ConvaTec Regulatory News (CTEC)

ConvaTec Group Plc First Half Results 2019

Improving growth trend in second quarter, Transformation Initiative on track, guidance confirmed

Key points:

·; Group reported revenue of $888.9 million in the first half was 3.5% lower year on year and flat1 on an organic basis;

o Excluding the one-off rebate provision6 taken in the first quarter ($8.9 million) to revise the estimate of the distributor rebates accrual, growth in the first half was 1.0%1 on an organic basis;

o The second quarter saw an improving revenue trend, with positive organic revenue growth across all franchises and Group growth of 2.1%1;

·; Transformation Initiative on track: three-year programme, $150 million investment (including c.$45 million capex), anticipated gross benefits in 2021 of $130 - $150 million per annum;

o $14 million cost in first half;

o Operational Excellence programme delivered net positive productivity in the first half, with benefits more than offsetting inflation and depreciation;

·; Reported operating profit / EBIT of $93.6 million, 23.3% lower year on year, reflecting the one-off rebate provision6, foreign exchange, plus investment in commercial areas and regions, and the Transformation Initiative;

·; Adjusted2 operating profit / EBIT of $165.2 million, 18.8% lower year on year, due to same drivers as above; adjusted2 EBIT margin declined, as expected, to 18.6% (2018: 22.1%);

·; Interim dividend 1.717 cents maintained;

·; Leverage 2.6 times Net Debt/EBITDA3, continued good adjusted cash conversion 89.8% (2018: 75.2%);

·; Guidance for the full year maintained: organic revenue growth 1.0% - 2.5%1, adjusted EBIT2 margin 18% - 20%, including c. $40 million Transformation Initiative and c. $10 million of MDR4 costs.

Group revenue

* Excluding one-off provision of $8.9 million taken in Q1 to revise the estimate of the distributor rebates accrual.

Rick Anderson, Executive Chairman, commented

"All of our Franchises delivered organic1 revenue growth in the second quarter, indicating positive progress against our performance improvement plans. There is more work to do, but we are well positioned to deliver on our objectives for the full year and consequently our revenue and adjusted EBIT margin guidance is maintained. Throughout the second half of the year, our priority remains improving execution. In addition, I look forward to welcoming Karim Bitar as our new CEO on 30 September.

We expect to see further revenue growth for the Group in the second half. A key focus area is our US Wound business, where a more targeted and effective salesforce is already showing encouraging signs. Ostomy is continuing to deliver a slow but steady recovery, and within Continence and Critical Care our Home Distribution Group (HDG) continues to outgrow the market in the US, albeit at a lower rate. Infusion Devices saw strong orders from customers in the second quarter.

Our Transformation Initiative has made good progress in many areas, but there is much more to do. Launched in February, we invested $14 million in the first half to establish the programme, identify opportunities and begin execution of the first wave of projects, with detailed tracking of key milestones and weekly reviews by the Executive team. Our Transformation Office provides a model to embed more discipline and better execution into the business: initial progress is encouraging and a "ConvaTec Way" is emerging.

We expect a significant increase in transformation spend in the second half, in line with previous guidance of $40 million spend for the year, as more projects move from planning into execution. We will continue to "forward invest" for growth and efficiency, to enable us to capture more opportunities for value creation over the medium to long term for all our stakeholders."

Enquiries:

Analysts and Investors

John Crosse, VP Investor Relations +44 (0)7500 141435

Mark Reynolds, Director Investor Relations +44 (0)7551036625

investorrelations@convatec.com

Media

Bobby Leach, VP Group Corporate Affairs +44 (0)7770 842226

Finsbury +44 (0)207 2513801

There will be an analysts and investors meeting today at 9.00am BST 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.

United Kingdom: +44 20 3936 2999

United States: +1 646 787 9445 

All other locations: use UK number

Access Code: 528708

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

Financial Calendar

Ex-dividend date 5 September 2019

Dividend record date 6 September 2019

Scrip dividend election date 23 September 2019

Dividend payment date 17 October 2019

Q3 trading update 30 October 2019

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 where a copy of this announcement can also be found.

(1) Organic growth presents period over period growth at CER5, excluding M&A activities.

(2) Certain financial measures in this document, including adjusted results, 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 (page 17).

(3) Last 12 months adjusted EBITDA of $458m.

(4) EU Medical Device Regulation.

(5) 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.

