Friday, August 12, 2022

ConvaTec Group Plc (CNVVF) CEO Karim Bitar on Q2 2022 Results – Earnings Call Transcript


ConvaTec Group Plc (OTCPK:CNVVF) Q2 2022 Results Conference Call August 4, 2022 4:00 AM ET

Company Participants

Karim Bitar – Chief Executive Officer

Jonny Mason – Chief Financial Officer

Conference Call Participants

Hassan Al-Wakeel – Barclays

Paul Cuddon – Numis Securities

Chris Gretler – Credit Suisse

David Adlington – JPMorgan

Karim Bitar

Okay. Well, good morning, good afternoon, good evening, wherever you may be. A warm welcome to all of you here live in London. And for all the folks that are joining us virtually also just a very, very warm welcome. What we wanted to do today was to dedicate some time to really review and discuss with you ConvaTec’s performance during the course of the first half of 2022. And what I thought I’d do at this point was just highlight to you that we do have our disclaimer. So hopefully, you’ve all taken note of the fact that we have our disclaimer.

But I want to really shift gears and provide a warm welcome to Jonny Mason, our new CFO. Many of you know me. I’ve now been with ConvaTec approximately 3 years, but we’re really delighted to have Jonny be our CFO. He’s jumped right in with a ton of energy, a lot of drive, and we’re all feeling his impact across the entire enterprise, and that’s really, really positive. And one area where he particularly focused on is a whole simplification and efficiency agenda. And so you all have a chance to learn more about that, but really providing tremendous leadership to that agenda and that initiative.

What are we going to cover today? Well, today, really, what I’m hoping to do is that you walk away with 2 overarching key messages, okay? Two key thoughts. The first one is that fundamentally, ConvaTec is pivoting to sustainable and profitable growth. And second, that at ConvaTec, we’re very much on track to deliver our 2022 guidance. When you think about pivoting to sustainable and profitable growth, there’s really 3 elements we’re going to try to highlight to you today. The first one is that our revenue growth — organic revenue growth in the first half of the year was strong. The second element is that our profits in essence were stable, now despite some significant inflationary pressures and also continuing to invest heavily both in R&D and in sales and marketing.

Thirdly, the reason that I’m making the claim that we are pivoting to sustainable and profitable growth really links to the fact that we have strengthened our competitive position, and we’ll learn more about that today. So I think at this point, what I’m going to go ahead and do is to pass the baton on to Jonny. So maybe we can spend some quality time trying to understand with more depth and more color, how do we perform in the first half of the year? And what were some of the key drivers?

So Jonny, I want to pass the baton to you.

Jonny Mason

Thank you, Karim. Good morning, everybody. Really great to be here to talk to you about ConvaTec for my first time, almost exactly 6 months in. I’ve really enjoyed trying to get to grips with it and really looking forward to the opportunities ahead. So here are the key figures for the results for our first half year. And I’d like to draw out 5 highlights for you, which I’ll talk about in more detail as we go through the slides. First one is on sales and the business grew nicely. We delivered 8% constant currency growth and 6.4% on an organic basis.

Second point is on margin. We had an EBIT margin of 19.6%, which was good given the inflationary headwinds that we were facing, and it left our adjusted operating profits flat on the previous year. On profit, PBT was down slightly because there were some higher finance costs. And there’s a higher book tax rate as well, which I’ll talk about, that doesn’t impact cash at all. Fourth point is on cash. There was strong cash generation, and we reinvested that to grow the business. And then fifth, on guidance, as Karim says, on our key guidance measures of organic sales growth and EBIT margin, they remain unchanged.

So this graph, which is Page 6 for those dialing in, shows our sales growth across the category, separating out the organic growth from the M&A contribution. And then the FX headwind is shown on the right in green. You can see that all 4 categories delivered meaningful sales growth with the largest contributions from Advanced Wound Care in pink on the left and Infusion Care in orange on the right. So what I’ll do now is talk through the sales development by category. And starting with Advanced Wound Care, which is on the top of this next chart in pink. Organic revenue growth was 7.3%. It was a really nice strong growth continued in our emerging markets in LatAm and in Asia Pacific.

And in Europe, there was growth across all regions, except for France where the reimbursement cuts had an impact. And we do expect that to continue with a bit more impact in the second half of the year. It’s also possible in Wound Care that in H1, there was some stocking because of the Ukraine conflict and the worries about the supply chain. And then in North America, sales were softer because labor shortages across the health care sector impacted on procedure volumes. And our weaker position in Foam continued to weigh on performance.

So given those factors I’ve just mentioned, we do expect organic growth in Wound Care to be a bit softer in the second half. And we’re looking forward very much to the launch of our new Foam product, ConvaFoam towards the end of the year. Now this organic growth was supplemented by a good contribution from our acquisition, Triad, $9.7 million since the acquisition was made in mid-March. We’re very pleased with the performance so far and excited about the prospects for that business, Karim will say a bit more later.

And then the second category at the bottom of this slide is Continence & Critical Care. Organic growth of 3.6% in the first half, which comprised of 4.1% in the Continence piece and 1.8% in the Critical Care. And within that Critical Care area, hospital care was a positive contributor to growth in the first half, but it’s excluded from organic from the 31st of May because that’s when we closed our factory in Belarus following the announcement to exit that area of business.

So in H2, the organic component will only be Flexi-Seal. And we do expect that to be — to continue to be negative in the second half because it’s up against some tough COVID comparisons. And in this category, contributions from the Cure and the Patient Care Medical acquisitions more than offset the impact of the disposal of — in continence and the early part of the exit from hospital care. So total growth was 6.1% in this category.

So now on to Page 8. Ostomy Care is the next one in green at the top there. Good organic revenue growth of 3%. Performance in emerging markets was strong, both LatAm and Asia Pacific. And European performance was also strong with good performances in countries such as Italy and Poland, partially offset by rationalization of less profitable activity in Amcare U.K. The U.S. was softer, where SKU rationalization continued to impact, but we were very pleased that referrals through Home Services Group were good, grew well, albeit off a small base.

And then in this category, Russia was excluded from organic growth from the 31st of May to reflect the restructure of that business. And it’s worth noting that through all of this rationalization, the constant currency growth in ConvaTec manufactured product was 4.3%.

And then the fourth category is Infusion Care, bottom of the slide in orange, which was flattered by beneficial customer order phasing. We expect growth in the second half to be much slower and are still expecting this business to deliver high single digits for the full year, and that will be ahead of the market growth, which we think will be about 7%. So to summarize on sales, a very good first half, good growth in all categories and on track to deliver our targets for the year.

Well, let me now move on to EBIT margin, which was 19.6% in the first half. This bridge on Page 9 shows the comparison to last year. Now last year’s first half was flattered by unusual phasing of OpEx with OpEx heavily weighted to the second half last year, leading to a sharp reduction in EBIT margin across the year. That is not planned this year. You can see on this graph, there’s 2 significant negative impacts on margin in pink being COGS inflation, 290 basis points and increase in sales and marketing and in research and development spend, 190 basis points.

These were offset by improvements in 3 key areas, which are the boxes in, I think, it’s called teal. 90 basis points from price and mix, reflecting the benefits of our centers of excellence in pricing and in sales force effectiveness and also the improvement in mix of products we’re selling. The second was 130 basis points of productivity improvement in operations, reflecting a variety of continuous improvement programs, which Karim will talk about a bit more later. And then third, we delivered 130 basis points improvement to margin in G&A as our simplification and efficiency agenda started to gain traction.

Now this is the first time for ConvaTec that G&A has been below 10% of sales. But it’s a milestone. It’s a first step, and we’re looking forward to further improvement as we drive that down more towards 7%. So after the FX tailwind of 60 basis points, we had 19.6% at the half year. Now in the second half, we do expect margin to be lower, and that will be because of an increasing impact of inflation. In the first half, it was about 7% on cost of goods. We still think 8% to 9% is about right for the full year. That’s not changed since we announced it in May. And that implies, obviously, an increase in the second half. But to summarize on margin, we had a strong first half, and we’re on track to deliver our target for the full year.

This chart shows how the growth in sales and the changes in margin that I’ve just talked about lead to stable operating profit. The bars are in constant currency on this one. And the height of the bar is the sales. And so you could see how 3.6% growth in sales on a reported basis compared to an increase in cost of goods to 5%, an increase in sales, marketing and distribution of 9%. Research and development was up 15%, and that was all offset by a reduction in G&A of 9% to leave our adjusted operating profit flat to $104 million, although worth noting on a constant currency basis, the operating profit does go up by 1.1%.

So now I’m on Page 11. And from that stable operating profit that I’ve just described, there are a few impacts further down the P&L, which are worth a mention. First of all, finance and nonoperating expenses, not on the slide, but they were up by $7 million year-on-year, and that reflected the cost of the bond we issued in October and also some FX hedging activity. So PBT was down 3.7% for the first half. And then on tax, our cash tax rate was — is expected to be for the full year about 18% to 19% in line with guidance, and that hasn’t changed. But the book tax rate has increased to an expected level of about 25% for the full year. And that’s because of some noncash deferred tax adjustments, which were triggered by the M&A activity in the first half.

We can do a teaching on that afterwards for the accountants amongst you, but it doesn’t affect the cash. So yes, and then on the top right, there are the adjustments to reported profit, which all relate to M&A or business restructuring. So on the bottom right, you can see our EPS. Reported EPS is down 44%, and that’s mostly because of those big M&A and restructuring adjustments. Report — adjusted EPS, excuse me, is down 10% because of the increase in financing charges and book tax rate. And if you exclude the noncash deferred tax adjustments, the reported, the adjusted EPS would be down about 2.7%, which is more like the moving PBT.

So let’s move on to cash. And this chart on Page 12 shows the bridge from net debt at December on the left to the net debt on the right, with the bars representing the main components and the variances to last year’s movements are in the gray box at the bottom. So EBITDA for the first half was $252 million, pretty much in line with what it was last year, strong cash generation. This was applied to invest in the business in 3 areas, which are the pink boxes. First of all, the increase in working capital combined the normal seasonal increase with an increase in inventory of about $20 million to improve the resilience in the supply chain. We increased our CapEx. I’ll come on to that. And we invested $179 million in different M&A activities, which Karim will mention shortly. So we ended up with a net debt of $1,077 million, which was a leverage of 2.3x.

This chart shows CapEx. And on the left, you can see how it’s increased over recent years to the range we’re guiding for this year of between $100 million and $120 million. Now going forward, we don’t expect that to go any higher. And in fact, in the medium term, we expect that to come back down towards a range of $80 million to $100 million. But it’s being spent to grow the business. And the chart on the right shows the categories that we’ve invested in, in this first half year. The dark blue at the bottom is maintenance and compliance. That was about 18% of our $64 million of CapEx in the first half. And then the other categories, capacity to grow is mostly in Infusion Care. We invested in innovation, automation and digital, which all make the business stronger going forward.

So let me finish with a few words on guidance. I’ve already said our guidance for sales and EBIT margin. That’s organic sales growth and EBIT margin is unchanged from when we first issued it in March. For organic sales growth, 4% to 5.5% for the year implies slower growth in the second half than we had in the first, and that’s mostly because of order phasing in Infusion Care. Nevertheless, we expect Infusion Care to finish the year with high single-digits growth and ahead of the market. So it’s just phasing. And we also expect some lighter headwinds in other categories, which I’ve already described.

Similarly, for EBIT margin of at least 18% on a constant currency basis. That implies a lower margin in the second half, and that’s because of the time lag of inflation impacts. We had 7% in the first half. We expect a bit more in the second, leading to between 8% and 9% for the full year. And then the other items of guidance I described at the bottom of the chart.

To summarize overall, before I hand back to Karim, I would say that we are pleased with the performance in the first half of the year. We had strong sales growth, and we’re on track to deliver the target for the year. The performance on EBIT margin in the first half was good, showing clear signs of underlying improvement in efficiency, and we’re on track to deliver the target for the year. Cash generation was strong, and we invested to further grow the business in the future. And I think these results demonstrate that ConvaTec is really pivoting towards sustainable and profitable growth.

So thanks very much for listening, and I will hand back to Karim.

Karim Bitar

Thanks, Jonny. Really appreciate that. And hopefully, you’ve gotten a good sense of from a financial perspective, how we had a good half year. But why don’t we shift gears now and start talking a little more from a strategic vantage point. How is it that we’ve actually gone ahead and strengthened our competitive position, okay? And fundamentally, what we’ve been up to is to really execute on our corporate strategy. So this chart should be pretty familiar to all of you, which we describe as FISBE, right? We have basically 5 key elements. We need to focus, we need to innovate, we need to simplify, we need to build capabilities and execute.

When you look at those 5 pillars, we’ve been vigorously executing against each and every one of those pillars, and I’m going to walk you through a little bit more detail as to what exactly have we done. But when you look at the focus element, what we’ve tried to do, in essence, is to use divestitures and acquisitions to focus the business more so in the chronic care space, and we’ll talk more about that. When you look at innovation, we’ve doubled the investment in R&D and fundamentally been building more muscle tissue, but really positioning ourselves to be able to have a continual stream of new products. And I’ll talk to you more about how that is actually occurring and happening.

When it comes to simplification, we’ve been investing in key initiatives like global business services to simplify processes and systems, and we’ll talk more about that. And we’re seeing now that those investments are having an impact. On capabilities, we’ve been investing in areas such as sales force excellence and pricing and marketing, et cetera. And we’re seeing that these capabilities are starting to impact the business. And then lastly, on execution, we have a very robust methodology, and we’re executing against that methodology with robust business cases and action plans and who does what, by when and metrics and milestones. And so I’m going to try to give you a feel for how is it that we’re actually executing systematically across the entire enterprise.

So let’s go ahead and dive in. And let’s take a look at on the element of focus, what is exactly happening? What we’ve been doing basically during the course of the last 3 years is to proactively think what businesses do we not want to be in and what businesses do we want to be in. So the ones that we do not want to be in, we’ve said, well, what are the criteria? Well, if the markets aren’t growing, if we feel that the profitability is unattractive and we don’t think we can win in those segments or categories, we exit. And so you see us, for example, exiting the skincare business. You see us exiting, for example, the hospital care business.

