ConvaTec Regulatory News (CTEC)

2 August 2018

ConvaTec Group Plc First Half Results 2018

Solid performance - full year guidance confirmed

ConvaTec Group Plc and its subsidiaries ("ConvaTec" or the "Group"), a leading global medical products and technologies company focused on therapies for the management of chronic conditions, today reports first half results for the six months ended 30 June 2018 in line with expectations, with guidance for the full year confirmed, despite a challenging environment in certain key markets.

Key points:

· Group reported revenue of $921.3 million grew 10.8% year on year, 6.4%2 CER or 2.6%3 organically;

· Mixed results in Advanced Wound Care with a strong performance in AQUACELTM Foam and Silver offset by challenges in our older DuoDERMTM and base AQUACELTM dressings; good recovery in Ostomy Care and strong organic revenue growth from Continence & Critical Care and Infusion Devices;

· Good progress on reducing backorders - now at normal level;

· Adjusted1 gross margin % decreased by 100 bps, 30 bps negative foreign exchange impact and 70 bps operational impact, as a result of expected headwinds. Reported gross margin increased 50 bps due to lower restructuring costs year on year.

· Reported operating profit / EBIT $122.0 million, an increase of 31.5% year on year;

· Adjusted1 operating profit / EBIT $203.5 million, 5.2% higher year on year; Adjusted1 EBIT margin 22.1% (2017: 23.3%), in line with expectations;

· Interim dividend 1.717 cents, payout ratio of 35% of adjusted net income (annualised), in line with policy;

· Guidance for the full year confirmed: organic revenue growth 2.5% - 3.0%, adjusted EBIT margin 24% - 25%.

Paul Moraviec, Group Chief Executive Officer, commented

"In the first half of 2018, we delivered a solid performance and made good progress in many areas. Our Continence & Critical Care and Infusion Devices franchises delivered strong results and in the second quarter Ostomy Care returned to positive organic revenue growth. Within Advanced Wound Care we have seen strong demand for our newer Foam and Silver dressings, although this was offset by headwinds in our older DuoDERMTM hydrocolloid and base AQUACELTM dressings, as a result of the supply constraints of last year and challenging market dynamics. However, recent positive trends and early results from our growth initiatives give us confidence that we will see an improved performance in Advanced Wound Care in the second half.

"The backorders which arose last year continued to fall during the second quarter and are now at a normal level, as planned. Despite the modest decline in adjusted gross margin in the first half, we are making good progress with our cost out programmes. We continue to invest in the commercial areas of the business and in new product development, whilst further reducing leverage. We are well positioned to deliver on our plans during the remainder of the year and consequently our guidance for the full year is unchanged."

Franchise Summary:

Group reported revenue grew 10.8% in the first six months of 2018, 6.4%2 CER or 2.6%3 organically and 8.1% reported growth in the second quarter, 5.3% CER2 or 1.7%3 organically.

• Advanced Wound Care ("AWC") revenue grew 6.6% on a reported basis, or 1.0%3 organically in the first half of 2018, and grew 3.3% on a reported basis and declined by 0.2%3 organically, in the second quarter. Our AQUACELTM Foam and anti-biofilm Silver platforms performed well, offset by challenges in our older DuoDERMTM and base AQUACELTM dressings as a result of the supply constraints of last year and challenging market dynamics, most notably in the UK. Performance in the US post-acute channel continues to be a drag on growth, and we are taking action by rolling out a national US wound acceleration plan. We anticipate an improved performance from AWC in the second half of the year.

• Ostomy Care ("OC") revenue grew 4.4% on a reported basis, but declined 1.0%3 organically in the first six months of 2018, and in the second quarter grew by 3.8% on a reported basis or 0.3%3 organically. We made further progress in reducing orders on hold in the second quarter, which provided a tailwind to performance. We continue to execute our strategy to return the franchise to consistent growth, with a good performance in Latin America and Asia Pacific and positive trends in some European markets.

• Continence & Critical Care ("CCC") revenue grew 25.7% on a reported basis, 23.4%2 CER or 5.7%3 organically in the first half of 2018, and by 24.7% on a reported basis, 23.3%2 CER or 5.9%3 organically in the second quarter, with a strong Continence Care performance from our Home Distribution Group ("HDG") being partially offset by planned product rationalisation, which reduced CCC revenue by c. $1 million in the first half.

• Infusion Devices ("ID") revenue grew 12.2% on a reported basis, 9.2%3 organically, in the first half of 2018 and by 4.6% on a reported basis and 2.7%3 organically in the second quarter, a strong performance driven by one-off tailwinds and continued growth in the insulin pump market.

There will be an analysts and investors meeting today at 9.00am GMT at The Auditorium, UBS, 5 Broadgate Street, London, which can be viewed live through the ConvaTec website www.convatecgroup.com/investors/reports. A recording will be available on the site shortly afterwards.

