivalents
Current assets excluding cash and cash equivalents increased by
$30.6 million to $613.1 million (2019: $582.5 million), primarily
driven by the net effect of foreign exchange of $27.7 million.
Current liabilities
Current liabilities increased by $115.9 million to $513.2
million (2019: $397.3 million), reflecting a $52.5 million increase
in trade and other payables, primarily due to increases in accruals
for strategic projects and employee incentives, as well as a $45.8
million increase in the current portion of borrowings resulting
from the scheduled repayments under the Group's credit
agreement.
Non-current liabilities
Non-current liabilities have reduced by $68.9 million to
$1,582.6 million (2019: $1,651.5 million). This includes a
reduction in non-current borrowings of $75.5 million, resulting
from scheduled repayments of $73.0 million during the year, the
increase in the classification of the current portion of borrowings
as described above, partially offset by $39.0 million in relation
to the foreign exchange impact on Euro denominated borrowings.
COVID-19 pandemic
In March 2020 management established a Rapid Response Team to
assess, respond to and monitor the effects of COVID-19 on its
employees, customers and the performance of the business.
Management and the Board performed regular and extensive reviews of
the impact of the COVID-19 pandemic on the Group's financial
affairs, including the potential effects on the Group's liquidity
position, accounting judgements and estimates and the financial
control environment. This included enhanced monitoring of the
Group's liquidity position - see above for commentary on the strong
liquidity retained throughout the year. Monitoring of the position
was done through daily liquidity and weekly cash collection
reporting supported by regular Treasury forecasting and reporting
procedures.
Accounting considerations
In response to the pandemic, the Group considered the potential
impact on our accounting judgements and key sources of estimation
uncertainty.
Going concern and Viability statement
As discussed above, the overall financial performance of the
business has remained robust with a strong liquidity position
maintained throughout the year and access to committed funding
through to October 2024, of which $200 million has remained undrawn
throughout the year. In preparing the Group's Viability statement,
the Board-approved strategic plan was used as a foundation and
severe but plausible downside scenarios linked to the Group's
principal and emerging risks, including supply chain disruption
(incorporating the effect of climate change), COVID-19 impact,
delivery of transformation initiatives, and pricing and
reimbursement, applied against the strategic plan. Brexit was not
considered a significant risk for the Group and, therefore, not
included in the scenarios. After the application of these
scenarios, and before mitigations to address them, the Group is
forecast to maintain a strong liquidity position and to operate
comfortably within the debt covenants. A reverse stress test,
before mitigation, was also considered but the conditions of the
reverse stress test were considered implausible given that a
reduction of >$150 million EBITDA would be required in 2021 to
create conditions which may lead to a potential covenant breach and
substantially higher reductions in profitability in subsequent
years.
In relation to going concern, given available cash resources,
forecast performance for the next 18 months, including covenant
compliance, the going concern assumption has been assumed in the
preparation of the Financial Statements. In reaching this
conclusion and given the economic uncertainty that has been cre
ated by the pandemic, the Board applied the same severe but
plausible scenarios utilised in the preparation of the Viability
statement. Under each scenario the Group retained significant
liquidity and covenant headroom throughout the going concern period
i.e. 12 months from the date of this report.
Financial control environment
With a substantial number of office-based employees working from
home during the year, including within the finance community, we
regularly reviewed and monitored the financial and IT general
control environment.
The Group uses a single system for the self-certification of
global financial controls across all markets. The
self-certification process continued throughout the year with no
deterioration in response rates, which remained high. The Global
Financial Controls team, acting as the second line of defence,
investigates all notified control failures to ensure that there is
no risk of material financial misstatement. To further assure the
control environment during the year, additional guidance was
provided to our global finance teams to ensure that any COVID-19
triggering events were considered. Further incremental evidence
review activities were undertaken in key markets to ensure that
controls were operating in line with global standards and as
reported. In addition, internal audit reviews continued to be
completed, focused on our financial internal controls. No control
failures were identified during the year that posed a risk of a
material financial misstatement.
In transitioning finance activity to our Global Business
Services facility, detailed analysis of segregation of duty
activities were completed, controls documentation prepared, and
subsequent operation of those controls reviewed to ensure that the
control environment in this newly created hub was robust.
A review of the operation of IT general controls was conducted
on a regular basis during the year by the IT governance risk and
compliance team and no weaknesses were identified that would give
rise to a risk of material financial misstatement. Given the
transition to home-working, internal audit performed a review of
home-working practices to ensure there were no material exposures
or weaknesses in the effectiveness of controls.
APMs
Although the Group has incurred certain costs in relation to the
COVID-19 pandemic e.g. in delivering COVID-19 secure workplaces and
manufacturing sites, none of these costs have been treated as
adjusting.
Taxation matters
In response to COVID-19, various governments offered support
programmes to companies to ensure their future in these
unprecedented times. Given the robust performance of the Group, no
employees were furloughed and no governmental COVID-19 support
programmes were applied for or accepted.
Consolidated Income Statement
For the year ended 31 December 2020
2019
2020 restated(a)
Notes $m $m
-------------------------------------------- ------ -------- -------------
Revenue 2 1,894.3 1,827.2
Cost of sales (875.5) (871.6)
-------------------------------------------- ------ -------- -------------
Gross profit 1,018.8 955.6
-------------------------------------------- ------ -------- -------------
Selling and distribution expenses (463.3) (458.9)
General and administrative expenses (262.1) (240.5)
Research and development expenses (82.4) (53.8)
Other operating expenses - (105.5)
-------------------------------------------- ------ -------- -------------
Operating profit 211.0 96.9
-------------------------------------------- ------ -------- -------------
Finance income 1.9 7.8
Finance expense (50.3) (81.4)
Non-operating income/(expense), net 3 12.1 (4.4)
-------------------------------------------- ------ -------- -------------
Profit before income taxes 174.7 18.9
Income tax expense 4 (62.2) (9.1)
-------------------------------------------- ------ -------- -------------
Net profit 112.5 9.8
-------------------------------------------- ------ -------- -------------
Earnings per share
Basic earnings per share (cents per share) 5.7c 0.5c
Diluted earnings per share (cents per
share) 5.6c 0.5c
-------------------------------------------- ------ -------- -------------
(a) Following a review of cost allocations, general and
administrative expenses of $30.5 million (2019: $25.9 million),
principally relating to employee costs and insurance, have been
reclassified to selling and distribution expenses to better reflect
the nature of the costs. The comparatives have been restated to
reflect the revised classification.
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2020
2020 2019
Notes $m $m
-------------------------------------------------- ------ ------ ------
Net profit 112.5 9.8
Other comprehensive income
Items that will not be reclassified subsequently
to the Consolidated Income Statement
Remeasurement of defined benefit pension
plans (0.4) (5.0)
Change in pension asset restriction 5.0 (0.6)
Income tax relating to items that will
not be reclassified 0.2 1.5
Items that may be reclassified subsequently
to the Consolidated Income Statement
Exchange differences on translation of
foreign operations 53.0 25.1
Effective portion of changes in fair
value of cash flow hedges 8 (6.7) (9.5)
Costs of hedging 8 (0.1) -
Changes in fair value of cash flow hedges
reclassified to the Consolidated Income
Statement 8 (0.2) (0.8)
Income tax relating to items that may
be reclassified 1.7 2.8
-------------------------------------------------- ------ ------ ------
Other comprehensive income 52.5 13.5
-------------------------------------------------- ------ ------ ------
Total comprehensive income 165.0 23.3
-------------------------------------------------- ------ ------ ------
All amounts are attributable to shareholders of the Group and
wholly derived from continuing operations.
