Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ConvaTec Group PLC (CNVVY, Financial) reported strong broad-based organic revenue growth of 6.6% in the first half of 2024, which is in the top half of their guidance range.
- The company is on track to expand its operating profit margin, achieving a 40 basis point increase on a constant currency basis despite a 70-basis point FX headwind.
- Free cash flow to equity improved significantly, nearly $50 million stronger than the previous year, primarily due to better working capital management.
- ConvaTec Group PLC (CNVVY) confirmed its 2024 guidance and medium-term targets, expecting to deliver 5% to 7% organic revenue growth and at least a 21% operating profit margin in constant currency.
- The company is launching several new products across all four categories, which are expected to drive long-term growth and strengthen its competitive position.
Negative Points
- Earnings per share were flat as reported, with only a 4.5% increase on a constant currency basis, impacted by higher financing costs.
- The company faced a 220 basis point headwind from inflation in the first half, with expectations for inflation to remain a challenge in the second half.
- There is uncertainty surrounding the draft LCD proposal, which could impact growth in the wound care segment if implemented as drafted.
- The company experienced headwinds in certain regions, such as China and LATAM, due to political reforms and anti-bribery campaigns, affecting growth in those areas.
- FX headwinds have developed recently, with the pound moving about 5%, which could negatively impact the company's margins.
Q & A Highlights
Q: Can you confirm if the mid-20s mid-term EBIT margin is reported or constant currency, and what is the FX headwind expected by the end of this year?
A: The mid-20s margin guidance was not qualified with an FX condition, so it is not stated in constant currency. It is underpinned by current FX levels, and we are still on track for mid-20s as a reported margin. The time period allows for external uncontrollables like inflation and FX.
Q: What gives you confidence that inflationary headwinds will ease significantly in the second half of the year?
A: The inventory sold in the first half was mostly manufactured in 2023, and with FIFO accounting, it takes over 6 months for external price effects to flow through. The inventory for the second half was mostly made in the first half, giving us visibility on inflation numbers. We hedge costs on a rolling basis, typically over 6 months, and expect inflation to be in the 3% to 5% range for the year.
Q: How do you expect to offset potential biologics reimbursement changes in 2025, and is the 5% to 7% growth target still realistic?
A: We anticipate a reasonable probability that the LCD will be modified or delayed. Even if not, we have a rich portfolio in wound care and other categories. We remain cautiously optimistic about achieving the 5% to 7% growth target.
Q: Can you discuss the work being done to expand InnovaMatrix into new indications and points of care?
A: In the US, we have clearance for 15 indications, and we are rapidly growing in areas like dermatology, pressure ulcers, and vascular ulcers. Outside the US, we are leveraging our strong commercial infrastructure to introduce InnovaMatrix in Europe and Latin America, where there is a demand for biologics.
Q: What are the expectations for the ex-US launch of ConvaFoam, and which markets are you targeting?
A: We have received clearance for ConvaFoam in Europe and the UK, and we are focused on launching in key European markets. Over the next 12 to 18 months, we will roll it out globally, including in emerging markets.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