The full text of this announcement and the presentation for the analyst and investors meeting can also be downloaded from the website above.

About ConvaTec

ConvaTec is a global medical products and technologies company focused on therapies for the management of chronic conditions, with leading market positions in advanced wound care, ostomy care, continence and critical care, and infusion devices. Our products provide a range of clinical and economic benefits including infection prevention, protection of at-risk skin, improved patient outcomes and reduced total cost of care. To learn more about ConvaTec, please visit www.convatecgroup.com

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(1) Certain financial measures in this document, including adjusted results above, are not prepared in accordance with International Financial Reporting Standards ("IFRS"). All adjusted measures are reconciled to the most directly comparable measure prepared in accordance with IFRS in the Non-IFRS Financial Information below (page 14).

(2) Constant exchange rates ("CER") growth is calculated by applying the applicable prior period average exchange rates to the Group's actual performance in the respective period.

(3) Organic growth presents period over period growth at CER, excluding M&A activities.

(4) Last 12 months adjusted EBITDA of $517.8m

Operating Review

For the six months ended 30 June 2018

In the first half both our Continence & Critical Care and Infusion Devices franchises delivered strong performances. Ostomy Care is regaining momentum while Advanced Wound Care performance reflected a challenging environment in certain markets.

Organic revenue grew by 2.6%3 in the first half of 2018, and 1.7%3 in the second quarter, with a stronger than anticipated performance in Ostomy Care offset by a weaker performance in Advanced Wound Care, demonstrating the benefits of our diversified portfolio.

Advanced Wound Care ("AWC")

Organic revenue growth in our AWC franchise in the first half of 2018 was 1.0%3, with a decline of 0.2%3 in organic revenue in the second quarter versus the prior year. Reported revenue of $290.0 million grew 6.6% compared to the first half of 2017, and reported revenue of $142.9 million in the second quarter grew 3.3% versus the prior year.

We saw a mixed performance in the first half of 2018. While we continued to see strong demand for our growth products AQUACELTM Foam and anti-biofilm Silver, this was offset by headwinds in our older DuoDERMTM hydrocolloid and base AQUACELTM HydrofiberTM dressings. DuoDERMTM has taken longer than anticipated to recover from the supply constraints and consequent lost accounts of last year, and we have seen challenging market dynamics, such as increased competition in the UK, which has impacted our base AQUACELTM HydrofiberTM dressings.

Growth in AQUACELTM surgical cover dressing improved during the first half, and while well above the overall franchise growth rate of 1.0%, is not yet at the double-digit growth rates seen in 2017 before the supply constraints took effect.

Recent trends in DuoDERMTM have been positive, and we expect AQUACELTM surgical cover dressing to continue to build momentum.

As noted in February in our FY17 results announcement, we are focused on improving performance in the US post-acute channel and we are taking action with the national rollout of a programme to drive account conversion in this channel and expand our Foam portfolio, following a successful pilot.

We recently gained 510(k) approval for our AQUACELTM Ag+ anti-biofilm dressing for the US, which we will brand and market as AQUACELTM Ag Advantage.

We continued the rollout of our Avelle™ Negative Pressure Wound Therapy ("NPWT") system, which is now selling in 23 markets around the world, and continue to see revenues grow.

As a result of the actions we are taking, we anticipate AWC revenue performance will improve in the second half compared to the first six months.

Ostomy Care ("OC")

Organic revenue in our Ostomy Care franchise declined in the first half by 1.0%3, but grew 0.3%3 in the second quarter. Reported revenue of $266.0 million in the first six months grew 4.4% compared to the same period in 2017. Reported revenue of $138.0 million in the second quarter grew 3.8% year on year.

We continue to execute on our strategy to return the OC franchise to consistent growth, with momentum returning to the franchise and a good performance in the second quarter, particularly in Latin America and Asia Pacific and positive trends in some European markets. This is supported by growth in our me+™ direct-to-consumer programme and good traction with our recent product launches Esteem™+ Flex Convex one-piece system, Natura™ Convex Accordion Flange and Varimate strips.

We made further progress in reducing orders on hold in the second quarter, which provided a tailwind to growth, and backorders which arose in the second half of 2017 are now back to a normal level. We continue to stabilise and optimise our manufacturing and supply chain. We anticipate Ostomy revenue performance will continue to improve in the second half.

Continence & Critical Care ("CCC")

Growth in CCC continues to be driven by strong Continence Care performance by HDG in the first half. On a reported basis revenue grew 25.7% to $220.1 million in the first half, and included a $33.0 million contribution from Woodbury Holdings ("Woodbury") acquired on 1 September 2017, and J&R Medical, which was acquired on 1 March of this year. Reported revenue in the second quarter was $111.7 million, growth of 24.7% year on year and included a $17.1 million contribution from Woodbury and J&R Medical.

On 1 March 2018, the Group also divested its Symbius Medical respiratory business - revenue for this business during the period 1 March to 30 June 2017 was $2.0 million, and in the second quarter of 2017 was $1.5 million.