Consolidated Statement of Financial Position
As at 31 December 2020
2020 2019
Notes $m $m
---------------------------------- ------ -------- --------
Assets
Non-current assets
Property, plant and equipment 352.2 321.6
Right-of-use assets 85.8 84.5
Intangible assets and goodwill 2,089.6 2,166.9
Deferred tax assets 41.4 55.0
Derivative financial assets 8 - 1.0
Restricted cash 5.7 3.6
Other non-current receivables 13.3 8.9
---------------------------------- ------ -------- --------
2,588.0 2,641.5
---------------------------------- ------ -------- --------
Current assets
Inventories 297.1 281.8
Trade and other receivables 316.0 300.7
Cash and cash equivalents 565.4 385.8
---------------------------------- ------ -------- --------
1,178.5 968.3
---------------------------------- ------ -------- --------
Total assets 3,766.5 3,609.8
---------------------------------- ------ -------- --------
Equity and liabilities
Current liabilities
Trade and other payables 341.8 289.3
Borrowings 7 86.6 40.8
Lease liabilities 19.8 18.4
Current tax payable 55.6 44.6
Provisions 9.4 4.2
---------------------------------- ------ -------- --------
513.2 397.3
---------------------------------- ------ -------- --------
Non-current liabilities
Borrowings 7 1,369.8 1,445.3
Lease liabilities 72.3 70.1
Deferred tax liabilities 101.4 107.8
Provisions 1.5 1.7
Derivative financial liabilities 8 7.7 -
Other non-current payables 29.9 26.6
---------------------------------- ------ -------- --------
1,582.6 1,651.5
---------------------------------- ------ -------- --------
Total liabilities 2,095.8 2,048.8
---------------------------------- ------ -------- --------
Net assets 1,670.7 1,561.0
---------------------------------- ------ -------- --------
Equity
Share capital 245.5 242.9
Share premium 115.3 70.7
Own shares (6.7) (10.8)
Retained deficit (845.3) (847.7)
Merger reserve 2,098.9 2,098.9
Cumulative translation reserve (46.1) (99.1)
Other reserves 109.1 106.1
---------------------------------- ------ -------- --------
Total equity 1,670.7 1,561.0
---------------------------------- ------ -------- --------
Total equity and liabilities 3,766.5 3,609.8
---------------------------------- ------ -------- --------
Consolidated Statement of Changes in Equity
For the year ended 31 December 2020
Cumulative
Share Share Own Retained Merger translation Other
capital premium shares deficit reserve reserve reserves Total
Notes $m $m $m $m $m $m $m $m
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
At 1 January
2019 240.7 39.8 (6.8) (744.5) 2,098.9 (124.2) 113.3 1,617.2
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Net profit - - - 9.8 - - - 9.8
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Other
comprehensive
income:
Foreign
currency
translation
adjustment,
net of tax - - - - - 25.1 - 25.1
Remeasurement
of
defined
benefit
pension
plans, net
of tax - - - - - - (3.5) (3.5)
Change in
pension
asset
restriction - - - - - - (0.6) (0.6)
Effective
portion
of changes in
fair
value of cash
flow
hedges, net
of tax - - - - - - (7.5) (7.5)
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Other
comprehensive
income - - - - - 25.1 (11.6) 13.5
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Total
comprehensive
income - - - 9.8 - 25.1 (11.6) 23.3
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Dividends paid 5 - - - (79.9) - - - (79.9)
Scrip dividend 5 2.2 30.9 - (33.1) - - - -
Share-based
payments - - - - - - 14.2 14.2
Share awards
vested - - 10.0 - - - (10.0) -
Excess
deferred
tax benefit
from
share-based
payments - - - - - - 0.2 0.2
Purchase of
own
shares - - (14.0) - - - - (14.0)
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
At 31 December
2019 242.9 70.7 (10.8) (847.7) 2,098.9 (99.1) 106.1 1,561.0
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Net profit - - - 112.5 - - - 112.5
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Other
comprehensive
income:
Foreign
currency
translation
adjustment,
net of tax - - - - - 53.0 - 53.0
Remeasurement
of
defined
benefit
pension
plans, net
of tax - - - - - - (0.2) (0.2)
Change in
pension
asset
restriction - - - - - - 5.0 5.0
Effective
portion
of changes in
fair
value of cash
flow
hedges, net
of tax - - - - - - (5.3) (5.3)
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Other
comprehensive
income - - - - - 53.0 (0.5) 52.5
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Total
comprehensive
income - - - 112.5 - 53.0 (0.5) 165.0
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Dividends paid 5 - - - (62.9) - - - (62.9)
Scrip dividend 5 2.6 44.6 - (47.2) - - - -
Share-based
payments - - - - - - 12.4 12.4
Share awards
vested - - 9.7 - - - (9.7) -
Excess
deferred
tax benefit
from
share-based
payments - - - - - - 0.8 0.8
Purchase of
own
shares - - (5.6) - - - - (5.6)
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
At 31 December
2020 245.5 115.3 (6.7) (845.3) 2,098.9 (46.1) 109.1 1,670.7
--------------- ------ --------- --------- -------- --------- --------- ------------ --------- --------
Consolidated Statement of Cash Flows
For the year ended 31 December 2020
2020 2019
Notes $m $m
----------------------------------------------- ------ -------- ----------
Cash flows from operating activities
Net profit 112.5 9.8
Adjustments for
Depreciation of property, plant and equipment 38.5 35.5
Depreciation of right-of-use assets 22.4 22.4
Amortisation 136.8 151.9
Income tax expense 4 62.2 9.1
Non-operating expense, net 9.8 4.4
Finance costs, net 48.4 73.6
Share-based payments 12.4 14.2
Impairment/write-off of intangible assets 1.8 105.5
Impairment/write-off of property, plant
and equipment 9.9 8.8
Change in assets and liabilities:
Inventories (5.3) 20.4
Trade and other receivables 6.5 (13.9)
Other non-current receivables (4.1) 1.8
Restricted cash (2.1) -
Trade and other payables 47.5 43.8
Other non-current payables 5.3 (0.5)
----------------------------------------------- ------ -------- ----------
Net cash generated from operations 502.5 486.8
Interest received 1.9 1.8
Interest paid (50.4) (49.8)
Income taxes paid (54.5) (37.0)
----------------------------------------------- ------ -------- ----------
Net cash generated from operating activities 399.5 401.8
Cash flows from investing activities
Acquisition of property, plant and equipment
and intangible assets (86.2) (61.4)
Proceeds from sale of property, plant and
equipment and other assets 0.1 0.1
Acquisitions, net of cash acquired - (12.3)
Proceeds from divestiture 6 29.8 -
Change in restricted cash - 0.8
----------------------------------------------- ------ -------- ----------
Net cash used in investing activities (56.3) (72.8)
Cash flows from financing activities
Repayment of borrowings (73.0) (1,618.7)
Proceeds from borrowings - 1,481.0
Payment of lease liabilities (20.6) (20.9)
Purchase of own shares (5.6) (14.0)
Dividend paid 5 (62.9) (79.9)
----------------------------------------------- ------ -------- ----------
Net cash used in financing activities (162.1) (252.5)
----------------------------------------------- ------ -------- ----------
Net change in cash and cash equivalents 181.1 76.5
Cash and cash equivalents at beginning of
the year 385.8 315.6
Effect of exchange rate changes on cash
and cash equivalents (1.5) (6.3)
----------------------------------------------- ------ -------- ----------
Cash and cash equivalents at end of the
year 565.4 385.8
----------------------------------------------- ------ -------- ----------
1. Basis of preparation
1.1 General information
ConvaTec Group Plc (the "Company") is a company incorporated in
the United Kingdom under the Companies Act of 2006 with its
registered office situated in England and Wales. The Company's
registered office is 3 Forbury Place, 23 Forbury Road, Reading, RG1
3JH, United Kingdom.
The Company and its subsidiaries (collectively, the "Group") are
a global medical products and technologies group focused on
therapies for the management of chronic conditions, with leading
market positions in advanced wound care, ostomy care, continence
and critical care and infusion care.
The announcement is based on the Group's Financial Statements
which are prepared in accordance with IFRS as adopted by the EU and
therefore comply with Article 4 of the EU International Accounting
Standards ("IAS") Regulations.
The Financial Statements are presented in US dollars ("USD"),
reflecting the profile of the Company and its subsidiaries'
(collectively, the "Group") revenue and operating profit, which are
primarily generated in US dollars and US dollar-linked currencies.
All values are rounded to $0.1 million except where otherwise
indicated.
The financial information set out in this announcement does not
constitute the Group's statutory accounts for the years ended 31
December 2020 and 2019 but is derived from those accounts.
Statutory accounts for 2019 have been delivered to the Registrar of
Companies and those for 2020 will be delivered following the
Company's Annual General Meeting. The auditor's reports on the 2020
and 2019 accounts were unqualified, did not draw attention to any
matters by way of emphasis without qualifying their report and did
not contain a statement under section 498(2) or (3) of the
Companies Act 2006.
1.2 Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements, in conformity with
adopted IFRS, requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and
the reported value of assets and liabilities, income and expense.
Actual results may differ from these estimates or judgements of
likely outcome. Management regularly reviews, and revises as
necessary, the accounting judgements that significantly impact the
amounts recognised in the Consolidated Financial Statements and the
sources of estimation uncertainty that are considered to be "key
estimates" due to their potential to give rise to material
adjustments in the Group's Consolidated Financial Statements within
the next financial year.
In preparing the Consolidated Financial Statements, no critical
accounting judgements or key estimates have been identified.
Considerations for the identification of critical accounting
judgements and key estimates
Management regularly reviews the considerations in relation to
critical accounting judgements and key estimates. Management
considered, throughout the year, the financial reporting impact of
risks associated with our identified principal risks which include
the effects of COVID-19, climate change and Brexit.
The Group's Audit and Risk Committee has reviewed, discussed,
and challenged management on the determination of its critical
accounting judgements and key estimates.
In response to COVID-19 a detailed assessment was performed by
management of the potential impact on each balance sheet caption
and associated accounting estimates and judgements at each
reporting date during the year. No critical accounting judgements
or key sources of estimation uncertainty have been identified from
this assessment. This review included but was not limited to the
following areas:
Goodwill and indefinite-lived intangible assets
The annual cash generating unit ("CGU") impairment review was
conducted in accordance with the Group's accounting policy. The
review demonstrated that no impairment was required in the year
ended 31 December 2020. Reasonable possible change sensitivity
analysis was performed considering changes in key assumptions
including short term revenue growth rates, discount rates and
terminal value growth rate and taking into consideration the Board
approved 2021 budget and longer-term strategic plan as foundations
and consideration of severe but plausible downside scenarios,
consistent with those set out in the Group's Viability statement.
Under all reasonable possible change scenarios headroom remained on
all CGUs, demonstrating that the impairment of goodwill and
indefinite-lived intangible assets is not a key source of
estimation uncertainty.
Finite-lived intangible assets
The carrying values of finite-lived intangible assets are
reviewed for indicators of impairment annually or when events or
changes in circumstances indicate the carrying value may be
impaired. The Group's finite-lived intangible assets are
predominantly product-related, trade names and
customer-related.
Management identified a key source of estimation uncertainty in
relation to certain finite-lived intangible assets in the year
ended 31 December 2019. As a result, the recoverable amounts of
finite-lived assets with a carrying value of $539.2 million (2019:
$635.2 million) were re-assessed in 2020 based on fair value less
costs to sell, using an income approach reflecting the current
market expectation over their remaining useful expected life. The
approach uses estimated future cash flows deemed attributable to
the asset, discounted to their present value using a post-tax
discount rate that was based on the Group's weighted average cost
of capital adjusted to reflect the territory of the assets. The
post-tax discount rate used in the fair value calculation was 9.0%
(2019: 11.0%).
For the year ended 31 December 2020 the recoverable amounts of
all finite-lived intangible assets was determined to be in excess
of net carrying value and no impairment was required. In assessing
whether the impairment of assets represents a source of estimation
uncertainty, IAS 1, Presentation of Financial Statements states
that reasonably possible outcomes within the next financial year
should be considered. Management has defined severe but plausible
scenarios in the Viability statement testing which are linked to
the Group's principal and emerging risks, including supply chain
disruption (incorporating the effect of climate change), COVID-19,
delivery of transformation initiatives, pricing and reimbursement
and foreign exchange sensitivity. Whilst these sensitivity
scenarios are based on severe downside events and circumstances,
management also considered the impact that these scenarios would
have on the impairment of assets. Management has not identified any
reasonably possible scenarios that would lead to an impairment as
at 31 December 2020. As a result, the impairment of finite-lived
intangible assets is no longer considered a key source of
estimation uncertainty.
Property, plant and equipment and right-of-use assets
The carrying values of property, plant and equipment and
right-of-use assets are reviewed for indicators of impairment
annually or when events or changes in circumstances indicate the
carrying value may be impaired.
During the year ended 31 December 2020, manufacturing
optimisation and efficiency programmes have been implemented as
part of the Transformation Initiative, resulting in the
identification of impairment triggers in relation to machinery with
a carrying value of $7.2 million. The recoverable amount was
determined to be negligible based on the net present value of
future cash flows and the assets were fully impaired.
The majority (c.90%) of the carrying value of the Group's
property, plant and equipment relates to manufacturing sites. These
sites have continued to operate within normal parameters, with
appropriate safety precautions and requirements implemented during
2020 and, therefore, no other impairment indicators were identified
in relation to property, plant and equipment.
Right-of-use assets primarily comprise leased buildings, the
majority of which relate to manufacturing sites which, as stated
above, have continued to operate within normal parameters and,
therefore, no indications of impairment have been noted.
Inventories and trade receivables
Overall demand for our product lines remained strong, however,
as noted in the Financial review, COVID-19 affected the AWC
category, most notably because of the decline in elective
surgeries. In line with our control framework and accounting
policies, management reviewed inventory ageing and obsolescence and
no incremental obsolescence provisions were required as a result of
COVID-19. Despite the challenges of the pandemic, the Group
continued to undertake physical cycle counts and, as appropriate,
wall to wall counts at manufacturing sites and third-party
distributors in line with internal policies.
The Group has monitored the cash collection position on a weekly
basis since the onset of the pandemic and noted no material
deterioration in collections or trade receivables ageing profile
that required an increase in the allowance for expected credit
losses.
Recognition of deferred tax assets
At 31 December 2019, the Group recognised a deferred tax asset
of $23.0 million following the introduction of the Swiss tax
reform, which was substantively enacted on 4 October 2019. The
'Swiss Practitioners' method was adopted to determine the best
estimate of the related deferred tax asset expected to arise on the
transition to the new tax rules in Switzerland. This gave rise to a
deferred tax asset of $23.0 million. The estimate of the deferred
tax asset was identified as a key source of estimation uncertainty
at 31 December 2019 given the anticipated future transformative
changes in the business. As at 31 December 2020, the deferred tax
asset recognised in relation to the Swiss tax reform is $7.3
million. The valuation methodology used has been reassessed to
reflect the Group's transformation changes and the resulting future
role of the Swiss-based operations in the Group. While some level
of uncertainty remains until the relevant corporate income tax
return is filed and agreed, the Group has considered the key
assumptions that impact the determination of the deferred tax asset
and any changes are not expected to have a material impact on the
deferred tax asset in the next 12 months and, therefore, this is no
longer a key source of estimation uncertainty as at 31 December
2020.
1.3 Accounting standards
New standards and interpretations applied for the first time
On 1 January 2020, the Group adopted the following new or
amended IFRSs and interpretations issued by the IASB:
- Amendments to References to Conceptual Framework in IFRS Standards
- Definition of a Business (Amendments to IFRS 3)
- Definition of Material (Amendments to IAS 1 and IAS 8)
- Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)
Their adoption has not had a material impact on the Consolidated
Financial Statements. Apart from these changes, the accounting
policies set out in ConvaTec's Annual Report and Accounts 2019 have
been applied consistently to both years presented in these
Consolidated Financial Statements.
