ConvaTec Group PLC
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ConvaTec Group PLC
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Ladies and gentlemen, hello, and welcome to the ConvaTec Group Plc Q1 trading update for the 3 months ended 31st of March 2021. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions]I will now hand over to your host, Frank Schulkes, CFO, to begin. Frank, please go ahead when you're ready.
Thank you very much, Maxine. Good morning, everyone, and thanks for joining us today. It's a busy morning of reporting. So I will make a few opening remarks, and then we can open it up for questions. As well as delivering a strong performance during the first quarter, we continued to make good progress with our strategy as we pivot to sustainable and profitable growth, most notably with the acquisition of Cure Medical. The business, which is based in California, develops, manufactures and distributes intermittent catheters. And consistent with the focus and innovate pillars of our strategy, we are investing in the United States as well as enhancing our portfolio in one of our key categories. This acquisition strengthened our position as a leading manufacturer of Continence Care products in the U.S.In addition, Cure has established relationships with a large number of partners beyond those already served by ConvaTec's Continence Care team. Cure's portfolio of products is complementary to our proprietary and differentiated hydrophilic GentleCath portfolio. And together, we can offer a comprehensive range of products and services to better serve the broad range of needs for patients and caregivers. Cure is being integrated into our Continence business, led by Kjersti, and the Cure and ConvaTec Continence sales forces are beginning to market the combined portfolios to U.S. partners and clinicians. Moving to the first quarter financials. Revenues rose 5.4% on a constant currency basis during the quarter. And if we remove the $1.3 million of incremental revenues from Cure during the period and adjust for the disposal of the U.S. Skincare business, which last year contributed $6.8 million to the first quarter, then revenues rose 6.7% on an organic basis. We're pleased with this strong performance. And some of this is driven by phasing and weaker comparatives in certain places. So let me try to help you unpack it slightly. Starting with Advanced Wound Care. We saw particularly strong growth in the wound business with revenues up 9.4% after adjusting for the skincare disposal. This was primarily driven by a very strong performance in the Global Emerging Markets and strong growth in Europe, both regions which had experienced some headwinds last year. By contrast, we've seen some continued softness in North America, although the comparative was somewhat tougher given the stocking activity we saw in the U.S. in Q1 last year. Elective procedures during the period remained below pre-COVID levels. Although encouragingly, we saw volumes of surgical cover dressings begin to improve in March. If we adjust for the comparatives and one-offs during the period, notably phasing, we estimate that growth on an underlying basis was consistent with the market. Although slower than the headline organic figure, it's nevertheless a good performance with very good growth in Asia and Latin America and improvements in the U.S. and Europe. Looking forward, however, uncertainty around COVID persists. It's not yet clear how the developing third wave, particularly in the Global Emerging Markets, will impact the business. We have already seen recent lockdowns starting to impact access to the hospital setting.There are also questions over the time frame for normalization given the variation in vaccination programs, coupled with the advent of new variants of the virus. Near term, however, we expect an even stronger headline growth figure in the second quarter given we are lapping easy comps. As you will remember, last year, we were down 13% in the second quarter as COVID took hold in all parts of the world. Our second half growth expectations are much more moderate given the comparative figure and the ongoing uncertainty. We expect to be able to provide better insights at the half year. Moving on to Ostomy Care. As indicated at the full year results in March, we made a solid start to the year in the Ostomy Care business and delivered 3% organic growth in Q1. This was in spite of a tough comparative. If you remember, last year, we saw significant stocking activity. The growth this year was primarily driven by the Global Emerging Markets and supported by modest growth in North America.In Europe, meanwhile, we continue to experience some softness, and some of the growth in Ostomy Care related to phasing of orders and tenders. And on an underlying basis, we think growth was in the low single digits. Looking forward, the second quarter will also be reasonably robust against a soft comp as in Q2 last year. We have begun to see some of the inventory unwind. In Continence & Critical Care, revenues increased by 5.6% on a constant currency basis. And if we remove Cure Medical, the revenues rose 4.5% on an organic basis. This was driven by continued strong demand for Critical Care products in January. And overall, Critical Care grew 7.5% during the quarter. Although it's worth noting that in the later part of the quarter, we saw the business begin to decline year-over-year. And this was anticipated as 2020 was inflated by COVID-driven incremental demand, and we expect things to normalize in our key markets. The Continence Care business showed more moderate growth, which was largely anticipated given the first quarter last year had benefited from some stocking. And we're now beginning to see the impact of lower new patient starts across the segment during the pandemic. Looking forward, we do expect Critical Care to continue to decline, while as previously indicated, Continence Care will be growing at a slightly slower pace than last year. Infusion Care continued to grow strongly, up 11.7% on an organic basis. And this is primarily driven by the continued strong demand for innovative infusion sets for diabetes patients, coupled with some stocking. We also saw good growth in our non-diabetes business, albeit of a small base. I'm pleased that earlier this month, Medtronic announced the launch, in selected European markets, of our new proprietary and differentiated extended wear infusion set, which can last up to 7 days. Looking forward, we expect a slowdown in overall Infusion Care growth from here given the particularly tough comparatives in the second half. I've given you a sense of expected phasing for the remainder of the year. At the group level, given the ongoing macro uncertainty and the declines being seen in Critical Care, coupled with relatively tougher comparatives in the second half, our guidance remains unchanged with organic revenue growth of 3% to 4.5% and EBIT margins on a constant currency basis to be between 18% and 19.5%. Given currency movements so far this year, it's worth noting that we're currently facing into an FX margin headwind of about 80 basis points compared to last year. My comments have hopefully addressed a number of questions, but we'll now open it up to Q&A. And given it's a busy morning for reporting, I ask that each person only ask one question. Thank you very much. Maxine?
[Operator Instructions] Our first question comes from Amy Walker from Peel Hunt.
Congrats, great quarter. Frank, could you just quantify for us in USD terms, please, the benefit from the phasing in the first quarter in wound and in ostomy? And then I think you also mentioned stocking in Infusion Care, that would be helpful.
Yes. Well, if you just look at the overall growth number, for instance, in the wound business of just over 9%, we expect -- we think that we grew sort of in line with the market, which means 4%, probably a little better than that. So you're really talking about 450, 500 basis points. And of course, that's a function of some destocking that happened last year, which made the comp easier and some stocking this year. And that's probably, I would say, probably a 50-50 split for the wound business.Ostomy Care, last year, we saw, of course, the stocking happening, which was largely COVID-driven, which helped last year's growth rates. On top of, of course, we had the rebate benefit last year, but you have to discount that because that was a '19 event. And we saw an impact that was slightly higher, and it was a combination of some stocking, but also some phasing. We saw some tenders, for instance, in Russia and in Latin America that happened last year in the second quarter, were now happening in the first quarter. Overall, that impact, net-net, was smaller because we think that the underlying growth rate in Ostomy Care is low single digits, so just below the 3%, but not massively below the 3%. So therefore, the impact, net-net, is pretty minimal. And then finally, in the Infusion Care business, I think the Infusion Care business, you will see growth rates move a little bit quarter-to-quarter given the patterns from last year. And you have to think about this business that over the long term, this business clearly has the capacity to grow higher single digit on a sustainable basis. But there will be some movements between the different quarters. And you can expect, for instance, in the second quarter, that the business will not grow at a double-digit rate and will be below that, and that's just the movement of certain order patterns. So that's how you have to think about sort of the movements between different quarters and the stocking and restocking activity. I hope that helps.
It does.
Our next question comes from Patrick Wood from Bank of America.
Interesting question, I guess, on Cure Medical. I'm just curious, how much does the product platform overlap with you guys? And therefore, is this acquisition a little bit more about getting those relationships that you didn't have before? Or is it really also that the products don't overlap much and you've got sort of a complementarity there? Just to help me understand a bit more about the split there.
Yes. A couple of things here. Indeed, first and foremost, of course, if you think about our strategy, focus on investing in 4 key categories, continence being one of them. And then, of course, focus and invest in our key markets, of which the U.S. is a priority market. So first of all, it's hitting the sweet spot there. Second, there is indeed good product alignment, very complementary portfolios. And that will allow us to really respond to a broad range of needs. And Cure has, in fact, a very interesting strong track record of constant and consisting -- consistent product enhancements, which fill product gaps in the GentleCath range. While, of course, GentleCath continues to meet the need for the hydrophilic end of the range with our FeelClean technology. So there is a good complementary portfolio. On top of that, as you mentioned, indeed, Cure has an extensive network of partners in the U.S., DMEs, so that gives us terrific access to that. And therefore, we see a clear opportunity to leverage both sales forces with the Cure sales forces, adding the GentleCath products and vice versa. So it's a combination of things, Patrick.
Our next question comes from Paul Cuddon from Numis Securities.
Just one really on emerging markets. You've called out the strong performance in Wound Care and in Ostomy. And to what extent does this reflect some of your transformation investments over the years? Or do we have that to come?
Yes. So if you look at the emerging markets, a couple of years ago, we made a leadership change there. And since then, new leadership has brought in also new leadership, specifically in the Asia Pacific region. In Latin America, we already had a very strong team and a very strong performing team.So with that new team, the focus really has been to work on a commercial execution, to focus on driving in-market demand, to up the game and create really a professional education capability in the region with the caregivers, the nurses, the docs. And if you add it all up, it really starts to pay off. So we start to see the returns of that improved commercial execution with that new leadership and that focus on the end-market demand. So -- and we've seen that clearly in Q1, and it's been broad-based. So Latin America as well as Asia Pacific in Wound as well as in Ostomy Care. Now at the same time, I've been clear, there has been some phasing in the first quarter because there were some tenders that normally were coming in the second quarter, were pulled into the first quarter. Nevertheless, that doesn't take away that execution is improving, and we're really very pleased with the progress we're making in the emerging markets.
Our next question comes from Hassan Al-Wakeel from Barclays.
My question is on the back of a really strong quarter, you've obviously maintained guidance despite comps getting easier throughout the year. Is the top end more of the guidance range like more likely now on growth, but also margins given some operational leverage that you might enjoy throughout the year?
Yes. Well, first of all, it is very early in the year. So it feels premature to really start talking about moving guidance at this stage, to be honest. And as I said, there is a lot of uncertainty around COVID with new waves popping up. Parts of the emerging markets are worsening, devastating what's happening in India. Tokyo is in a lockdown, and we see similar things happening in Latin America, Brazil. And also we see, in certain European countries, in fact, access going down. So with that uncertainty, and it's very early in the year, it's just too premature to talk about guidance. And if you look at the different business units, the Crit Care business will decline in the second half, and we've seen a positive in the first quarter. On the Infusion Care, the comps will get tougher in the second half versus the first half. And the Wound business enjoyed easier comps in the first half than we will see in the second half. So if you combine all of that, again, it's too premature, and we will know more at the half year. Then second question -- second part of the question was around margins. Listen, of course, there are a lot of variables at play when we talk about margin, think about price, mix, inflation, costs and so on. But yes, if we grow faster, typically, that helps operating leverage, right? It also depends a little bit where the growth is coming from. Of course, that's the mix element. But on top of that, we intend to keep on investing in the business. So my point is, it helps, for sure, but it's not just a simple one-dimensional equation.
Our next question comes from Michael Jungling from Morgan Stanley.
I have a question in relation to GPOs. How do you feel GPOs will be impacting your business for the rest of the year? And part of this question is also how you feel about the upcoming tender of a large GPO in the U.S. and whether that is something that is currently giving you -- preventing you from perhaps giving you a little bit more room for upping your guidance for this year.
Yes. So I don't think there is going to be any material impact related to GPOs in 2021. Of course, you've seen the Vizient GPO dynamics were not surprisingly when multi-sourced. Again, we don't expect any impacts, really no impact, positive or negative, in '21 related to any of the GPO dynamics.
Okay. And is that impacting your guidance in any way, shape or form?
No, no, no. No, nothing related to that. No.
Our next question comes from Veronika Dubajova from Goldman Sachs.
Wound Care momentum seems to have improved quite substantially, I think, versus what we've seen historically. And I guess you've had a couple of competitive launches against you in the sort of historical segments where you've been strong. Just trying to understand a little bit what you're seeing in the market and what's driving that improved momentum. Is it really just emerging market? Is there something happening in the portfolio? If you can talk to that, that would be helpful.
Yes. Well, indeed, Q1, of course, had quite some puts and takes with some destocking last year and stocking and public spending this year. But if you look at -- sort of the notch-up was really driven by the emerging markets. And I'm just coming back to why that was. We just see better execution, better commercial execution, and a clear example was the emerging markets. We're also seeing improved execution in Europe and the U.S., but we're not where we want to be yet. So it starts to improve. We start to see some stabilization of shares, but I would say that will take still some time, so give us through 2021. And at this moment, this part of the year, it was really driven by the emerging markets.
Our next question comes from Christian Glennie from Stifel.
Just to follow up on the electives piece of your commentary there. Some peers have reported a bit more of an encouraging recovery in terms of electives through Q1, helped them beat -- just trying to understand a bit more how much -- whether there was any element or real contribution in that return in Q1? Or is it you -- it was only towards the end of the quarter? And what your expectations are, therefore, in terms of recovery through the rest of the year?
Yes. So first, indeed, electives has seen quite a rollercoaster ride in the second quarter last year, a complete deep dive and a very fast recovery in Q3 and then they're sort of plateauing in Q4. We saw early in Q1, in fact, dipping it again a little bit versus Q4. And then only towards the end, we saw the electives and the associated surgical segment slightly improve. So at this moment, our view is that electives are still below pre-COVID levels. But we expect electives to improve throughout the year. How fast? It's tough at this moment to say. I think there is quite some variation in the different reports. I think we all agree that it's still below pre-COVID levels and that we also agree that it will improve. How fast is a little bit the question here, and we're watching that. But we've seen, towards the end, an improvement versus the prior quarters. Yes.
Our next question comes from Odysseas Manesiotis from Berenberg.
Congrats on the results. I wanted to ask on Germany reimbursement cuts for wound antimicrobials, we haven't seen much here since you first started talking about this. Have the regulatory discussions here died off? Or is it sort of a pandemic-related delay?And a very quick one on ostomy, if you're happy to share, of course. Good to see your HSG franchise having an impact here. Could you potentially quantify this for us?
Okay. So on German pricing -- reimbursement, sorry, basically, we're in a waiting mode here. So there has been a consultation. The implementation in October '21 could still be pushed out. And to be honest, it's a little bit radio silence. The appeal is ongoing, and I really don't have a further update at this moment. So we're in a waiting mode from that point of view while the appeal is ongoing. On Ostomy Care, I can say that if you look at the strategy that we're executing on Ostomy Care around commercial execution, of course, on the leadership side, the segmentation and a third element is really team selling, and a big important part of that is the collaboration between our HSG business and the Ostomy Care business. And I really don't want to give you any quantification, but we're very pleased with the progress that the both teams are making. And it is off a small base, but we see a very good growth coming through that team selling combination. So again, it's relatively small, but it looks positive, and we're very pleased with the progress we're making there.
Our next question comes from David Adlington from JPMorgan.
Just a question on Continence Care. You've pulled out the impact of lower new patient starts. I just wondered if, a, I think that was mostly through last year, but are you able to quantify that impact? And how are you seeing the new patient starts start to improve again?
Yes. So indeed, the new patient start during COVID has been growing slightly down. And you get a little bit of a delayed response because early on, the impact on revenue is sort of negligible. It's rounding, but over time, it starts to build, and that's why we have seen some of that in the first quarter. I would say we've seen the business grow 3% to 4% in the past. It was more like 4% to 5%. So there was an impact. On top of that, there was also a tough comp. So to point exactly how much the impact was, I would say, it's probably -- it's less than 100 basis points.But the more important thing, this is a temporary event. We already have seen new patient starts starting to come back to pre-COVID levels, not exactly there yet, but that is going to happen within probably the first half of 2021. And that means that after that sort of dip in growth rates, we expect then towards the end of the year that things will start to normalize again. So it's a temporary event. It's very tough to pinpoint exactly a number to it, but it has impacted the first quarter and will also impact the second quarter.
Our next question comes from Charles Weston from RBC.
What sort of adoption are you and Medtronic planning for with the new 7-day infusion set? And what's the impact for you on a volume/price margin perspective?
Well, first and foremost, of course, it is a truly innovative differentiated property we brought to the market. And the first thing that I want to mention here is it's great for patients, right? Patients today will have to change their sets every 3 days. With the extended wear infusion set, it can last up to 7 days. So that's a very important part of us bringing this product to the market for the patients' comfort. How fast the pickup will be is very tough to assess. The launch, first of all, is only in a couple of selected European markets. And in the end, it's up to Medtronic how fast and where they're going to launch. And of course, our growth rate will follow that. But given it's great for patients, I think there will be a good uptick. But it will, of course, start from a 0 basis. So it will probably take some time. It's, for me, very tough to say how big and how fast it will be. But for 2021, it's not going to be meaningful, and we'll build from there. From a margin -- and it's the one point of view I really can't comment, but it is sort of in line with our overall margins. It's a different type of product. And there will be less units, but there is also a different pricing associated with that. So overall, it will have a negative impact, but it might even have a little bit of a positive impact long term.
[Operator Instructions] Our next question comes from Lisa Clive from Bernstein.
Just sort of a question on your wound management performance. Could you give us a bit of a breakdown in terms of the sales by region? What proportion of your sales are roughly in sort of Europe, U.S., rest of the world? And what were the different growth rates? And a longer-term question. The U.S. market is -- really underutilizes Advanced Wound Care products. Could you just give us a comment on your views on the outlook for that market? And what is really needed, whether it's a lot more clinical data or something else to help drive further penetration in that market?
Okay. So first, if you look at the overall distribution, probably the U.S. is around 25% to 30% of our business in terms of Wound. And then Europe is probably around half, and then the rest is the emerging markets. That's how you sort of have to think about it. So overall, Europe, 50%; U.S., 25% to 30%; and the rest in the emerging. So overall growth rate for Wound in the segments that -- our addressable segment is probably around 4% with stronger growth in the emerging markets and more moderate growth in Europe and the U.S. Second question was, you said U.S. is underpenetrated. Is that what you said?
Yes, that's my understanding. And especially if you look at the sort of revenue distribution from the likes of you and Smith & Nephew, the sales coming out of the U.S. are just a lot lower than you would expect given the size of the market. So it just seems like oddly in the U.S., there's a lot of gauze and iodine being used instead of proper Advanced Wound Care products.
Well, I really can't comment too much on that.
Or am I wrong...
Yes, what I can tell you, though, is that there are clearly differences between the 2 markets. The U.S. market, for instance, is much more a market for us that is focused on surgical cover dressing. So the percentage of surgical is much higher in the U.S. than we, for instance, see outside of the U.S. So there's a clear focus there.On top of that, the U.S. market is basically is very focused also on silver, while in, for instance, Europe, there is much more a mix. Certain countries don't have silver like, for instance, France or other countries have silver. So there is much more a mix. So I would say, I wouldn't say it's underpenetrated. It's just a different distribution of types of products that are used.
We have no further questions, so I'll hand it back to you, Frank.
Okay. Great. So thank you very much. I hope that we were answering your questions, and looking forward to our next update after first half results. Have a great day. Bye-bye.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.