Convatec Group's (CNVVF) CEO Karim Bitar on Q1 2020 Results - Earnings Call Transcript
Convatec Group Plc (OTCPK:CNVVF) Q1 2020 Earnings Conference Call April 30, 2020 4:00 AM ET
Mark Reynolds – Investor Relations
Karim Bitar – Chief Executive Officer
Frank Schulkes – Chief Financial Officer
Conference Call Participants
Patrick Wood – Bank of America
Amy Walker – Peel Hunt
Alex Gibson – Morgan Stanley
Sebastian Walker – UBS
Christian Glennie – Stifel
Craig McDowell – JPMorgan
Paul Cuddon – Numis
Veronika Dubajova – Goldman Sachs
Good morning, everyone, and thank you for joining us for the ConvaTec Q1 trading update. I’m joined by Karim Bitar, Chief Executive Officer; and Frank Schulkes, Chief Financial Officer.
I will now hand over to Karim to commence the update.
Thanks, Mark, and good morning to everyone. It’s a real pleasure to be with you all today. And I just want to thank you once again for joining us. As you’re all aware, these are really challenging times. But at the same time, it’s good that we can have the opportunity to get together in dialogue. I hope you and your families are keeping safe and healthy. And as Mark highlighted, I’m joined by Frank, our Chief Financial Officer, who will be taking you through the Q1 trading in a moment. And later, the two of us will be happy to address any questions you may have.
As you hear, Q1 was a robust quarter. In fact, it reflected that customers, including patients, increased their own stock of products. In addition, it’s important to highlight that this was a weak prior year comparator and, at the same time, we did see increased underlying demand.
In terms of looking ahead, there are increased risks in the remainder of the year. And what’s important to highlight is that we expect a material reduction, particularly in elective surgeries, to impact our Advanced Wound Care revenues. In addition, external risks across the business, including in supply chain, exist, and we are monitoring these very, very carefully.
Our focus is really, first and foremost, to ensure the safety and well-being of our people and their families. Our people, our colleagues are absolutely critical to serving caregivers and patients. The second thing that we want to do beyond ensuring the safety and well-being of our employees and colleagues is to really reinforce and secure our supply chain. And I’ll tell you more about that. We’ll be doing a lot in that arena.
And then thirdly, we continue with our transformation initiatives, and we’re continuing very much at pace. We are maintaining our 2020 guidance. However, we are mindful of the increased risks.
Now what I’d like to do is to share with you some details on how are we responding to the challenges in the face of COVID-19? I think what’s important to highlight is that fundamentally, we are adapting to the new environment and the new context. We’re doing that by being very collaborative, by being very speedy and being very pragmatic in all of our decision-making.
Specifically, I have formed a rapid response team, which I chair, and we have approximately two dozen members to this rapid response team. The rapid response team consists of senior leaders across the company, including folks such as site heads, Chief Medical Officer, et cetera. And as a team, what we try to do is to bring expertise and decision-making authority all into one form.
We meet every 72 hours, and we are available 24/7 over Microsoft Teams, and this platform in terms of communicating has been very, very helpful to us. We’re focused on six fundamental work streams. We have one individual who’s accountable for each and every one of these work streams and works very, very closely with me and the entire rapid response team.
The first work stream is all about people and focusing on the safety and well-being of our colleagues and their families. The second one is all about the supply chain and reinforcing the supply chain and strengthening the supply chain. The third one is how do we interface with customers. The fourth one focuses on financial liquidity. Fifth, as you can imagine, IT is playing an important role and really contributing significantly. And then sixth is medical, and under the leadership of our Chief Medical Officer, we’re keeping a very close eye as to what is happening on a global basis in all the key geographies, and also making sure that, from a medical perspective, we really are leveraging best practices as we keep our colleagues safe.
What I’d like to do now is to delve a little bit more into detail in regards to four of those six work streams. The first one is in regards to our colleagues, the people that we all work with so closely and are so critical to helping serve caregivers and patients. The number one priority, frankly, is to really ensure their safety and well-being. These individuals are absolutely critical and crucial to providing the services and products that so many customers around the world rely on.
For all of our sites, we are implementing best practices in terms of temperature screening, social distancing and hygiene best practices. And this is supported by a tremendous amount of ongoing training and certification. Colleagues can definitely be working from home, and we’ve equipped them with the appropriate equipment and access. And frankly, we are adapting well to this new reality.
The second area we’re focused on is the supply chain. We’re taking every opportunity to reinforce our supply chain. We’re implementing best practices across all of our sites, and these protocols are not only being shared but implemented consistently on a global basis under the leadership of Donal Balfe, our Head of Quality and Operations. We’ve made adaptations, we’ve reworked shift patterns and, frankly, we’ve also rearranged methods for transportation for our colleagues very consistent with best practice when it comes to social distancing.
To date, we’ve largely been able to deliver our products and services to our customers. Thirdly, in terms of customers, what are we doing there? Fundamentally, we see this as an opportunity to really serve caregivers and patients. They rely on us, and so we’re very much in that serving mode: how can we be of assistance? And as we do that, we’ve, frankly, been leveraging and accelerating the usage of a numerous set of digital platforms.
Some of these platforms facilitate interactive dialogue, and there are things like Zoom and Teams and Google Meet, which I’m sure many of you are familiar with. We’re frankly growing our e-commerce platforms and leveraging those a lot more aggressively. And also, we’re trying to be very innovative and very pioneering by, for example, hosting virtual medical conferences. We recently hosted WoundCon, which was a global medical conference, focused in the area of wound care. We had approximately 1,500 health care professionals plus participated in this from 20 different countries, and it was a very, very successful virtual medical conference.
Lastly, in terms of customers, we’re also trying to go ahead and make sure that we are aware of the context and the communities in which we work in. We’re very blessed to have a product by the name of DuoDERM, and this is one of our dressings. And when you think about DuoDERM as one of our key dressings, what we’re going to go ahead and do with this hydrocolloid is we’ve actually gone ahead and provided over 250,000 DuoDERM dressings to approximately 1,000 hospitals globally, and we’ve done this for free.
And it’s really a gesture on our part just to support the frontline staff, whether it be nurses or doctors, who will tend to use DuoDERM on their face, really around their cheekbones because oftentimes they’ll get pressure ulcers, which could lead to bleeding, and this gesture has been very much appreciated on a global basis, whether that be in places in Europe, whether that be places in Asia, whether that be places in Europe – sorry, in North America. Fourthly, let’s
Fourthly, let’s focus on liquidity. As you’ll hear from Frank, liquidity remains robust. What we see is that the trends in terms of our liquidity are consistent. And Frank and his team did a very good job recently refinancing our debt with a new five-year facility maturing in October 2024.
Finally, let’s move on from the 6 work streams. I focused on four of them and, hopefully, I’ll give you a little bit of a color as to how we’re responding and adapting to the new context. What I would say in terms of our transformation and how it’s progressing is we are very much continuing to drive forward. We’re sustaining momentum. In fact, in quite a few instances, it’s acting as a catalyst, the whole context for us to accelerate the pace, particularly, for example, in areas such as leveraging digital platforms, but also then, for example, in the area of training and development, where we’re doing a lot of online training and development.
So for example, one of the key modules that we’re implementing across the entire company is actually a whole concept around the ability to execute, and we’re driving that aggressively. Conversely, in a prudent manner, some initiatives are being slowed because that makes sense, and we’re being thoughtful. So for example, in some instances, some of the planned sales force expansions that we were planning to make in some of the markets around the world, we’ve decided at this point in time to put those in a holding pattern.
I hope that update helps you, give you a sense of how we’re making progress. And now what I’d like to go ahead and do is to hand over to Frank so he can take you through Q1 trading. Frank, all yours.
Thanks, Karim, and good morning, everyone. As Karim mentioned, Q1 was a robust start to the year with group revenue of $460 million, increasing 6.9% on a reported basis and was up 8.9% in constant currency. It’s important to note that the performance reflected customers increasing their own inventories in light of COVID-19 and the impact of the rebate provision adjustment in Q1 prior year, which was a tailwind of about 220 basis points.
I will provide some detail on each of these as I walk through the business units. Advanced Wound Care revenue of $132 million increased 1.8% on a reported basis and was up 4.5% in constant currency. There was a modest headwind due to COVID-19 as lower activity in APAC was partially offset by some inventory building in the U.S. The impact of prior year’s rebate provision adjustment was a tailwind of approximately 400 basis points in the wound care business.
And then besides the impact of the French reimbursement cuts, there were some small puts and takes resulting in an estimated underlying growth of approximately 2% to 3%. The underlying growth was driven by good growth in global emerging markets and limited growth in the U.S. This was partially offset by lower growth in Europe. Customer Care revenue of $127 million increased 6.6% on a reported basis and was up 9.5% in constant currency. The strong revenue growth was driven by COVID-19-related demand from customers across care settings, increasing their own stock of products.
Furthermore, the prior year rebate provision adjustment was a tailwind of approximately 190 basis points. We estimate that our underlying growth of low single digit was broadly in line with recent quarters. Continence & Critical Care revenue of $119 million increased 9.5% on a reported basis and was up 10.9% in constant currency. We continue to see good growth in Continence & Critical Care, driven by our Home Services Group in the U.S., with good underlying demand and a modest tailwind from increased orders due to COVID-19.
Critical care business saw a strong growth, driven by demand for critical and hospital care products due to COVID-19. On top of that, there was also a tailwind of about 140 basis points related to the prior year rebate provision.
Infusion Care revenue of $82 million increased 11.8% on a reported basis and was up 12.6% in constant currency. As you know, quarterly revenue growth rates in Infusion Care can be lumpy. However, underlying demand remains in line with our expectations.
Looking ahead across the business, COVID-19 has introduced increased risks into our operating environment. A sizable part of our wound care revenue is linked to elective surgery as well as hospital visits more generally. And we expect to see declines in Q2 and Q3. However, some of this volume may start to recover later in the year. Conversely, we continue to see good momentum in Infusion Care, Continence Care and Critical Care.
As a result, we are maintaining our 2020 guidance for the year, and we are cautious about the increased risks. As Karim mentioned, we remain fully committed to driving forward our transformation as we focus on pivoting to sustainable and profitable growth.
In some cases, we will accelerate certain investments, in particular, in digital capabilities, while in other cases, for instance, sales force expansion, we will prudently slow down or defer. Overall, we expect the investment to be moderately lower than previously communicated.
Turning to cash. We continue to be cash generative and have strong liquidity with a cash position and leverage in line with 2019 year-end.
Finally, notwithstanding the uncertainty due to COVID-19, the Board continues to propose that the 2019 final dividend is paid subject to approval at the AGM on May the 7th.
With that, I will hand back to Maxine, and we will take your questions.
[Operator Instructions] We have a question from Patrick Wood from Bank of America. Your line is now open.
Perfect. Thank you very much for taking my questions. Just a couple if that’s possible. I mean when we’re looking at the business overall, it’s obviously down. It looks like very well in the first quarter. But for the OpEx deployment mid to longer term, how much is this disruptive in terms of the ability to actually put the costs through the business? That would be the first question.
And then the second one, any update on GPO contracts for ostomy in the U.S.? Sorry, thanks guys.
Thanks, Patrick for both questions. Frank, do you want to go ahead and take them? Frank, are you there?
Sorry, I was on mute.
Sorry. No problem.
So as we said, we are looking at our transformation project portfolio. In some cases, we are accelerating; in some cases, we are deferring, but most programs are continuing. And as Karim said, there is good momentum and there is good pace. We expect basically a moderate decline in our investment in 2020. And in some cases, that means that we might postpone a certain project start three months; in some cases, it might be a little longer. It all depends, of course, how long COVID-19, we will be in this situation. I think, overall, looking at the grand scheme of things and all the projects in flight that there is not going to be a long-term impact. But of course, the situation stays very fluid, and that’s how we look at the situation today.
Frank, if I can just add one comment here, I just think what’s important for everybody to realize is that, basically, our investment and strategy is very much focused on sustainable and profitable growth. So that’s the way we’re managing the business, which is very much of a medium-term time horizon. And so where there are opportunities, frankly, to contemplate, well, what is the new normal going to look like? Because we all realize that in the context of COVID-19, there will be a new normal.
And we’re in the midst of establishing what does that new normal look like. So one area which is absolutely critical that we go ahead and, frankly, increase our investments is the whole area of digital. And frankly, that’s exactly what we’re doing right now. If you look at our expenditures in the area of IT, we’ve been actually increasing them in a very substantial and meaningful manner. What I would just say on the investment strategy, what we need to be doing is to be thoughtful, what had we planned on doing, but maybe, more importantly, what do we expect the new normal to look like and thereby adjust our investments in the context of that, and that’s exactly what we’re doing. Sorry, Frank.
Yes. And on GPO – there’s really nothing new to report on GPO contracts.
Perfect. Thank you. And if I could just do one more very quickly. I mean for some of the categories, the reimbursement cuts that we see sort of globally tend to kind of come through in lumpy fashion, i.e. most countries kind of ignore the category for a long time and then they kind of look at it again and put a small cut-through and – so do you think the fact that like a bunch of countries are pretty distracted with other, let’s say, more pressing issues right now than looking at reimbursement codes for smaller parts of health care spend? Do you think it’s an opportunity that the reimbursement environment may be a little bit more favorable over the coming year or two than historically or just too soon to call?
Yes, Patrick, I think it’s a good question. What I would say, I think it’s premature to draw these kinds of conclusions. I think it’s – clearly, when you’re defining the new normal as to what’s going to happen with health care professionals behaviors, how are payers’ decision-making criteria going to modify or change, how is, frankly, patients’ behavior is going to change, I think that’s very, very fluid. We’re clearly assessing it. And you can imagine, as we define the new normal, we’re looking at a variety of scenarios. So all I could say is, it’s premature to conclude, but clearly top of mind.
Perfect. Thanks for taking my question.
Yes. You are welcome.
We have a question from Amy Walker from Peel Hunt. Your line is now open.
Thank you. Good morning, team. I have three, if I may, please. Frank, thank you very much for the quantification on the underlying demand piece. I wonder, could you help us understand your expectations in terms of the unwind of that stocking on a quarter-by-quarter basis. So for instance, could there be even some more stocking in the critical care side in the second quarter? And then should we expect or are you expecting unwind as soon as the second half? Just some color there would be helpful. The second question I had was around...
Amy, can I maybe process this? Let’s take one at a time. It might be easier for Frank and I to answer that way.
Of course, Karim. Yes, of course. Go on.
No problem. So Frank, do you want to take that first question about the unwinding of the stock?
Yes. So Amy, it’s very tough to, in fact, assess when this unwinding is going to happen. We don’t expect in the short term unwind of some of these stock builds, specifically in Ostomy Care, will happen, but it could still happen within the same year. So at this moment, we’re following it, of course, on a weekly basis. But for me now to forecast when we think this is going to unwind is too premature. So we’re following it. And for sure, when we are finishing our first half, there’s much more insight into that.
Amy, what I would just add to it, too, is I think it would be imprudent to assume that, for sure, there will be an unwind in the stocking, right? I think the reality is we just don’t know. Because I think at both the patient level, frankly, at a customer level, meaning, for example, hospital and at the distribution level, I think the theme of resilience, right, is going to become more and more important, right, in a post-COVID-19 situation. Because as you think about the whole concept of resilience, how do you build resilience?
So even as a patient, you may have thought, hey, carrying 30 days’ worth of my prescriptions was good enough. But maybe now you feel a little unsure, not sure what’s going to happen. So maybe you want to have 90 days. So I think Frank’s response is spot on, which is to say, there’s uncertainty, we need to monitor and assess and see how things move forward.
Thank you. That’s helpful. And then maybe following up on that theme, Karim, are you taking a similar view in managing your own business? Do you anticipate that you will from here and out maintain higher levels of stock? Would that tend to be higher in some parts of the business than in others? And what level of capacity utilization are you running now? And do you envisage running out in the next few months to support all of that?
Yes. I mean, look, I think, directionally, what I would tell you is that if historically enterprises had focused fundamentally, I would say, on health and safety as a key pillar when running supply chains, right, HS&E, the health safety and environment, that’s sort of like the foundation. And then you tend to have a very heavy focus on quality and efficiency. I think the theme of resilience really wasn’t top of mind. And I think that theme of resilience is going to pick up a lot more important.
Certainly, at ConvaTec, that’s the way we’re treating it. And so I think that from a strategic planning perspective and even short-term intervention perspective, we are going ahead and reinforcing our supply chain to make it more resilient, right? So I think the practical implication is that, yes, we are reviewing all kinds of interventions, right? So short term, you can obviously play with things like your inventory , whether they be the inputs, the intermediate product inventory or the finished product inventory.
Longer term, you can be looking at other elements, such as, say, automation, right, which also has some benefits. So I think the bottom line, Amy, is that we’re working through it. But what I would say is that as we rise to the challenge with COVID-19 and adapt to the situation, I think for us, as a company, resilience is clearly top of mind.
Okay. And then are you able to quantify operating rates or just to try and predict what...
I think it’d be premature for me to tell you. What I can tell you is that the supply chain is working very, very hard, right? And so capacity utilization rates are relatively high, right? So we’re rising to the challenge, and I would say, demand, as we described it, at least in the first quarter, was robust, and now we need to see how it plays itself out.
Okay. Very last one, if I may. Just – I don’t know if you can quantify this for us, but do you have a sense of what proportion of your personnel – you mentioned you’ve been monitoring activities around the world very carefully. What proportion of your personnel have already been affected my COVID-19? And how far through that sort of personnel impact you might already be? And whether there are certain areas that are more affected by others? Just any color that you could give around the impact on your workforce specifically would be helpful.
Yes. It’s difficult to say how far through we are, right, as we all know there’s an asymptomatic aspect to this as those are just also strictly being symptomatic and then diagnostic testing is actually quite limited on a global basis. Now obviously, that situation is improving. What I can tell you is that we have approximately 9,500-plus employees worldwide. We track literally on a daily basis what is the status of COVID-19 country-by-country, region-by-region, and what is the status of our employees.
I would say that any one point in time, typically, we’ve had a situation where maybe, and please, this is an approximate number, we may have had anywhere between, say, 50 to 80 employees who suspect that they may have COVID-19, either because they think they’ve been exposed to it or they have symptoms. They don’t know if they have it, but they suspect it, and we track that. We do also track who are the folks that actually have been – for example, have to maybe go ahead and be hospitalized and who are the folks then who had to go into critical care.
Up to this point, to the best of our knowledge, we have had a few folks who’ve had to be hospitalized, but no one has had to go into critical had to go into critical care or intensive care. So again, knock on wood, that really is real wood, Amy, I would say that things have worked out reasonably well. But it’s something that we monitor very, very carefully. And we’re benchmarking how are we doing vis-a-vis the context we’re in. And obviously, the context varies quite a bit, whether you’re in Mexico, whether you’re in Denmark, whether you’re in the UK, et cetera. I hope that answers your question.
Thank you. It does. Thank you very much. I will drop of now. Thank you.
We have a question from Alex Gibson from Morgan Stanley. Your line is now open.
Hi, good morning. Thanks for taking the question. I have two. So my first one would just be on – if you can help us decipher the demand you’re seeing today that is driving the better growth in your business. More specifically, if you could give a breakdown of growth that you could try to attribute to inventory stocking versus specific increases in consumption for some of your products as a result of COVID-19.
Frank, do you want to try to tackle that question?
Yes. So – well, I can’t give you precise numbers. I think during the presentation, we gave you some directions. As you heard in wound, in fact, we had a negative impact of COVID. It was modest. So there is not too much stocking going on there. If you look at the Ostomy Care business with a growth that was 9.5% or just over 7%, excluding the rebate, we estimate that the underlying growth was approximately in line with historical levels of low single digit. So there was a pretty sizable portion there related to COVID-19, and we expect that a lot of that was indeed customers as well as patients, by the way, upping their stock levels. Our estimate is probably 50-50. And think about patient stocking as follows.
Normally, a patient would, for instance, order one month of supply. In today’s environment, they probably order two to three months of supply. So that’s how you have to think about that. So I think in terms of stocking activity, in Ostomy Care, more than probably some of the other business units with wound the other way around.
And then finally, I would say, in the Critical Care business, that is really a combination of really higher usage of our products because a lot of our critical care products are used in the ICU. A lot of these are respiratory-type products, for instance. So we expect that the growth there was for a cycle far driven by actual underlying demand in terms of usage plus additional stocking as well.
Okay. And regarding both of those impacts, do you see the stocking and the consumption accelerating in the early part of Q2? Is that what you’re seeing today? Or has stocking now – people feel that they have the right level of inventories and now it’s more back to their normal consumption? And then the demand in the ICU product consumption? And then the demand in the ICU product range, are you seeing that as well?
Alex, I think we don’t know is the honest answer, right? I think it’s premature to draw those conclusions. I think what’s fair to say, as Frank highlighted, is there have been some stocking that’s been occurring. There’s been some real demand. And those variables need to play themselves out in the future.
Okay. And then my second question would just be thinking around your guidance and the assumptions that you are embedding in them around a magnitude of decline in Advanced Wound Care and any offset from the stocking and COVID-specific demand, do you actually factor these in today? Do you have explicit assumptions in where you see those moving? Or is it you’re maintaining your guidance now and you want to wait until Q1 for example, to see how the peaks and troughs are netting out in the business? How are you coming up with that guidance today
While based on what we can see today and how we’re assessing the business going forward, we indeed are still operating within those parameters of guidance. And as we said in the call so far, we are expecting a decline in demand in the wound business, specifically in the second and third quarter. So we have factored a certain level of decline or reduction into these numbers. At the same time, we also said our Critical Care business, our Continence business as well as our Infusion Care business are continuing to perform well, and we don’t changes there.
So that’s how we have sort of modeled our 2020. Again, we’re still operating within the parameters at the same time. Just to be clear, we’re acknowledging that there is more risk and uncertainty. So if things materially change, of course, we will provide an update.
Yes. Thank you for taking my questions.
We have a question from Sebastian Walker from UBS. Your line is now open.
Hi guys. Thanks for taking the question. Actually three hopefully quick ones, if I could. So first, cost inflation in things like freight cost, material cost and whatnot, could you just comment on how manageable you think those are for the rest of the year in the context of your margin guidance? Thank you.
Yes. Well, I think the overall cost inflation related to the categories you mentioned are moving within a range that I would call manageable in terms of materiality for our business. We are, of course, following these types of commodity or rates very intensively. So far, we’ve seen in freight rates an increase. So there is going to be some additional cost in the year related to this. But it is – as I said before, it’s still moving within a range that is not material and manageable for us within our guidance.
Perfect. Very clear. The second question probably as well for you, Frank, on working capital. What are you seeing in terms of receivables? Are those picking up materially? Are your customers still able to pay you? What’s cash looking like on a day-to-day basis in April?
Yes, part of, of course, watching our liquidity, we are looking at liquidity on a daily basis. On top of that, we are also monitoring our receivables from three different angles, and that is on a weekly basis, first and foremost, of course, receivable levels; second, we’re looking at collection levels; and third, we’re looking at past due levels. And we put those in sort of historical perspective because there’s always a level of seasonality in those. And so far, we have not seen any change in trend line in any of these variables. So customers continue to pay us well. We don’t see any changes there so far.
Great. That’s helpful. And then the last one, Karim. Just interested to hear your thoughts on kind of the new normal that you’re flagging. So you talked about some structural changes around digital interacting with customers. Are there any other kind of structural changes that you see coming out of this that you as a business are preparing for?
I mean I think, look, we’re in the midst of defining the new normal, right? I think it’s a very dynamic and fluid situation. I think what’s reasonable to assume that – when you think about customer engagement that the balance of face-to-face versus what I’ll call more virtual or digital, that balance is going to shift, right? And I think we’ll see that both, not only how we interface with our customers but also just the way we operate as a company, right? I think a lot of us have learned the power, frankly, of using applications like Teams or Zoom or Google Meet, whatever the case may be, right? I mean you can really get a lot of work done, and there’s a lot of functionality there. And so I think that the importance of being able to engage with customers both face-to-face but also through these platforms is going to increase, and how do you create that interaction is very, very important.
I think as I said earlier, I think on the supply chain, it’s clear to me that the theme of efficiency will persist and the theme of quality will persist and health and safety will persist. But I think the whole theme of resilience and how do you ensure that your supply chain is resilient will become more and more important.
And then I think that implications for the innovation side of the business, which are at the heart of this business, right, the whole R&D, innovation engine, I think that was always incredibly important, and in a certain sense, as we mapped out the whole vision of pioneering trusted medical solutions to improve the lives we touch. We talked about solutions, right? We talked about our focus on really trying to weave together the whole aspect of the physical product with digital and service.
And I think we’re learning from this experience that that’s what folks are looking for. Now look at, for example, our home service team group and the quality of service we’re providing with 180 Medical is just phenomenal and then the reactions we’re getting there from customers we see that, frankly, how that business is performing. And so if you can weave, frankly, digital service and devices together, I think that the new normal will further accentuate or highlight the importance of that.
So again, we’re working through defining the new normal, but I do think that there are implications for the front-end of the value chain, supply chain, the innovation side and then how do we operate in a more sort of an office setting typically, say, in areas like finance or legal or HR or IT. Seb, I hope that answers your question.
Yes. That’s great. Thanks.
We have a question from Christian Glennie from Stifel. Your line is now open.
Hi, good morning. A couple of questions, please. Just on Advanced Wound Care and the headwinds and risks around that. Just appreciate some greater insight, characterization of that potential headwind, maybe in terms of what proportion of, either in value or in sort of volume or portfolio terms, is used in elective surgeries, that would be helpful. I mean presumably also, you’re seeing an impact from reduced A&E visits, obviously, outside of COVID-related issues as well. Any greater insight into that sort of potential headwind would be great.
Frank, do you want to try to provide some color?
Sure. Sure. Yes. So when you look at the wound care business and how you can characterize the impact of COVID into wound is the following. Of course, a part of the business, which is really the surgical segment, is highly correlated to elective type of procedures. And as you probably have read, elective procedures are pretty significantly down in the U.S., for instance, as an example. So that business is less than 20% of the total wound care business, but there will be a significant impact in that specific segment in Q2 and Q3.
Beyond that, there are also lower hospital visits. For instance, there are lower visits to wound clinics. And that impacts also the chronic part – the chronic side of wound, which is a bigger part of the overall wound business. Of course, it’s not as dramatic as elective surgeries coming down, but there is a negative impact that we estimate in the rest of the year. So that will also have an impact – a negative impact on the wound business in the second and third quarter.
Okay. Thank you. Okay. That’s helpful. And then the other piece, just a quick follow-up was on any – you talked about stocking and presumably significant volume through, but any noticeable pricing move changes in the first quarter?
No. Nothing beyond what we already have communicated. Of course, the French price reimbursement – or price impact as a result of the reimbursement cut last year, which was about 5%, is playing out in the first quarter as well as in the second quarter, and then it will sort of normalize in the second half. So that is what we see. And there are – as we discussed earlier, there are always some reimbursement cuts in certain parts of the world.
Overall, these type of reimbursement cuts are all part of our overall sort of envelope of price erosion that we see on an annualized basis of about 1% to 1.5% in total. And within that, 1%, 1.5% typically, the wound business takes a bigger portion than some of the other business units.
Okay. That’s great. Thank you.
We have a question from Craig McDowell from JPMorgan. Your line is now open.
Thank you. Morning. Thanks for taking my questions. Just two, please. The first one, if you could give any indication based on the mix that you’re currently seeing and the trends that you’re pointing to in Advanced Wound Care, implications on gross margin for the first half and the full year, if possible.
Okay. So yes, we typically don’t comment on specific mix changes within a business unit, so I prefer not to comment. I can give you some insight in how we look at the rest of the year from a business unit point of view. Second, it’s premature to talk about implication on gross margin. When we are – during our first half results, we will, of course, talk about that in more detail.
Overall, what you can say, though, is when you look at the construct for the year, as we said, we expect that the wound business will decline in the second and the third quarter. And as you know, the wound business carries a highest gross margin relative to some other business units. So that will be a negative impact on mix in the rest of the year for our total business, and that will be reflected in EBITDA, of course. But that’s a part of our overall construct that we laid out.
Great. Thank you. And then just secondly, your comments on moderately lower investments in 2020 compared to previous guidance. Could you give any indication about where that –- the lower investment would fall? Would it be in the recurring OpEx, the one-off OpEx, or perhaps the CapEx? Any kind of indication that would be helpful for modeling? Thank you.
Yes. I think looking at, of course, the portfolio assessment that we’re doing, as we said, some projects are going to be accelerated. Karim talked about that. The majority will continue and some will be deferred. The ones that will be deferred or in the area, for instance, sales force increases, and they will be delayed in certain markets. So therefore, I think by default, we will see an impact default, we will see an impact in recurring OpEx line specifically.
Sure. Thank you.
We have a question from Paul Cuddon from Numis. Your line is now open.
Thank you very much. I have two please. You’ve – your comments on the stocking benefit is helpful, but I wonder to what extent your kind of customers and particularly new customers in new markets have been providing opportunities for ConvaTec to diversify customer supply, sort of new customer and demand, please?
Yes. I mean what I would say, look, on new customer demand, that persists. And so we’re always looking at what are the new patient starts. Now obviously, with certain geographies and certain marketplaces maybe having more limited access to health care settings, you may see in terms of new customer starts that putting downward pressure.
On the other hand, the countervailing element is that if you actually have the capability to serve folks in what I’ll call much more of a virtual or remote manner, frankly, some of the competition may not be able to do that as well. And so that creates an opportunity, frankly, to increase the new patient starts. So what I would say, Paul, is right now, it’s – there’s a balance. There certainly are new patient starts, and we can go through all the various categories. And so it’s a little bit of a balancing act as to how much of it is sort of on the plus side, how much of it is on the minus side, and then on the minus side, how long will that last, specifically on this limitation of being able to access certain points of care.
Okay. Thank you. Okay. And that brings me on to kind of Home Distribution Group. So I wonder how the net promoter scores are holding up through kind of Q1. And also if you could just sort of help clarify your kind of go-to-market strategy in Europe for the Home Distribution Group.
Yes. Look, I mean, first of all, it’s the home service group. And fundamentally, it’s really a service enterprise now. Obviously, there is the ability to go ahead and deliver physical products to patients, and we do obviously interface with health care professionals. That business unit really was set up very much with the goal of being leveraged on a global basis, and it is a global business unit. So the home service group has an arm, which is, why the medical team, which sits in the United States. But it also now has responsibility for what we’ve historically called Amcare, which is a similar type of business here in the UK.
So I think the bottom line is we’re trying to understand and ascertain how does this home service group leverage its capabilities, both from a geographic vantage point and from a category vantage point. But I would say that the business performs very, very well. And frankly, the net promoter scores continue to be very, very high. So there’s a high degree of satisfaction, frankly, with our customer base, and that business is being run very, very well.
We have a question from Veronika Dubajova from Goldman Sachs. Your line is now open.
Good morning. Thank you guys. Most of my questions have been answered already, but I guess two quick ones for me. Just I don’t know Frank if you’re willing to comment a little bit on what you see as the likely magnitude of decline in wound care in Q2. And I was intrigued to hear your comment about the third quarter also being down. Maybe help us understand what’s driving your assumptions on that. And then my second question is a very boring modeling question, but FX, just mark-to-market, I guess, it would be helpful maybe for you to comment on margins, in particular, given how currencies have moved. Thank you
Okay. So on wound, we are indeed, based on what I described in one of the earlier questions, given that electives are down as well as hospital visits are down. And we see also – this is not happening in every country at the same time, right? Therefore, we expect a decline in the wound business in the second quarter as well as in the third quarter. We’re not providing a specific amount to that, but you can imagine the wound business is our largest business unit.
So the impact on the overall group is going to be material in that sense. But coming back to the first part, we expect this to last for a couple of quarters, and we are modeling that things might get back to sort of normal levels in the fourth quarter. At the same time, things are very fluid. Things are changing on a day-to-day basis. So we’re watching, of course, the markets very carefully, and we’ll respond accordingly.
On the foreign exchange, so far, the FX impact in margin rate has been limited. It’s not a positive, but on the rate, it has been a limited impact. In terms of dollar amounts, we have seen a modest loss in terms of nonfunctional type of assets or payables, revaluation impacts. It is, of course, going up and down, as you understand, with the foreign exchange market, but we have seen a modest loss so far.
That’s very helpful. Thank you.
Mark, if you’d like to continue.
Yes. So one question has come through on the webcast. Could you please give us some further color on the supply chain reinforcement initiatives that you’ve undertaken? And any adaptations you’ve had to make in that environment?
Yes. Look, on the supply chain, what we’ve really done is to focus on three key vectors: vector number one has been all about testing and diagnostics; vector number two has been all about social distancing; and vector number three is really related to personal hygiene. So what we’re doing across all of our sites is that we are carrying out consistently temperature testing of all our employees, and we’re also, frankly, doing that in our offices where we have them still functioning or still open.
In regards to social distancing, we made a whole series of changes there. So for example, the distance while walking down hallways or corridors, say, in manufacturing sites, distances that are being kept in warehouses. When you look at distancing, for example, in cafeteria, there’s really designated areas where you can sit, and so you’re obviously avoiding people sitting face-to-face. It’s much more of a diagonal configuration. So a tremendous amount of work being done on social distancing.
Shuttles that are being used to move employees, whether it be in Mexico or whether it be in Dominican Republic or Slovakia, adding capacity there to ensure that there’s social distancing when our employees are traveling to and from home and so making sure we do that.
On the personal hygiene side, again, looking at all the various practices. So for example, literally going ahead and certifying our operators as to how to go ahead and wash your hands with what frequency and having a whole training program around that. So there’s really a myriad of interventions, and we’re really driving implementation and consistency of this on a global basis. Now to some degree, we’ve also adjusted in the sense that the guidelines and guidance that you get from the regulator are going to vary whether you’re in Slovakia, whether you’re in the UK, whether you’re in Mexico, whether you’re in Denmark, whether you’re in Dominican Republic, whether you’re in Belarus, et cetera.
But by and large, I would say that we’ve done and intervened very, very proactively. And at least up to this point, again, knock on wood, it’s really kept us in a good stead. So I hope that helps.
And then one other. Does the COVID-19 situation mean that efforts to rejig the portfolios, potential asset sales are on hold for now?
Yes. Look, I mean we are always looking at the configuration of our portfolio, and that’s always a dynamic situation. So I would say we’ve been very, very clear as to what are the businesses that we’re focused on. We’ve highlighted that Advanced Wound Care is absolutely core, Ostomy Care is absolutely core, Continence Care is absolutely core, Infusion Care is absolutely core, right? And we’ve highlighted that we’ve focused on now 12 key markets, and we’ve given particular importance to China and the U.S.A. So that does not change. In fact, that continues to be the case.
And then obviously, you’ve seen our new operating model, which is really based on the configuration of six business units, which are a lot more customer-centric, a lot more agile, a lot more accountable and then flanked, frankly, by enhancing our capabilities on the supply chain and quality and flanked by really elevating the importance of innovation in R&D. And so I would say that, that continues to be the case.
Thanks, Karim. I think there’s one further question on the call and then I think we can wrap up.
We have another question from Sebastian Walker from UBS. Your line is now open
Thanks for taking the followup. Actually just expanding on my last question. So the Critical Care business and the products within that, they’re seeing elevated demand. Could you maybe comment how much of the portfolio they typically represent and whether this changes your thinking at all in terms of the willingness to invest in Critical Care and expectations on structural demand going forward?
Yes. Look, I mean, the Critical Care business is a valuable business. And frankly, in a post-COVID-19 world, clearly, the value of that business increased, right? Frank alluded to that. So if you look at our portfolio, for example, demand for oxygen mask has really increased; demand for cannulas for intubation has really increased; products in the area of fecal management system, which has increased. And so our basic philosophy has been very much to focus on what is in the best interest of patients and what’s in the best interest of caregivers.
And so frankly, we have been increasing our investments there, trying to go ahead and meet the demand requirements the marketplace is placing on us. And we think that’s just , decidedly, the right thing to be doing in this COVID-19 context or situation because there are patients and caregivers that are really relying on us and counting on us. And so I think from a core value perspective, that’s really, really important to us.
And so we review that business. We assess that business. It’s growing. That’s a positive. We expect it to continue to grow. And so what I would say, Sebastian, it’s a dynamic situation, and we’re always sort of assessing, analyzing, evaluating. And we’re appreciative of the fact that, that business continues to grow, and we’re providing it with the appropriate support and investment to ensure that it’s meeting the needs of the patients out there.
Great. Thanks very much.
Super. Thank you, Karim. As ever, if anybody has any further questions, then please do contact the IR team at ConvaTec. Otherwise, I think we can bring it to a close.
Super. I would just say, again, just thank you to everybody for having joined us on this call. And hopefully, you’ve got a sense that Q1 performance was robust and, at the same time, we’ve tried to highlight to you that full year risks have increased due to COVID-19. So we will continue to keep you abreast. But thanks again for the continued interest in ConvaTec. We appreciate your support. Have a wonderful day.
- Read more current CNVVF analysis and news
- View all earnings call transcripts