At constant exchange rates, revenues in the first half grew 23.4%2, which reflected the contribution from Woodbury and J&R Medical.

Organic revenue grew 5.7%3 in the first half, including the impact of by planned product rationalisation, which reduced revenue by c. $1 million. In the second quarter organic revenue growth was 5.9%3 or 23.3%2 at CER.

We continue to rollout GentleCath™ Glide in European markets and expect to begin the launch of our next generation catheter product in the second half of 2018.

While undertaking scheduled testing of certain Critical Care hospital products manufactured in our Slovakia plant, we found an issue with some product packaging. To uphold our high standards of patient care we have decided to withdraw the affected products and change the packaging. While this is not anticipated to be material to the Group, it is possible there will be an impact on CCC growth in the second half.

Infusion Devices ("ID")

In our ID franchise, revenue grew by 9.2%3 on an organic basis in the first half of 2018, with growth of 2.7%3 in the second quarter. On a reported basis revenue of $145.2 million in the first half grew 12.2% year on year. Reported revenue for the second quarter of $70.5 million increased 4.6% year on year. Performance was boosted by one-off tailwinds in the first half, and we expect growth for the full year to be in line with the insulin pump market.

Reaction to the MiniMedTM MioTM Advance infusion set launched in the first quarter by our partner Medtronic has been extremely positive, with patients reporting it is quicker and easier to use and less painful to insert than other infusion sets.

We continue to see good growth in the insulin pump market, driven by new product launches by pump manufacturers.

Regional Revenue

Revenue in Europe, Middle East and Africa ("EMEA") declined by 1.5% on an organic basis in the first six months of the year, with both AWC and OC lower year on year, and CCC impacted by product rationalisation. On a reported basis revenue grew 8.3%, due to favourable foreign exchange.

Revenue in Americas grew 6.0% on an organic basis, with a strong performance from HDG and growth in AWC partially offset by weakness in OC. On a reported basis revenue grew by 13.8% with the inclusion of Woodbury and J&R Medical.

Revenue in Asia Pacific ("APAC") grew 1.1% on an organic basis, with growth in AWC and OC partially offset by product rationalisation in CCC. On a reported basis revenue grew by 5.1% due to favourable foreign exchange.

Adjusted gross margin

Adjusted gross margin was 59.3% in the first six months, 100 basis points lower compared to the prior year.

There was a negative impact from foreign exchange of 30 basis points, and a negative 70 basis points operational impact. Combined price and mix effects were broadly in line with expectations, and while productivity programmes delivered a cost out benefit, this was more than offset by headwinds previously outlined, such as inflation, deprecation and increased freight, as we continued to fulfil backorders.

On a reported basis gross margin was 52.1% in the first six months, 50 bps higher compared to the prior year, with the impacts summarised above offset by a decrease in restructuring costs and other costs related to the MIP programme.

Operating expenditure

In line with guidance, total adjusted operating costs represented 37.2% of revenue (2017: 37.0%), an increase of 20 bps. Reported operating costs represented 38.9% of revenue (2017: 40.4%), a decrease of 150 bps.

Adjusted sales and distribution expenses increased by $25.8 million or 13.8% in the first half as we continued to invest in commercial initiatives in EMEA, the Americas and China. Adjusted general and administrative expenses grew by $6.3 million or 6.3%, reflecting investments to support growth and productivity, along with the inclusion of the cost base of Woodbury and J&R Medical.

Adjusted R&D expenses increased by $3.3 million or 15.1% to support new product development.

This resulted in an adjusted operating profit margin for the year of 22.1% (2017: 23.3%). In the second half of the year we anticipate margin will be higher than the first six months, as a result of revenue seasonality, a number of the headwinds previously outlined diminishing, and efficiency programmes continuing to deliver expected benefits.

Reported operating profit margin increased to 13.2% (2017: 11.2%) due to higher revenue year on year and lower restructuring costs and share based compensation arising from pre-IPO employee equity grants.

Cash generation and leverage

Net cash from operating activities was $164.9 million (2017: $120.9 million), $44.0 million higher year on year primarily due to timing of interest payments and other payments including MIP-related activities, IPO costs and pre-IPO share awards, partially offset by an increase in working capital. Cash conversion was 75.2% (2017: 75.0%).

The Group ended the period with total interest bearing liabilities of $1,819.1 million. Excluding finance leases of $24.6 million net of cash of $339.1 million, net debt was $1,455.4 million. This amounted to 2.8x adjusted EBITDA4.

Dividend

On 1 August 2018, the Board declared an interim dividend 1.717 cents per share, in line with our dividend policy to target a payout ratio of 35% to 45% of adjusted net income over time. This interim dividend will be distributed on 12 October to shareholders registered at the close of business on 7 September 2018. See Note 6 - Dividends, for more detail.