(6) One-off provision of $8.9 million taken in Q1 to revise the estimate of the distributor rebates accrual.

(7) Medium to long term is 3 to 5 years.

Operating Review

For the six months ended 30 June 2019

Group reported revenue of $888.9 million in the first half was 3.5% lower year on year, impacted by the one-off rebate provision6 recognised in the first quarter of $8.9 million, and adverse foreign exchange movements of $33.2 million.

Organic revenue was flat1 for the half year and grew 2.1%1 in the second quarter. Excluding the $8.9 million one-off rebate provision6, revenue grew 1.0%1 on an organic basis in the first half. The most significant impact leading to differences between reported and organic revenue is the effect of exchange rate movements.

Advanced Wound Care ("AWC")

Organic revenue in the first half of 2019 was 1.8%1 lower year on year, with growth of 3.3%1 in the second quarter. Reported revenue of $271.4 million was 6.4% lower compared to the first half of 2018, and reported revenue of $141.7 million in the second quarter declined 0.8% versus the prior year.

Excluding the one-off rebate provision6 taken in the first quarter, organic growth in the first half was flat1.

AQUACELTM Foam and AQUACELTM Ag+ / Advantage performed well, excluding the one-off rebate provision6, offset by continued challenges in our legacy products, in particular base AQUACELTM dressings and skin care. However, our skin care business was less of a drag to growth in the second quarter, compared to the first, as expected.

In the US we have completed our move to a new salesforce model and lead indicators show good momentum, such as the volume of sales calls with clinicians increasing by over 20% in the second quarter, compared to the first. AQUACELTM Ag Advantage, launched late last year, has been positively received by clinicians and although early days, our Avelle™ Negative Pressure Wound Therapy ("NPWT") is seeing progress and recording its first sales, following launch earlier this year, and we remain excited by the market opportunity.

We saw good momentum in markets in EMEA and APAC. The UK market remains challenging, although stable. Reimbursement reductions in France announced during the second quarter were within our expectations for price headwinds in 2019.

Ostomy Care ("OC")

Organic revenue in our OC franchise declined in the first half by 0.2%1, but grew 0.3%1 in the second quarter. Reported revenue of $252.2 million in the first six months declined 5.2% compared to the same period in 2018. Reported revenue of $132.6 million in the second quarter declined 3.9% year on year.

Excluding the one-off rebate provision6 taken in the first quarter, organic growth in the first half was 0.6%1.

We continue to execute our strategy to return the franchise to consistent growth, with a good performance in the second quarter in a number of markets in EMEA and LatAm.

We were pleased to win a contract with one of the top 3 hospitals by volume of surgeries in the US, based on our product and service offering, leveraging our HDG model of patient support. We hope to use this as a template with other hospitals and IDNs (Integrated Delivery Networks) in the future.

We continue to invest in and grow our me+™ direct-to-consumer programme, and see traction with our more recent Convex product launches such as Esteem+™ Flex and Natura™ Accordion.

Continence & Critical Care ("CCC")

On a reported basis revenue grew 0.6% to $221.4 million in the first half, with constant currency growth of 2.4%5, reflecting the contribution of J&R Medical and divestment of the Group's Symbius Medical respiratory business, which both occurred on 1 March 2018. Revenue in the first half grew 2.3%1 on an organic basis. Reported revenue in the second quarter was $113.0 million, growth of 1.2% year on year, or 2.8%1 on an organic basis.

Excluding the one-off rebate provision6 taken in the first quarter, organic growth in the first half was 3.0%1. 

Growth in CCC was driven by HDG which continued to outgrow the overall US continence market, albeit the absolute level of growth was lower than in prior years partly due to the inclusion of the lower growth incontinence business of Woodbury (acquired in September 2017) in organic growth rates. Final patient testing of our next generation catheter against the market leader generated very positive feedback and this will be incorporated into our launch activity in Europe.

Infusion Devices ("ID")

In our ID franchise, revenue of $143.9 million declined 0.9% on a reported basis, but grew 0.8%1 organically in the first half of 2019. Revenue of $71.0 million in the second quarter grew by 0.7% on a reported basis and 1.9%1 organically.

Infusion Devices saw strong orders from customers during the first half, driven by continued growth in the insulin pump market.

