Medical products group instigates plan to arrest ‘disappointing’ performance

ConvaTec Group, the Deeside company which specialises in medical products and technologies, reported “disappointing” results for the year to December 31, 2018, today.

Although in line with the revised guidance provided in October 2018, group chief executive Rick Anderson blamed the poor performance on “failures in execution which have caused the company to underperform”.

The business reported revenues for the year to December 31, of £1.43bn, compared with £1.38bn. Reported pre-tax profits of £157m were up from £128m.

In October last year shares in the group fell by more than 26% when chief executive Paul Moraviec announced he was to retire with immediate effect, and the business revised down its growth and earnings expectations.

It said this was due to a change in inventory policy by its biggest customer in the infusion devices franchise, which was expected to have a material negative impact on revenue in the fourth quarter of between £13.72-£15.53m, and, “to a lesser extent, challenging market dynamics in specific markets in advanced wound care”.

Since then it has established a transformation initiative to implement a refreshed execution model “Pivot to Growth” to deliver strategy more effectively and drive higher revenue growth and profitability.

This involves the investment of around £117m over three years, with a two- to three-year payback expected.

The company said by the end of year three it also expects to incur £39m of ongoing annual costs related to commercial spend and R&D, building from £12m in 2019.

But it added that it expects higher revenue growth, £62.4m gross annual cost savings by year three – increasing to £93.6m gross annual savings by 2023 – and an improved profit margin.

Guidance for the current financial year anticipates organic revenue growth of 1% to 2.5%, an adjusted EBIT margin of 18% to 20%, including £39m of operational spend associated with the transformation initiative and costs related to medical device regulation).

Rick Anderson said today: “These are disappointing results, in light of our revenue and margin guidance at the beginning of 2018.

“With the executive committee, I have undertaken an extensive review of the business since my appointment as CEO and it is clear that swift and strong action is required to address the failures in execution which have caused the company to underperform.

“Following board approval, we are now implementing a refreshed execution model to support our strategy and deliver sustainable and profitable growth.

“We will achieve this by concentrating on those product and market segments which offer the best returns, developing a strong and innovative pipeline of new products, simplifying our business to run it more efficiently and investing to strengthen our commercial and operational execution.

“This model can be leveraged by an incoming CEO, without constraining any potential strategic changes they may wish to implement.”

He added: “We have solid fundamentals, robust cash flows and we have reduced our leverage, but need to invest in the business over the next three years.

“I fully believe the changes we are making to our execution model will deliver the returns that our shareholders and other stakeholders rightly expect in the future.”

He said: “The search for a permanent CEO has made significant progress since October, with a very strong short-list of candidates.

“The board is moving quickly on this key appointment.”