People

On 3 July 2018 Novo Holdings effected a rotation in its Board representative. As such, Kasim Kutay resigned his position as a Non-Executive Director to be replaced by Sten Scheibye, with the approval of the Nominations Committee and the Board. Sten Scheibye was Chairman of the Novo Nordisk Foundation and of Novo Holdings A/S from 2013 and has recently retired from both these positions. He currently holds the position of Senior Advisor to Novo Holdings. He was appointed Chairman of Healthcare Denmark in 2015. He was a member of the Danish Corporate Governance Committee from 2003 - 2011, serving the last two years as Chairman, and from 1995 - 2008 he was the President and CEO of Coloplast A/S.

Stephan Bonnelycke joined the Group as President of Ostomy Care, on 1 August 2018. He is also a member of the Executive Committee. He joins from Hollister, where from 2000 he held a number of senior commercial and marketing roles, one of which was as Global Business Director, running Hollister's Global Ostomy Business. He will lead the development and delivery of our Ostomy strategy, working closely with the other Franchise and Regional Presidents and other key functional areas.

Acquisitions

On March 1 2018 the Group acquired J&R Medical LLC ("J&R Medical"), a Texas-based independent distributor of catheter-related supplies. The addition of J&R Medical strengthens our presence in a substantial and important US market. Concurrently the Group divested its Symbius Medical respiratory business. For the year ended 31 December 2017 J&R Medical delivered revenues of approximately $9.0 million.

Outlook and Guidance

The fundamentals of our business remain strong. The Group is a diversified chronic care business with strong brands and differentiated products, holding leading market positions in large and structurally growing markets.

Full year 2018 guidance of organic revenue growth of 2.5% to 3.0% and adjusted EBIT margin of 24% - 25% is confirmed.

We also re-iterate 2018 technical guidance:

· Capex broadly in line with 2017

· Effective tax rate around 15%

Principal risks and uncertainties

The Group has a robust risk management process in place to identify, evaluate and manage the identified risks that could impact the Group's performance. The current principal risks and uncertainties, together with an explanation of the impact and mitigation actions, are set out in the 2017 Annual Report on pages 30 to 36. The risks associated with the current uncertainty around global trade and Brexit are included under macroeconomic and foreign exchange. The Group has reviewed these risks and concluded that they represent the current position and remain relevant for the first half of the financial year.

A summary of the relevant areas of principal key risks and uncertainties is:

· Operational and supply chain;

· Macroeconomic and foreign exchange;

· Governmental social health care policy;

· Intellectual property and product innovation;

· Regulatory;

· Product quality and safety;

· Ethics, bribery and corruption;

· Budgeting and forecasting;

· Data loss/mistreatment.

Forward Looking Statements

This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the Group's control. "Forward-looking statements" are sometimes identified by the use of forward-looking terminology, including the terms "believes", "estimates", "aims", "anticipates", "expects", "intends", "plans", "predicts", "may", "will", "could", "shall", "risk", "targets", "forecasts", "should", "guidance", "continues", "assumes" or "positioned" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, amongst other things, results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy of the Group and the industry in which it operates.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Company, are inherently subject to significant business, economic and competitive uncertainties and contingencies. As such, no assurance can be given that such future results, including guidance provided by the Group, will be achieved; actual events or results may differ materially as a result of risks and uncertainties facing the Group. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed, or implied in such forward-looking statements. Forward-looking statements are not guarantees of future performance and the actual results of operations, financial condition and liquidity, and the development of the industry in which the Group operates, may differ materially from those made in or suggested by the forward-looking statements set out in this Presentation. Past performance of the Group cannot be relied on as a guide to future performance. Forward-looking statements speak only as at the date of this document and the Group and its directors, officers, employees, agents, affiliates and advisers expressly disclaim any obligations or undertaking to release any update of, or revisions to, any forward-looking statements in this document.

Financial Review

For the six months ended 30 June 2018

The following table sets forth the Group's revenue and expense items for the six months ended 30 June 2018 and 2017:

(1) Refer to Non-IFRS Financial Information for information related to adjustments, page 14 onwards.

(2) On 1 August 2018 the Board declared an interim dividend to be distributed on 12 October 2018 in the total amount of $33.7 million, representing 1.717 cents per share based upon the issued and fully paid share capital as at 30 June 2018 of 1,961,473,904. Please see Note 6 - Dividends for further information.

(3) Constant exchange rates ("CER") growth is calculated by applying the applicable prior period average exchange rates to the Group's actual performance in the respective period.

(4) Organic growth presents period over period growth at CER, excluding M&A activities.

Non-IFRS financial information

The statement contains certain financial measures that are not defined or recognised under IFRS. These measures are referred to as "Adjusted" measures and this information has been provided to permit a more complete and comprehensive analysis of the Group's operating performance, consistent with how the Group's business performance is evaluated by management. All adjusted measures are explained and reconciled to the most directly comparable measure prepared in accordance with IFRS on pages 14 to 18.

Revenue

On a reported basis revenue increased 10.8% to $921.3 million for the six months to 30 June 2018 from $831.3 million in the prior year. On a constant exchange rate basis revenue increased 6.4%2 for the six months to 30 June 2018, including a $33.0 million contribution from the acquisitions of Woodbury and J&R Medical. Organic revenue growth for the period was 2.6%3. Reported revenue reflected the contribution of Woodbury and J&R Medical, and favourable foreign exchange movement in the Pound Sterling and Euro, compared to the US dollar.

Gross profit margin and cost of goods sold

Adjusted gross profit margin for the six months to 30 June 2018 was 59.3% compared with 60.3% for the prior year. The 100 bps decline in the Group's adjusted gross margin percentage reflected a modest performance benefit to adjusted gross margin from productivity programmes which was more than offset by pricing, mix effects and other cost headwinds. Overall there was a negative impact on adjusted gross margin of 70 basis points as a result of operational effects, and a negative 30 bps foreign exchange impact. Refer to Non-IFRS Financial Information from page 14 for further information.

Adjusted cost of goods sold of $374.7 million for the six months to 30 June 2018 increased 13.5% or $44.6 million on the prior year, driven by the headwinds and cost increases outlined above, and increased volume of goods sold, as well as unfavourable foreign exchange.

Reported cost of goods sold increased 9.6% or $38.6 million for the six months to 30 June 2018, to $440.9 million, from $402.3 million in the prior year, with the increases summarised above offset by a decrease in restructuring costs and other costs related to the MIP programme. Refer to page 15 for further information. As a percentage of revenue, reported cost of goods sold decreased to 47.9% for the six months to 30 June 2018 from 48.4% in the prior year.

On a reported basis, gross profit increased $51.4 million or 12.0% and gross profit margin was 52.1% and 51.6% for the six months ended 30 June 2018 and 2017 respectively.

Operating costs and expenses

The following is a summary of operating costs and expenses for the six months to 30 June 2018 and 2017, and the percentage of each category compared with total revenue in the respective period. Percentages may not sum due to rounding.

1 Refer to Non-IFRS Financial Information from page 14 for information related to adjustments

2 Represents the percentage of revenue

Adjusted operating costs and expenses as a percentage of sales was 37.2% for the six months ended 30 June 2018, an increase of 20 bps on the prior year reflecting the increased investment in costs to promote growth and new products, as outlined below.

Selling and distribution expenses

Adjusted selling and distribution expenses increased $25.8 million or 13.8% for the six months ended 30 June 2018 to $212.3 million. This increase was driven by investments in growth in EMEA, the Americas and China, as well as the inclusion of Woodbury and J&R Medical. As a percentage of revenue, adjusted selling and distribution expenses were 23.0% and 22.4% for the six months ended 30 June 2018 and 2017 respectively. On a constant exchange rate basis, adjusted selling and distribution expenses increased $15.5 million or 8.3%3. Reported selling and distribution expenses also increased $25.8 million for the six months ended 30 June 2018 to $212.3 million, due to the increases described above.

General and administrative expenses

Adjusted general and administrative expenses increased $6.3 million or 6.3% for the six months ended 30 June 2018 to $105.6 million. This increase was driven by investments to support growth and productivity, and the inclusion of the cost base of Woodbury and J&R Medical. As a percentage of revenue, adjusted general and administrative expenses were 11.5% and 11.9% for the six months ended 30 June 2018 and 2017 respectively. On a constant exchange rate basis, adjusted general and administrative expenses increased $2.6 million or 2.7%3. Reported general and administrative expenses decreased $6.4 million for the six months ended 30 June 2018 due primarily to a reduction in share-based compensation arising from pre-IPO employee equity grants, offset by the increases noted above.

Research and development expenses ("R&D")

Adjusted R&D expenses increased $3.3 million or 15.1% for the six months ended 30 June 2018 to $25.2 million, to support new product development. As a percentage of revenue, adjusted R&D expenses were 2.7% and 2.6% for the six months ended 30 June 2018 and 2017 respectively. On a constant exchange rate basis, adjusted R&D expenses increased $1.6 million or 7.4%3. Reported research and development expenses increased $2.8 million for the six months ended 30 June 2018.

Operating profit

Adjusted operating profit increased $10.0 million or 5.2%3 at CER to $203.5 million for the six months ended 30 June 2018 due to the $90 million increase in revenue, partially offset by increases in the Group's operating costs and expenses as outlined above.

Adjusted operating profit margin for the six months ended 30 June 2018 of 22.1% decreased 120 bps from the prior year. On a constant exchange rate basis, adjusted operating profit increased $6.0 million or 3.1% for the six months ended 30 June 2018.

Reported operating profit increased $29.2 million for six months ended 30 June 2018 to $122.0 million primarily due to an increase in revenue, partially offset by higher operating costs and expenses as outlined above.

Other costs and net expenses

Finance costs

Finance costs increased $3.6 million, to $32.9 million for the six months ended 30 June 2018 from $29.3 million for the six months ended 30 June 2017, primarily due to an increase in the floating rates on the US Dollar Term A Loan Facility and US Dollar Term B Loan Facility.

Other expense, net

Reported other expense, net decreased $17.4 million, to $0.6 million for the six months ended 30 June 2018, from $18.0 million for the six months ended 30 June 2017, primarily driven by decreases in (i) the foreign exchange net losses related to intercompany transactions, including loans transacted in non-functional currencies and (ii) foreign exchange losses as a result of hyperinflation accounting. Refer to Note 4 - Other Expense, Net for further information.

Income tax benefit (expense)

For the six months ended 30 June 2018, the Group recorded an income tax benefit of $16.1 million and for the six months ended 30 June 2017, the Group recorded an income tax expense of $21.3 million. The $37.4 million decrease in income tax expense was primarily impacted by an adjustment for prior years in respect of previously unrecognised deferred tax assets of $30.6 million resulting from the US Tax Cuts and Jobs Act enacted on 22 December 2017.

After adjusting for certain financial measures that the Group believes are useful supplemental indicators of future operating performance (see reconciliation to adjusted earnings for the six months ended 30 June 2018 and 2017), the adjusted tax rate on continuing operations was 14.2% and 17.4% for these periods, respectively.

Net profit

As a result of the above factors, reported net profit was $104.6 million in the first six months of 2018, compared to net profit of $24.2 million in 2017, an increase of $80.4 million.

Adjusted net profit increased by $25.7 million to $144.3 million in the first six months of 2018, from $118.6 million in 2017. As a percentage of revenue, adjusted net profit was 15.7% and 14.3% respectively. The increase was primarily driven by (i) higher adjusted gross profit, partially offset by higher operating expenses (discussed above) (ii) higher finance costs more than offset by a reduction in other expense, net.

Exchange rates

The table set out below summarises the exchange rates used for the translation of currencies into USD that have the most significant impact on the Group's results:

Non-IFRS Financial Information

This report contains certain financial measures that are not defined or recognised under IFRS. These measures are referred to as "Adjusted" measures and include: Adjusted Cost of goods sold, Adjusted Gross margin, Adjusted Selling and distribution expenses, Adjusted General and administrative expenses, Adjusted Research and development expenses, Adjusted Operating profit ("Adjusted EBIT"), Adjusted Profit before tax, Adjusted Finance costs, Adjusted Other expense, net, Adjusted Net profit, Adjusted Earnings per share (shown collectively in the reconciliation to adjusted earnings, below), Adjusted EBITDA (defined below), and Cash conversion (defined below) which exclude the effect of certain cash and non-cash items that Group management believes are not related to the underlying performance of the Group. These non-IFRS financial measures are also used by management to make operating decisions because they facilitate internal comparison of performance to historical results on a consolidated Group basis. These measures are not measurements of financial performance or liquidity under IFRS and should not replace measures of liquidity or financial performance that are derived in accordance with IFRS.

The Group believes these measures are useful supplemental indicators that may be used to assist in evaluating the Group's financial performance on a consistent basis, similar to the way in which the Group's management evaluates performance, that is not otherwise apparent on an IFRS basis, given that certain non-recurring, infrequent or unusual items that management does not otherwise believe are indicative of the underlying performance of the consolidated Group may not be excluded when preparing financial measures under IFRS.

Items adjusted for the six months ended 30 June 2018 and 2017 include pre-2018 acquisition-related amortisation, share-based compensation expense arising from pre-IPO employee equity grants, restructuring and other costs primarily related to the MIP Programme, and the tax impact of certain items as further described under (f) below.

Reconciliation to adjusted earnings - for the six months ended 30 June 2018 and 2017

(a) Represents an adjustment to exclude items primarily related to amortisation, asset write offs and accelerated depreciation, including (i) pre-2018 acquisition-related amortisation expense of $71.9 million and $67.2 million for the six months ended 30 June 2018 and 2017, respectively, (ii) accelerated depreciation of $1.3 million for the six months ended 30 June 2017 related to the closure of certain manufacturing facilities, (iii) impairment charges and assets write-offs related to property, plant and equipment of $0.4 million, in the aggregate, for the six months ended 30 June 2018, (iv) net gain on the sales of assets of $1.9 million and $2.6 million during the six months ended 30 June 2018 and 2017, respectively, and (v) an acquisition accounting adjustment of $1.0 million related to acquired inventories that were sold during the six months ended 30 June 2017. Refer to Note 4 - Other Expense, Net for further information.

(b) Represents restructuring costs and other-related costs (excluding accelerated depreciation described above under (a)) primarily incurred in connection with the MIP Programme and also includes other termination and leaver costs relating to organisation structure changes and other-related costs.

