Convatec Group PLC (CTEC) Earnings Call Transcript & Summary

Why don't we kick off, and I want to go ahead and welcome everybody here who's with us in person and anybody joining us live on the webcast. No worries. We got some music in the background. That's not bad. Maybe later on, we'll do some dancing. But on a serious note, what I want to do is, again, just welcome everybody here and really to kick off the day by just sort of highlighting to you that we really want to focus today's discussion on how is it that ConvaTec is executing successfully on its strategy and how that's driving an acceleration in the momentum of our business. In terms of disclaimers, they should be familiar to all of you. And what we'll be doing today is both Jonny and I will be hosting session. I'll go ahead and kick off with a brief introduction. And then thereafter, I'll pass the baton on to Jonny, who will give you a lot more color and detail as to how are we performing from a financial vantage point. Thereafter, I'll pick up the reins again and try to give you a lot more color in terms of strategically, how are we driving the business forward, and then last, we try to give you some commentary as to what is the basis for us going ahead and raising our 2023 guidance, and what's the basis for strong growth prospects in the future. From an overarching perspective, there are really 4 key messages I'd like to leave you with today: the first one is we are accelerating organic revenue growth, and we're doing that on a broad basis. The second thing is, we are expanding our operating profit margin. As we drive that strong financial performance, we continue to strengthen our competitive position. As a result of the strong financial performance and the strategic advancement in our competitive position, we're going ahead and using that as a basis to raise our guidance for 2023. At this point, I'm going to pass the baton on to Jonny, and we're going to focus more on the financials. Jonny, it's all yours.

Thank you, Karim. Good morning, everybody. Great to see you again. Here are the highlights of our financial performance in the first half of the year, and we're pleased with what we see as a strong performance. Organic revenue growth was 6.6%, which was good growth across all 4 categories and is accelerating, especially in Wound Care. The gross margin expansion of 220 basis points was a result of good performance on pricing, improved mix, continued progress on productivity and operations, all more than offsetting inflation in COGS, which we think was 7.7% for the first half. And then the expansion of operating margin at 70 basis points, that came after a significant increase in operating investments to drive future growth, and it reflected further progress on simplification and productivity especially in G&A. So cash generation increased with EBITDA going up to $262 million, and that enabled us to make investments in inventory, CapEx and M&A whilst maintaining a strong balance sheet of 2.5x, 2.5x leverage. The organic growth was spread across all 4 categories. We'll look at each category individually in a moment. But on this chart, starting from the left, you can see that Wound Care was 8.7%. And total growth at constant currency for Wound Care was 13%. So the difference was ATT, which was growing quickly throughout the first half of the year, but only became organic growth from April. Continence Care grew a strong 7.6%. Ostomy Care grew 3%, the new category, including FMS, underlying the ConvaTec product in Ostomy grew 6.5%. And then Infusion Care grew 7.5% in the first half year. So this is moving past the phasing issue which led to low growth in the first 4 months and back on track to high single-digit growth as we said it would be. All that combined to a group organic growth of 6.6% and then you can see on the right, there were 2 deductions in coming to total sales growth: the first being the exit from the low-growth, low-margin Hospital Care business last year; and the second being a small FX headwind. So by category, starting with Wound Care at the top of this chart, the 8.7% growth was supported more than 2 points by ATT, and that helped our growth rate in North America. The remainder of the business grew more than 6 points, and that growth was mostly in GEM and in Europe, where China and Germany performed particularly well, based on strong performance of the AQUACEL Ag+ portfolio. Continence Care is at the bottom of the chart. This is predominantly in the U.S.A. Strong performance from the Home Services Group with good customer loyalty and customer retention scores. The sales growth was supported by a favorable reimbursement pricing environment. And ConvaTec product, both Cure and GentleCath performed well, improving the mix in our portfolio. In Europe and in GEM, we made good progress building our presence. We're still very small, but we're growing nicely. Ostomy, next. At the top of this chart, the headline 3.1% includes FMS, our Fecal Management System, which used to be reported under Critical Care. Now FMS was negative 9% sales growth in the first half of the year because it lapped some tough COVID comparatives. By the end of this year, that phasing effect will have played through, so it will no longer be a drag on the category. Excluding FMS and other products, the ConvaTec product in Ostomy, which is what drives profitability, grew 6.5%. Now that growth was strong in GEM. In China, and in Brazil and Colombia, in particular, where we are gaining market share. In Europe, the growth was good, although it was moderated by some planned reductions in sales of non-ConvaTec products, particularly in the U.K. And the -- and in North America, there was also growth as the Home Services Group is now helping to add new sales in Ostomy. And then at the bottom of the chart is Infusion Care, 7.5% sales growth over the first half. As I said, we're now through that phasing impact which impacted the first 4 months of the year, and we're back on track for the high single-digit growth, which we said we expected and we continue to expect on an ongoing basis. Now this is based on continued strong demand for our infusion sets for people with diabetes, but it's supported by double-digit growth of the neria brand for non-insulin therapies such as immunoglobin or pain management medications. And looking forward, there are some very exciting new customer product launches coming with our infusion sets, which Karim will talk about in his section. So let's look at profitability. Operating margin went up, as I said, 70 basis points to 20.3%. I'll talk through the main features on this bridge from left to right. Good price performance, 110 basis points of margin impact. The price performance was across the board, but the biggest parts were in Continence Care and in GEM. Strong contribution from mix 290 basis points, more than half of this is the impact of getting out of the low-margin, low-growth Hospital Care business last year and getting into high-margin biologics with ATT. And then the remaining piece of the mix improvement reflects the continuing focus on the profitability of our business across categories and within category, such as increasing the mix of ConvaTec products. There was continued delivery on operations productivity with continuous improvement and other projects leading to an increase in gross margin overall of 220 basis points. And I skipped over inflation, which was 7.7 points in the first half of the year on our cost of goods, 270 basis point headwind. That inflation was a bit lower than in 2022. We still expect it to be in the range of 5% to 7% for the full year, so lower in the second half than it was in the first. And then moving to the right of the chart on OpEx, you can see a significant increase in cost-to-sales ratio. 40 basis points of that is in R&D, where we increased the investment and 250 basis points of it is in sales and marketing, of which over half is the ATT entry and Hospital Care exit, same mix effect as we've got going on in gross margin, but the other way around. And then the rest of the sales and marketing investment reflects investments to drive future growth in places like China, in continents outside the U.S.A. and in other areas. And these increases were offset by continuing progress on simplification and productivity, especially in G&A, where we are on track to reach our target of 7% of sales over the next few years, and we improved another 150 basis points in the first half. So all of that with a small FX impact left us with an operating margin in the first half now into the 20%. This chart shows that lower in the P&L, we are now starting to grow net profit and EPS compared to the reduction in those metrics last year. Higher finance expenses resulting from the higher market base rates and higher levels of debt from M&A were offset by lower nonoperating expenses and tax expenses. So net profit grew in line with operating profit roughly 5%. And then based on the strong operating performance in the first half, and reflecting confidence in the future growth prospects, the Board has announced an increase in the interim dividend of 3%. Now let's look at cash. I mentioned that cash generation increased EBITDA of $262 million. This was applied to investments in inventory, CapEx and M&A. The inventory increased $68 million on top of an increase of $58 million last year. This was to further improve the resilience of our supply chain, but it also included some operational stock builds ahead of summer, ahead of a factory -- of the EuroTec factory closure and ahead of our newly won FMS GPO contract. And so the inventory will reduce in the second half of the year as these factors play through to be between $20 million and $40 million higher than the year before. Other working capital also increased. A large part of that was seasonal. And there's also a part though, which is in ATT where it's growing quickly and receivables are longer than in the rest of the business. CapEx was in line with guidance, further supporting projects on product innovation, capacity expansion, digitization and automation. And then the M&A investments were the ATT earn-out and 30 Tech are the new nitric oxide technology. So all that left us with a net debt of $1.3 billion and leverage of 2.3x. So moving on to guidance for the rest of the year. We are increasing our organic revenue growth guidance to be in the range of 6% to 7.5%. And this is based on the broad-based good growth across all 4 categories in the first half and an acceleration, particularly in AWC, in Wound Care driven by ATT. We're also increasing our guidance on adjusted operating margin by 80 basis points to now be at least 20.5% on a constant currency basis. And this is based on the good performance in mix, in price and in operations productivity in the first half of the year. We do note that at current spot rates, in the second half of the year, there'll be an FX translation tailwind on that margin, and that might be up to 60 basis points, but we'll wait and see where FX settles. The rest of the guidance is set out on the chart. We're going to continue to invest to grow the business, and we expect to finish the year with leverage around 2.3x, so a bit lower absent any further M&A. So I'll finish with this chart, which is 2-time series. Organic revenue growth on the left and adjusted operating margin on the right, I think it demonstrates clearly that ConvaTec has now pivoted to sustainable growth. And we are expanding our operating margin towards our target of the mid-20s. And I'll just remind you of what we said at our Capital Markets event back in December, which is the delivery of those 2 targets leads to double-digit compound growth in EPS and free cash flow over the medium term. Thanks very much. I'll hand you back to Karim.

Thanks, Jonny. Okay. So look, a very strong financial performance in the first half of the year. Let's try to now understand from a strategic advantage point, where exactly are we headed? What are the growth prospects for our business? How are they performing? How are we executing on the FISBE strategy? So you're all familiar with our FISBE strategy: focus, innovate, simplify, build and execute. In terms of focus now, we've reconfigured the business to whereby over 90% of our revenues are in Chronic Care. That in essence means that we have a high exposure to diseases like diabetes, cancer, autoimmune diseases. That high exposure to Chronic Care translates into a high level of recurring revenues and a pretty darn solid and repeatable amount of demand out there. You then say, "Well, what have you done in terms of driving more focus?" We said we're going to focus on 4 categories and 12 geographies, the U.S.A. and China being uber important. Well, guess what, as we've focused our investments on those 12 geographies, we're growing disproportionately in those geographies. That is a deliberate move and is paying dividends. And as we focus in key markets like the U.S.A., we've chosen to utilize our balance sheet to pursue bolt-on acquisitions such as that of Triad Life Sciences, which we now call Advanced Tissue Technologies. That's where we have InnovaMatrix, and that's doing very, very well. It strengthened our Wound Care presence in the U.S.A. And most recently, we went ahead and acquired [ A Better Medical Care ], okay? [ A Better Care Medical ], which is a home care company in the Continence Care space in the U.S.A. and further strengthens our position there. What about in terms of innovation? Yes, we've doubled our investment in R&D, but even more interesting is that now we have a rich pipeline. We are in the midst of this year of launching 6 new products, very, very different picture than we had several years ago. In addition, not only are we developing, scaling up and launching new products across the board. We're also investing in new technology platforms. So we acquired from 30 Technology a very innovative, highly differentiated and highly proprietary technology platform that focuses on nitric oxide. And this has all to do with antimicrobial properties, which can be leveraged across many of our categories. What about in terms of simplification? We've been driving that agenda very, very aggressively. In fact, in the first half of the year, we reduced G&A by 150 basis points, all the way from 9.7% down to 8.2%. It wasn't that long ago that at ConvaTec, we were spending about 13 points of revenue on G&A. Clearly, we are driving simplification and productivity. What about capabilities that we were trying to build? Well, we're embedding those capabilities. We've now embedded our pricing center of excellence, where we collaborate in terms of managing strategic and tactical pricing with the 5 global business units and we were able to achieve an increase in price and therefore, an impact of 110 basis points of additional gross margin. And what about executing? Again, we've really focused on increasing our [ do-say ] ratio. And when you look at the way we're executing commercially, what I would highlight to use that's improved on a worldwide basis. But in key markets, okay, particularly in global emerging markets where we're growing in the teens, both in Ostomy Care and in Wound Care. And you look at a market like China, we are winning share both in Ostomy Care and Wound Care. So clearly, we're executing. But let's step back for a second now and say, okay, I've understood the broad picture of, ConvaTec what's happening in each one of the various 4 categories. Wound Care, terrific business, right? First half of the year, strong performance. AQUACEL Ag+ Extra, the gold standard when it comes to an antimicrobial wound dressing, 30-plus share of market globally. We're growing AQUACEL Ag+ Extra double digit on a worldwide basis. And I would expect it to continue to grow. What about the Foam segment? We've launched now a very competitive product offering, significantly improved exudate absorption capabilities, significantly improved adhesion properties. That launch is off to a good start in the U.S. We're getting positive feedback. We have numerous clinical evaluations being carried out nationwide. And then lastly, in the whole area of biologics, InnovaMatrix is really growing very, very well. The clinical feedback we get is tremendous. We get clinical feedback from surgeons, pediatrists who basically say, "Hey, it's amazing how quickly these very-difficult-to-treat wounds are healing. I'm amazed that I could actually treat that really difficult-to-treat wound, right?" So the clinical feedback we keep on getting is really positive. Fundamentally, the way I described Advanced Tissue Technologies in that portfolio is at InnovaMatrix, that dog really hunts and hunts well. What should you be expecting in the first half of the year? You should be expecting that we will grow this business double digit in 2023. What about further out? What are the gross prospects there? Well, let's step back and look at the various segments we compete in. Today, we fundamentally compete in 3 segments. These are large segments. They're growing anywhere between 6% to 7%. And in every one of these segments, the Antimicrobial segment, the Foam segment, the Wound Biologics segment, we've got a very competitive product offering. ConvaTec now is in a position where we no longer have one hand tied behind our back. We can effectively compete in all 3 segments. And in fact, we're executing across the board, and we are winning share in key markets, in all 3 segments. Let's double-click a little more on InnovaMatrix and Advanced Tissue Technologies. Again, what you'll see is that we're not sitting on our laurels. We're not focused strictly now on InnovaMatrix AC. We're introducing new formulations and new indications. InnovaMatrix PD stands for InnovaMatrix Powder. So now all of a sudden, if you have a wound, which is very deep as opposed to having a flat wound dressing, it's actually in a powder formulation and it has meaning and significance to physicians. In addition, we're also now received approval in a new indication for burns, which is also very exciting because if you think about it, our extracellular matrix is derived from the placenta of a cell. So we're talking about a xenograft. And the size of our biological wound dressing is multiples larger than that of many other offerings in the marketplace that has relevance if you have a particularly large wound or burn, I should say. I don't wish that upon anybody, but just realize. I think what this really tells you is that the performance of our product offering with InnovaMatrix, whether it be PD or whether it go ahead and be InnovaBurn is very strong. We're getting a lot of positive clinical feedback. But in addition, we find ourselves where our production costs are very low. From a cycle time perspective, we can work rapidly with the FDA. This is a 510(k) approach. We're able to leverage our infrastructure from a development perspective, a clinical perspective, a commercial perspective. And guess what? We're actively now pursuing the development of this franchise outside the United States, in key markets in Latin America, in key markets in Europe and key markets in Asia. So bottom line, what I would tell you is that when you think about the Advanced Wound Care business, you ought to anticipate medium term and on a consistent basis that this franchise will be growing high single digits, year in and year out. We really see it, and I really see it as a locomotive for growth at ConvaTec. What about Ostomy Care? How is that doing? Again, Jonny highlighted to you, 6.5% growth with our own products. We had good growth in the emerging markets. I highlighted to you. We're growing in the teens in global emerging markets. We're winning share in markets like Brazil, in markets like China. We're growing our business in key markets in Europe such as Poland and Italy. In the U.S., we're growing that business. We've now stabilized new patient starts. We're working very closely with the Home Service Group, 180 Medical. We have a dedicated team just for Ostomy Care. They provide exceptional service and patients and consumers in the community setting really appreciate that service. But above and beyond, executing well from a commercial vantage point and from a service vantage point, we're also now getting ready to launch new products in Ostomy Care. It's been a long time since ConvaTec we've launched some new products. Very excited about the fact that in Q1 of 2024, so less than a year, we'll be launching Esteem Body. What is Esteem Body? This is a one-piece soft convex offering. It's a large segment. It's a growing segment. And now all of a sudden, we're going to be able to leverage a historical advantage that we've had at ConvaTec. When you think about adhesive technology and base plates, you don't want skin irritation and you don't want infections. And that's true of all categories, by the way. And so in this instance, we're going to leverage that know-how that we further improved and combine it with a pouch, which is a lot more discrete and a lot more comfortable. So we're very excited about this launch. So stay tuned. Ostomy Care, what should you be expecting? You should expect that we will grow this business in mid-single digits year in and year out. Continence Care. What's happening here? Strong performance again. Clearly, we've got a leadership position in the United States. We're the #1 service company in the U.S. with a 40-plus share of market, and we're the #2 in terms of being a manufacturing company. The level of customer loyalty is truly world class that the 180 Medical team is able to establish. And so this business is growing for us. And as I said before, we just acquired A Better Choice Medical, which has further strengthened that home service capability in the United States. Beyond that, we're leveraging a broad portfolio. You'll recall that a couple of years ago, we acquired a company called Cure. And so now we've got the Cure portfolio and the GentleCath Glide portfolio that originates with ConvaTec. The Cure portfolio is very much focused on the value segment. The GentleCath Glide is much more focused on the premium segment. And we leveraged those 2 portfolios on a global basis. Now above and beyond that, what are we doing? We're investing in our commercial presence outside the United States, whether it be Latin America, Europe or Asia to grow the business. And lastly, we're launching new products. In the fourth quarter, we'll be launching GentleCath Air for Women 2.0, What does that mean? It basically means that we take the GentleCath Glide technology, our proprietary differentiated technology, which you think is a polymer, which has a superiority claim in the United States. It's a lot less sticky and it's a lot more comfortable. You don't want a catheter that's sticky, right? You want a catheter that's comfortable. You hardly feel anything. Friction would be bad. And we're taking that GentleCath Glide technology and turning it into a compact discrete catheter, GentleCath Air for Women. So we're going to start launching it in France in the fourth quarter. And then in the first half of 2024, we'll be launching in other European markets and in the United States. You ought to expect this business to also be growing consistently year in and year out in mid-single digits. What about Infusion Care? Tremendous business. How is Infusion Care performing? Again, we grew the Infusion Care business. We have over 1.1 million patients who are challenged by diabetes using our proprietary and differentiated infusion sets. Now what's interesting about it is that there is a very dynamic marketplace out there. So when you start thinking about insulin pumps, what's happening there? Really, what we see is 2 phenomena: phenomena #1 is there are new entrants coming about. Phenomena #2 is there's a lot of innovation occurring. So let's try to understand the dynamic of new entrants and new innovations. You'll notice that there's a new entrant in the market, Beta Bionics. So who is Beta Bionics? They're making a durable insulin pump. So what's so unique about their pump? Well, what's interesting about them is they've developed a pump now that uses prefilled insulin cartridges. No other pump does that. So you can now use a prefilled insulin cartridge. I don't have to sit there and extract the insulin, put it into the reservoir, et cetera, et cetera. It's a big deal for diabetes patients, okay? It's a big deal. Second, their algorithm is very simple to use. Why? I don't have to input a specific number of carbs. I just need to tell the pump, am I basically having a heavy carb meal or a light carb meal. If I decide to have pizza, Coke and ice cream, guess what? That's a pretty heavy carb meal. I'll put in high carb. So it's simple to use. Now guess what? We're working now with Beta Bionics. We're providing them with their Infusion sets. Well, what about Medtronic? When Medtronic also is innovating. They've developed the 780G. It's a whole integrated system. It's an automated insulin delivery system. And guess what? When you look at its performance in Europe, it's doing pretty darn well. It's growing in the teens. And now they've got approval in the U.S. And so as you think about it being approved in the U.S., how might it do? There's significant interest in it. Why? Well, it's got some new features, some new benefits. As an example, you can detect if you're just about to have a meal and therefore, anticipate and say, okay, you're having a meal, I need to have a bolus of insulin to cover that. It's the only one that works with an extended wear infusion set, that last a week. We make that extended-wear infusion set. There's a lot of benefits to the diabetes patient. What about folks like Tandem? What are they doing? Well, Tandem now has decided to introduce something called the Mobi, they've gotten approval for it. So now I start to look at that diagram, it's really important you look at the diagram. Notice that the size of that durable pump is about half the size of the 2 on the left. It's about 50% smaller. So now the smartphone is being used as a key input, right, the key control. That durable pump became wearable, very similar to a patch pump, okay? Notice how the tubing shrunk in a significant manner. The point I'm trying to make here is that there are new entrants and new players, and we're working with all of them. What about outside of diabetes? Well, we offer our infusion sets on the brand name of neria guard. That business does very well in the areas such as immunoglobulin replacement, in areas such as pain management. But we're also poised to, frankly, grow that business, and I'll be telling you more about that shortly, particularly in the area of severe Parkinson's, where we now have collaborations established both with the folks at AbbVie and the folks at Mitsubishi Tanabe, okay? So I think the bottom line is you ought to expect in 2023, our Infusion Care business to grow high single digits. What are the long-term prospects? Many of you have been asking and posing questions as to the long-term prospects in terms of growth for Infusion Care. So I've taken the liberty to go ahead and give you some additional data. So let's focus on diabetes, about 335 million patients worldwide. That's the bar on the left. What proportion of these diabetes patients use insulin in an intensive manner. So think of it as multiple daily injections. I no longer produce insulin, right? So all the other solutions aren't working. It's about 10%. It's about 35 million folks worldwide. Now let's understand that sliver of 10%, what proportion are using multiple daily injections, right? They're oftentimes pulling a pen, right, multiple daily injections versus a pump. Only 5% are using the pump, right, only 5%. And the real question is, do you believe that pump users are going to increase? We firmly do. Why? Only 17% of insulin intensive users use a continuous glucose monitor. Continuous glucose monitoring is a catalyst for more utilization of a pump. Why? Because now I combine the continuous glucose monitor sensor with the pump and it becomes the artificial pancreas. Technical term, automated insulin delivery. So this 5% has been growing, right? And we'll continue to grow rapidly, okay? It's a very important point because if you don't believe the pumps are going to grow at the expense of multiple daily injections that ought to affect your thesis, okay? Let's double-click a little more, and let's get some data from a third party. Here is data from Seagrove. Seagrove are experts in the field of diabetes. It's a market research agency. They've looked at historically, what's been happening with multiple daily injections and pump growth, what will happen in the future. When you look at it from a retrospective perspective, multiple daily injections have been growing about 3%. That is consistent with the incidence and prevalence of diabetes on a global basis. It's going to continue. People will continue to use pens. We're not arguing that. But what's important to realize is that durable pumps have been growing about 6%, they'll be growing at about 8%. You might say, why is there going to be an increase? Simple. New entrants like Beta Bionics, new innovations that I spoke about earlier. In the area of patch pumps, we expect them to continue to grow in a substantial manner, but we also see a convergence between patch pumps and durable pumps. That's what we're referring to as hybrid pumps because imagine if you could get the best of both worlds. Durable pumps tend to carry more insulin. Durable pumps from an environmental perspective, frankly, have some advantages. So how about if I could get a base plate, right, a base plate with a durable pump. The base plate would be disposable and the durable pump would hold, and we see this development happening in the marketplace. So the expectation is that durable pumps will grow 8%, patch and hybrid about 16%. Relevance to ConvaTec. When you see this expansion of insulin pumps driven by continuous glucose monitoring, driven by continuous innovations in the pump, so there's a broadening to address all the market needs, we at ConvaTec have infusion set systems with -- think of it as modular components. Our components are relevant across all these segments. So we're well positioned to grow as automated instant delivery and pump therapy grows at the expense of multiple daily injections. What about outside of diabetes? Well, let's take a retrospective look. In the last several years, we've been growing in areas like immunoglobulin deficiency, that really results from say, if you've had cancer, autoimmune disease or say, if you're going ahead and using morphine for pain management in a palliative setting. We've been growing that business in the teens, in the low teens. And now we're adding new applications such as severe Parkinson's with AbbVie and Mitsubishi Tanabe. So we expect to be able to grow this business not in the low teens, but in the mid- to high teens. What does that translate into? Like what's the bottom line here? The bottom line here is that this segment of Infusion Care should be contributing approximately 2 percentage points of growth year in and year out. So let's tie it all together. If you look at all the developments in diabetes and all developments outside diabetes, what should you be expecting Infusion Care to do? Well, what we expect Infusion Care to do is to fundamentally grow in the pump arena with durable pumps, patch and hybrid pumps and therapies outside resulting in a consistent delivery of high single-digit growth, year in and year out. I hope you've gotten a good sense now of the 4 categories and our overarching strategy. Let me try to sum up. In summary, strong financial performance in the first half of the year. We had an acceleration of organic revenue growth to a tune 6.6%. Second, we expanded our operating margin by 70 basis points to 20.3%. Looking forward, what should you expect for this year? You ought to expect that our organic revenues will be growing between 6 to 7.5 percentage points. And you ought to expect that the operating margin that we will achieve will be at least 20.5 percentage points on a constant currency basis. Fundamentally, there are some attractive growth prospects at ConvaTec. You've got a business that has a strong competitive position with a high exposure to chronic care markets, you got a business now that has a track record of delivery. This will be the fourth year in a row that we're delivering organic revenue growth above 4%, and we're consistently accelerating. It will be the second year in a row do we increase and expand our operating margin. Bottom line, my level of confidence is increasing in terms of our ability to grow short term, medium term and long term. On that note, thank you.

Okay. I think we can open up for questions. Graham was slightly...

And maybe on Infusion Devices to follow up there. Firstly, if you add up the little segments and we know your rough split, that feels like double-digit growth, not high single digits over the midterm, just to check my math. And then secondly, when we think of 2024, to Beta Bionics, it looks like it's more of a sort of end of year proper launch and Mobi also looks like it's probably going to be more of a '24 push. So does that give you confidence that actually '24, you've got reasonable visibility in the sense that you feel like you believe those products there or there should be good demand to give you at least that high single digit again, even against a tough comp?

Yes. I think the short answer is -- I'll take the second question first. So what is your level of confidence in 2024 to basically achieve high single-digit growth in Infusion Care? Bottom line? High, okay? And if you do the math, take your second question, I would say the math would tell you, sure. It could be higher than high single digit. But we all know things can happen, there is risk, et cetera, et cetera. So I think that it's important that we'd be thoughtful in terms of the kind of expectations we set. And hopefully, we develop that track record with all of you. So I think it's reasonable for you to expect high single-digit growth consistently in Infusion Care. Could it be higher? Sure, it could be higher. But I think that high single-digit growth expectation is a reasonable expectation, including 2023, 2024 and beyond.

And maybe a quick one on ATT. The -- are there any markets internationally -- when are you going to launch internationally? And are there any markets internationally where you can move as fast as you have in the U.S.? I mean, it's quite a lot of growth for the group in terms of the impact so far.

Yes. I think we're going to need to learn what is the scale of the opportunity outside of the United States. I think what's fair to say this in 2024, you will see us launching InnovaMatrix outside the United States in some key markets. So I think for competitive reasons, we don't want to disclose it at this point, but we'll start. So I don't think there will be a flurry of all markets across the world all at one time. But we do see opportunities honestly in Latin America. We do see opportunities in Europe. We do see markets opportunities in Asia. It's also a matter of doing the necessary clinical work, doing necessary registration work, doing necessary reimbursement work. And that tends to vary, frankly, country by country. But I think we've got reasonably good clarity as to having an action plan in place that we're executing on. But stay tuned, and we'll give you updates, but you ought to anticipate that there will be markets outside of the U.S. in 2024 that we do launch in.

I think Veronika was next and then -- Greg, can you pass the mic?

Yes. Excellent. It's Veronika Dubajova from Citi. Three questions for me. One, the Wound Care growth on my math, I think the sort of old AWC business, if I can call it that, grow sort of 6% to 7% in the first half of the year, which clearly continues to be above market. So I would love to get your thoughts on where you think those share gains are coming from? I know, Karim, you talked a little bit about the product, but maybe regions, channels, competitors, if you can give us a little bit of that thought process. And how sustainable you see that growth as being going forward? And then I'll have 2 questions after that, but maybe we can knock this one out of the way first.

Look, so we're talking about the Antimicrobial Hydrofiber segment, I think we've got a terrific offering in AQUACEL Ag+ Extra. And frankly, in that specific segment, we're growing across the globe. In that segment, we see growth in North America. We see growth in key European markets such as Germany. We see growth, frankly, and this is a share growth, just to be clear, in key markets and global emerging markets such as, say, Brazil or say, such as China. So I think it's a strong business. And frankly, as commercial execution just continues to strengthen, we're able to actualize the full potential of that brand.

And any particular competitors you think you're winning from?

I think we're just really focused on our game honestly at this point, Veronika. So yes, I'll leave it at that.

No. Understood. And then 2 financial questions for Jonny, if that's okay. The first one is just on the step-up in SG&A and R&D. If you can give us a little bit of flavor for whether there are any timing issues or impacts related to that or is this the new run rate? And maybe talk through what are some of the investments that you're making that are driving that growth? And then just a confirmation that the free cash flow should indeed improve in the second half of the year and maybe a brief forward on the working capital because I know the inventory growth was quite significant this half year.

Sure. I think the way to think about that step-up in OpEx is that it does set a new base level. I described that 40 basis points of it was an increase in R&D and we have an ambition. It's very nearly 5% of sales. We do have an ambition to sustain that in order to keep driving the future product portfolio. The rest was in sales and marketing. Look, there is a step-up because of the higher rate of sales and marketing intensity in things like biologics. We're also investing in areas where sales at the moment are relatively low but are growing fast, such as China, Continence Care outside the U.S.A. Now that should leverage over time. That will leverage over time. But what we've seen in this first half is a re-basing of both the gross margin and the OpEx ratios as a result of those big M&A transactions that we made last year. And so we -- our operating margin of 20.3%, that's the basis now from which we will improve going forward towards the mid-20s. And then on free cash flow, yes, we can confirm it will improve in the second half, both in inventory and in receivables. Some of the inventory investment in the first half was to increase the resilience of the supply chain. But we've pointed to that being kind of [ $20 million to $40 million ] increase for this year in terms of millions of dollars. That's what we'd expect it to end at the end of the year. The growth at the half year was [ $68 million ], but that included seasonality and operational factors, which will reverse. And then also in the payables and receivables, excuse me, there's also some seasonality, quite normal. You've seen it in previous years and some of that will reverse. There will be an increase in receivables year-on-year by the end of the year because ATT does have a longer receivables period, but that will be a relatively low tens of millions number.

Jack from RBC. A couple on the Wound Care side of things. So first of all, I may have missed it, but could you provide an update on the negative pressure, the single-use negative pressure wound therapy situation, where you are with that? And also on the 30 Technology, I was wondering if you could be kind of -- if you -- understood your thinking has developed since your acquisition about kind of where you see specific opportunities there, i.e., whether it's kind of new markets, whether it's kind of taking market share and helping you take market share in kind of existing markets?

Sorry, Jack, can you just repeat your second question? I want to make sure I understood it.

So on the nitric oxide technology, has your kind of understanding of the opportunities developed to the point where you can be looking at more specific?

Yes. So look, I'll try to tackle the 2 questions. So one is, first of all, single-use negative pressure wound therapy. What are you planning on doing there? I think the bottom line is we're going ahead and actively developing what we're calling ConvaVac, okay? So that development is ongoing in progress, and we think there's an opportunity on a global-wide basis. So you'll hear more in the future, but that's ongoing right now. Clearly, we want to strengthen our offering. We currently offer in the marketplace a product called Avelle. We think there's significant room for improvement, both in terms of performance of that product and also in terms of cost position, how do you actually go ahead and manufacture. But the development is moving right ahead. Stay tuned. We'll tell you more in the future is what I would say there. On the nitric oxide technology, what I would say there is that we're actively developing the first application. We see that occurring in the Wound Care space. We're very encouraged by the performance that we see this technology platform being able to provide so we continue to be on track to deliver our first offering with this technology platform in 2025.

Anchal Verma from JPMorgan. I have 3, please. Firstly, given the strong H1, could you give us any color on how you see phasing across Q3 and Q4 across the different divisions for growth and margin? And then secondly, on Infusion Care, it would be actually a bit helpful to understand perhaps if you could give us a breakdown how much of the sales come from the double-digit in area ex diabetes opportunities, just to see how the phasing is. And I think at H1, you said that phasing will be H2 weighted. So has that changed? Or is there lots of scope for growth in H2 as well? And then finally, on Continence Care, could you please share an update on your market share for the Home Services segment and the Product segment and if you've seen kind of share gains on the Product segment in the U.S.?

Okay. Maybe I'll ask Jonny to take the first one in terms of the phasing. I don't need to focus so much on phasing, honestly.

I'm not sure we want to get into margin phasing between Q3 and Q4. We're updating on our first half margin now and giving guidance to the second half. And we don't want to get into the volatility -- there's nothing in particular, but what you should be looking for is a further improvement in operating margin in the second half of the year. And it will come from more pricing improvement, more mix, more operations productivity. But there is still a significant inflationary headwind. And we're pointing to potentially an FX headwind as well in the second half if rates stay where they are because at the moment, the dollar is a bit weaker.

Yes. Look, I think on the Infusion Care business, what portion of our business is outside of the diabetes insulin arena. It's about 10%. So we had that on the slide. And then in terms of Continence Care, our share of market on the service side is 40% plus, I'd say, very robust, and we continue to grow that business. On the manufacturing side, we're the #2 player. Again, let's call it roughly about 20%. And again, we continue to grow that business, too.

Sorry, on the phasing growth as well, please -- is on the growth side, phasing for H2?

Yes. There was a question on the phasing. I think it was Infusion Care growth, H1 versus H2. Look, what we've said for Infusion Care is it's going to be high single digits for the year. It's a business where sales are uneven but relatively predictable because we have good dialogue with our customers. And so mild phasing perhaps in the second half, but focusing on high single digits for the year is the outcome we need to stick to and then every year going forward.

One thesis I'd give you. If you're trying to analyze our business and you really think about the end markets, the end markets are all chronic, including the Infusion Care business. It's fundamentally high exposure to diabetes with now this 10%, which is an autoimmune, it will be in Parkinson's. I could go through it. So yes, there'll be some fluctuation maybe with the Infusion Care business, say, with one customer versus another customer. That's normal. You need to be thinking, what do I think is going to be happening at the end market level? So do you fundamentally believe the pump therapy and automated insulin delivery is going to grow, then probably a good space to be. If you don't, then you should have a different thesis. I mean, literally, it's that simple. So I would focus less on short-term fluctuations because I don't think there is indicative of structurally what is really happening. And that's the way we run our business. We're investing heavily in R&D in Infusion Care, heavily in capacity because we fundamentally believe that from a demand perspective, there's a strong, robust demand for our offering.

It's Sam England from Berenberg. The first one, just on inflation, can you give us a sense for how quickly lower inflation or deflation might take to work through -- work their way through to gross margins? And how much of a lag there is sort of inherent in the business as deflation comes through? And then the second one, you've obviously made big progress on the pipeline in recent years. So how should we think about medium-term R&D investment as a percentage of sales? Was it the case that there was a big sort of upfront spend on R&D as you build out the pipeline and that fade away and reduce as a percentage of sales? Or will you continue investing at the same level?

So I'll take the first one on inflation. We do hedge our costs to smooth the impact on the P&L. So changes in market prices feed through into our P&L with a time lag. And of course, it depends, but 3 to 6 months is typical. And so we've seen some market prices starting to fall in the first half of the year, for instance, in freight and in utilities. As I described, I think, in my section, we therefore expect that to feed through into our P&L in the second half of the year. So 7.7% inflation in the first half becomes 5% to 7% for the year. So the second half is obviously lower than the first half. And at current rates, inflation would continue to subside into 2024 as those effects flow through when you get the run rate effect going into the full year of 2024 at current market rates.

Yes. Look, what I would say on R&D investment is fundamentally the way to look at ConvaTec, is we're a defensive growth stock, right? High exposure to chronic care if there's strong demand there. What you need to do is to make sure that you've got differentiated solutions out there. And I deliberately use the word solutions, meaning the device and the service and link it into digital, okay? If you do well, there's significant growth. So when we think about R&D investment, we really sort of say, okay, well, how do we drive that top line? How do we drive consistent organic growth? And so the basic premise isn't a percentage, in fact. It really is to say, in each one of those 4 categories, I need to have a competitive product offering today. And I got to make sure that there's a stream of innovation behind it. I got to sustain it, right? So what that's translated into now is a 5% plus, right? So I think for modeling purposes, if that's where we're going with it, I would say, hovering around 5% is probably a reasonable assumption. But you also need to be ready that if we see an opportunity where there's an unmet clinical need, there's an opportunity to develop a differentiated product offering and to build a proprietary position. We're going to go for it. Just as you saw us do with the nitric oxide technology and Triad, right? It had been easier, frankly, short term, from pure earnings perspective to say, I'm going to pass on that. We're not going to do that. It's not the kind of company we want to be. We want to drive sustainable and profitable growth year in and year out, and so we'll continue to invest in that manner.

Scraping a barrel. Just firstly, guys, am I correctly in saying the medium-term guidance for Wound Care is now high single digits you were at mid?

That's right.

Okay. So I guess with that in mind, at this point today, you must feel pretty confident about the 4% to 6% range set out at the CMD. I'm just wondering whether you see any reason to narrow that at all? Jonny, just on the balance sheet, 2.5x leverage. I'm just wondering, does that sort of constrain you a little bit in terms of sort of further M&A? I see you're coming down to 2.3x even at that level, would that sort of be a level you're not particularly comfortable being it for too long? And then just finally, Karim, just on the pipeline and innovation, the sort of vitality index, as you call it, obviously, 6 launches this year, so I guess that will play out. Where do you see that sort of by the end of the year or maybe FY '24, perhaps that percentage?

Do you want to take the CMD guidance one? And then I'll take the next 2?

Sure. Yes. Look, we said 4% to 6%. I think what you're seeing is an increasing confidence that we will be in the top end of that range. You're correctly seeing an upgrade in our expectations for Wound Care. That has changed. It is more positive than it was at the Capital Markets event in December.

Maybe just on [indiscernible] leverage.

So 2.5x now, what we said is our [ target is 2 ]. It still is. We do allow ourselves to go up higher for appropriate M&A. We're not feeling constrained in looking for appropriate M&A. We're continuously scanning the horizon for M&A opportunities that will increase our competitive position in our key markets and our 4 categories. We're not thinking of transformational M&A, but bolt-ons. And so I think, no, we're not really feeling constrained. We do see leverage coming down. We've said that working capital is going to improve in the second half of the year, and we'll continue to target 2x because absent M&A, the business does delever quite quickly.

Look, on the vitality index, what I would say is that we're hovering around 26%, 27%. We commit to get to 30% plus of sales coming from new products launched in the last 5 years by 2025, we're on track. So you ought to expect us to keep on driving that vitality index. And we see it fundamental to be able to drive that consistent top line growth.

Christian Glennie with Stifel. Firstly, on ConvaFoam, it sounds like you've had a good start there. Just remind us maybe in terms of what you think your market share. I think you previously had targeted about sort of 10% as a potential. Is that still the case? Or might be there some upside to that?

Yes. I think we're going with ConvaFoam, I would say, after very good start in the U.S., very positive feedback in terms of the performance of the product. Many, many evaluations on a national basis, as I shared earlier. So I'd say it's very encouraging. We're looking to also launch it, frankly, in Europe in 2024. So we're on track to go ahead and do that. And then frankly, in other markets on a worldwide basis. In terms of share today, on a global basis in the Foam segment, we've achieved about a 5% share of market. I think it's reasonable that we ought to be able to achieve at least a 10% plus. So what is the plus equal? Time will tell. Let's, first of all, get to the 10%. One step at a time. But I'd say just very encouraged by the feedback that we're getting from the marketplace, and we're definitely going to go ahead and drive investment and focus on this offering.

And then on Infusion Care, a couple of quick ones there. On what -- is there anything in your expectations around growth on the Parkinson's AbbVie product for the U.S.? Obviously, that will have a CRL early this year. Any particular insight into the potential timing and resolution issues? And then clearly, the patch pump, whether it's -- Tandem developing, Medtronic also developing. You talked about the potential for that also being an opportunity for you. How do you actually go about leveraging that with those -- getting those relationships with those partners? Is it real? And also, is it still the same economics, I guess, ultimately, obviously, you have all of that apart from the tubing, but just to get a sense for how you actually leverage that opportunity in the patch pump?

So look, I would say on AbbVie. AbbVie now has received approval for the L-Dopa Carbidopa pump in Japan. That just happened last month. I think they're on track to receive an approval in Europe this calendar year. And I think the best guess is that in the U.S., we ought to anticipate something in 2024. I think you have to ask AbbVie, frankly, what their perspective is. But from our side, there's a level of optimism that it's a matter of time that they work through some of the challenges. I think on the second question, which was really related to hybrid pumps, patch pumps. How real is that opportunity? And what are the economics there? I would say, a, the economics are very attractive, so that's not an issue. So it's an attractive opportunity. And I think it's very real. But for competitive reasons, it would not be appropriate for me to say anything beyond that. But I've clearly highlighted to you that it's within our sights, and stay tuned.

But I mean if I just may add to that, I think this was sitting in the question. Our ability to achieve high single-digit growth this year and next is not reliant, for example, on AbbVie.

Sure. And then finally, sorry, in terms of free cash flow, just to follow up on that, the 27% in the first half, what roughly should it be in terms of conversion for the full year? And what should this business be doing on a sort of annual basis in terms of the cash flow conversion?

Well, look, for the full year, if you work the numbers through, what we've talked about is an increase in receivables and an increase in inventory, combining to somewhere around $50 million, then it gives you a cash conversion above 50% -- 50% to 75% for the full year. Some of that inventory increase is onetime. It is building resilience in our supply chain and as the receivables grow in ATT, it depends how quickly that grows right. But this year's cash conversion should be a base from which we can grow because we won't need to be increasing inventory into the future going forward to the same extent.

Okay. I think we've got some questions from folks who have joined us online and maybe, Kate, Head of Investor Relations is going to facilitate posing these questions.

We do. So a couple here from [ Hassan ] at Barcap. The first one is just on guidance and phasing. Obviously, the comps get easier in the second half. You're already effectively at the middle of your new organic growth range. Is there any reason why in the base case, we shouldn't see an acceleration in growth in the second half? And could that be an incremental tailwind which is sustainable into next year?

Jonny, do you want to take that one?

Look, could we be in the upper end of the range of organic growth guidance that we've just said? We could. Yes, the arithmetic shows that we don't want to get ahead of ourselves. We want to be cautious in our guidance, so that's why we're guiding 6% to 7.5%. But there is a good chance we could be in the upper end of the range. Could that set a basis going forward? Well, this year, remember, we have got a particular acceleration from ATT. And that will continue to grow nicely, but it's growing from a very small base at the moment. So whereas we're expecting Wound Care to be double-digit growth this year, we're saying it's going to be high single-digit growth going forward because the relative impact of ATT will diminish over time. And so there's reasons to think that this year might be a bit higher because of that Wound Care change.

Another question from [ Hassan ]. There were a couple, I thought I'd split them up for your benefit. Could you talk about the strong underlying growth in the 6.5% and in particular, what you're seeing in the U.S.? Are you yet gaining share on the new patient side?

I think that's Wound Care, is it?

No, sorry, Ostomy Care.

Ostomy Care.

Specifically, Ostomy Care. Yes. Look, what I would say is on Ostomy Care U.S.A., we're definitely improving. I think it's -- in my mind, it's still too early to say that we're growing share in terms of new patient starts. I'm comfortable saying that we've stabilized. I think that's a prudent way of describing that. I think clearly, the collaboration between the Ostomy Care team, where we're targeting the right accounts, where we are increasing our emphasis in terms of our clinical approach and then coordinating very tightly with the Home Service Group that has a dedicated team is working really well, and that is clearly contributing to growth in the U.S. marketplace in Ostomy Care.

Two more. The first one from Adam Barker at Goodbody. What do you see as the major competitive risk in Infusion Care? Is there a risk that either there are new entrants or some of your customers choose to backward integrate some of the components that you supply?

Yes. So look, I think in Infusion Care, there could be new entrants and there could be folks that backward integrate. I think what we need to realize is that we really have a strong position. We work at critical mass. We produce over 110 million infusion sets per annum. I need to remember that these are over 15 different components and about 20 different steps, and we do this in highly automated lines, hundreds of millions, okay? So the know-how and technology and proprietary position that we have in this area is very strong. That doesn't mean that insurmountable, just means it's very, very strong. And so look, I think that, that risk is there, and the onus on ConvaTec is to ensure that we provide a very high-quality service, a very high quality product and ensure that the economics that we're providing to our partners are attractive to them and at the same time, provide us for an appropriate rate of return. And I think if we can find that balance, I'm confident that we'll continue to grow this business in high single digits.

Final question from Miles Dixon at Peel Hunt. Thinking about the product launches you've described in Infusion -- in Ostomy Care, sorry, and the acquisition of ATT, 30 Tech, are there any fundamental product areas that you would like to supplement or add to your portfolio moving forward?

I think the short answer is no. I think that during the course of the next 12 to 24 months, we'll be in a position where across all 4 categories. We've got competitive, if not very competitive offerings across the categories and the segments in which they compete in. And then I think the opportunity challenge is to sustain that stream of innovation. We came from where we had gaps. I think those gaps are being rapidly filled and then we just need to sustain that stream of innovation. And I think, frankly, the R&D team at ConvaTec is doing a really nice job of driving that and they're working very, very closely with the global business units. And so I think we've got a much better appreciation for the unmet clinical needs in the marketplace and driving that pipeline. So that's what I have to say. Super. Okay. Anybody else have any more questions here? Oh, we got 1 more, Seb. Okay. Go for it.

It's Sebastien Jantet from Liberum. So I wanted to just go back and talk a little bit about the medium-term margin guidance and get a little bit of sense about how you're thinking on that's going? Because obviously, we've had very strong revenue growth. You're guiding more confidently other towards the top end of that. You previously said that the target is to get to mid-20s by the medium term hopefully, defining need with those terms in terms of when or exactly how much. But let's just say that that's 25% by '26. I guess some kind of the question I'm asking is that in terms of how that might phase and of course, I'm not asking for '24 guidance here, but you've got maybe 20% of margin this year. You've got another 3 years to deliver maybe 500 basis points to begin to hit that kind of target. Should we be thinking of that as phasing equally over that period? Or is there going to be a big chunk of it? And should we be thinking in terms of your confidence about revenue, perhaps bringing the time you might get to that mid-teens slightly kind of earlier?

Yes. Look, I think what I would say is the way we're trying to drive the business, and then I'll let Jonny here to join me if he's got additional thoughts. But I think fundamentally, we don't see any structural reasons why we can't get to the mid-20s, okay? And our confidence and able to achieve those mid-20s continues to increase. The reality is that we're trying to balance 2 elements: one is, what is the external environment looking like? If you believe that this era sort of hyperinflation is going to rapidly come down, that bodes better in terms of how quickly we get there. If you think the inflationary environment is going to persist at very high levels for a long time, that makes it more challenging, right? I mean, that's something just structural. The other element is how do we balance out the level of investment we're going to make short term relative to the opportunity, right? And what I mean by that is, fundamentally, we are focused on driving that top line growth, right? And I gave you the example of 30 Technology. It would have been easier to say pass on that opportunity. But we fundamentally think that, that opportunity is going to contribute to sustained growth, and so you're trying to balance those 2 elements. But I would say our level of confidence is definitely growing. And I don't see any reason why we're not going to get there. Jonny, if you want to add to...

Yes. Look, I think that's a very important point. It's somewhat within our control, but we don't want to go too fast. With a bit of time under our belt now, we are comfortable in giving you a bit more definition. So mid-20s for us, it's '24 to '26. And medium term, we're now saying it will be approximately 3 years. So it might be '26, it might be '27. There are still some uncertainties out there. But that's where we are targeting with all of what Karim said in terms of balancing appropriate investment to drive the future against improving margin at the right sort of pace. And to your point about phasing, I think even phasing is as good an assumption as any other. There are some external factors, but we're on a steady course of improvement. If you strip out FX, we've done about 300 points in 2 years by the end of this year. And we will -- what we have committed to is we'll make progress every year.

Okay. Any more questions? Super. Look, just a big thank you. I really appreciate all your high level of engagement, and I look forward to seeing you soon. All the best.

Thanks very much.