ConvaTec warns on full year and 2018 targets after supply issues
By Oliver Haill
Date: Monday 16 Oct 2017
(ShareCast News) - ConvaTec Group warned that revenues and profits for the full year will be lower than it had previously guided and that growth targets in 2018 may need to be adjusted.
Although revenues in the third quarter grew 6.7% to $445.5m, which equates to 5.1% at constance exchange rates and 3.3% on an organic basis, the FTSE 100 company said it now anticipated full year organic revenue growth of 1-2% after performance was severely affected by supply issues in both advanced wound care and ostomy care and a lower than anticipated revenue contribution from new products, which also damaged it profits margins.
Guidance had been for an organic revenue growth rate greater than the 2016 rate on a constant currency basis, with group revenues last year growing 2.3% on a reported basis or 4% at constant exchange rates, while the consensus City forecast had been looking for 3.4% organic growth.
Not far from its calendar year end, ConvaTec said in order to achieve the top of the targeted 1-2% growth range depended on "the degree of success in resolving remaining supply issues, fulfilment of backorders and recovery of orders in both advanced wound care and ostomy care in the last three months".
Wound care and ostomy have been hit by delays in moving manufacturing lines from Greensboro in the USA to Haina in the Dominican Republic, the cost of which is also expected to not only erase the gains from management's margin-improvement plan in the first half of this year, but also the majority of the gains made from the plan the previous year.
Some client orders were lost in both wound care and ostomy as supply issues in Haina continue to drag on the existing manufacturing operations there, with less progress than anticipated made in reducing backorders but expectations that these supply issues will be resolved by the end of the year - though ostomy production are likely to run below full volume in the first half of 2018.
Despite the decline in revenue expectations, the group is working towards adjusted operating costs of around 35% of full year revenue, compared to 37% in the first half.
"I am disappointed that our performance in the third quarter was severely affected by supply issues in both Advanced Wound and Ostomy Care and a lower than anticipated revenue contribution from new products, leading to a reduction in our full year organic revenue growth expectations," said chief executive Paul Moraviec.
He added: "Despite these setbacks, the business remains well positioned in large, structurally growing chronic care markets, with strong brands, differentiated products and a strong and innovative R&D pipeline. We understand the operational issues we need to address, and are determined to drive performance and to deliver margin improvement in the future.
"However, given what we have experienced in the third quarter, we are reviewing the financial implications for growth and margins in FY2018 and will provide further guidance at our preliminary results in early 2018."
Convatec shares fell more than 21% on Monday morning to below the 225p flotation issue price in October 2016.
Broker Numis, which had been forecasting 2.6% organic and 3.5% full year growth when adjusted for the discontinued products, estimated up to 8% downgrade to consensus EPS expectations from the current 17.6 cents at the top end of the new revenue guidance.
"Our provisional forecast changes now infer 16.4 cents of adjusted EPS, which implies a 7% downgrade. With growth expectations clearly unravelling and the shares now trading on 18.5x FY17 EV/EBITDA, we continue to see significant downside for the shares," said analyst Paul Cuddon, reducing his target price to 220p to reflect the lower growth trajectory and downgrading to 'sell' from 'reduce'.
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