ConvaTec confident despite margin pressures

Medical products company ConvaTec reported “strong” revenue growth ahead of expectations for its first half on Friday, with organic growth at 7.4%, or 7.0% on a constant currency basis to $1.01bn, with growth coming in at 11.0% on a reported basis.

The FTSE 250 firm said performance for the six months ended 30 June was driven by “particularly strong” growth in its advanced wound care division, against the weak Covid-19-depressed comparative, coupled with “good growth” in infusion care, and “solid performances” in continence and critical care, and ostomy care.

It said it made continued progress with its transformation strategy, having strengthened its continence care unit with the acquisition of Cure Medical, launched an “innovative and differentiated” extended-wear infusion set, and established marketing and quality “centres of excellence” in the period.

Reported operating profit was $136m, 19.9% higher year-on-year, with adjusted EBIT rising 17% on a constant-currency basis to $204m, which the board put down to the strong revenue growth, as well as a gross margin improvement and “beneficial” operational expenditure phasing.

ConvaTec’s reported free cash flow totalled $106m, down from $145m year-on-year, with adjusted free cash flow coming in at $114m, compared to $148m in the first half of 2020.

The company said its adjusted cash conversion of 56.6% for the period, compared to 72.9% a year earlier, reflected working capital movements during the first half, and increased capital investment.

It said it had a “strong” balance sheet, with a net debt-to-adjusted EBITDA leverage of 2x at period end, compared to 2.2x at the interim in 2020, and 2x at the end of December.

The board declared an interim dividend of 1.717 cents, in line with the prior year.

It also updated its 2021 full-year outlook, with organic revenue growth now expected to be between 3.5% and 5% compared to a previous 3% to 4.5%, and a constant-currency-adjusted EBIT margin of 18% to 19%, compared to the 18% to 19.5% previously flagged.

Based on current exchange rates, that would equate to guidance of between 17.1% and 18.1% for the published adjusted EBIT margin.

“I am pleased with our continued strategic progress, on delivering another semester of good growth and on the underlying performance of the group, notwithstanding that the financial performance was helped by the Covid-19-impacted second quarter comparative,” said chief executive officer Karim Bitar.

“Our ongoing strategic transformation remains on track, and we have made progress during the period.”

Bitar said that, while the company was “mindful” of “relatively tougher comparatives” in the second half, and continuing pandemic uncertainty, particularly in the Asia-Pacific and Latin America geographies, it was updating its full year organic revenue growth expectations.

“Our constant currency margin guidance has been tightened against a backdrop of higher-than-anticipated cost inflation and a planned increase in transformation investments, primarily in research and development and sales and marketing, given our confidence in our strategy.

“We will continue to strengthen our foundations as we pivot to sustainable and profitable growth, and I am confident in the inherent attractiveness of the markets we serve and in ConvaTec's growth prospects.”

At 1020 BST, shares in ConvaTec were down 5.16% at 244.4p.