Interest Rate Benchmark Reform
On 1 January 2020, the Group adopted the IASB issued Interest
Rate Benchmark Reform - Phase 1 Amendments to IFRS 9, IAS 39 and
IFRS 7. As a result of the ongoing interest rate benchmark reforms,
these amendments modify specific hedge accounting requirements to
allow hedge accounting to continue during the period of uncertainty
that arises before the current interest rate benchmarks are
amended.
The amendment is only applicable to the interest rate swaps held
as cash flow hedges by the Group and its impact is assessed as
being limited. Refer to Note 8 - Financial instruments for further
details. In preparation of the reform transition date the Group
anticipates being required to make amendments to the contractual
terms of the swaps and to update its hedge designation as
appropriate.
In August 2020, the IASB also issued Phase 2 Amendments which
are effective from 1 January 2021. The Group has not early adopted
as no amendments have been made to the hedged item and/or hedging
instruments in the financial year.
New standards and interpretations not yet applied
At the date of authorisation of these Consolidated Financial
Statements, other than noted above, there were no new or revised
IFRSs, amendments or interpretations in issue but not yet effective
that are potentially relevant for the Group and which have not yet
been applied.
2. Revenue and segmental information
The Board considers the Group's business to be a single segment
entity engaged in the development, manufacture and sale of medical
products and technologies. R&D, manufacturing and central support
functions are managed globally for the Group. Revenues are managed
both on a category and regional basis. This note presents the performance
and activities of the Group as a single segment.
Pages 5 to 7 of the Chief Executive's Review provide further detail
of category revenue.
The Group's CEO, who is the Group's Chief Operating Decision
Maker, evaluates the Group's global product portfolios on a revenue
basis and evaluates profitability and associated investment on an
enterprise-wide basis due to shared geographic infrastructures and
support functions between the categories. Financial information
relating to revenues provided to the CEO for decision-making
purposes is made on both a category and regional basis; however
profitability measures are presented and resources allocated on a
Group-wide basis.
Revenue by category
The Group generates revenue across four major product
categories.
The following table sets out the Group's revenue for the year
ended 31 December by category:
2020 2019
$m $m
------------------------------ -------- --------
Advanced Wound Care 546.8 569.9
Ostomy Care 525.9 525.0
Continence and Critical Care 498.6 456.7
Infusion Care 323.0 275.6
------------------------------ -------- --------
Total 1,894.3 1,827.2
------------------------------ -------- --------
Geographic information
Geographic markets
The following table sets out the Group's revenue in each
regional geographic market in which customers are located:
2020 2019
$m $m
---------- -------- --------
EMEA 731.4 724.1
Americas 1,015.4 959.8
APAC 147.5 143.3
---------- -------- --------
1,894.3 1,827.2
---------- -------- --------
3. Non-operating income/(expense), net
Non-operating income/(expense), net was as follows:
2020 2019
Notes $m $m
----------------------------------------------- ------ ------- ------
Foreign exchange losses(a) (26.3) (5.2)
Gain on foreign exchange forward contracts(a) 8 21.7 0.9
Gain on foreign exchange cash flow hedges 8 0.2 -
Gain on divestiture(b) 16.5 -
Other expense - (0.1)
----------------------------------------------- ------ ------- ------
Non-operating income/(expense), net 12.1 (4.4)
----------------------------------------------- ------ ------- ------
(a) The foreign exchange losses in 2020 primarily relate to the
foreign exchange impact on intercompany transactions, including
loans transacted in non-functional currencies and are offset by
foreign exchange forward contracts in accordance with the Group's
foreign exchange risk management policy.
(b) Refer to Note 6 - Divestiture for details of the gain on
divestiture of the US Skincare product line.
4. Income taxes
The note below sets out the current and deferred tax charges, which
together comprise the total tax expense in the Consolidated Income
Statement.
4.1 Taxation
The Group's income tax expense is the sum of the total current
and deferred tax expense.
2020 2019
$m $m
--------------------------------------------------- ------- -------
Current tax
UK corporation tax 0.4 -
Overseas taxation 54.9 38.4
Adjustment to prior years (0.6) (1.5)
--------------------------------------------------- ------- -------
Total current tax expense 54.7 36.9
--------------------------------------------------- ------- -------
Deferred tax
Origination and reversal of temporary differences (13.8) (26.4)
Change in tax rates 2.5 (4.0)
Adjustment to prior years 1.2 2.6
Change in basis of estimate for Swiss deferred
tax asset 17.6 -
--------------------------------------------------- ------- -------
Total deferred tax expense/(benefit) 7.5 (27.8)
--------------------------------------------------- ------- -------
Income tax expense 62.2 9.1
--------------------------------------------------- ------- -------
In 2020, the change in basis of estimate for Swiss deferred tax
asset of $17.6 million relates to the Swiss tax reform. The change
in tax rates mainly relates to the revaluation of the net deferred
tax liability in the UK from 17.0% to 19.0%, which was
substantively enacted in March 2020, following the reversal of the
change in corporation tax rate originally due to come into effect
from 1 April 2020.
In 2019, the origination and reversal of temporary differences
includes deferred tax benefit of $23.0 million in relation to the
enactment of the Swiss tax reform on 4 October 2019, which was
effective from 31 December 2019. The change in tax rate mainly
relates to changes in the UK and Swiss tax rates that were
substantively enacted as at 31 December 2019.
4.2 Reconciliation of effective tax rate
The effective tax rate for the year ended 31 December 2020 was
an expense of 35.6%, as compared with an expense of 48.1% for the
year ended 31 December 2019.
Tax reconciliation to UK statutory rate
The table below reconciles the UK statutory tax expense to the
Group's total income tax expense:
2020 2019
$m $m
--------------------------------------- ------ ------ ------- ------
Profit before income taxes 174.7 18.9
Profit before income taxes multiplied
by rate of corporation tax in the
UK of 19.0% (2019: 19.0%) 33.2 3.6
Difference between UK and overseas
tax rates(a) 4.8 (13.6)
Non-deductible/non-taxable items 3.4 2.6
Tax impact of impairment of certain
intangible assets - 24.6
Movement in unrecognised losses and
other assets 1.8 17.7
Movement on provision for uncertain
tax positions (0.5) (5.3)
Deferred tax impact of the Swiss tax
reform 17.6 (23.0)
Other(b) 1.9 2.5
--------------------------------------- ------ ------ ------- ------
Income tax expense reported in the
Consolidated
Income Statement at the effective
tax rate 62.2 35.6% 9.1 48.1%
--------------------------------------- ------ ------ ------- ------
(a) This includes changes in tax rates based on substantively
enacted legislation across various tax jurisdictions as of 31
December.
(b) Includes tax on amortisation of indefinite-lived intangibles
and taxes on unremitted earnings.
The Group has worldwide operations and therefore is subject to
several factors that may affect future tax charges, principally the
levels and mix of profitability in different tax jurisdictions,
transfer pricing regulations, tax rates imposed and tax regime
reforms.
The calculation of the Group's tax expense therefore involves a
degree of estimation in respect of certain items for which the tax
treatment cannot be finally determined until resolution has been
reached with the relevant tax authority. In 2020, the Group
provisions for uncertain tax positions relate mainly to transfer
pricing positions and withholding tax liabilities.
The Group's effective tax rate in 2020 has mainly been
influenced by the deferred tax expense of $17.6 million arising
from the change in estimate of the deferred tax asset arising upon
the Swiss tax reform (refer to Note 4.1). In 2019, the Group's
effective tax rate was mainly driven by a deferred tax benefit of
$23.0 million arising from the Swiss tax reform, offset by $17.7
million relating to tax losses where no deferred tax asset has been
recognised and $24.6 million relating to the impairment of certain
intangible assets in the Group where no tax relief for the costs
has been taken.
On 3 March 2021 the UK government announced an intention to
increase the UK corporation tax rate to 25% with effect from 1
April 2023. If enacted this will impact the value of our UK
deferred tax balances, and the tax charged on UK profits generated
in 2023 and subsequently. We have yet to determine the impact of
these proposed changes.
5. Dividends
Dividends paid and proposed were as follows:
Settled
in Settled
Total cash via scrip
----------- ----------- ------------
No of scrip
pence cents shares
per share per share $m $m $m issued
----------------------- ----------- ----------- ------ -------- ----------- ------------
Final dividend 2018 3.097 3.983 79.1 59.1 20.0 11,198,285
Interim dividend 2019 1.404 1.717 33.9 20.8 13.1 6,159,842
----------------------- ----------- ----------- ------ -------- ----------- ------------
Paid in 2019 4.501 5.700 113.0 79.9 33.1 17,358,127
----------------------- ----------- ----------- ------ -------- ----------- ------------
Final dividend 2019 3.095 3.983 75.8 38.0 37.8 16,991,621
Interim dividend 2020 1.306 1.717 34.3 24.9 9.4 3,841,666
----------------------- ----------- ----------- ------ -------- ----------- ------------
Paid in 2020 4.401 5.700 110.1 62.9 47.2 20,833,287
----------------------- ----------- ----------- ------ -------- ----------- ------------
Final dividend 2020
proposed 2.845 3.983 79.9
----------------------- ----------- ----------- ------ -------- ----------- ------------
The Company operates a scrip dividend scheme allowing
shareholders to elect to receive their dividends in the form of new
fully paid ordinary shares. For any particular dividend, the
Directors may decide whether or not to make the scrip offer
available.
The final dividend proposed for 2020, to be distributed on 13
May 2021 to shareholders registered at the close of business on 6
April 2021, is based upon the issued and fully paid share capital
as at 31 December 2020 and is subject to shareholder approval at
our Annual General Meeting on 7 May 2021. The dividend will be
declared in US dollars and will be paid in Sterling at the chosen
exchange rate of $1.400/GBP1.00 determined on 4 March 2021. A scrip
dividend alternative will be offered allowing shareholders to elect
by 22 April 2021 to receive their dividend in the form of new
ordinary shares.
The interim and final dividends for 2020 give a total dividend
for the year of 5.700 cents per share (2019: 5.700 cents per
share).
6. Divestiture
During the year, the Group completed the divestiture of the trade
and assets of the US Skincare product line, a limited product range
within Advanced Wound Care ("US Skincare"). This note provides details
of the transaction and the accounting for the divestiture that has
been recorded.
On 25 September 2020, the Group completed the divestiture of the
trade and assets of US Skincare, including the Aloe Vesta and
SensiCare brands, for net consideration of $29.6 million. The
divestiture is part of the execution of the Group's strategic
transformation and consistent with our five pillars (FISBE, refer
to page 7 ) to focus on key markets and categories and provide
appropriate product portfolios to serve those markets.
Details of the divestiture
$m
---------------------------------------------------------- ------
Consideration received:
Net cash received 29.8
Adjustment to consideration included in other payables (0.2)
---------------------------------------------------------- ------
Total net consideration 29.6
---------------------------------------------------------- ------
Net assets sold:
Intangible assets (net book value) (6.5)
Inventories (5.1)
---------------------------------------------------------- ------
Gain on divestiture before transactions costs and income
tax 18.0
Transaction costs (1.5)
---------------------------------------------------------- ------
Gain on divestiture before income tax 16.5
Income tax expense on gain -
---------------------------------------------------------- ------
Gain on divestiture after income tax 16.5
---------------------------------------------------------- ------
The gain on divestiture is presented within Non-operating
income/(expense), net in the Consolidated Income Statement.
7. Borrowings
The Group's sources of borrowing for funding and liquidity purposes
derive from bank term loans together with a committed revolving
credit facility. In October 2019, the Group voluntarily prepaid
and discharged all outstanding contractual obligations under its
previous credit agreement and refinanced under a new credit agreement
that matures in October 2024.
The Group's consolidated borrowings as at 31 December were as
follows:
2020 2019
-------- --------
Year Face Face
of value value
Currency maturity $m $m
------------------------------------- --------------- ---------- -------- --------
Revolving Credit Facilities Multicurrency 2024 - -
Term Loan Facility A(a) USD/Euro 2024 560.1 600.9
Term Loan Facility B(b) USD/Euro 2024 908.2 901.4
------------------------------------- --------------- ---------- -------- --------
Total interest-bearing borrowings 1,468.3 1,502.3
Financing fees (11.9) (16.2)
------------------------------------------------------------------ -------- --------
Total carrying value of borrowings
from credit facilities 1,456.4 1,486.1
Less: current portion of borrowings 86.6 40.8
------------------------------------------------------------------ -------- --------
Total non-current borrowings 1,369.8 1,445.3
------------------------------------------------------------------ -------- --------
(a) Included within Term Loan Facility A is EUR140.4 million
($171.6 million), and EUR161.3 million ($180.9 million) at 31
December 2020 and 2019 respectively, denominated in Euros. This
represents 31% (2019: 30%) denominated in Euros and 69% (2019: 70%)
denominated in US dollars.
(b) Included within Term Loan Facility B is EUR227.8 million
($278.2 million), and EUR242.0 million ($271.4 million) at 31
December 2020 and 2019 respectively, denominated in Euros. This
represents 31% (2019: 30%) denominated in Euros and 69% (2019: 70%)
denominated in US dollars.
The Group was in compliance with all financial and non-financial
covenants in the credit agreement at 31 December 2020 and 2019,
with significant available headroom on the financial covenants
(c.$840 million debt headroom on net debt to adjusted EBITDA
ratio).
Borrowings not measured at fair value
At 31 December 2020, the estimated fair value of the Group's
borrowings, excluding leases obligations, approximated $1,473.7
million (2019: $1,513.2 million). The fair value of the Group's
borrowings is based on discounted cash flows using a current
borrowing rate and are categorised as a Level 2 measurement in the
fair value hierarchy under IFRS 13, Fair Value Measurements.
8. Financial instruments
A derivative financial instrument is a contract that derives its
value from the performance of an underlying variable, such as foreign
exchange rates or interest rates. The Group uses derivative financial
instruments to manage foreign exchange and interest rate risk arising
from its operations and financing. Derivative financial instruments
used by the Group are foreign exchange forwards and swaps and interest
rate swaps.
The Group utilises interest rate swap agreements, designated as
cash flow hedges, to manage its exposure to variability in expected
future cash outflows attributable to the changes in interest rates
on the Group's borrowing facilities.
In the final quarter of 2020 the Group designated certain foreign
currency pairings of forecast third-party transactions as cash flow
hedges in accordance with its risk management policy. Details of
the financial instruments held at year end and their respective
fair values are provided within the note below.
Financial instruments are classified as Level 2 in the fair
value hierarchy in accordance with IFRS 13, Fair Value
Measurements, based upon the degree to which the fair value
movements are observable. Level 2 fair value measurements are
defined as those derived from inputs other than quoted prices that
are observable for the asset or liability, either directly (prices
from third parties) or indirectly (derived from third-party
prices).
The Group holds interest rate swap agreements to fix a
proportion of variable interest on US dollar denominated debt, in
accordance with the Group's risk management policy. The interest
rate swaps are designated as hedging instruments in a cash flow
hedging relationship.
In accordance with Group policy, the Group uses forward foreign
exchange contracts, designated as cash flow hedges, to hedge
certain forecast third-party foreign currency transactions for up
to one year. When a commitment is entered into a layered approach
is taken when hedging the currency exposure, ensuring that no more
than 100% of the transaction exposure is covered. The principal
currencies hedged by forward foreign exchange contracts are US
dollars, Euro and Danish Krone.
The Group further utilises foreign exchange contracts and swaps
classified as fair value through profit or loss ("FVTPL") to manage
short-term foreign exchange exposure.
Cash flow hedges
The fair values are based on market values of equivalent
instruments at 31 December. The following table presents the
Group's outstanding cash flow hedges at 31 December:
2020 2019
---------------------------- -------------------------
Fair value(a)
Notional assets Notional Fair value(a)
amount / (liabilities) amount assets
----------- ----------
Effective Maturity
date date $m $m $m $m
---------------------------------- ----------- ---------- --------- ----------------- --------- --------------
3 Month LIBOR Float to 24 Jan 24 Jan
Fixed Interest Rate Swap 2020 2023 275.0 (7.7) 275.0 1.0
Foreign currency forward 15 Nov
exchange contracts 2021 98.3 1.7 - -
----------------------------------------------- --------- --------- ----------------- --------- --------------
373.3 (6.0) 275.0 1.0
--------------------------------------------------------- --------- ----------------- --------- --------------
Recognised in other comprehensive
income:
Effective portion of
changes in fair value
of cash flow hedges (6.7) (9.5)
Costs of hedging (0.1) -
Changes in fair value
of cash flow hedges reclassified
to the Consolidated Income
Statement (0.2) (0.8)
----------------------------------------------------------- --------- ----------------- --------- --------------
Total (7.0) (10.3)
----------------------------------------------------------- --------- ----------------- --------- --------------
(a) The fair values of the interest rate swaps are shown in
derivative financial liabilities in the Consolidated Statement of
Financial Position (2019: derivative financial assets). The fair
values of the foreign exchange forward contracts are included
within trade and other receivables. Finance expenses in the
Consolidated Income Statement includes the negligible ineffective
impact of the interest rate swaps.
The reduction in fair value of the interest rate swaps follows a
reduction in US interest rates in response to COVID-19.
During the year ended 31 December 2020, the Group reclassified a
$0.2 million gain (2019: $nil) on foreign exchange cash flow hedges
that has been recognised in non-operating income/expenses, net, in
the Consolidated Income Statement.
Foreign exchange forward contracts
The following table presents the Group's outstanding foreign
exchange forward contracts at 31 December:
2020 2019
------------------ ------------------
Notional Fair Notional Fair
amount value amount value
Financial Statement
Term line item $m $m $m $m
------------------ ------- --------------------- --------- ------- --------- -------
Foreign exchange 28 Trade and other
contracts days receivables 512.5 6.4 130.7 1.0
Foreign exchange 28 Trade and other
contracts days payables 355.3 (7.7) 136.0 (2.2)
------------------ ------- --------------------- --------- ------- --------- -------
867.8 (1.3) 266.7 (1.2)
------------------------------------------------ --------- ------- --------- -------
During the year ended 31 December 2020, the Group realised a net
gain of $21.7 million (2019: $0.9 million gain) on foreign exchange
forward contracts designated as FVTPL in non-operating
income/expenses, net, in the Consolidated Income Statement.
9. Commitments and contingent liabilities
Capital commitments
At 31 December 2020, the Group had non-cancellable commitments
for the purchase of property, plant and equipment, capitalised
software and development of $29.6 million (2019: $12.4
million).
Contingent liabilities
Liability claims
On 31 May 2019, ConvaTec Inc. filed a lawsuit against Scapa
Group plc (trading as Scapa Tapes North America LLC) and Webtec
Converting LLC seeking a declaration that the company was within
its rights to terminate a contract between the parties. On 10 July
2019, the defendants filed a motion seeking dismissal of the
declaratory judgement action, and Scapa Tapes North America LLC
filed a separate complaint seeking damages of $83.8 million against
ConvaTec Inc. in relation to the contract cancellation. ConvaTec
Inc., in turn, has asserted a claim for damages against Scapa Tapes
North America LLC and Scapa Group plc. All claims are being
litigated before the Connecticut state court in the United States,
discovery in the case is progressing, and the trial is presently
scheduled for July 2022. The Group's Board, in conjunction with its
legal advisors, do not believe the claim has merit and no provision
is recognised as at 31 December 2020.
10. Subsequent events
The Group has evaluated subsequent events through 4 March 2021,
the date the Consolidated Financial Statements were approved by the
Board of Directors.
On 3 March 2021 the UK government announced an intention to
increase the UK corporation tax rate to 25% with effect from 1
April 2023. If enacted this will impact the value of our UK
deferred tax balances, and the tax charged on UK profits generated
in 2023 and subsequently. We have yet to determine the impact of
these proposed changes.
Details of the proposed final dividend are disclosed in Note 5 -
Dividends.
11. Responsibility statement of the directors on the annual
report
The Responsibility Statement below has been prepared in
connection with the Company's full Annual Report for the year
ending 31st December 2020. Certain parts thereof are not included
within this announcement.
We confirm to the best of our knowledge:
-- the Financial Statements, prepared in accordance with IFRS as
adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit and loss of the company
and the undertakings included in the consolidation taken as a
whole;
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties they face; and
-- the Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary to assess the Company's performance, business model and
strategy.
This Responsibility Statement was approved by the Board of
Directors on 4 March 2021 and is signed on its behalf by:
Karim Bitar Frank Schulkes
Chief Executive Officer Chief Financial Officer
4 March 2021
Non-IFRS financial information
Non-IFRS financial information or alternative performance
measures ("APMs") are used as supplemental measures in monitoring
the performance of our business. These measures include adjusted
cost of sales, adjusted gross margin, adjusted selling and
distribution costs, adjusted general and administrative expenses,
adjusted research and development costs, adjusted other operating
expenses, adjusted operating profit ("adjusted EBIT"), adjusted
EBITDA, adjusted profit before tax, adjusted finance costs,
adjusted non-operating expense, net, adjusted net profit, adjusted
earnings per share, adjusted working capital, adjusted cash
conversion, free cash flow and net debt. The adjustments applied to
IFRS measures reflect the effect of certain cash and non-cash items
that the Board believes are not related to the underlying
performance of the Group. Reconciliations for these adjusted
measures determined under IFRS are shown on pages 39 to 43. The
definitions of adjusted measures are as calculated within the
reconciliation tables.
In management's and the Board's view, the APMs reflect the
underlying performance of the business and provide a meaningful
supplement to the reported numbers to explain how the business is
managed and measured on a day-to-day basis. Adjusted results
exclude certain items because, if included, these items could
distort the understanding of our performance for the year and the
comparability between periods. Adjusted measures also form the
basis for performance measures for remuneration, e.g. adjusted
EBIT. The Group has made no adjustments to the Group's reported
results related to COVID-19.
In determining whether an item should be presented as an
allowable adjustment to IFRS measures, the Group considers items
which are significant either because of their size or their nature,
and which are non-recurring. For an item to be considered as an
allowable adjustment to IFRS measures, it must initially meet at
least one of the following criteria:
- It is a significant item, which may cross more than one accounting period.
- It has been directly incurred as a result of either an
acquisition, divestiture, or arises from termination benefits
without condition of continuing employment related to a major
business change or restructuring programme.
- It is unusual in nature, e.g. outside the normal course of business.
If an item meets at least one of the criteria, the Board,
through the Audit and Risk Committee, then exercises judgement as
to whether the item should be classified as an allowable adjustment
to IFRS performance measures.
Key adjustments for adjusted EBIT (also referred to as adjusted
operating profit) are termination benefits arising exclusively from
major change programmes, together with CEO-related compensation not
subject to continuing employment. Further adjustments, which
include amortisation of pre-2018 acquisition intangibles and
impairments to intangible and fixed assets are also made in
arriving at adjusted EBIT. The tax effect of the adjustments is
reflected in the adjusted tax expense to remove their effect from
adjusted net profit and adjusted earnings per share.
Adjusted EBITDA, which is used to calculate our metric of
adjusted cash conversion and the effective use of our working
capital, is calculated by adding back CEO-related compensation not
subject to continuing employment, share-based payment expenses,
together with termination benefits and related costs to our
reported EBITDA.
Adjusted items, excluding the impact of tax, for the years ended
31 December 2020 and 2019 include the following credits or costs
that are reflected in the reported measures:
- Amortisation of intangible assets relating to acquisitions pre
1 January 2018 (ongoing) ($125.3 million and $140.2 million
respectively).
- Impairment of assets as a result of transformation or an
unusual circumstance (loss of $1.7 million and $105.2 million
respectively).
- Divestiture activities (gain of $16.5 million for the year ended 31 December 2020).
- Termination benefits in relation to major change programmes
($12.2 million and $5.8 million respectively).
- CEO buy-out costs reflecting non-performance-related
compensation for the loss of incentive awards from previous
employment, not subject to continuing employment ($6.2 million for
the year ended 31 December 2019).
These items are excluded from the adjusted measures to reflect
performance in a consistent manner and are in line with how the
business is managed and measured on a day-to-day basis. They are
typically gains or losses/costs arising from events that are not
considered part of the core operations of the business or are
considered to be significant in nature. They may cross several
accounting periods. We also adjust for the tax effect of these
items.
Acquisition-related amortisation of intangible assets
The Board, through the Audit and Risk Committee, continuously
reviews the Group's APM policy to ensure that it remains
appropriate and represents the way in which the performance of the
Group is managed. Since 2018, the Group has made two small number
acquisitions, each for a consideration of less than $15 million,
for which the amortisation charge on acquisition intangibles was
immaterial. Given the Group's strategy to be more active and to
pursue larger acquisitions which strengthen our position in key
geographies and/or business categories or which provide access to
new technology, we believe that a refinement and clarification of
the policy is required under which the Group will adjust for
amortisation of intangible assets in relation to future
acquisitions together with associated acquisition-related expenses.
This refinement better reflects the underlying performance of the
business and aids year-on-year comparability.
Impairment of assets
Impairments, write-offs and gains and losses from the disposal
of fixed assets are adjusted when management consider the
circumstances surrounding the event are not reflective of our core
business or when the transactions relate to acquisition-related
intangible assets.
Divestiture activities
These include significant assets which are disposed of or
divested as a result of a sale, major business change or
restructuring programme, including gains and losses resulting from
classification of assets as held for sale.
Termination benefits and related costs
Termination benefits and related costs arise from Group-wide
initiatives to reduce the ongoing cost base and improve efficiency
in the business. The Board considers each project individually to
determine whether its size and nature warrants separate disclosure.
Qualifying items are limited to termination benefits (including
retention) without condition of continuing employment in respect of
major Group-wide change programmes. Where discrete qualifying items
are identified these costs are highlighted and excluded from the
calculation of our adjusted measures. Restructuring-related costs
not related to termination benefits are reported in the normal
course of business. No termination benefits or related costs have
arisen related to COVID-19.
CEO buy-out costs
The Group incurred costs following the commencement of
employment of Karim Bitar as CEO of ConvaTec Group Plc on 30
September 2019 to compensate for the loss of incentive awards from
his previous employment. These costs relate to past performance in
a previous employment, were not contingent on continuing employment
with ConvaTec Group Plc, have no future performance requirements
and did not represent the underlying cost base or performance of
the Group in 2019. Awards granted include both cash and
equity-based payment components which vested immediately.
Other discrete tax items
Other discrete tax items relate to the recognition in 2019 of
the best estimate of the deferred tax asset related to the Swiss
tax reform which was substantively enacted on 4 October 2019 and
was effective on 31 December 2019, and the subsequent reassessment
of the deferred tax asset as a result of a change in the basis of
estimate in 2020. The deferred tax asset arose due to
grandfathering provisions that the Swiss tax reform had introduced
with effect from 31 December 2019 to alleviate the higher Swiss tax
rates that apply from 1 January 2020. The deferred tax associated
with the Swiss tax reform is adjusted as it is a significant tax
item which does not reflect the underlying performance of the
business.
Reconciliation of reported earnings to adjusted earnings for the
years ended 31 December 2020 and 2019
Finance Non-operating
Year ended 31 December Gross Operating Operating expense, expense, Net
2020 Revenue margin costs profit net net PBT Taxation profit
$m $m $m $m $m $m $m $m $m
------------------------- ------- ------- --------- --------- --------- ------------- ------ -------- -------
Reported 1,894.3 1,018.8 (807.8) 211.0 (48.4) 12.1 174.7 (62.2) 112.5
Amortisation of pre-2018
acquisition intangibles - 106.7 18.6 125.3 - - 125.3 (10.2) 115.1
Divestiture activities - - - - - (16.5) (16.5) - (16.5)
Impairment of assets - - 1.7 1.7 - - 1.7 - 1.7
Termination benefits
and other related
costs - 1.3 10.9 12.2 - - 12.2 (2.1) 10.1
------------------------- ------- ------- --------- --------- --------- ------------- ------ -------- -------
Total adjustments
and their tax effect - 108.0 31.2 139.2 - (16.5) 122.7 (12.3) 110.4
Other discrete tax
items - - - - - - - 17.6 17.6
------------------------- ------- ------- --------- --------- --------- ------------- ------ -------- -------
Adjusted 1,894.3 1,126.8 (776.6) 350.2 (48.4) (4.4) 297.4 (56.9) 240.5
------------------------- ------- ------- --------- --------- --------- ------------- ------ -------- -------
Software and R&D
amortisation 9.4
Post-2017 acquisition
amortisation 2.1
Depreciation 60.9
Impairment/write-off
of assets 10.0
Share-based payments 12.4
------------------------- ------- ------- --------- ---------
Adjusted EBITDA 445.0
------------------------- ------- ------- --------- ---------
Termination benefits and other related costs relate to the
Transformation Initiative and amounted to $12.2 million, pre-tax,
in the year ended 31 December 2020. The Transformation Initiative
is a global multi-year transformation programme which commenced in
2018 and will simplify the way in which the business operates. We
expect to incur c.$10-15 million of severance and associated
retention costs during 2021. No termination benefits or related
costs recognised by the Group are related to COVID-19.
Divestiture activities relate to the gain on the divestiture of
the trade and assets of the US Skincare product line, a limited
product range within Advanced Wound Care. Further details of the
transaction and the calculation for the gain on divestiture are
provided in Note 6 - Divestiture.
Other discrete tax items arose following a reassessment of the
estimate of the deferred tax asset recognised in the prior year
related to the Swiss tax reform. The revised estimate is based on
the Discounted Cash Flow method, which reflects the Group's
transformation changes and the anticipated role of the Swiss based
operations in the Group.
Finance Non-operating
Year ended 31 December Gross Operating Operating expense, expense, Net
2019 Revenue profit costs profit net net PBT Taxation profit
$m $m $m $m $m $m $m $m $m
------------------------- ------- ------- --------- --------- --------- ------------- ----- -------- -------
Reported 1,827.2 955.6 (858.7) 96.9 (73.6) (4.4) 18.9 (9.1) 9.8
Amortisation of pre-2018
acquisition intangibles - 122.6 17.6 140.2 - - 140.2 (10.1) 130.1
Impairment of assets - - 105.2 105.2 - - 105.2 - 105.2
Termination benefits
and other related
costs - - 5.8 5.8 - - 5.8 (0.9) 4.9
CEO buy-out costs - - 6.2 6.2 - - 6.2 (1.2) 5.0
------------------------- ------- ------- --------- --------- --------- ------------- ----- -------- -------
Total adjustments
and their tax effect - 122.6 134.8 257.4 - - 257.4 (12.2) 245.2
Other discrete tax
items - - - - - - - (23.0) (23.0)
------------------------- ------- ------- --------- --------- --------- ------------- ----- -------- -------
Adjusted 1,827.2 1,078.2 (723.9) 354.3 (73.6) (4.4) 276.3 (44.3) 232.0
------------------------- ------- ------- --------- --------- --------- ------------- ----- -------- -------
Software and R&D
amortisation 10.4
Post-2017 acquisition
amortisation 1.3
Depreciation 57.9
Impairment/write-off
of assets 9.1
Share-based payments 10.1
------------------------- ------- ------- --------- ---------
Adjusted EBITDA 443.1
------------------------------------------------------ ---------
Impairment of assets of $105.2 million is predominantly related
to a review of the product portfolio which had been undertaken as
part of the Transformation Initiative which resulted in the
identification of impairment triggers in 2019 in relation to
certain of the Group's intangible assets.
Termination benefits and other related costs were $5.8 million,
pre-tax, in the year ended 31 December 2019, comprising $1.5
million for programmes commenced in 2018 and completed in 2019, and
$4.3 million in relation to the Transformation Initiative.
CEO buy-out costs were $6.2 million, pre-tax, in the year ended
31 December 2019 and related to cash paid of $2.1 million and
equity-based incentive awards of $4.1 million granted to the CEO
upon commencement of employment with ConvaTec Group Plc on 30
September 2019. These awards were not subject to continuing
employment or performance conditions.
Other discrete tax items were a result of the Swiss tax reform
which was substantively enacted on 4 October 2019 and was effective
on 31 December 2019. As a result, ConvaTec International Services
GmbH, was subject to a significant change in effective tax rate.
The Swiss effective rate, which will increase over a ten-year
period to 1 January 2030, is alleviated by grandfathering
provisions which resulted in the estimation and recognition of a
deferred tax asset. The value of the 2019 deferred tax asset of
$23.0 million was estimated using the Swiss Practitioners method as
permitted under Swiss law.
Reconciliation of reported and adjusted operating costs for the
years ended 31 December 2020 and 31 December 2019
2020 2019
----------------------------------- ---------------------------------------------
S&D(a) G&A(b) R&D(c) Operating S&D(a) G&A(b) R&D(c) Other(d) Operating
costs costs
$m $m $m $m $m $m $m $m $m
---------------------- ------- ------- ------ --------- ------- ------- ------ -------- ---------
Reported(e) (463.3) (262.1) (82.4) (807.8) (458.9) (240.5) (53.8) (105.5) (858.7)
Amortisation of
pre-2018 acquisition
intangibles - 18.6 - 18.6 - 17.6 - - 17.6
Impairment of
assets - 1.7 - 1.7 - - - 105.2 105.2
Termination benefits
and other related
costs 0.7 9.0 1.2 10.9 1.7 4.1 - - 5.8
CEO buy-out costs - - - - - 6.2 - - 6.2
---------------------- ------- ------- ------ --------- ------- ------- ------ -------- ---------
Adjusted (462.6) (232.8) (81.2) (776.6) (457.2) (212.6) (53.8) (0.3) (723.9)
---------------------- ------- ------- ------ --------- ------- ------- ------ -------- ---------
(a) "S&D" represents selling and distribution expenses.
(b) "G&A" represents general and administrative expenses.
(c) "R&D" represents research and development expenses.
(d) "Other" represents other operating expenses.
(e) Following a review of cost allocations, general and
administrative expenses of $30.5 million (2019: $25.9 million),
principally relating to employee costs and insurance, have been
reclassified to selling and distribution expenses to better reflect
the nature of the costs. The comparatives have been restated to
reflect the revised classification.
Reconciliation of basic and diluted reported earnings per share
to adjusted earnings per share for the years ended 31 December 2020
and 31 December 2019
Reported Adjusted Reported Adjusted
2020 2020 2019 2019
$m $m $m $m
---------------------------------- --------- ------------- --------- -------------
Net profit attributable to
the shareholders of the Group 112.5 240.5 9.8 232.0
---------------------------------- --------- ------------- --------- -------------
Number Number
---------------------------------- --------- ------------- --------- -------------
Basic weighted average ordinary
shares in issue 1,991,596,105 1,971,014,011
Diluted weighted average ordinary
shares in issue 2,006,590,463 1,976,156,374
---------------------------------- --------- ------------- --------- -------------
cents per cents per cents per cents per
share share share share
---------------------------------- --------- ------------- --------- -------------
Basic earnings per share 5.7 12.1 0.5 11.8
Diluted earnings per share 5.6 12.0 0.5 11.7
---------------------------------- --------- ------------- --------- -------------
Cash conversion for the years ended 31 December 2020 and 31
December 2019
2020 2019
$m $m
--------------------------------------------------------- ------ ------
Reported Operating profit/EBIT 211.0 96.9
Depreciation of property, plant and equipment 38.5 35.5
Depreciation of right-of-use assets 22.4 22.4
Amortisation 136.8 151.9
Impairment/write-off of intangible assets and property,
plant and equipment 11.7 114.3
--------------------------------------------------------- ------ ------
Reported EBITDA 420.4 421.0
Non-cash items in EBITDA
Share-based payment expense 12.4 14.2
--------------------------------------------------------- ------ ------
12.4 14.2
Working capital movement 47.8 51.6
Gain on foreign exchange derivatives 21.9 -
Capital expenditure (86.2) (61.4)
--------------------------------------------------------- ------ ------
Reported net cash for cash conversion 416.3 425.4
Less: tax paid (54.5) (37.0)
--------------------------------------------------------- ------ ------
Reported free cash flow 361.8 388.4
--------------------------------------------------------- ------ ------
Reconciliation of Adjusted EBITDA, Adjusted Non-Cash Items, Adjusted
Working Capital and Adjusted Net Cash (for Adjusted Cash Conversion
measurement)
2020 2019
$m $m
--------------------------------------------------------- ------ ------
Reported EBITDA 420.4 421.0
Share-based payment expense 12.4 14.2
CEO buy-out costs - 2.1
Termination benefits and other related costs 12.2 5.8
--------------------------------------------------------- ------ ------
Total adjustments (a) 24.6 22.1
--------------------------------------------------------- ------ ------
Adjusted EBITDA 445.0 443.1
--------------------------------------------------------- ------ ------
Reported non-cash items 12.4 14.2
Share-based payment expense (12.4) (14.2)
--------------------------------------------------------- ------ ------
Total adjustments (b) (12.4) (14.2)
--------------------------------------------------------- ------ ------
Adjusted non-cash items - -
--------------------------------------------------------- ------ ------
Reported working capital movement 47.8 51.6
(Increase)/decrease in severance provision (4.9) 0.3
Decrease in accruals for share-based payment associated
costs - 0.1
Decrease in liability for pre-IPO MIP - 0.1
--------------------------------------------------------- ------ ------
Total adjustments (c) (4.9) 0.5
--------------------------------------------------------- ------ ------
Adjusted working capital movement 42.9 52.1
--------------------------------------------------------- ------ ------
Reported net cash for cash conversion 416.3 425.4
Non-operating gain on foreign exchange forward contracts (21.7) -
Total adjustments above (a), (b), (c) 7.3 8.4
--------------------------------------------------------- ------ ------
Adjusted net cash for cash conversion 401.9 433.8
Less: tax paid (54.5) (37.0)
--------------------------------------------------------- ------ ------
Adjusted free cash flow 347.4 396.8
--------------------------------------------------------- ------ ------
Reported cash conversion 99.0% 101.0%
Adjusted cash conversion 90.3% 97.9%
--------------------------------------------------------- ------ ------
Net debt
Net debt is calculated as the carrying value of current and
non-current borrowings on the face of the Consolidated Statement of
Financial Position, net of cash and cash equivalents and excluding
lease liabilities.
Reported Reported
2020 2019
$m $m
--------------------------------------- -------- --------
Borrowings 1,456.4 1,486.1
Lease liabilities 92.1 88.5
--------------------------------------- -------- --------
Total interest-bearing borrowings 1,548.5 1,574.6
Cash and cash equivalents (565.4) (385.8)
--------------------------------------- -------- --------
Net debt (including lease liabilities) 983.1 1,188.8
--------------------------------------- -------- --------
Net debt 891.0 1,100.3
--------------------------------------- -------- --------
Net debt/adjusted EBITDA 2.0 2.5
--------------------------------------- -------- --------
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March 05, 2021 02:00 ET (07:00 GMT)
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