(c) Represents remediation costs, which include regulatory compliance costs related to Food and Drug Administration activities, IT enhancement costs, and professional service fees associated with activities that were undertaken in respect of the Group's compliance function and to strengthen its control environment within finance.

(d) Represents an adjustment to exclude (i) share-based compensation expense of $4.2 million and $18.0 million for the six months ended 30 June 2018 and 2017, respectively, arising from pre-IPO employee equity grants.

(e) Represents IPO related costs, primarily advisory fees.

(f) Adjusted income tax benefit (expense) is income tax benefit (expense) net of tax adjustments. In addition to the tax impact of items (a) to (e), there were tax benefits resulting from an adjustment for prior years in respect of previously unrecognised deferred tax assets of $30.6 million plus alternative minimum tax credit of $0.6 million resulting from the US Tax Cuts and Jobs Act enacted on 22 December 2017, and hedging interest volatility on external borrowings of $2.3 million. Refer to Note 5 - Income Taxes for further information.

(g) Adjusted earnings per share and adjusted diluted earnings per share have been calculated by dividing adjusted net profit by the weighted average ordinary shares in issue and the diluted weighted average ordinary shares in issue, respectively, as calculated in Note 7 - Earnings Per Share.

Adjusted EBITDA

Adjusted EBITDA is defined as Adjusted EBIT (defined above) further adjusted to exclude (i) software and R&D amortisation, (ii) post-2017 acquisition amortisation, (iii) depreciation, and (iv) post-IPO employee share-based compensation.

The following table reconciles the Group's Adjusted EBIT to Adjusted EBITDA.

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(a) The following is a summary of software and R&D amortisation as recorded in the Condensed Consolidated Statement of Profit or Loss for the six months ended 30 June 2018 and 2017:

(b) The post-2017 acquisition amortisation was recorded in General and administrative expenses in the Condensed Consolidated Statement of Profit or Loss.

(c) The following is a summary of depreciation (excluding accelerated depreciation), as recorded in the Condensed Consolidated Statement of Profit or Loss for the six months ended 30 June 2018 and 2017:

(d) The post-IPO share-based compensation was recorded in General and administrative expenses in the Condensed Consolidated Statement of Profit or Loss.

Cash conversion

The Group believes that cash conversion is a useful supplemental metric that provides a measure of efficiency by which the Group is able to turn profit from operations into cash flow to service the requirements of debt and equity investors, as well as paying for the Group's tax obligations, re-investing in the business for growth and enhancing dividend capacity.

Cash conversion is computed as the ratio of Adjusted EBITDA less change in working capital and capital expenditure to Adjusted EBITDA.

The computation of cash conversion for the six months ended 30 June 2018 and 2017 is as follows:

Cash conversion is also computed as the ratio of net cash generated from operating activities adjusted for (i) cash interest payments, (ii) cash tax payments, and (iii) other payments within operating activities, less capital expenditure to Adjusted EBITDA. The resulting cash conversion figures are the same under either definition.

The computation of cash conversion for the six months ended 30 June 2018 and 2017 on this basis is as follows:

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(a) Other payments primarily represent payments related to restructuring and other related costs incurred in connection with the MIP Programme.

FINANCIAL POSITION

Selected measures of financial position

The following table presents a summary of the Group's financial position at 30 June 2018 and 31 December 2017:

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(a) Long-lived assets consist of property, plant and equipment, intangible assets, and goodwill.

Long-lived assets

Long-lived assets decreased $87.7 million, or 3.0%, to $2,805.8 million at 30 June 2018, from $2,893.5 million at 31 December 2017, primarily due to (i) the depreciation of property, plant, and equipment and amortisation of intangible assets of $94.7 million, in the aggregate, and (ii) a decrease from foreign currency exchange of $31.7 million. These decreases were partially offset by (i) additions of property, plant, and equipment and intangible assets of $26.4 million, in the aggregate, and (ii) long-lived assets from J&R Medical acquisition of $14.9 million.

Cash and cash equivalents

Cash and cash equivalents increased $49.8 million, or 17.2%, to $339.1 million at 30 June 2018, from $289.3 million at 31 December 2017, primarily due to cash generated from operating activities of $164.9 million, partially offset by (i) dividend paid of $55.3 million, (ii) purchases of property, plant, and equipment and capitalised software of $35.3 million, (iii) $14.4 million paid in connection with the J&R Medical acquisition in March 2018, and (iv) the effect of exchange rate changes on cash and cash equivalents of $10.2 million.

Borrowings

Borrowings decreased $19.8 million, or 1.1%, to $1,803.1 million at 30 June 2018, from $1,822.9 million at 31 December 2017, primarily due to (i) the foreign currency impact on the Euro-denominated long-term borrowings, (ii) the mandatory prepayment for excess cash retained in the business, and (iii) scheduled June 2018 loan amortisation payment for the US Dollar Term B Loan Facility (refer to Note 9 - Borrowings for further information). These decreases were partially offset by the non-cash amortisation of deferred financing fees and debt discounts.

Liquidity and Capital Resources

Overview

At 30 June 2018, the Group's cash and cash equivalents were $339.1 million. Additionally, at 30 June 2018, the Group had $192.9 million of availability under the revolving credit facility. Restricted cash was $4.8 million and $5.7 million at 30 June 2018 and 31 December 2017, respectively.

The Group's primary source of liquidity is cash flow generated from operations. Historically, the non-elective nature of the Group's product offerings has resulted in significant recurring cash inflows. The Group generated $164.9 million of cash from operating activities for the six months ended 30 June 2018. Significant cash uses for the six months ended 30 June 2018 included (i) dividend paid of $55.3 million, (ii) capital expenditures of $35.3 million, (iii) interest payments of $22.4 million, (iv) $14.4 million paid in connection with the J&R Medical acquisition, and (v) income tax payments of $13.6 million.

The Group's business may not continue to generate cash flow at current levels and, if it is unable to generate sufficient cash flow from operations to service its debt, the Group may be required to reduce costs and expenses, sell assets, reduce capital expenditures, refinance all or a portion of existing debt or obtain additional financing. The Group may not be able to complete these initiatives on a timely basis, on satisfactory terms, or at all. The Group's ability to make scheduled principal payments or to pay interest on or to refinance its indebtedness depends on the Group's future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the healthcare industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond the Group's control.

The Group believes that the business has characteristics of strong cash flow generation. The Group's strengths include the recurring, non-discretionary nature of its products, its diverse product offering and geographic footprint, and the strong market position of the Group's leading brands. The Group believes that its existing cash on hand, combined with the Group's operating cash flow and available borrowings under the credit facilities will provide sufficient liquidity to fund current obligations, working capital and capital expenditure requirements, as well as future investment opportunities in the foreseeable future.

Cash flows

The following table displays cash flow information for the six months ended 30 June 2018 and 2017:

Cash flows from operating activities

Net cash generated from operating activities was $164.9 million and $120.9 million for the six months ended 30 June 2018 and 2017, respectively. The following table sets forth the components of net cash generated from operating activities for the six months ended 30 June 2018 and 2017:

Cash interest payments decreased $13.6 million, to $22.4 million for the six months ended 30 June 2018, from $36.0 million for the six months ended 30 June 2017, due to (i) the timing of interest payment on the US Dollar Term A Loan Facility as the interest payment was made in July 2018 and (ii) the incremental interest payments related to the Group's credit facilities, as the first interest payment was made in March 2017 since the October 2016 financing. These decreases were partially offset by an increase in the floating rates on the US Dollar Term A Loan Facility and US Dollar Term B Loan Facility.

Other payments decreased $21.8 million, to $6.7 million for the six months ended 30 June 2018, from $28.5 million for the six months ended 30 June 2017, primarily driven by a decrease in payments related to (i) service fees associated with MIP-related activities, (ii) the Group's 2016 IPO costs, and (iii) cash-settled pre-IPO awards.

The working capital increase of $21.6 million and $15.6 million for the six months ended 30 June 2018 and 2017, respectively, was primarily related to timing of receipts, purchases, and payments in the ordinary course of business.

Cash flows from investing activities

Net cash used in investing activities decreased $17.0 million, to $45.2 million for the six months ended 30 June 2018, from $62.2 million for the six months ended 30 June 2017. The decrease was primarily related to (i) lower acquisition spending in the six months ended 30 June 2018 and (ii) a decrease in capital expenditures.

Cash flows from financing activities

Net cash used in financing activities increased $28.0 million, to $59.7 million for the six months ended 30 June 2018, from $31.7 million for the six months ended 30 June 2017, primarily due to (i) $55.3 million of dividend paid, (ii) mandatory prepayment of $2.4 million for excess cash retained in the business under the Group's credit facilities, and (iii) scheduled June 2018 loan amortisation payment of $1.6 million for the US Dollar Term B Loan Facility. These increases were partially offset by (i) scheduled June 2017 loan amortisation payments of $19.6 million, in the aggregate, related to the credit facilities, (ii) $10.5 million of accrued costs paid in the six months ended 30 June 2017 in connection with issue of share capital in October 2016, and (iii) $1.4 million of deferred financing fees paid in the six months ended 30 June 2017.

INDEPENDENT REVIEW REPORT TO CONVATEC GROUP PLC

We have been engaged by the group to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises the Condensed Consolidated Statement of Profit or Loss, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Cash Flows and related notes 1 to 12. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the group in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the group those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the group, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the group a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

Reading, United Kingdom

1 August 2018

Condensed Consolidated Statement of Profit or Loss

All results are attributable to equity holders of the Group and wholly derived from continuing operations. The Notes on pages 28 to 42 form an integral part of the Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Comprehensive Income

All amounts are attributable to equity holders of the Group and wholly derived from continuing operations.

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity