LONDON (ShareCast) - (Sharecast News) - ConvaTec Group updated the market on its trading for the third quarter on Monday, revising its guidance for the full year for both organic revenue growth and adjusted EBIT margin.
The FTSE 250 firm said that revised guidance was driven primarily by a change in inventory policy by the biggest customer in its Infusion Devices franchise, which was expected to have a material negative impact on revenue in the fourth quarter of between $18m and $23m, and to a lesser extent "challenging" market dynamics in specific markets in Advanced Wound Care.

As a result, the group now expected full-year organic revenue growth to be flat to 1.0%, from 2.5% to 3.0% previously.

After that reduction in revenue expectations and consequent adverse mix impacts, guidance for adjusted EBIT margin for the 2018 financial year was also revised down to between 23% and 24%, from between 24% and 25% previously.

ConvaTec also announced on Monday that its chief executive officer Paul Moraviec was leaving amid the sour news for investors.

"The board continues to have confidence in the fundamentals of the business and its future potential," ConvaTec's directors said in a statement.

"Our cost out plans are under development and the group will provide an update on these with the 2018 results in February."

Group total revenue in the third quarter increased 0.4% on an organic basis versus the prior year, or 2.9% at constant exchange rates.

On a reported basis, total group revenue of $452.2m was ahead 1.5% year on year, including the $12.3m revenue contribution from Woodbury Holdings and J&R Medical combined, offset by unfavourable foreign exchange movements.

For the nine months to 30 September, total revenue increased 1.9% on an organic basis versus the prior year, or 5.2% at constant exchange rates.

On a reported basis, total group revenue of $1.37bn grew 7.6% year-on-year, including the $45.3m revenue contribution from Woodbury Holdings and J&R Medical combined and favourable foreign exchange movements.

In Advanced Wound Care, revenue grew 0.8% on an organic basis in the third quarter, a modest improvement versus the second quarter but a "disappointing" result, according to the board.

Reported revenue of $146.8m declined 0.8% compared to the prior year.

"As expected, growth trends in our older DuoDERM and base AQUACEL Hydrofiber products continued to normalise during the third quarter, although our skin care business remains a drag on growth," the board said.

"Our foam range of dressings and AQUACEL anti-biofilm silver delivered good growth in the quarter.

"In October we launched AQUACEL Ag Advantage in the US, following 510k approval in July."

ConvaTec said Avelle revenues continued to grow, although it still expected the contribution to the franchise overall this year to be modest.

In the US the recovery in surgical cover dressing, as the firm won back hospitals and surgeons following the supply constraints of last year, was said to be taking longer than expected.

"As previously outlined, our Wound acceleration plan is being rolled out across the US to address performance issues, focusing on account conversion, re-positioning our foam offering, salesforce effectiveness and expanding our reach into the post-acute channel.

"However, the financial benefits, particularly from increased penetration of the post-acute segment, will take time to ramp up and are at the low end of our expectations for FY 2018.

"In the UK we continue to see some challenging market dynamics, including NHS supply chain tendering activity."

In Ostomy Care, ConvaTec said revenue grew 1.5% year-on-year on an organic basis in the third quarter, driven by new products and the benefit of a weaker comparator period due to the supply issues experienced throughout the second half of 2017.

Revenue of $131.4m fell 0.5% against the third quarter of 2017 on a reported basis.

"We anticipate that the impact of the supply constraints and associated patient loss in FY 2017 will be towards the upper end of previous guidance of between 50 and 100 bps of group organic revenue growth in the 2018 financial year.

"We saw good performances in Latin America and Asia Pacific during the quarter and continuing positive trends in some smaller European markets.

"Ongoing investment in our me+ platform is driving momentum in me+ patient enrolment and we continue to see good traction with our recent product launches of Esteem + Flex Convex, Natura Convex Accordion Flange and Varimate strips."

ConvaTec said it would launch an additional product in the Esteem + Flex Convex range in the fourth quarter.

The board said it was also pleased to agree a two-year extension to the Vizient GPO contract for Ostomy in the US, which now runs until June 2021.

In Continence & Critical Care, revenue grew 1.4% year-on-year on an organic basis, with HDG (Home Distribution Group) and sales of GentleCath driving overall franchise growth.

That was reportedly offset by the packaging recall in its Slovakia plant, and ongoing product rationalisation in critical care, which impacted growth in the third quarter by around $3.5m and c. $0.5m respectively.

"In our Slovakia plant, around 70% of the affected products have now been repackaged and released to market, and we anticipate the majority of the remaining 30% will be resolved by the end of the year.

"Our estimate of the total revenue impact in the 2018 financial year remains unchanged at less than $5m."

The female version of the company's "next generation" catheter was already CE marked and was now being trialled by patients in Europe.

Feedback from patients had apparently been "strong", and the company said it would ramp up launch activity over the coming months.

On a reported basis, revenue of $107.5m grew 11.7% year-on-year, including a combined revenue contribution of $12.3m from Woodbury Holdings, which was acquired on 1 September 2017, and J&R Medical, which was acquired on 1 March.

On 1 March, the group also divested its Symbius Medical respiratory business - revenue for that business in the third quarter of 2017 was $1.4m.

In Infusion Devices, revenue declined 3.7% year-on-year on an organic basis, following "significant tailwinds" which boosted growth in the first half of the year and a strong prior year comparator in the third quarter.

Revenue of $66.5m declined 4.0% year on year on a reported basis.

"The group has been advised by our biggest customer of a change to its inventory policy and expected ordering patterns.

"This is expected to have a material negative impact on revenue expectations for the fourth quarter of between $18m and $23m compared to our previous expectation."

CEO resigns after profit warning

Paul Moraviec informed the board that he wishes to retire and had ceased to be a director with immediate effect, ConvaTec also told shareholders on Monday morning.

The FTSE 250 company said it had asked Rick Anderson, currently a non-executive director there and a former group chairman at Johnson & Johnson, to assume the position of interim chief executive with immediate effect, until a suitable candidate was appointed to replace Moraviec.

It said Anderson would be taking up his role on a full-time basis, and would be based at its head office in Reading.

Moraviec would continue to be available to the company to ensure an orderly transition, the board explained.

The search for a new CEO would commence "immediately", and would be led by chairman Sir Christopher Gent and deputy chairman Steve Holliday.

"I would like to thank Paul for leading ConvaTec through an important phase of the company's development and the first period of being a public company," said Sir Christopher Gent.

"Paul leaves with the board's best wishes for his retirement.

"I am grateful to Rick for agreeing to take on executive responsibility as interim chief executive officer and I am sure the company will be in very good hands until Paul's replacement has been appointed."

Paul Moraviec added that the company had made "significant progress" during his time as CEO, adding that he was confident that ConvaTec now had the "strong platform", infrastructure and leadership to enable the business to flourish.

"I would like to thank all my colleagues across ConvaTec for their hard work and dedication, they have taken ConvaTec to a leading position in the medtech industry and I look forward to watching the company's future success."

Rick Anderson would cease to be a member of the audit and risk committee with immediate effect, the board confirmed.

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