On the other hand, we’ve said there are 4 categories which we’re very committed to. We think we can win and play in these 4 categories. So we said Advanced Wound Care, Ostomy Care, Continence Care and Infusion Care are core to ConvaTec. And in these areas, what we’ve done is we’ve proactively pursued bolt-on acquisitions to strengthen our competitive position. So for example, most recently here in 2022, we acquired a company called Triad Life Sciences. This is a U.S. biotech that is focused on developing and growing in the area of biologics in the Advanced Wound Care space. So you clearly see us strengthening our position in the Wound Care space.

We’re leveraging our commercial infrastructure, which we already have. We’re leveraging our R&D capabilities here, and we’re strengthening our position in a large segment of the Advanced Wound Care market and a rapidly growing one and one that we think can generate some attractive returns. So as you look at our business, what’s happened now is that these 4 categories, when you put them all together, basically position us to have over 90% of our revenues in the chronic care space. And we’re attracted to the chronic care space because it’s large, it’s growing, and frankly, it creates a more sticky model and a more resilient business for us.

Now not only have we tried to focus the business on the 4 categories and more chronic care oriented, but we’ve done the same thing from a geographic vantage point, and that’s what you see in the 2 bar charts on the right. From a geographic perspective, we said there are 12 markets we are really focused on, the U.S.A. and China being uber important. So we have disproportionately invested in these 12 markets, both organically and inorganically. And by doing that, what you’ll notice that the revenue growth rate is higher in those focused 12 markets by about 1.7 percentage points, right? That’s a deliberate move. So hope you’ve gotten a sense that the business is more focused now on 4 categories and 12 geographies and is actually more poised for further growth.

What about on the innovation side? Well, we’re now in the midst of starting to launch a significant number of new products, and we’re going to keep on driving to have a continual stream of new products. It’s at the heart and essence of being a successful medical technology company. We’re in the midst right now during the course of the next 24 months to be launching 8 new products. In fact, 2 of those, we’ve already launched. GC Air for Male, our compact intermittent male catheter, which uses our proprietary FeelClean technology. We’ve already launched in France, and we’re getting positive initial reactions both from consumers and health care providers. We’re in the midst of launching and here in the U.K. right now. And shortly, we’ll be also launching it in the U.S.A.

Very similarly, also in Q2, we went ahead and launched InnovaMatrix, okay? So here is a biologically-derived extracellular matrix. And you might say, what does that mean? Well, this extracellular biologically derived matrix, which comes from the placenta of a cell originally and is treated in a proprietary manner, we utilize to treat very difficult-to-treat wounds such as, say, diabetic foot ulcers, which you cannot treat in any other way. And the initial reactions we’re getting from clinicians is incredibly positive. And in addition, from a reimbursement perspective, we’re getting reimbursement across a variety of points of care. So again, very encouraging.

Now beyond these 2, later this year in the fourth quarter, we’ll be launching 2 more products, ConvaFoam, which is a very competitive Foam offering and new advanced extended wear infusion sets, both of these in the U.S.A. So hopefully, you’re getting a sense that we’re in the midst of launching new products, which is important to be able to drive both the organic sales growth and to drive margin expansion in the medium and the long term.

What about on simplification. On simplification, what we’ve basically been dealing is investing heavily in global business services. We’ve set up a big and large and important global business service in Lisbon in Portugal. And what we’ve done is we’ve redesigned core processes. We’ve redesigned processes such as purchase to pay, order to cash, record to report. And we’ve built in new systems. By doing that, we’re driving efficiencies. We’ve been doing this particularly in the area of finance and in the area of IT, and our plans are now to expand this approach to the era of human resources. And that’s why you started seeing the G&A expense starting to come down. And as Jonny said, our goal is to continue to drive simplification and efficiency in this arena.

But we also look for simplification efficiency opportunities across our portfolio. So for example, in Ostomy Care, what you’ll notice is that during the course of the last several years, we’ve reduced the SKUs by about 25%, okay? So we are roughly at 2,500 SKUs. We’re down to about 1,800, give or take, right? And as we streamline the SKUs in Ostomy Care, that started to positively impact our gross margin, okay? So I’m hoping you’re getting a sense that the simplification agenda is very much being driven and we’re starting to see some of the benefits.

What about on the b for build, what’s happening there? Well, we’ve been building capabilities. We built several years ago a pricing center of excellence that works very closely with the global business units, implementing best practices, such as, say, global floor prices, right, just as an example. And what we see is that, for example, here in the first half of the year, we were able to increase our prices by about 60 basis points. Typically, in our industry, you would experience roughly 2 percentage points decrease. We, historically, as a company would have experienced a 1 percentage point decrease. And so again, this shows you how these capabilities are impacting the performance of our business.

Sales force excellence, what have we done there? We’ve rolled out a customer relationship management system, both in North America and Europe, and are in the midst of rolling it out in global emerging markets. This has allowed us to target our key accounts a lot more effectively and dedicate much more time. And that’s again contributing to driving revenue growth. On the marketing side, really exciting. What we’ve done there is we refreshed the ConvaTec brand, right? We’ve got a much more credible brand, a much more relevant brand, a much more unique brand. And as we’ve launched this brand with a promise of forever caring, what we’re finding is that customers, whether they’d be consumers or health care providers are reacting very, very positively.

In fact, the levels of awareness are increasing in terms of who is ConvaTec amongst our target audiences. And the degree of favorable attitude, their inclination to want to work with us and dialogue with us is also improving as you see some — from some of the data here on the right-hand side. That bodes well because it’s the basis for driving real demand and driving sales.

And what about on the execution front, what are we doing there? Well, again, as we drive simplification and efficiency, we’re looking to do that in quality and operations. So in quality and operations, what we’ve been thinking about is let’s think about equipment efficiency. How do we drive equipment efficiency? And so I’m going to give you a very practical example. We make many of our ostomy pouches in the Dominican Republic in our Haina facility. And so what we’ve been doing is actually shifting production to more automated assembly lines. And by having fewer assembly lines, what we’re able to do is to go ahead and drive throughput, we’re able to reduce cycle time, better leverage our overheads. In the case of the Natura pouches, we were able to actually save in excess of $800,000 in terms of our production costs without hampering or limiting quality in any way, shape or form.

Similarly, we’ve tried to look at process improvements. So many of our products get sterilized. You see sterilization occurring to Advanced Wound Care or you see it in Continence Care or Infusion Care. So we’ve now developed a sterilization strategy across the entire portfolio, whereby we’re saying, actually, the validation methods that we’ve actually sterilized the products, why don’t we group our products into distinct categories and standardize that and you use the same validation methods. They’re more robust and because of their consistency, we’re actually saving money. And here, we’re saving more than $400,000. Again, these are simple examples, but I’m trying to give you a sense that we’re very thoughtful and structured and we really are working on ensuring that we execute and increase our [DSA] ratio.

Outside of quality and operations, what have we done in the area of ESG. Well, we’ve now gone ahead and started embedding ESG across our business units and across our functions. We’ve developed a framework, which we call Convatec Cares. But in essence, we’re starting now to set real hard targets in key areas. So for example, in the area of environment, we’re right now in the midst of defining science-based targets for Scope 1 emissions, Scope 2 emissions, and next year, we’ll be doing the same thing for Scope 3 emissions. And we’ll be happy to share those with you here in the appropriate time.

In addition, we’re setting clear targets, for example, in the area of social where we’re very focused on diversity equity inclusion. And we have a very clear goal of having at least 40% of women in senior leadership roles. So if I were to summarize at this point, what I’d tell you is that by executing consistently on each and every one of the 5 pillars of FISBE, we have strengthened our competitive position.

So let me try to summarize what Jonny and I have tried to describe to you here today. Hopefully, you’ve gotten a sense that in terms of financial performance, we had good financial performance in the first half of the year. This was characterized by strong revenue growth and profits being stable despite significant investments in sales and marketing and a challenging inflationary environment. I hope you’ve also gotten the sense that we’ve strengthened our competitive position, right, particularly in the chronic care area. And when you look at that element, what that says is that ConvaTec is pivoting to sustainable and profitable growth.

And then lastly, as you think about the future, what’s going to happen moving forward, we are on track to deliver our 2022 guidance, both in terms of top line growth, so organic sales growing between 4% to 5.5% and our EBIT margin expanding and growing 18% plus.

You might be saying now, well, Karim, what are the prospects, [meaning] the long term? Well, what I’d like to say is that we’re planning a Capital Markets Day on November 17, and I would encourage you to join us. Both Jonny and myself will be there. But in addition, we’ll have the entire ConvaTec executive leadership team join us. And so I think it will be a terrific opportunity for us not to focus so much on the short term, but actually, what are the medium to long-term prospects for ConvaTec, sorry, for ConvaTec. But fundamentally, I would say that we’re cautiously optimistic about the long-term prospects.

On that note, I’m going to say thank you, and we’ll open up for Q&A.

Question-and-Answer Session

Q – Graham Doyle

Graham Doyle. There we go. Can I just ask a couple of one on COGS and one on revenues? Just as we think about COGS in particular, it’s roughly 50-50 labor and raw materials. When you look at what you can forward plan on that, so you should have pretty good visibility on labor costs, presumably you hedge forward on raw materials. So could you give us a sense of how forward hedged you are? And then on revenue, and it’s not a ’23 guidance question, but it’s sort of like that. If you look at your portfolio and you think about what happens next year, so you fully have the Triad business on board. You’ve got a couple of new products in there as well. And the SKU headwinds are sort of removed. So is it fair to say the portfolio would be a position to be stronger from an organic growth perspective next year than it perhaps was this year?

Karim Bitar

Okay. Why don’t I ask Jonny maybe to answer the first question on COGS, and maybe I’ll try to take the one on revenues. Is that…

Jonny Mason

Yes, it works well. Yes, you’re right to split the COGS in roughly that ratio. And labor inflation has been less than material inflation so far this year. I think everyone is aware of that in the market. We think it will continue though into next year, and we’re planning on that to continuing labor inflation pressure. On materials, we hedge where we can. And we do have some hedging arrangements on energy, for instance, and we have a little bit of silver as well. But in the majority of cases, it’s not very easy to buy forward with the materials that we’re buying. And so majority of our costs are not hedged.

There’s a short time delay, and that’s why we see inflation coming to build a greater impact in the second half than the first. But you should think about it being mostly not hedged just a short time delay. Now that said, we put in place a inflation scenario back in May when we first announced the increase, which we thought was quite prudent, and it’s proving to be that way. So we are not seeing pressures in the market get any worse than we thought they were. We’re still squarely on for 8% to 9% for the full year.

Karim Bitar

Yes, Graham. Look, I think on the revenue side, I think you’re trying to get a sense of what are the prospects in ’23 and beyond. I think the way I’d frame it is that we’re pleased with the markets that we’re competing in, right? They’re all growing in the end markets anywhere between mid-single digit to high single digit. I think it’s fair to say that our competitive position is strengthening, right? And so the way you think about particularly the new products, it’s a little bit was where you were going [that] is to think that fundamentally, we believe this business can grow top line organically between 4% to 6%.

And fundamentally, we think that when you think about it from a medium- to long-term perspective, we can grow the EBIT margin to the mid-20s, okay? And we also believe that this business is a highly cash-generative business and will allow us to go ahead and make the appropriate bolt-on acquisitions to continue to bolster our performance, right? So then you start saying, okay, well, so what does that translate into? I think the way I think about the new products and this strength is to say, look, the more successful we are in launching these new products in a consistent and continual manner, then you’re probably going to be closer to the 6%. The less successful we are in executing, you’re probably going to be closer to 4%, right?

So I think I wouldn’t focus on any one specific product. But at least that’s the way we’re thinking about it as a leadership team. And obviously, we’ll be striving to get at the higher end of the range and the lower end of the range. But I think there is a fair amount of uncertainty, a, based on the macro environment; and b, how well do we execute. And then the combination of those 2 factors will lead to one concluding — well, they’re going to be closer to 4% or 4% to 6&.

Graham Doyle

Maybe just a follow-up on the wound launches then. The Triad launch books have gone really, really well in terms of what you’ve done so far. Is there anything — and it’s a different category, but is there anything you can take from that into ConvaFoam next year?

Karim Bitar

I think the short answer is yes, in the sense that the team that’s accountable for driving performance of ConvaFoam is really the same team, right? So we have a team that’s focused on the surgical setting. We have a team that’s focused on the wound clinics. So they’re going to definitely be heavily involved with ConvaFoam. They’re also involved now with InnovaMatrix. And so I think that the commercial infrastructure that we’ll be using will be the same commercial infrastructure is what I would say.

Patrick Wood

It’s Patrick at Bank of America. I’ll keep it to 2, please. I guess on the first one, I appreciate there are comparatively small customer for you. But any thoughts on Tandem’s recent acquisition and the thought process midterm about implications for either customers bringing in-house set production? Or if you think of Insulet and stuff like that, how that might affect the business and how we should think about things there? And I guess the second one was correct me if I’m wrong, but I certainly got the sense that you’ve become a bit more specific and maybe vocal about the 25% midterm margin. I know you’ve always said that, but it felt like it’s become a little bit more specific, putting it in the release, stressing it on the road. If that is the case, is there something that triggered that, that made you feel more confident in that 25% number? Or am I just misreading materials there?

Karim Bitar

Yes. They’re both good questions. So we’ll try to answer them, Patrick. I think, look, what I would say is in the area of automated insulin delivery, obviously, which is where Tandem competes, I mean, we see that segment within the diabetes marketplace growing because fundamentally, I think this idea of taking multiple daily injections, whether you’re a type 1 or type 2 is not all that attractive. And so the idea of having an artificial pancreas, whether it’s Tandem’s or anybody else’s, frank, I think is very, very attractive. So we’re very, very committed to that marketplace and that segment, and I think there’s significant opportunities.

To your specific question, which was, hey, I saw they carried out an acquisition in the area of infusion sets. What is the implication for you, in essence, is the essence of the question. The first thing I’d say is we are very cognizant and aware of all technologies being developed, including this one, right? So not a surprise for us if that makes sense. And so you can imagine that as we have our radar up and running, we’re very proactive and thoughtful as to where do we want to license, where do we want to partner? What do we want to acquire?

I think here it spells an opportunity for us. Fundamentally, when we work with folks like Tandem or other companies, we look to form strategic partnerships and really be collaborative. And so that creates the opportunity and frankly, share resources. They could be human capital. They could be financial. They could be IP in nature. So from our vantage point, frankly, we have a healthy and constructive relationship with partners, and we see this really as an opportunity is what I would say, fundamentally.

On the EBIT margin, why are you being more explicit. I’m not sure if we are being more explicit or not. It’s difficult for me to say, look, I’ll let you draw that conclusion. If that’s your perception, I need to respect that perception. I would say that we do have a level of confidence that we can see how we can get there in terms of the mid-20s, right? And so the more time and effort you dedicate trying to say, well, how exactly am I going to get to the mid-20s, right? And in our mind, there’s really 3 basic buckets, right? There’s something about G&A. I think we’re pretty open today to say, look, we’re hovering around 10. We got to get to 7. We now need to redesign our processes and systems and automate a lot more. We got to do that in finance. We got to do that in HR. We got to do. We’re on the case, right? So time will tell, proof is in the pudding.

That’s not going to suffice. We’re going to have to go and drive frankly, the simplification efficiency in the whole area of quality and operations. We’re in next of doing that and getting even more clarity, how do we drive that across the entire network, right? And so we’ll have maybe a chance to talk more about this in November. And then frankly, we need to even get more productivity from the significant investment, say, in the areas of sales and marketing, right? So I’ll let you draw your own conclusion. What I’m comfortable saying is that we are confident that we can get into the mid-20s. And I think we’ve got more clarity as to how to get there because we’ve had the time and effort and put in the effort to delineate and map that out. All the way back.

Unidentified Analyst

So just on to the strong first half, can you talk us through the puts and takes of — on the revenue guidance for the full year and the impact that might have on margin and achieving above the 18%? And then also, just wondering how you’re seeing supply chain issues progressing in the first half. I don’t think you really spoken about that.

Karim Bitar

We’ll have Jonny take the first one, puts and takes and revenue impact on margin, and then I’ll comment on the supply chain.

Jonny Mason

Yes. So I described a few of the headwinds that we see in the second half compared to the first. There’s clearly some uncertainty over some of those. And the level to which they impact can be a plus or a minus. Now the biggest one is on Infusion Care, where we had a really strong first quarter. We know it was favorably impacted by customer orders and customer orders for the second half are not finalized. So there is some variability on what that will be. And that’s why we’ve stuck with a range of 4% to 5.5%. All of our scenarios for all of these puts and takes, as you call them, leave us within that range. The lower outcomes take us towards the bottom, the higher outcomes take us towards the top.

We’ve got some headwinds in Wound Care, most notably French reimbursement cuts and some impacts of elective procedures in the U.S.A. and our Foam performance. And we’ve made good estimates of what we think they would be. But of course, they’ve got variability in them as well. Ostomy and Continence, I think there’s less variability. We have got SKU rationalization continuing in Ostomy. We think it will be a bit more intense in the second half than the first, not massively so, but it will take the organic revenue growth down slightly compared to the first half. And similarly, in Continence, we think sequestration is going to come back in the U.S., and that will take a little bit off the top of the Continence growth.

But the reason we are reconfirming our guidance within that range is because we think that’s where it will be. As to the impact of those on margin, not massive is how I would describe it. I think the impacts on margin are bigger from the other factors. And you saw that from our — from the chart I showed on the screen. The big moves in margin are coming from inflation. We’ve factored in a big impact in the second half. We think we’re covered. We’ve got a prudent scenario, no reason to change that. And we are offsetting that big impact from inflation with continuing progress on productivity and operations, on efficiency and G&A and then on pricing. So we do believe we can cover a lot of the inflation impact and still get to at least 18% on a constant currency basis. I hope that helps.

Unidentified Analyst

Yes. And the supply chain?

Karim Bitar

Yes. Look, on supply chain, look, what I would say is that relative to where we were historically, our supply chain is more robust and is more resilient. I think we learned a lot during the COVID context in terms of going ahead and making sure that we added capacity when that was on production, what it was, securing multiple suppliers for our raw materials, whether that was increasing inventory levels. And I can go through a litany of interventions that we’ve put in place, right? So I think it’s fair to say that the degree or level of resilience of our supply chain compared to several years ago has definitely increased.

I think on the other hand, one needs to always be cautious in these situations, meaning that there’s a lot of moving parts when you look at the geopolitical environment, right? Whether it’s a situation now in the Ukraine, what may happen in Asia Pacific. And so the point I’m just trying to make is that there’s a fair amount of uncertainty out there. So I would say that on supply chain, our level of confidence in terms of is it a more robust and resilient supply chain than it was historically. I think the short answer is yes. Is there a risk out there? I think the honest answer also is yes. And so I think one needs to be vigilant.

But at this point, I don’t see any reason for significant concern or worry and we’re continuing to, frankly, further build even more resilience into our supply chain. You kind of see that in the investments we have in automation and the investments that we have, frankly, in adding capacity, how are we managing our stock levels. So I have actually a high degree of confidence in terms of the leadership that we have there and how they’re approaching this thing.

Ed Ridley-Day

Ed Ridley-Day, Redburn. First of all, congratulations on excellent half given the challenging circumstances. First question would be on Infusion Care, very strong first half. Could you give us a bit more color about this customer ordering patterns, particularly given that we know that obviously, a couple of important delays in the end market and the extent to which your full year guidance reflects the Medtronic’s 780G launch delay in the U.S. and to what extent you’re taking that into account?

And while we’re on Infusion Care, Karim, you’ve kind of shared historically some of the new initiatives in terms of innovation and R&D, in terms of leveraging that technology into new areas. You obviously have some strong relationships with existing corporates. If you could give us any more color on the development of those technologies and the potential, that would be helpful.

Karim Bitar

So just I want to clarify on the second one. Could you just repeat the second question?

Ed Ridley-Day

Yes, just in terms of the other areas you could move your IC technology into the drug delivery [et cetera]

Karim Bitar

Yes. So maybe I’ll tag team here with Jonny. I think, look, I don’t want to spend an undue amount of time on order patterns. I just don’t think it’s constructive. And frankly, what we’ve been trying to do is to get all of us to think about this is fundamentally a Chronic Care business, and so it’s a very sticky model. And so when you look at a time series at a minimum, be looking at across 6 months and frankly, preferably, I would say you ought to be looking at a time series of 2 to 3 years. You just get a much better sense and we try to be transparent with you here, trying to share with you that data.

So what I would say is fundamentally is when you look at the automated insulin delivery marketplace, what is really happening there? Well, it’s growing really rapidly, right? And you can either have automated insulin delivery that relies fundamentally on a durable pump. So folks like Medtronic, folks like Tandem or on what’s being called more of a patch pump, disposable pump, whatever they want to call it, but that will be more of an Insulet type situation. The reality is there’s space for both. When you look at the nature of the type 1 and type 2 patients, right, there is space for both. And frankly, there’s also some convergence that’s starting to occur because the pumps now more and more so are looking more like hybrid pumps, okay? And more and more so everybody is trying to go to a system of connecting to the continuous glucose monitoring system.

And then you start getting into the whole debate as to, okay, you need an infusion set or not. The reality is you’re going to have to subcutaneously administer with insulin. And so if it’s not an infusion set in a traditional sense, there are key components where we have capabilities and can get involved. So from our vantage point, our view is if automated insulin delivery is growing, there is space for ConvaTec to actively contribute and we’re not going to get phased so much by specific order patterns. It could be a good first half or second half. That’s going to happen. That’s just the nature of the business, right?

I would say that on the second side of the equation, which is what about opportunities outside of insulin and outside diabetes care. I think they are still significant. Okay? We’re investing heavily in R&D in that area. And frankly, I think that we’re making good progress in the area of Parkinson’s disease. So there are major pharmaceutical companies that are actively developing L-dopa, carbidopa suspensions to treat severe Parkinson’s from a regulatory perspective. They’re in the midst of submitting right now Phase III clinical data through the FDA to EMA, to [indiscernible] in Japan. I would anticipate this is public information that there probably will be launches in 2023. And I think we’re very well positioned, frankly, to secure some of those opportunities.

So from our vantage point, I would say, automated insulin delivery will continue to be an attractive space to actively partner with various players. And at the same time, we’re going to be looking to further diversifying to other applications and other disease phase. I don’t know, Jonny, if you want to add anything?

Jonny Mason

I’d just add one thing. Obviously, we’re not going to comment on individual customers. But Medtronic is a big customer of ours. We have a very good relationship with them. We talk to them all the time. And so you should assume that we’re pretty well connected with what their plans are.

Kane Slutzkin

It’s Kane Slutzkin from Numis. Could you guys just talk a bit more on the staff challenges you’re seeing in the U.S.? I mean, obviously, it’s important enough to be a driving factor in sort of your guidance. I’m just wondering, is this COVID-related? Is it sort of isolation absenteeism that’s impacting? Was there something more untoward there or more structural? And then just secondly, could you color on the demand you’re seeing for home care services in Ostomy and Continence, please?

Karim Bitar

Yes. So look, on the staffing side, I would say the phenomena is actually pretty global in nature. I think, frankly, in a post-COVID situation accessing health care staff, particularly nurses, it’s really tough. I mean I think a lot of the nurses are just really, really tired and exhausted, and I also described it to me. I’ve been out in the field recently in Italy, in Germany, in the U.K. I’ll be there in the U.S.A. And it’s just a general sentiment. And so you frankly find that surgeons quite frustrated. For example, in the United States, they can access enough nurses to be able to carry out surgical procedures, right? And since that’s a more of a private pay system, you can imagine that it impacts their own personal pocket very, very directly.

So I think this phenomena of tight health care professional labor market, I think we’re going to continue to see probably for the next 18 months, at least in my view. So I think it’s sort of — I don’t know if you want to call it a new normal. The reality is that we, as a company fundamentally are not really exposed to that acute setting, right? Because fundamentally, we’re a chronic care oriented company. Now the reality though is, for example, in Advanced Wound Care, roughly 15% of our revenues are surgical in nature, but that’s most pronounced in the U.S.A. So that’s why you heard Jonny’s comments, et cetera. So bottom line, I think the situation will hopefully improve in time, but I think it’s a new normal.

On Home Care, definitely a growing channel segment. I think it’s a significant opportunity for us. We’re investing heavily in our home service group, whether that be in Continence Care, whether that be in Ostomy Care. And I think you’ll see us continue to do that, but we think it’s a significant opportunity, and we think it’s an opportunity across categories and global in nature. Jonny, do you want to add anything?

Sam England

Sam from Berenberg. You’re pushing into wound biologics of a relatively small base with the Triad acquisition. Is that an area you think you can grow organically over time through R&D? Or do you think you’ll need to do further M&A to accelerate growth in the biologics space?

Karim Bitar

Look, I think we’re going to leave all our options open, but I think that the Triad platform is a super exciting platform. We were very thoughtful as to did we want to go ahead and work in the area of allografts or xenografts, so human tissue or animal tissue. And we were very clear that we wanted to be, frankly, in the xenograft space. Why? Because from a quality perspective and from an ethical perspective and from a regulatory approval perspective, many more degrees of freedom on the animal side. And then we were very deliberate. We looked at — do you want to be in the fish space? Do you want to be in the bovine space? Do you want to be in the porcine space? And we said, no, we want to actually be in the porcine space.

So frankly, we’re very excited because here all of a sudden this extracellular matrix, which is being derived from the placenta of the cell, you have a situation where the genetics of pigs are very highly controlled more so than other species. You can control the nutritional factors. You can control the environment. And so frankly, your ability to control the input from a cost perspective, from a quality perspective, and use your own proprietary technology to use that as a biologically-derived medical device creates a lot of opportunities, frankly, both within Advanced Wound Care and potentially beyond. So from our vantage point, what we’ve been able to secure is a technology platform that we’re looking to grow and further develop.

Sam England

Okay. Great. And then maybe one follow-up around R&D investment as well. It was obviously up in the first half of this year. I suppose how much of that is sort of genuine investment? How much came from sort of inflation in costs to deliver R&D? I mean how should we think about the second half and into 2023 in terms of sort of the inflation in the R&D budget, either from more investment or from just broader cost inflation?

Jonny Mason

Yes. So the increase in the first half was, I might call it unusually high because the first half last year was quite low. We are expecting a near double-digit increase for this full year. And that’s the best way to think about it. And that covers much more than just inflation. There is real extra resources going into the R&D effort internally in particular. Yes. That will take our R&D to about 5% of sales. And we think that’s a much more sensible level for it to be at than the levels it used to be. So the high first half reflected the increase last year, the run rate coming through, but think about double digits for this year or nearly that.

They’ve asked some questions on the phone. If —

Karim Bitar

Sure. Okay, I got the signal we’ve got some questions on the phone. Do we want to start with some questions on the phone and then come back to the room?


[Operator Instructions] We go to our first question from Hassan Al-Wakeel of Barclays.

Hassan Al-Wakeel

Thank you for the comprehensive update and really looking forward to the Capital Markets Day. I have 3 questions, please. Firstly, on margin guidance. Given FX is now a more meaningful tailwind, should we assume that gets fully realized, i.e., a reported EBIT margin of at least 18.6% for FY ’22? And is the top end of growth guidance now more realistic given what you’ve achieved in the first half? And related to margins, given high levels of inflation likely to persist into next year, how are you thinking about costs in FY ’23? And are you able to commit to meaningful margin expansion next year? And if so, what are the drivers?

Secondly, could you talk about what you’re seeing in the Ostomy business? And U.S. GPOs in particular, and whether you’re seeing any pressure from Coloplast who’ve got on these contracts, I guess, over the last couple of years and how NPS is trending, please? And then finally, on global emerging market strength, it’s been called out in a few places in your release. Could you please elaborate on the growth drivers here as well as your progress in China given the challenges?

Karim Bitar

So why don’t I maybe let Jonny comment first on some of the financial aspects of margin and growth. And then maybe I’ll take Ostomy Care and emerging markets. Is that okay?

Jonny Mason

Yes, sure. I mean I measured at least 3 questions within the first question. So nicely done, Hassan. Yes. So margin, our guidance is on a constant currency basis for last year. So we’re not going to include the FX tailwind in achieving that guidance. As FX stands today, that would equate to 18.6% reported at the end of this year, but who knows what FX will be for the second half of the year. So we will report 18 — at least 18 on a constant currency basis with last year and then whatever else on top.

You asked about where in the range. We’re deliberately confirming the range and not changing it because we think that is still the right range. We talked about puts and takes in the second half. We can see scenarios where we move towards the bottom or towards the top of the range. And for now, I think that’s the best place for us to stay. And who knows, probably as the year goes by, we’ll be able to refine a bit more. But for now, we’re confirming that range.

As for ’20 — costs in ’23, it is too early to be talking about that, I would say. We’ll get on to that, I think, in the Capital Markets Day. I’m very pleased to hear that you’re going to attend. There’s an extra incentive for you to come along. We are committed to the journey of getting from here to a mid-20s margin over the medium term. But the timing, the precise phasing of that is uncertain. It will depend on what goes on in the world. We don’t expect to go backwards, but the pace of forward progression, we’ll talk about that more later in the year.

Karim Bitar

Thanks, Jonny. Look, Ostomy Care, what I would say there is that in terms of the U.S. performance, I think we’re in the midst of stabilizing the U.S. performance. I think clearly, there’s some really formidable competitors in the United States, and I think it’s always important to be respectful of your competitors, and I think they do a very good job there. We’ve been strengthening our commercial execution in the U.S.A. We’ve been working a lot more closely with the home service group in the U.S.A. And I think that, that’s being well received by consumers and by health care providers because of very high-quality services being provided there.

Specifically in terms of new patient starts, I would say it’s fair to say that, again, there we stabilized the situation. Historically, we had seen decreases in terms of new patient starts. I think that we’re seeing that now to be flat to growing. So it’s an encouraging picture, but I think there’s still opportunity to continue to strengthen our performance in the U.S.A. and other key markets around the world when it comes to Ostomy Care.

And then lastly, on the emerging markets progress. Look, I think we’re making very good progress both in Latin America and Asia Pacific. So that’s a real positive, and we see strong performances both in Advanced Wound Care and in Ostomy Care. Specific to China, clearly, the whole situation with the lockdowns, particularly in this first half of the year, has made access more difficult, right, particularly in-person access in terms of being able to engage with health care professionals. Our assessment is that as the year moves along and we enter 2023, we would anticipate that, that picture is going to start to improve, okay? But I would say that we’re pleased with the overall performance in China in light of the current context.

And so we always benchmark ourselves relative to what’s happening in the market. So are we growing our share? Are we not? And I’m comfortable saying that we are growing our business faster than the market in China. And so that’s an encouraging sign for us, and we’re continuing to invest there, and we’re very committed to growing our business. Again, China being one of the top 12 markets that we’re focused on.


Our next question comes from Paul Cuddon from Numis Securities.

Paul Cuddon

I have 2 questions, please. Firstly, on Wound Care. And given the sort of improving diversity to the kind of portfolio, especially in the U.S. So I can see an argument for sales synergies with these new products, I can also see one for cannibalization. So could you perhaps talk about how you see these new products fitting into the sales channels that you have and how that might sort of affect longer-term performance?

Karim Bitar

Yes. Paul, I would say fundamentally, biologics, I would not see that fundamentally cannibalizing our business. I think when you think about prevention and treatment and wounds and the types of wounds, I think that actually are complementary. So if you look at our strongest franchisor business, that’s the whole antimicrobial Hydrofiber segment or category, which we continue to grow across the world, including the U.S.A. But I think what this allows us to do is that when all other treatments don’t solve the problem, right? You’re sort of desperate, you don’t know what else to do, then that’s where a biologic treatment like an extracellular porcine-derived, extracellular matrix really fits in.

And so I think what it is, it’s really a market creation opportunity in the sense that all these wounds that historically, you just couldn’t treat, you had no other solution to be able to have an extracellular matrix that provides a skeleton for the tissue to grow, may also have, frankly, regenerative properties is super exciting for health care providers and for patients. And so from our vantage point, I would say, complementary from a product portfolio perspective, complementary from our ability to leverage our infrastructure. And yes, just very, very excited about the opportunity.

Paul Cuddon

Excellent. And the second one for Jonny. Just on this Triad impact on the tax rate. I mean, should we assume this is now ongoing into kind of ’23 and beyond? Or is this just a one-off impact?

Jonny Mason

Yes, Paul, this — so the book tax rate will be an ongoing impact. So that carry forward U.S. tax losses, which didn’t used to be recognized, has now being recognized because the future profile of U.S. tax profitability is stronger. And so that book tax rate will stay up towards the kind of 25% level. The cash tax rate, 18% to 19% this year. That will edge up over time as we use up the tax losses, but it will be a slow and steady increase.


We take our next question from Chris Gretler of Credit Suisse.

Chris Gretler

Karim and Jonny, appreciate the time. And congratulations on this very good execution in the first half. I have 3 questions left. And first on FX, actually, could you — at current rates, could you disclose what you would expect as a positive effect on margin for the second half or at least give us kind of an update on cost and revenue in dollars? That will be the first question.

Jonny Mason

Yes. So what we’ve stated on the FX is at current spot rates. So we would expect there to be a headwind on sales of around about 5% year-on-year in the second half. It was 4.4% in the first half. And then on margin around about 60 basis points is still 50 to 60 on the EBIT margin is what we would expect in the second half.

Chris Gretler

Great. The second question is just on the stocking effects. Could you maybe quantify what you think now that was in IC and Wound Care?

Jonny Mason

I’m sorry, I didn’t quit —

Karim Bitar

Stocking effects. Do you want to point the…

Chris Gretler

The stocking effects you discussed in your prepared remarks in infusion devices and Wound Care.

Jonny Mason

Yes. So we built inventory just over $20 million, if that was the question in the first half, and that was spread across Wound Care, Infusion Care and Ostomy Care as well. So not massive builds in any one particular place, but just improving buffers in the supply chain where they are most sensitive to make it more resilient against interruptions in the supply chain. So quite widespread.

Chris Gretler

Okay. Good to [know that]. Makes a lot of sense. And the last question is on pricing. Actually, I was quite impressed by this positive pricing you broke out on 60 basis points. Could you maybe discuss the pricing power you have by major franchise?

Karim Bitar

Yes. What I would say, look, on pricing, it’s an important variable. And as you well know, Chris, we fundamentally work in reimbursed arenas. And so what we’ve been doing with the pricing center of excellence is just trying to build a lot more discipline in terms of how do we price across geographies, how do we price across product groupings. And then, for example, having a lot more discipline in terms of maybe discounts we offer that if they are volume-based discounts, and we need to make sure that those discounts are based on actual volume purchases, not intentions to buy, right?

I know it sounds pretty basic, but building that kind of discipline in terms of systems and processes and infrastructure, I think, has really helped us out. I would say that across the categories, depending upon which categories are more reimbursement oriented or more cash oriented and which ones are maybe more direct-to-consumer, direct to health care provider versus maybe more business to business, there may be some variance in terms of opportunities as to how we manage price, and I would leave it at that.


And our next question comes from David Adlington of JPMorgan.

David Adlington

Just one left and it’s coming back to Chris’s question because I think the question was misunderstood. I just wondered if you were able to quantify the stocking benefit on your revenues in both Wound and Infusion Care.

Jonny Mason

I don’t — so 2 parts then. And maybe just make sure I’m understanding this [firstly], David. First of all, we built our own inventory to improve the resilience in our supply chain. There’s no revenue benefit. We don’t recognize the sales. So we’ll recognize the sales when we sell it. I did refer in my comments on Wound Care in the first half to the fact that we think there might have been a bit of stocking in Europe because of the crisis, the supply chain and the Ukraine crisis. We had organic revenue growth of over 7% in Wound Care in the first half. And we think that’s going to edge down in the second half, maybe mid-single digits for that business for the year. So it’s not a big impact that stocking effect that we saw, just one of the several headwinds that lead us to think Wound Care in the second half might grow a bit less than it did in the first. Does that answer your question, David?

David Adlington

Understood. It does, yes. I mean you talked about phasing benefits rather than stocking benefits. I think we were maybe interpreting that as being stocking benefit in Infusion Care. Is that — am I misinterpreting that?

Jonny Mason

Yes, so the phasing benefit in Infusion Care then. I mean — so that’s not our stock. That’s what the customers are ordering. And in our discussions with them, we have — we still have the same view that we’ve always had that it will be high single-digits growth for the year. So you can easily quantify that. We had over 14% in the first half. If you solve it to be a bit higher than the market at 7% for the year, then obviously, your sales growth in the second half is much lower. But our main point about Infusion Care is it’s growing on an ongoing basis really well. It’s growing ahead of the market. And we’re looking through the first half and second half phasing to a high single-digit growing business.


There are no further telephone questions at this time, gentlemen.

Karim Bitar

Super. Any more questions here in the — yes, one on the back.

Unidentified Analyst

I’m [Nasser Chidime] from Alliance Bernstein. I wanted to ask regarding sales and marketing investment. Has that been spread evenly across all business lines or across the select few products mainly?

Karim Bitar

Yes. It really hasn’t been so much focused on specific product lines, I would say. Typically, the way we think about it is we have our 12 key geographies and what do we believe it takes to be at a minimum of critical mass in those geographies? And then, frankly, what are the growth opportunities that, that specific product offering or a category may offer in that geography. And so we go through a process where we prioritize and make trade-offs. So as an example, we think, for example, that in China, there’s some significant growth opportunities.

And so we’re investing heavily in both in sales and marketing for Ostomy Care and for Advanced Wound Care. There may be other geographies where maybe we think there’s less opportunities. And so maybe we’ll invest to a lesser degree or look at alternative models of maybe, say, servicing those opportunities maybe more in an indirect way than a direct way. Did that answer your question?

Question up front.

Unidentified Analyst

Yes. Myself [Pradeep] [indiscernible], State Bank of India. First of all, thank you for the presentation and conversation for the reporting this numbers. So my first question is about since your presence is in dual markets as we have mentioned in via geographies. And you have also mentioned about the ForEx risk, which has always been there. Can you just give an idea of what is your hedging policy actually? Just roughly what is the percentage terms, how it is hedged? Or what is your plan to mitigate this ForEx risk? And my second question is regarding this — with the rising interest rate, I think in the inflation you have mentioned, but have you factored that in the guidance whatever in your upcoming year, the profit margins? And to what extent you have factored the rising interest scenario?

Jonny Mason

Okay. So I think 2 questions. I’ll start. So first of all on ForEx. I think you’re asking to what degree are we hedged in ForEx. And the answer to that is that we match our borrowing liabilities very closely to the earnings in the currencies that they are being generated. And that is something we rebalance all the time. So from an earnings to liabilities point of view, we’re very well hedged. We don’t hedge the fact that more — a higher proportion of our sales are denominated in U.S. dollars than our operating costs. That’s a structural feature of our business. It’s not hedged.

And so what you will see, as you’re seeing this year is a stronger U.S. dollar leads to lower sales growth in reported terms and a higher EBIT margin and vice versa. We don’t ever plan to hedge that. That’s just the characteristic of the business that we run. As regards interest rates, we do also hedge interest rates. So we’ve got rolling layered hedges on our interest rates, and we’ve got quite a high proportion of fixed rate interest at the moment. As we look forward in our plans, we do anticipate that it is a rising interest rate environment. It doesn’t have a massive impact, honestly, on the earnings of the business, but we have built it in.

Karim Bitar

Great. One more in back.

Jack Reynolds-Clark

Quick follow-up from me. Jack Reynolds-Clark from RBC. Just given the higher level of leverage that you had leaving the first half, how are you thinking about M&A opportunities in the near term?

Jonny Mason

Well, certainly, yes, so 2.3 leverage. It’s above our target. We’ve got a target of around 2x. It’s not a hard and fast limit. We would expect to trend down back towards that target of 2x over the next 12 to 18 months as the cash flow is delivered. We would assess any M&A opportunity on the characteristics presented. I mean we’re not sitting here saying no more M&A because we’re over 2x. It would depend on the opportunity. And similarly, we do over time plan to track back down towards that 2x target.

Karim Bitar

I would just add to Jonny’s comment. [I’d say], look, it’s a highly cash-generative business. I think we actually have a strong balance sheet. And so our philosophy on M&A is we’re going to be proactive. Our radar is up and running. We have a pretty good sense of what’s happening in the marketplace. And fundamentally, we’re not interested in transformative deals. We’re interested in bolt-on acquisitions that strengthen our competitive position. And those bolt-on acquisitions can take 3 different flavors. Flavor number one is, hey, it’s a geographic play. So a good example would be Cure Medical that strengthened our position in the Continence Care market in the U.S.A., right? And that’s been a very successful acquisition for us, and we’re pleased with the performance there.

Another one might be a technology play where we’re trying to go ahead and maybe get into a new technology platform that we can maybe leverage with their commercial infrastructure. A good example is Triad Life Sciences. Another one can be capability, right? So I would say, fundamentally, if a right opportunity presents itself and there’s a good strategic fit and a good financial fit and we have very, very clear metrics in terms of the financial returns, we expect. So Jonny and I are pretty darn disciplined as to what kind of returns on capital do we expect. We review those together. So I think we’re actually in pretty good shape. We’ll take it that way.

Super. Sensitive to time, maybe I’ll see if just one last question, if just one last burning question. Anybody have one last question? Doesn’t look like it.

Okay. Well, look, just a huge thank you to everybody who joined us virtually and for everybody who joined us here today, really appreciate the engagement. Really appreciate your support. So look forward to staying in touch. And as we said for all the folks that are interested, November 17 here in London, we’ll be hosting a Capital Markets Day and look forward to continuing dialogue with you.

Jonny Mason

Thanks very much.

Karim Bitar

Take care.

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