Transformation Initiative ("TI")

Our Transformation Initiative is on track. Launched in February, during the first half of the year we established the Transformation Office to accelerate delivery of our programme, identified and prioritised opportunities across our four workstreams (Commercial Excellence, Operational Excellence, Business Services Transformation and Portfolio Optimisation) and began execution of the first wave of projects. There is clear accountability for delivery of projects and robust governance, with detailed tracking of key milestones with weekly reviews of the programme by the Executive Chairman, CFO and the rest of the Executive team. Allocation of investment and resource is tightly controlled.

Our Commercial Excellence programme is currently helping to drive a more targeted and effective salesforce in US AWC; Operational Excellence delivered net positive productivity in the first half; in Business Services Transformation we have moved to the final stages of detailed design and in Portfolio Optimisation analysis is ongoing, to identify tail-end SKUs and determine how to serve markets more effectively.

First half cost was $14 million, out of an anticipated full year spend of c. $40 million in supporting the Transformation Initiative. We expect investment to increase in the second half as more projects move from planning into execution.

Overall we anticipate the annual gross benefits in 2021 arising from the $150 million investment will be $130 - $150 million. These benefits will be partially offset by ongoing permanent investment in the business, which will rise to $50 million per annum by 2021 (vs. 2018), and the usual headwinds of price, inflation, and increased depreciation. We expect to deliver margin expansion, over the medium to long term7, from our adjusted EBIT margin in 2018 of 23.4%, and the anticipated decline to 21.0% to 22.5% in 2019, excluding TI and MDR4 costs.

Regional Revenue

* Excluding one-off provision of $8.9 million taken in Q1 to revise the estimate of the distributor rebates accrual.

Revenue in Europe, Middle East and Africa ("EMEA") in the first half declined 5.3% on a reported basis due to unfavorable foreign exchange, more than offsetting growth of 1.5%1 on an organic basis. Growth in OC and ID was partially offset by weakness in hospital and critical care. In the second quarter EMEA organic revenue grew 3.3%1, driven by an improved performance from both OC and AWC, again offset by CCC.

Revenue in Americas in the first half declined 2.7% on a reported basis, or 1.9%1 on an organic basis, which includes the one-off rebate provision6 taken in the first quarter of $8.9 million. Whilst OC and AWC delivered strong growth in LatAm, and HDG delivered a good performance, this was more than offset by declines in both OC and AWC in North America, which included the impact of the rebate provision6. Excluding the rebate revenue in the Americas was broadly flat1 year on year on an organic basis. Second quarter growth of 1.1%1 on an organic basis saw an improved AWC performance.

Revenue in Asia Pacific grew 0.9% on a reported basis in the first half, reflecting unfavorable foreign exchange, with 5.6%1 growth on an organic basis, driven by OC and AWC. Organic growth in the second quarter of 2.8%1 was primarily driven by AWC, offset by a weaker OC performance.

Adjusted EBIT margin

Adjusted EBIT margin was 18.6% in the first half, a decline of 350 basis points year on year. The main drivers were the one-off rebate provision6, foreign exchange and increased investment.

Adjusted gross margin declined 70 basis points, a result of negative foreign exchange and the one-off rebate provision6. Our Operational Excellence programme delivered a net productivity benefit in the first half, which helped offset negative price and mix.

Operational expenditure increased, as expected, driven by investment in commercial areas and regions, and spend related to the Transformation Initiative and MDR4.

In the first half we incurred $14 million and $1 million of cost related to the Transformation Initiative and MDR4 respectively. We anticipate a significant increase in expenditure in these two areas in the second half, and continue to expect c. $50 million cost for both TI and MDR4 combined in FY 2019.

See Financial Review for further information on costs and margin.

Cash generation and leverage

Net cash from operating activities was $194.0 million (31 December 2018: $164.9 million), principally reflecting the receipt of $30 million which was the gross settlement of a foreign exchange forward contract. Adjusted cash conversion was 89.8% (2018: 75.2%), reflecting reduced EBITDA but improved working capital year on year.

The Group ended the period with net debt of $1,211.8 million (31 December 2018: $1,305.2 million), which amounted to 2.6x adjusted EBITDA3 (31 December 2018: 2.7x).

See Liquidity and net debt in the Financial Review for more detail.

Dividend

We are maintaining our interim 2019 dividend at 1.717 cents per share, in line with the interim dividend for 2018. Whilst this is outside our stated policy of 35% to 45% of adjusted net profit, resulting from our investment in transformation, it is a reflection of the Board's confidence in the future performance of the Group and its underlying financial strength, distributable reserves position and cash generation of the Group.

See Note 5 - Dividends, for more detail.

Outlook and Guidance

Full year 2019 guidance of organic revenue growth of 1.0% to 2.5%1 and adjusted2 EBIT margin of 18% - 20% is maintained.

The adjusted2 EBIT margin guidance includes investments in the Transformation Initiative and MDR4 costs, which totalled $15 million in the first half. We anticipate a significant increase in expenditure in these two areas in the second half and continue to expect c. $50 million of cost for both TI and MDR4 combined for the full year.

Excluding TI and MDR4 costs we expect the adjusted2 EBIT margin to be 21.0% to 22.5%.

FY 2019 adjusted2 effective tax rate is expected to be approximately 16.5%.

People

As previously announced, Karim Bitar will join the Group as CEO on 30 September.

Following the retirement of Sir Christopher Gent at our AGM in May, the search for a Chairman has made good progress and we expect to provide an update in due course.

The search process is also underway for new Non-Executive Directors, following the departures of Jesper Ovesen and Steve Holliday, as previously announced.

David Shepherd, President of AWC, has assumed direct responsibility for the US Wound business. This will drive continued improvement in performance and ensure the US has the focus and resource it requires. George Poole has stepped down as President of the Americas.

2019 LTIP

In our 2018 Annual Report and Accounts on page 110 the Remuneration Committee noted that it would be appropriate to align the targets and metrics that apply to the 2019 LTIP awards with our Pivot to Growth plans. Those targets have now been agreed by the Committee. The performance measures will each pay out one third. The performance period is from 1st January 2019 to 31st December 2021. All performance measures will vest on a straight line sliding scale between the performance measurement points. All definitions are consistent with the descriptions in the 2018 Annual Report and Accounts.

The performance conditions that will be attached to the 2019 LTIP awards are set out in the table below.

To the extent the 2019 LTIP awards vest, vested shares will be required to be held by Directors for a further two-year post-vesting holding period.

Principal risks and uncertainties

The Group's risk management process identifies, evaluates, and manages the identified risks that could impact the Group's performance. The Group's principal risks and uncertainties, together with an explanation of the potential impact and mitigating actions, are included in the Group's 2018 Annual Report and Accounts on pages 36 to 43. The Group has reviewed these risks and concluded that they all remain relevant for the first six months of the financial year and are summarised below:

·; Change and transformation;

·; Attract, engage and retain leadership talent;

·; Brexit;

·; Legal and Compliance;

·; Global Operational and Supply Chain;

·; Product Innovation and Intellectual Property;

·; Pricing and reimbursement;

·; Forecasting Process;

·; Information security;

·; Macroeconomic and foreign exchange;

·; Quality and Regulatory.

UK withdrawal from the European Union ("Brexit")

The Group has, for some time and with external advisory support as required, been monitoring the potential outcomes of the Brexit negotiations, assessing the potential effects on our business, whatever the circumstances under which the UK will cease to be a member of the EU, including a "No Deal" scenario and preparing contingency plans to address the potential outcomes of the UK leaving on 31 October 2019. However, it remains unclear what will be the position for the UK on the revised leaving date of 31 October 2019 and our planning will continue to evolve and adapt in light of political developments. Based on our understanding today, we do not believe that Brexit will generate unmanageable risks for our business. For further information on our analysis of Brexit risks and our preparations, please see our 2018 Annual Report and Accounts.

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

The commentary in this financial review includes discussion of reported and alternative performance measures. Management uses alternative performance measures as a meaningful supplement to reported measures. These measures are disclosed in accordance with the European Securities and Markets Authority guidelines and are explained and reconciled to the most directly comparable measure prepared in accordance with International Financial Reporting Standards ("IFRS") on pages 17 to 21. Further detail on the Group's financial performance, measured in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union, is set out in the Financial Statements and Notes thereto on pages 22 to 34.

In addition, the discussion below includes commentary on revenue on a constant currency basis and on an organic basis. Constant currency removes the effect of fluctuations in exchange rates. Organic removes the effect of fluctuations in exchange rate and the impact of acquisitions and disposals. Both measures enable the Group to focus on the underlying revenue performance. Constant currency information is calculated by applying the applicable prior period average exchange rates to the Group's revenue performance in the respective period. Revenue growth on an organic basis is a non-IFRS financial measure and should not be viewed as a replacement of IFRS reported revenues.

Results of operations

The following table sets forth the Group's revenue and expense items for the six months ended 30 June 2019 and 2018:

Revenue

On a reported basis revenue decreased by $32.4 million (3.5%) to $888.9 million for the six months to 30 June 2019 (2018: $921.3 million), attributable principally to unfavourable foreign exchange movements ($33.2 million) and the $8.9 million one-off rebate provision6. On a constant exchange basis revenue increased by 0.1% and was flat on an organic basis. Further detail on revenue performance is discussed in the Group's Operating Review on pages 4-6.

Gross margin

Reported

On a reported basis gross profit decreased by $21.2 million (4.4%) and gross margin fell to 51.7% (2018: 52.1%), 40 basis points of margin decrease, largely the result of unfavourable foreign exchange movements.

Adjusted

Adjusted gross margin for the six months to 30 June 2019 was 58.6%, compared to 59.3% for the comparative period in 2018. Our Operational Excellence programme (part of our Transformation Initiative) delivered a net positive productivity benefit to gross margin in the first half. This was offset by the impact of the $8.9 million one-off rebate provision6 in the first quarter, negative product sales mix. Adjusted gross margin was also impacted by negative foreign exchange.

Operating costs and expenses

The following is a summary of operating costs and expenses for the six months to 30 June 2019 and 2018 and includes the percentage of each category compared with total revenue in the respective period.

Selling and distribution

On a reported and adjusted basis, selling and distribution expenses increased by $2.4 million to $214.7 million in the six months ended 30 June 2019 (2018: $212.3 million). The increase is driven by investment in our sales organisation, principally relating to our teams in the US, our HDG sales team and selective markets in APAC. This investment has been partially offset by positive foreign exchange benefits.

General and administrative

Reported

On a reported basis, general and administrative expenses increased by $6.3 million to $127.2 million in the six months ended 30 June 2019 (2018: $120.9 million). The increase reflects certain elements of the ongoing investment in the Group's transformation projects ($13.7 million), partially offset by positive foreign exchange benefits ($4.4 million).

Adjusted

Adjusted general and administrative expenses (which principally excludes the pre-2018 acquisition amortisation charges) increased $11.7 million or 11.1% for the six months ended 30 June 2019 to $117.3 million. The increase includes $13.7 million Transformation Initiative costs as described in reported above, together with increases in share-based compensation ($3.1 million), offset by positive foreign exchange benefits.

Research and development ("R&D")

For the six months to 30 June 2019, excluding the decrease resulting from changes in foreign exchange ($1.2 million) R&D expenses have remained broadly flat at $23.7 million (2018: $25.2 million).

Operating profit

Reported

On a reported basis, operating profit for the six months to 30 June 2019 was $93.6 million, a decrease of $28.4 million (2018: $122.0 million) reflecting the decreases in revenue and gross margin and increased investment in the Group's operating cost base, including transformation and MDR4 costs of $15.1 million. Foreign exchange contributed $5.5 million to the operating profit decrease in the period.

Adjusted

Adjusted operating profit for the six months to 30 June 2019 was $165.2 million, a decrease of $38.3 million (2018: $203.5 million). This reflects the decrease in revenue and gross margin and increased investment in the Group's operating cost base (including the $15.1 million of Transformation Initiative and MDR4 costs). Foreign exchange contributed $6.7 million to the operating profit decrease in the period.

Taxation

Reported

For the six months ended 30 June 2019, the Group reported an income tax expense of $16.8 million (2018: benefit of $16.1 million). The $32.9 million increase in income tax expense was primarily impacted by an adjustment in the six months ended 30 June 2018 in respect of previously unrecognised deferred tax assets of $30.6 million resulting from the US Tax Cuts and Jobs Act.

The ETR for the six months to 30 June 2019 has risen as a significant proportion of the profits in 2019 are expected to arise in jurisdictions with higher tax rates.

Adjusted

After adjusting for certain financial measures that the Group believes are useful supplemental indicators of future operating performance, the adjusted tax rate on continuing operations was 16.5% and 14.2% for the six months ended 30 June 2019 and 30 June 2018 respectively.

Reconciliation of reported tax (expense)/benefit to adjusted tax expense

(a) In 2018, other discrete items principally represents tax benefits of $30.6 million in respect of previously unrecognised deferred tax assets arising from the US Tax Cuts and Jobs Act.

Net profit

Reported

Reported net profit for the six months to 30 June 2019 was $44.5 million (2018: $104.6 million), a decrease of $60.1 million.

Adjusted

Adjusted net profit for the six months to 30 June 2019 has decreased $33.3 million to $111.0 million. As a percentage of revenue, adjusted net profit was 12.5% and 15.7% for the six months ended 30 June 2019 and 2018 respectively. The decrease reflects the changes in operating profit discussed above.

Foreign exchange

The table below summarises the exchange rates used for the translation of currencies (that have the most significant impact on the Group results) into USD:

Liquidity and net debt

The following table represents the Group's net debt position as at 30 June 2019 and 31 December 2018:

(a) Finance lease liabilities have been reclassified from borrowings to lease liabilities in the Condensed Consolidated Statement of Financial Position as a result of the adoption of IFRS 16 on 1 January 2019. Refer to Note 1 - Basis of preparation and accounting standards for further details.

(b) Leverage is calculated as net debt / last 12 months adjusted EBITDA.

The Group is in compliance with all financial and non-financial covenants associated with the Group's outstanding debt.

Cash flows

The cash balance has increased by $36.9 million to $376.0 million as at 30 June 2019 compared to 30 June 2018.

The following table displays cash flow information for the six months ended 30 June 2019 and 2018:

Cash flows from operating activities

Net cash generated from operating activities was $194.0 million and $164.9 million for the six months ended 30 June 2019 and 2018, respectively. The following table sets forth the components of net cash generated from operating activities:

Interest paid increased $7.1 million, to $29.5 million for the six months ended 30 June 2019, due to interest on lease liabilities recognised under the newly adopted standard, IFRS 16 and the timing of interest payments on the US Dollar Term A Loan facility in 2018.

Other payments, which reflect movements in cash relating to adjusted items, decreased by $1.9 million, to $4.8 million for the six months ended 30 June 2019, primarily driven by a reduction in restructuring and other related costs.

The reported working capital decrease of $36.6 million for the six months ended 30 June 2019, compared to $23.3 million increase in 2018, primarily relate to (i) a $28.0 million inflow from inventory decreases in our manufacturing sites following normalisation of the back orders reported at the end of 2017 and early 2018 and (ii) the receipt of $30.0 million which was the gross settlement of a foreign exchange forward contract. The net settlement of this instrument was an overall payment of $nil but, due to a timing difference, $30.0 million was received 28 June 2019 and $30.0 million was paid on 1 July 2019.

The adjusted working capital decrease of $10.0 million for the six months ended 30 June 2019 compared to $21.6 million increase in 2018 is consistent with the movements reported in working capital and reflects the exclusion of $30.0 million relating to the foreign exchange forward contract described above and additional decreases in adjusted items.

Cash flows from investing activities

Net cash used in investing activities decreased $14.1 million, to $31.1 million for the six months ended 30 June 2019 (2018: $45.2 million). This is reflective of lower investment in acquisitions in 2019, comparative to the acquisition of J&R Medical during 2018 ($14.4 million).

Cash flows from financing activities

Net cash used in financing activities increased $40.8 million, to $100.5 million for the six months ended 30 June 2019 (2018: $59.7 million), primarily due to $10.0 million from the recognition of additional lease payments on adoption of IFRS 16 and timing of scheduled loan amortisation payments. Scheduled loan repayments of $1.6 million and an excess cash payment of $2.4 million were paid in the six months to 30 June 2018, $33.3 million was paid on 2 July 2018 ($31.0 million scheduled loan amortisation was paid in June 2019).

Cash conversion

Non-IFRS financial information

Non-IFRS financial information or alternative performance measures ("APMs") are used as supplemental measures in monitoring the performance of our business. The adjustments applied to IFRS measures reflect the effect of certain cash and non-cash items that Group management believe are not related to the underlying performance of the Group and provide a meaningful supplement to the reported numbers to support how the business is managed and measured on a day-to-day basis. Reconciliations for these adjusted measures determined under IFRS are shown on pages 18 to 21. The definitions of adjusted measures are as calculated within the reconciliation tables.

Pre-tax adjusted items for the six months ended 30 June 2019 and 2018 include the following credits or costs that are reflected in the reported measures:

- amortisation of intangible assets relating to acquisitions pre 1 January 2018 (ongoing) ($70.2 million and $71.9 million respectively).

- share-based compensation expense arising from pre-IPO equity grants, concluded in H2 2018 ($4.2 million in six months ended 30 June 2018).

- change and restructuring programme related costs, expected to be concluded in H2 2019 ($1.4 million and $5.0 million respectively).

- gains/losses in relation to the sale, impairment or write-off of intangible and fixed assets, the sale, write-off or impairment arising as a result of a major change or restructuring programme or an unusual circumstance (net gain in H1 2018 of $1.5 million).

Adjusted cash conversion for the six months ended 30 June 2019 excludes a receipt of $30.0 million in relation to the gross settlement of a foreign exchange forward contract. The net settlement of this instrument was an overall payment of $nil but, due to a timing difference, $30.0 million was received 28 June 2019 and $30.0 million was paid on 1 July 2019.

These items are excluded from the adjusted measures to reflect performance in a consistent manner and are in line with how the business is managed and measured on a day-to-day basis. They are typically gains or losses/costs arising from events that are not considered part of the core operations of the business or are considered to be significant in nature. They may cross several accounting periods. We also adjust for the tax effect of these items.

Net debt, which is used to monitor the leverage of the business, is calculated as the carrying value of current and non-current borrowings on the face of the Condensed Consolidated Statement of Financial Position, less the carrying value of finance leases (Note 7 - Borrowings) net of cash and cash equivalents.

Acquisition related amortisation of intangible assets

Our adjusted measures exclude the amortisation of intangibles arising from acquisitions made before 1 January 2018. After 1 January 2018, amortisation in relation to incremental "bolt-on" acquisitions is not excluded as smaller acquisitions are part of our Group strategy and should be included in our reported and adjusted measures. We will review significant acquisitions on a case-by-case basis to determine whether the exclusion of the amortisation of acquired intangibles would provide a more meaningful comparison of our results.

Pre-IPO equity grant compensation

In order to provide greater comparability, and reflecting the changes within the Group as a result of the IPO (October 2016), certain IPO related costs were excluded from adjusted measures. Final residual share based costs were incurred in 2018.

Change and restructuring programme related costs

These arise from prior Group-wide initiatives to reduce the ongoing cost base and improve efficiency in the business. We consider each project individually to determine whether its size and nature warrants separate disclosure. Where discreet qualifying items are identified these costs are highlighted and excluded from our adjusted measures.

Adjustments to intangible and fixed assets

Gains and losses from the disposal of fixed assets, together with accelerated depreciation and impairment and write-offs in relation to intangible and fixed assets are adjusted when management consider the circumstances surrounding the adjustment unusual and not reflective of our core business.

Reconciliation of reported earnings to adjusted earnings for the six months ended 30 June 2019 and 2018

Restructuring and other related costs were $1.4 million, pre-tax, in the six months to 30 June 2019 and related to the transition of the head office support functions from the US to the UK and restructuring of geographical sales teams. These programmes are considered substantially complete.

Restructuring and other related costs were $3.1 million, pre-tax, in 2018 and related to three significant restructuring programmes including:

- $5.0 million in relation to the transition of the head office support functions from the US to the UK and restructuring of geographical sales teams.

- offset by gain on sale of asset $1.9 million relating to the divestment of Symbius in 2018.

The impairment/write-off charge of $0.4 million relates to the final write-off of certain manufacturing fixed assets following the closure of the Greensboro site in 2017.

Other discrete items principally represent tax benefits of $30.6 million in respect of previously unrecognised deferred tax assets arising from the US Tax Cuts and Jobs Act.

Reconciliation of basic and diluted reported earnings per share to adjusted earnings per share for the six months ended 30 June 2019 and 30 June 2018

(a) See Note 6 - Earnings per share

Reconciliation of reported operating costs to adjusted operating costs for the six months ended 30 June 2019 and 30 June 2018

(a) "S&D" represents Selling & distribution expenses

(b) "G&A" represents General & administrative expenses

(c) "R&D" represents Research & development expenses

Cash conversion for the six months ended 30 June 2019 and 30 June 2018

Condensed Consolidated Income Statement

The accounting policies and notes on pages 27 to 34 form an integral part of the Condensed Consolidated Financial Statements. All results are attributable to shareholders of the Group and wholly derived from continuing operations

Condensed Consolidated Statement of Comprehensive Income

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

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity