Annual Results for the Year ended 31 December 2019: Presentation Deck

2019 Annual Results & Strategic Update

28 February 2020

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Unless otherwise stated all stated financial metrics in this presentation are adjusted; for a full definition of the adjustments made please refer to the Financial Review in the full year results statement.

1

Hosts and agenda

John McAdam	Frank Schulkes	Karim Bitar
Chairman	Chief Financial Officer	Chief Executive Officer
1. Introduction	2. Financial review	3. Strategic update

2

1. Introduction

John McAdam, Chairman

3

2. Financial review

Frank Schulkes, Chief Financial Officer

4

Financial results - Performance in line with expectations

			2019	2018	Growth		Comments
		Revenue	$1,827m	$1,832m	2.3%1	•	$49m FX headwind, $1.4m M&A
		Gross margin2	59.0%	60.2%	(120) bps	•	(40) bps FX and (80) bps performance incl. transformation
		Opex2% revenue	39.6%	36.7%	290 bps	•Investment in transformation and MDR
		•Partially offset by cost control in other areas
		EBIT2	$354m	$429m	(17.5)%	•	Largely transformation investment driven and FX
		EBIT margin2	19.4%	23.4%	(400) bps		headwinds
		EPS2	$0.12	$0.16		•In line with earnings reduction
		Dividend per share ($ cents)	5.7 cents	5.7 cents		•49% of adjusted net profit
		Cash conversion2, 4	98%	81%		•Continued strong cash conversion
		Net Debt / EBITDA2, 3	2.5x	2.7x		•	Leverage down, dividend maintained
1	Organic growth is growth at constant exchange rates excluding M&A activities
2	Results are adjusted unless otherwise stated. A reconciliation of adjusted to reported results is in the full year results statement on pages 36 to 42
3	2019 adjusted EBITDA $443 million (2018: $482 million)					5
4	Cashflow (Adjusted EBITDA - capex - net change in working capital / Adjusted EBITDA). See slide 10

2019 revenue - Modest organic growth

Organic1growth 2.3%

	0.5%	1.9%	4.1%	4.1%
						1
						11
($m)				18	(49)
1,832	3	11			1,827

2018	Advanced Wound	Ostomy	Continence &	Infusion	M&A	FX	2019
	Care	Care	Critical Care	Care

• Reported revenue declined 0.3% and grew 2.4% at constant currency
• $49m currency headwind, principally Euro and GBP
• Net M&A contribution of $1.4m, impact of J&R Medical and Southlake Medical Supplies acquisitions and Symbius disposal2

1	Organic growth is growth at constant exchange rates excluding M&A activities
2	J&R Medical acquired 1 March 2018, Southlake Medical Supplies acquired 1 October 2019, Symbius disposed of 1 March 2018	6

AWC & OC - Further improvement required

Advanced

Wound Care1

FY 19 0.5% Q4 19 1.8%

Ostomy

Care1

FY 19 1.9% Q4 19 5.2%

• Foam and silver driving growth with strong performance from AQUACELTMAg+ / Advantage anti-biofilm
• New product launch, ConvaMaxTM, in super absorber segment
• Pressure on legacy portfolio remained
• Solid performances in EMEA, APAC and Latin America, US remains in transition
• Deployed new specialised salesforce in the US
• Modest improvement against weak prior year
• Good performance from recent product launches EsteemTM+ Flex Convex and NaturaTMAccordion
• Ongoing investment in me+TMis driving patient enrolments
• Solid performances in Latin America, APAC and select European markets
• US continues to underperform

1Organic growth is growth at constant exchange rates excluding M&A activities

7

CCC & IC - Performing solidly

Continence & Critical Care1

FY 19 4.1%

Q4 19 3.8%

Infusion

Care1

FY 19 4.1%

Q4 19 12.4%

• Strong performance from Home Service Group, gaining share in US continence market
• GentleCathTMGlide growing strongly
• Hospital & Critical Care revenue declining modestly
• Growth benefits from prior year packaging recall
• Good underlying demand in insulin pump market
• Continued strong growth in MiniMedTMMioTM
• Q4 growth benefits from change to ordering patterns in prior year

1Organic growth is growth at constant exchange rates, excluding M&A activities

8

Margin & cost review - Continuing to invest

Gross margin1rate %		Opex1% of revenue

59.0	60.2
2019	2018

YoY change

Movement	(120) bps
One-off Transformation	(30) bps
FX	(40) bps
Operational	(50) bps

39.6%

2.2%	36.7%
2.7%	2.7%
10.9%	11.4%		TI & MDR
	R&D
			G&A
23.6%	22.7%		S&D

20192018

• Negative price / mix in line with expectations	• Opex % of revenue excl. transformation and MDR 37.4%
• Operational excellence programme drove positive net	• Growth driven by increased commercial investment:
productivity in 2019	‒ Specialised salesforce in US Wound
• Modest transformation investments	‒ Regional growth - China sales and distribution

1Results are adjusted unless otherwise stated. A reconciliation of adjusted to reported results is in the full year results statement on pages 36 to 42

9

Cash and leverage - Robust cash generation and continued deleverage

Adjusted Cash Flow ($m)

2019			2018
EBITDA1,3	443	482
Capex	(61)	(72)
11.4%
NWC		52	(21)
Free cash flow4	434	389
23.1%	22.4%

98% adjusted cash conversion (2018: 81%)

Net Debt

	31 Dec 2019	31 Dec 2018
	($m)	($m)
Long-term borrowings2	(1,486)	(1,621)
Cash and cash equivalents	386	316
Net Debt	(1,100)	(1,305)
Net Debt / EBITDA1,4(x)	2.5	2.7

Targeting <2x net debt/EBITDA1

Completed debt refinance

1	Results are adjusted unless otherwise stated. A reconciliation of adjusted to reported results is in the full year results statement on pages 36 to 42
2	Carrying value of total interest bearing liabilities excluding finance lease obligations
3	Adjusted EBITDA $443 million (2018: $482 million)	10
4	Cash generated from operations, net of PP&E

3. Strategic update

Karim Bitar,

Chief Executive Officer

Transforming ConvaTec by

Pivoting to Sustainable and Profitable Growth

11

Pivoting to Sustainable and Profitable Growth

Context

• Attractive markets

•Mixed performance

Challenge

•Organisational complexity

• Limited capabilities
• Imbalanced P&L
• Clear vision
• Defined strategic pillars

Path forward

• Simplified operating model
• New values

12

We compete in attractive markets

					Market size1	Market growth
					(circa $bn)	(circa)
		Advanced Wound Care2							4%
								7.0
		Ostomy Care3					2.5		4%
		Continence Care4							4%
					2.0
		Infusion Care5							5%
					1.0+
1
Market size and growth information are estimates and are based on internal analysis and publicly available sources, including SmartTRAK and Global Industry Analysts Inc. reports.
2	The AWC market includes advanced dressings (global alginate and gelling fibre dressing sectors (combined), contact layers, hydrogels, hydrocolloids and super absorbents (other advanced dressings),
silver/antimicrobials and foam), biologics and negative pressure wound therapy.
3	The Ostomy Care market includes pouching systems and ostomy care accessories (including deodorants, skin barriers and clothing) but excludes irrigation products.
4	The CCC market comprises the US and Europe intermittent catheter and fecal management market.	13
5	The Infusion Care market size refers to disposables for insulin infusion pumps.

However, our performance has been varied

						ConvaTec
			2019 revenue ($m)	Performance
Advanced Wound Care								Mixed
						570
						525
Ostomy Care					Lagging
				457
Continence & Critical Care						Mixed
				275
Infusion Care							Leading

14

We face some internal challenges

Challenges

Imbalanced P&L

Revenue growth

1Indicative comparator information for peer group based on publicly available

15

We need to serve the distinct needs of patients and caregivers

Who are our typical patients?

What are their conditions?

Who are their primary caregivers?

Where are their care locations?

Advanced Wound Care		Ostomy Care			Continence Care
Patients of all ages	Elderly patients		Elderly and disabled
							patients
•	Ulcers	•	Bowel cancer		•	Age-related
•	Surgery	•	Other bowel conditions			incontinence
•	Trauma	•	Cervical cancer		•	Neurologic injuries
							•	Spinal injuries
▪	Surgeon	▪	Stoma nurse		▪	Home care provider

• Wound nurse

Hospital					Hospital				Residential care
Physician clinic					Residential care				Home
Home					Home

Infusion Care

Patients with long-term needs, particularly diabetes

• Diabetes
• Cancer
• Autoimmune disease
• Neurological disease
• Diabetologist
• Endocrinologist

Physician clinic

Home

Hospice

16

As part of our transformation, we are strengthening our organisational architecture

Vision

Strategy

Operating model

Values

17

Our new vision

"Pioneering

trusted medical solutions

to improve the lives we touch"

18

We have established five strategic pillars to achieve our strategic intent of Pivoting to Sustainable and Profitable Growth

Focus	Innovate	Simplify	Build	Execute
on "must-win"	in our work and	our operations	"mission-critical"	with excellence
markets and	trusted solutions		capabilities
categories

19

Focus: We will invest strategically in key markets and categories

Invest heavily in top	Compete effectively	Serve indirectly or
12 markets	in ~40 other markets	exit~35 tail markets

20

Innovate: Our innovation will focus on providing differentiated patient-centric trusted medical solutions

Trusted medical solutions

Wrap-around

Products

Smart

Design-

Innovation

Services

to-value

driven

Patient centric

across…

Patient-centric

innovation

innovation

Evidence-

Digital

based

Personalised

21

Simplify: We are simplifying our operating model to be more customer-centric, agile, innovation-led and accountable

CEO

Advanced Wound

Ostomy Care

Continence Care

Infusion Care

Home Services

Global Emerging

Care

Group

Markets

Technology and Innovation

Quality, Operations and Regulatory

Customer Support Functions (Finance, IT, HR & Legal) and Transformation Office

22

Build: We are building "mission-critical" core capabilities across the

value chain

R&D	Supply chain	Marketing		Service		Commercial
Strengthening product,		Producing high quality		Focusing on customer		Broadening our service		Improving our
process and clinical		solutions reliably and		insights, targeted		capabilities, building on		salesforce effectiveness
development along with		efficiently		messaging and clinical		our service excellence		and refining our pricing
medical education				proof points supporting				and market access
				our value proposition
				using digital channels

23

Execute: Instil executional excellence across the organisation

More than 100 initiatives being implemented

Examples(Commercial, Operational and Business Services)

▪

▪

▪

US Wound Care specialised salesforce

EU CRM implementation AQUACELTMAg Advantage SCD

▪

▪

▪

Ostomy SKU rationalisation

Packaging waste reduction

Global Business Services

24

Our new values will underpin our vision, strategy and operating model

Do what's	Improve
care
right

	Pioneering
	trusted medical
	solutions to
Own	improve the	Deliver
lives we touch	results
it

Grow

together

25

To realise our strategic intent of Pivoting to Sustainable and Profitable Growth, we are investing

Increasing non-	Increasing investment
recurring	in ongoing costs to
transformation	c.$75 million
investment to	(previously
c. $210 million	c.$50 million)2
(previously
c.$150 million)1

Increased anticipated annual gross benefits in 2021, between

$150 to $170 million

and further thereafter (previously $130 to $150 million)

1	Between 2019 and 2021	26
2	By 2021

In summary - Starting to transform ConvaTec

Financial performance is on track

▪

▪

Modest revenue growth

As expected, profits are down

Transformation is being implemented at pace as we Pivot to Sustainable and Profitable Growth

2020 outlook:

▪

▪

Constant currency revenue growth: 2.0% to 3.5%1

Constant currency adjusted EBIT margin: 16.0% to 18.0%1,2

1	Our intention is to drive absolute revenue and earnings growth, both organic and inorganic, therefore a constant currency measure is more appropriate moving forward
2	A reconciliation of adjusted to reported results is in the full year results statement on pages 36 to 42	27

Q&A

28

Appendix

29

Transformation investments and benefits

Now

Previously

Non- recurring investment

Recurring annual investment

Annual gross benefits

Total: c.$210m

• Cost: $140m to $150m
• • $35m to $40m excluded from adj. EBIT
• Capex: $60m to $65m

c.$75m pa by 2021

$150m to $170m pa by 2021

Total: c.$150m

• Cost: c.$105m
• Capex: c.$45m

c.$50m pa by 2021

$130m to $150m pa by 2021

Ongoing annual costs and gross benefits versus 2018 baseline. Annual gross benefits will continue to grow in outer years

30

Transformation Initiative investments and benefits

Transformation investment

• Transformation investment of c.$210 million over 2019 to 2021 (previously c.$150 million over 2019 to 2021). This consists of:
• • $140 million to $150 million of cost investment, of which between $35 million and $40 million will be excluded from adjusted EBIT, in line with our policy, and between $60 million and $65 million of capex investment
  • • FY 2019:$64 million of investment:
    • • $40 million of operational costs (largely opex)
      • $20 million of capex
      • $4 million of cost items excluded from adjusted EBIT, in line with our policy
    • FY 2020:$105 million to $110 million of investment:
    • • c.$50 million of operational costs (largely opex)
      • c.$30 million capex
      • Between $25 million and $30 million of cost items to be excluded from adjusted EBIT, in line with our policy

  Recurring transformation investment

• Recurring transformation costs related to commercial and R&D investment increasing to c.$75 million by 2021 (previously $50 million by 2021)
• • FY 2019:$13 million in 2019
  • FY 2020:Between $60 million and $65 million in 2020

Annual gross benefits

• Anticipated annual gross benefits in 2021 increased to between $150 million and $170 million (previously between $130 million and $150 million).

31

Quarterly revenue performance

			Quarterly reported revenues by franchise					Organic1growth rate by franchise (%)
			2018					2019								2018					2019
$m	Q3			Q4		Q1		Q2			Q3				Q4			Q3				Q4		Q1		Q2			Q3			Q4
AWC		147			151		130		142			148				151			0.8			(1.8)		(6.8)		3.3			3.6			1.8
Ostomy
132			136		120		133			132				141			1.5			(1.5)		(0.8)		0.3			3.0			5.2
Care
C&CC	108			115		108		112			115				120			1.4			3.9		1.8		2.8			8.0			3.8
ID	66			57		73		71			68				63			(3.7)			(24.9)		(0.2)		1.9			4.3			12.4
Group	452			459		431		458			463				475			0.4			(4.0)		(2.0)		2.1			4.6			4.6

1Organic growth presents year on year growth at constant exchange rates ("CER"), excluding M&A activities

Values may not sum due to rounding

32

Quarterly revenue performance

$m

Americas

EMEA

Quarterly reported revenues by region

2018

2019

Q3

Q4

Q1

Q2

Q3

Q4

		238		221		241		247		250
232

		185		177		181		180		186
185

Organic1growth rate by region (%)

2018

2019

Q3

Q4

Q1

Q2

Q3

Q4

(1.1)		(6.0)		(5.0)		1.1		7.1		5.1

1.3		(3.5)		(0.2)		3.3		1.9		3.2

APAC				36		33		36		36		39
	36

Group				459		431		458		463		475
	452

5.5		7.3		8.9		2.8		2.2		8.2

0.4		(4.0)		(2.0)		2.1		4.6		4.6

1Organic growth presents year on year growth at constant exchange rates ("CER"), excluding M&A activities

Values may not sum due to rounding

33

Exchange rate sensitivity

▪

▪

▪

ConvaTec's geographic profile can lead to transactional currency impacts.

We monitor key rates against the US dollar.

31stJanuary 2020 spot rates would indicate a $6-7m gain on revenue and negligible impact on adjusted EBIT compared

with average FY19 rates

		FY 2019	FY 2019	Spot @ 31 Jan.	Sales		Adj. EBIT
		Average	Closing	2020	Sensitivity1	$m	Sensitivity1	$m
	Euro	1.12	1.12	1.11	4.1		2.1
	GBP	1.28	1.33	1.32	1.6		(1.6)
	Japanese Yen	0.01	0.01	0.01	0.4		0.2
	DKK	0.15	0.15	0.15	0.3		(0.7)

1Impact on sales/adjusted EBIT based on a 1% weakening of the USD

34