Good morning, and welcome to ConvaTec Group's 2020 Interim Results Presentation. My name is Mark Reynolds, and I am the Head of Investor Relations at ConvaTec.

To begin, I would like to draw your attention to disclaimer on the first slide regarding the forward-looking nature of some of the commentary in today's presentation. I'm joined on the call by Karim Bitar, our CEO; and Frank Schulkes, our CFO, who will provide strategic and financial updates.

And with that, I'll hand over to Frank, who will start the presentation by walking you through the financial performance for the first half of 2020.

Thanks, Mark. Good morning, and thanks for joining us on the call today.

Let me take you through our financial results in detail. Starting with Slide four.

Our performance in the first half of 2020 was solid with revenue growth and increased operating profit. Revenues came in at $908 million, increasing 2.1% on a reported basis.

Taking out the negative impact of FX movements, constant currency revenue growth was 4.3%. We expect this to be at a reduced level in the second half, which I will explain later.

Adjusted gross margin of 60% was 140 basis points higher than last year including a 40 basis point tailwind from FX and another 40 basis points tailwind then from the prior rebate provision. Operationally, we achieved a 60 basis point increase year-on-year driven by net productivity gains, which were partially offset by some modest price and mix headwinds.

I will provide further detail on this in a minute. Our operating costs as a percentage of sales at 40% was flat year-on-year.

As expected, there were higher levels of transformation costs as well as the costs associated with implementing the EU Medical Device Regulation, which is MDR in short. But this was offset by lower operating expenses driven by circumstances related to COVID-19 as well as cost management.

A material part of this reduction is of a temporary nature. Again, I will provide you with more details on these elements in a minute.

As a result, our adjusted EBIT margin was 20%, up 140 basis points from last year, and up 90 basis points in constant currency. We maintained our interim dividend of $0.017 per share, and we continue to deliver robust cash flow with cash conversion of 73% versus 90% in 2019.

As I mentioned at the full year results, we did expect cash conversion to reduce given last year's inventory reductions, coupled with higher CapEx spend in 2020. Finally, net debt leverage in the business has continued to come down to 2.2x from 2.6x at the end of June last year.

Moving to Slide five. Overall demand, although resilient in total was a mixed picture.

As communicated earlier in the year, Wound Care revenue growth was negatively impacted by both reduced elective surgeries and hospital and wound clinic visits, impacting both the surgical as well as the chronic segments. Ostomy Care growth remained low single digits, with stock building in the first quarter, partially offset by destocking in the second quarter.

Continence & Critical Care as well as Infusion Care grew strongly, the former driven by elevated demand for critical care products as a result of COVID-19. Reported revenue increased 2.1% and 4.3% in constant currency.

The FX headwind of $19 million or 220 basis points was a result of the U.S. dollar strengthening against most currencies, most notably the euro, Brazilian real and the British pound.

Turning to each of the business units on Slide 6. In Advanced Wound Care, revenue declined 4.8% in constant currencies in the first half of 2020 driven by a decline of 13.2% in the second quarter as expected.

This was due to significantly lower surgical volumes, but also by lower chronic volumes as hospital and wound clinic visits were significantly reduced due to COVID-19. The overall decline was broad-based and COVID-19-driven with North America, Europe and Asia Pacific within global emerging markets all declining.

Latin America continued to deliver good growth, although COVID-19 cases have been growing there significantly recently. In terms of brands, we continue to see good growth from our AQUACEL Ag+ AAA brand with our legacy products challenged.

We estimate that advance Wound Care grew roughly in line with the first quarter, excluding the impact of COVID-19 and last year's rebate provision. In Ostomy Care, we grew 3.1% in constant currency in the first half of 2020 with a 2.7% decline in the second quarter.

Growth in the first quarter benefited from a weaker comparator because of last year's rebate provision as well as inventory building, which partially reversed in the second quarter. Excluding these items, we estimate that the underlying growth was, again, low single digit, consistent with recent quarters.

We saw good growth in some key emerging markets, such as China, Brazil and Colombia. In Europe, Central and Eastern Europe as well as Southern Europe continued to perform well, while we experienced very modest growth in the U.S.

From a brand perspective, growth was driven by continued traction with our more recent Convex product launches, Esteem+ Flex and Natura Accordion. Moving to Slide 7.

In CCC, we grew 11.5% in constant currency in the first half of 2020 and 12% in the second quarter, with elevated levels of growth driven by strong COVID-19-related demand for critical care products. Continence Care continued to grow mid-single digits driven by Home Services Group in the U.S.

with GentleCath Glide growing strongly. Infusion Care grew 12.6% in constant currency in both the first half and the second quarter due to a good performance in the growing insulin pump market, in which we saw strong growth for a new Mio Advance infusion set.

Moving on to gross margin and OpEx on Slide 8. Starting on the left with gross margin.

The gross margin rate was 60% in the first half, up 140 basis points year-on-year. Versus the first half of 2019, we saw the positive impact from the prior year rebate provision of 40 basis points and also a 40 basis point tailwind from FX movements.

Operationally, we came in 60 basis points higher than last year driven by net productivity gains, partially offset by a modest negative impact of price and mix. The operational excellence work delivered between $15 million and $20 million in gross project benefits in areas like procurement, waste reductions and better overall equipment effectiveness.

This was partially offset by the usual headwinds of cost inflation, depreciation, implementation costs as well as some COVID-19-related expenses, which we will continue to incur in the second half. Moving to OpEx on the right.

Our OpEx as a percentage of sales was flat versus 2019 at 40%. However, if you strip out nonrecurring transformation investments and MDR costs, OpEx as a percentage of sales was 36.2% versus 38.3% in the prior year, down 210 basis points.

The first half of 2020 also included a step-up in recurring transformation investments of about $16 million versus last year. So the underlying OpEx run rate was materially lower than 2019.

And this was largely driven by COVID-19 circumstances as well as cost management. We expect this temporary lower run rate to start reversing in the second half.

For the second half, we expect a step-up in recurring investments versus the first half. But for total year, we estimate the recurring transformation investments to be between $50 million and $55 million versus the $60 million and $65 million that we estimated in February as we are proactively rephasing some of our transformation projects.

In total, in the first half, we spent $43 million of nonrecurring investments in transformation, of which $25 million was operational costs mainly booked in G&A, $12 million was CapEx and $6 million are cost items like severance excluded from adjusted EBIT. Our recurring OpEx investments totaled about $16 million.

And additionally, we incurred $9 million in relation to MDR, all booked in R&D. Further details on this can be found in the appendix to the presentation on Slide 22.

Moving to cash flow and net debt leverage on Slide 9. Cash flow remains robust, with cash conversion at 73% versus 90% last year.

The reduction in cash conversion was driven by favorable inventory movements in the prior year, coupled with an increase in CapEx in the first half of 2020. Net debt leverage came in at 2.2 times from 2.6 times at the end of June last year, and 2.5 times at 2019 year-end.

Finally, from me, on Slide 10, some considerations on second half dynamics in both revenue and Opex. In terms of revenue, we expect the Wound business to decline versus 2019 as elective surgeries as well as hospital and wound clinic visits, although sequentially improving will still be materially lower than pre-COVID levels.

We expect lower revenue growth in Ostomy Care due to some further destocking, the impact of lower new patient starts and some portfolio rationalization. In Critical Care, we expect growth to normalize to low single digits, with possibly some destocking as well.

Continence Care and Infusion Care should continue to perform well. And then in OpEx, we expect a step-up in strategic transformation investments, in particular, in recurring transformation OpEx.

And we expect to start to see a reversal of the first half temporary low OpEx run rate. As a result, we expect lower EBIT rate in the second half than the first half.

And for the full year, we expect to be in line with our guidance. Furthermore, as we are proactively rephasing some transformation projects and investments as a result of COVID, which I highlighted earlier, we now expect the 2021 benefits to be between $130 million and $150 million.

Finally, there continues, of course, to be elevated risks and uncertainty in our markets as a result of COVID-19 developments. So we will stay vigilant.

Thank you very much. Handing over to Karim now.

Frank, thanks a lot for that very helpful summary of the overarching financial performance in the first half of the year. What I'd like to do now is to really focus on our strategic transformation.

And really highlight to you two overarching points. The first point is that the strategic transformation is progressing well, and is very much on track.

And we've been able to go ahead and drive the strategic transformation in the context of COVID-19. Secondly, what's important to note is that as we've been executing our strategic transformation, we've really gone ahead and done that via our corporate strategy, which we've developed an acronym for FISBE focus, innovate, simplify, build and execute.

And what I'd like to do here shortly is to explain to you how are we driving the strategic transformation agenda via the FISBE corporate strategy with the ultimate goal of achieving sustainable and profitable growth, very much with a three to five-year time horizon. Now what's important to note is that as we've been driving forward and making progress with our strategic transformation, we've been confronted by the COVID-19 challenge.

And that's really been top of mind. We've dedicated a lot of time and effort and energy to our number one priority, which has been to safeguard the health and safety of all of our employees.

In addition, we've gone ahead and really reinforced our supply chain and put in a whole series of interventions, whether those are in regards to social distancing, whether these are in regards to screening and testing, whether these are in regards to hygiene practices. But we've tried to be very proactive in making the appropriate investments and training.

And as we've done that, our focus has been to ensure that our supply chain becomes more and more resilient and, therefore, can serve our customers on a global basis. And knock on Wood up at this point, we've been reasonably successful in going ahead and doing that.

What I'd like to do now is to maybe move on to the next slide and shift a little bit gears and talk a little bit more about how is it that we're going to achieve sustainable and profitable growth. I think it's important to highlight that when we use the word sustainable, what we mean there is that we need to be able to achieve consistently a 4-plus percent revenue growth, year-in and year-out, real market demand of 4-plus.

And when we talk about profitable growth, what we really are focused on is really growing our earnings. And obviously, if we're able to do that, we'll be able to improve our free cash flow picture.

Now this begs the question of how exactly are we going to be able to do this. Well, the first thing we've done is to find what is our vision.

This is our true North. Our vision is very simple, is captured in these 10 words, pioneering trusted medical solutions to improve the lives we touch.

These 10 words capture three key ideas. First and foremost is pioneering.

We want to be R&D-driven and innovation-driven, and I'll be speaking a lot more about that. Second, our view is that fundamentally, we want to provide solutions.

We want to go and integrate a device with digital and service. And by doing that, what we'll be able to do is to actually improve the lives of the people we touch, socially, emotionally and functionally.

But it's critical that these solutions be trusted, i.e., be it high quality. And we've had challenges with that issue or that topic in the past.

So you take those 3 concepts of pioneering and trusted medical solutions and improving lives we touch, and then you got to translate that into, what is your strategy? What is it that you will do and what is it that you will not do?

Where will we compete? And how will we compete?

And hopefully, our corporate strategy will answer that question for you. Number one is, we are very focused on some key markets and categories.

We've identified 12 key markets that are really important to us, and 2 in particular stand out. United States and China.

We have to win in those 2 marketplaces because, frankly, if we win in all the on marketplaces and don't win in the USA and China, we don't win overall. Second, there are 4 categories we've identified that we want to focus on.

Advanced Wound Care, Ostomy Care, Continence Care and Infusion Care. And we'll talk more about how are we actually executing on the strategic pillar of focus.

Innovation, I'll talk a lot more about this, but we are ramping up our investments in innovation, and we're going to be doing that in a very significant manner and in a very deliberate manner. Simplify, we're looking to frankly simplify how we're organized.

We've moved to global business units, and I'll talk to you more about that, the 6 global business units. And we're also simplifying some key functions, such as, say, the area of finance or IT and trying to break the logjam that we historically experience.

Fourthly, we need to build some core capabilities. We've under-invested in core capabilities in areas such as sales and marketing.

I'm going to try to share with you some examples to give you a sense of the progress we're making. And then lastly, we need to execute with excellence.

And so here, again, we're working with our transformation office to ensure that we do have business cases. We have clarity as to who is doing what by when, and we track the implementation of all these interventions.

And there, again, you'll see that we're making good progress. So let's dig in now.

Let's move on to the next slide. In terms of focus, we're rationalizing the portfolio across product categories and markets.

In terms of product categories, one thing that we're going ahead and doing is in Ostomy Care is to going ahead and streamlining our SKUs. In fact, we've already eliminated approximately 200 SKUs in the first half of this year.

Not only are we looking within product categories to better rationalize the SKUs, but we've also looked at, which product categories maybe are not core to us. One of those categories is the skincare business.

We did make the decision to divest the skincare business and have decided to sell that business to Medline, this is a business that represented about $30 million of revenues. And we sold it for approximately $29 million.

You might be asking, well, why did you decide to sell this business that was part of the Advanced Wound care business unit? Fundamentally, 3 reasons: A, this business had been experiencing historically negative revenue growth; B, the gross margins were unattractive to us within the context of our portfolio.

And C, and maybe most importantly, we did not feel that we were positioned to be able to win in the marketplace and that a better owner and a more natural owner would be Medline. And not only are we focused on narrowing the scope of the categories we compete in and the portfolio that we offer, but we also need to pick the markets we want to serve.

And so I mentioned to you that we really are focused on 12 key markets globally, and we did make the decision that we were going to exit or serve indirectly approximately 35 markets, and we shared this with you back in February. Well, we've now exited approximately 26 of these 35 markets.

And amongst these markets are places like Algeria, Albania and Venezuela. What's salient and important to note is that in terms of revenue, these are modest revenues.

And maybe most importantly, by doing this, it allows us to reduce complexity from a commercial perspective and from a supply chain perspective. So hopefully, you're getting a sense that we're very, very much committed to this pillar of focus.

And again, the reason we're doing this is to go ahead and position the business for sustainable and profitable growth medium term. Now let's take a look at what we're doing in innovation.

On the innovation side, we are increasing our investment significantly. What we're looking to do short term is to go ahead and refresh our product portfolio.

There really is a need to refresh the portfolio. And longer term, we need to focus on how we can differentiate our solutions and make those available to customers around the world.

As part of that endeavor, we went ahead and opened up a new innovation center in Boston in the USA. You might be saying, well, why did you do this?

Well, fundamentally, we've got some very good R&D capabilities in the UK and Denmark, but we need to augment them in the single most important market in the world from a commercial vantage point, but also a market where there's tremendous talent, and there a leading health care and technology partners that we want to collaborate with. So we've opened up this innovation center, and we'll be further expanding it during the course of the next 12 months.

As we do that and we think about our innovation footprint and capabilities, we've decided that there's a series of capabilities that we need to be able to leverage across all business units, across the entire portfolio. And we specifically identified for them.

The first 1 is this concept of user-centered design, really focusing on the patient, having an obsession with how that patient thinks and feels, interact with the solution we're providing them with. And there's a whole methodology behind it.

Two, is the area of advanced biomaterials and design for manufacturing. Back in February, I alluded to you that one of the key challenges that we've had is that we've not had a capability in terms of process development or design for manufacturing.

We've now dedicated time, resources and efforts to think through that we fundamentally produce single unit devices that are disposable, right? And so these single unit disposable devices that are disposable are made in very, very large quantities.

And so it's imperative that upfront, we design for quality and we design for cost to manufacture. And we're starting to build that capability.

Mechatronics and the sensors are fundamental and vital. That if we're going to go ahead and move into providing solutions, these are capabilities that we need.

And then lastly, we really see software as a medical device. And so we want to incorporate software into our solutions.

And by doing that, all of a sudden the software starts acting as a clinical decision tool, which can basically help a patient, improve the patient's outcomes, can help the provider ensure that he or she is doing a better job of treating that patient and potentially has the opportunity or provides the opportunity to go ahead and reduce cost from a payer vantage point. So hopefully, here, you're getting a sense of two things; one, we're significantly increasing our investment in innovation to refresh the portfolio short term and longer-term further differentiate, but also trying to build capabilities that we can leverage across our portfolio.

Again, why are we doing this? We want to achieve sustainable and profitable growth.

Let's move on now to what we're doing in terms of simplifying. On the simplification side, as you know, we've formed global business units.

And the reason we form these six global business units, Advanced Wound Care, Ostomy Care, Continence Care, Infusion Care, Global Emerging Market and the Home Services Group is to make sure that we've got a clear line of sight to our customers and that there's a clear accountability. So there's one single individual who can actually make the decision.

In addition, we've also tried to go ahead and simplify how our functions work. And here is an example of what we're doing in the area of finance and IT.

We opened up our new Global Business Services hub in Lisbon. We did this here in Q2 in the springtime.

And in fact, we recruited and onboarded virtually over 80 individuals. So this facility is up and running.

It's real. And what it's starting to do is to improve, not only the efficiency, but also the quality of service for key processes such as purchase to pay, order to cash and record to report.

Beyond simplifying, we need to also build some key capabilities. And let's try to understand what we're doing on that front.

So again, on the sales and marketing side, what have we done? On the sales force side, we've built a Center of Excellence for the salesforce.

And what we're doing is developing standards. For example, one standard global CRM system, one standard Consultative Selling System.

relooking at our incentives and making sure they're aligned with the metrics that we want to drive, such as new patient starts. In terms of marketing, and we're seizing the opportunity with the COVID-19 situation to respond to how customers want to interface with us, which is with much more of a virtual world.

And so in fact, in May, we went ahead and held a professional education event for health care professionals in the wound care space. Typically, we would have held this event in the United States.

And typically, we would have had approximately 500 participants. This year, we actually had 1,300 participants.

So we had triple the number of participants. This was a week-long program.

Some of it was live, some of it was offline. And what was interesting was that we were able to have a global reach.

Approximately 25% of our participants were from outside the United States. And in terms of cost to run the entire event, it was less than 1/3 of what we would normally spend.

So you can see that in terms of reach and efficiency, tremendous impact. And frankly, the levels of satisfaction that we're getting from feedback loops that we put in place are very encouraging.

So hopefully, you're getting a sense here that we're starting, and I want to underline the word starting, to build stronger sales and marketing capabilities. Now this is going to be a journey.

And again, this will be a three to five-year journey to drive that whole notion of sustainable and profitable growth. In terms of execution, let's see how are we doing in terms of executing all of our initiatives.

Well, we have over 100 initiatives across the entire value chain. So whether they be in R&D or supply chain or in the commercial area, and we're making good progress.

We're measuring the impact, and we can see the impact. And I wanted to share with you two examples.

The first example focuses on the supply chain. We're in the area of Advanced Wound Care.

And what you see here is that the supply chain folks were able to figure out a way of reducing the amount of packaging that was going to be utilized, by about 18%. What that translated into was benefit to us as a company of $1.2 million per annum.

But in addition, we were able to improve storage, transportation and extend the shelf life by a full year. On the digital side, you look at what we're doing in China.

We had made plans to go ahead and add a significant number of salespeople that could maybe visit face-to-face with health care professionals. With the COVID-19 situation, that's become more difficult.

And so again, we proactively rephased our investments, Frank alluded to this earlier. So what did we do?

We invested less in folks actually going and calling on health care professionals in person and put the funds into two basic digital arenas. One was the whole social media area, which you kind of see us on the bottom left.

And that's a picture of a webinar that we held in China. We've run over 90 events here in the first half of the year.

And we've been able to interact with over 50,000 health care professionals and patients. On the right side, that diagram or picture is actually one of our e-commerce side.

And today, in China, about 1/3 of our revenues in Ostomy Care are actually being generated on the e-commerce side. So I'm trying to give you a sense that we are tracking our transformation initiatives.

We are being proactive in terms of thinking through when and where and how do we make those investments. But clearly, we're starting to see some of the benefits being delivered to us.

So let's try to go ahead now and get a sense of what is it that we discussed, and what does the outlook look like. I'm going to try to summarize.

So hopefully, what you're able to observe and hear from Frank and I's discussion today is that we grew our revenues and we grew our earnings to the tune of 4.3% and 9.3% in constant currency. We've gone ahead and declared an interim dividend, consistent and in line with last year.

So that's kind of the financial picture. In terms of the strategic transformation, you hopefully got a sense that we're making good progress.

And at the same time, we are responding to the COVID-19 challenge. And as we drive that strategic transformation, once again, it's all about implementing the FISBE corporate strategy to achieve sustainable and profitable growth.

Lastly, in terms of outlook, we're basically anticipating that we're going to go ahead and grow our revenues, 2% to 3.5%. So that will be a lower rate than the first half of the year.

And that we'll be growing our EBIT margin between 16% to 18%, particularly as we go and increase our investments in transformation. Now all of this is very much in the context of COVID-19.

And I think it's important to highlight that there still remains a significant amount of uncertainty as we go ahead and approach the second half of the year. On that note, thank you very, very much.

And I think at this point, we'll open it up for Q&A.

It's Amy Walker from Peel Hunt. Karim, I wonder if I could start by asking what the top priorities for the innovation center are in terms of specific product lines.

You alluded to a few areas, but specific product lines and capabilities. And importantly, when do you expect that these initiatives will deliver product launches that can move the needle on the top line?

I'll let you answer. And then I've got 2 more questions, if I could.

Yes. So what I would say is that as Divakar Ramakrishnan has taken the range of R&D, we need to remember that he's basically 6 months into the process.

And so I think that the addition of the innovation center in Boston is part of the overarching complex. So we will definitely be continuing to carry out some important significant R&D on the outskirt of Copenhagen and [indiscernible], in the UK R&D side.

So really, you need to think about this as a 3-legged network that's being leveraged. And we have a philosophy of discovery without walls.

And so we're going to be looking to actively collaborate with other entity. They could be government, nongovernment, et cetera, et cetera.

In terms of priority, look, it's pretty clear. We need to refresh our portfolio short term.

So as I discussed with you guys last time, this is what I would call, for example, Avelle 1.5, right? We need to deliver that ASAP.

We've had some quality challenges there with the whole pump system, and there's some leakage issues. And so busily working on that.

We need to make sure that the GentleCath Air, the compact products, which we've been talking about for a while, we need to get that coming through. So those types of opportunities, and I could go down the line, Amy.

But I call it short term. I think you'll see those being rolled out during the course of the next, roughly, let's call it, 12 to 24 months, right?

So I think it's probably the best way to be thinking about that. And progressively, we'll be giving you more updates on explicit target base.

I'd wanted to give Divakar a chance to, frankly, reflect and build some robust timeline that we can commit to, and then obviously share more broadly with all of you. Beyond that, though, the capabilities that I shared with you there, some of them, for example,on Avelle 1.5, and we need it for Avelle 2.0.

And so that will be impacting the portfolio short term. We need it for GCR, GentleCath Air, immediately.

So what I would say is that the, some of those capabilities will be used short term. Some of them, such as software as a medical device will be a little bit more longer term and more in the, let's call it, 24 to 48 months because there we're thinking about, well, how can we go and drive more differentiation as opposed to refreshing the current portfolio.

So I hope I answered your question, Amy.

That does. My second question was for Frank, I suspect.

The guidance on the fixed cost is very clear, Frank. But I wondered if you could help us a bit with the gross margin outlook.

So specifically, how much scope is there to drive more productivity gains in the short term on the gross margin given that the base effect and the FX were quite big contributors? What more could be done to sort of offset if those roll off in the short term?

Yes. So first of all, we delivered some pretty solid net productivity in the first half.

As you heard, $15 million to $20 million in gross benefits. And of course, we will have the usual suspects of headwinds.

The operational excellence program is up and running. Started really to deliver last year.

Will continue to deliver this year and so forth in the outer years as well. What's, this is not really a very linear program.

Of course, it will not be that every month, there will be always a fixed amount of productivity growth benefits delivered. So there will be a little variation in the gross benefits delivered quarter-by-quarter.

And there will also be variation in the headwinds. But overall, you can expect that also in the second half and in 2021, we expect a net positive contribution from productivity going forward to help in gross margin.

That's great. And as you've just named check 2021.

I wonder previously, ConvaTec's indicated that 2020 would be a trough year for margins, albeit are off across the space, I think, given what we're doing with from a pandemic perspective, and I know this [indiscernible]. But I wondered what is your thinking about whether that's still the likely base case.

And what are the key risks to that potentially between now and next year?

Yes. As you mentioned, and I think we talked about this also after our Q1 results.

We still believe that 2020 is likely to be the trough. But indeed, the situation is very fluid, of course.

We are -- as you heard from Karim, we are deferring some projects. So that have an impact on, first, the timing of the costs as well as the timing of some of the benefits.

We are very committed. The overall transformation program will deliver, but developments related to COVID basically add a level of uncertainty.

So likely to be biggest risk is really, in our view, how COVID is going to further develop. And if there's going to be a serious second wave that are going to impact our markets.

And that might mean that we are going to continue to rephase some of the programs. But in the grand scheme of things, we are very committed in delivering the transformation program.

We will continue to invest, and we will also -- we'll deliver the benefits. The timing of those are very much a function of how COVID is further developing.

Just to clarify, and this is my last question, I'll give other people a chance. But in a situation where you're presented with a choice between having to bite the bullet on making the transformation and then accepting that that's going to be a shorter-term headwind for margins, perhaps even bigger in 2021 than 2020.

Would that be your preference or will managing the margins on a more stage basis be a bigger priority?

Well, listen, our strategic transformation program is a three to five-year program, right? So for us -- in the end, we want to pivot to sustainable and profitable growth.

And therefore, I think the strategic transformation in the end is a very important program for us. And the longer-term growth of the company, including margin dollars, will get priority long term.

Got it.

Karim, you want to add something to that?

No. I was just going to second that look.

[indiscernible] is very clear, Amy, right? I mean we have to get to 4-plus percent.

That's really what we're obsessed about, right? And once we achieve that in a sustainable manner, and that we can see a whole string of semesters where real demand in the marketplace is 4 plus.

Thereafter, that gives us the opportunity to go ahead and expand the operating margin, right? But we need to get out of the [indiscernible] And so I wholeheartedly endorse what Frank just said.

Okay. Thank you, guys.

Thanks Amy.

Perfect. Thank you very much.

I'll just ask the first two or three together because they're kind of quick. The first one would be, please, can you give us a sense of -- and apologies if I missed it, the July run rates, generally, what you're seeing as you sort of move through into the latest months, whether at the group level or divisional, I don't mind?

And the second quick question would be the sort of sustainability of ID, which I think has been a lot stronger in the first and second quarter than perhaps we expected. Appreciate it's a lumpy business.

But is it reasonable to look at like tandem in the U.S. and see what they're doing in the market conversion and use that as a general proxy for the way to think about some of the growth in that market?

Okay. Why don't we -- maybe Frank take question number one, and I'll take the second one.

Yes. Sure.

So what we see in July is, in fact, very much in line with our expectation and how we assess the second half and how we, in fact, have modeled the second half. So we don't see any fundamental issue.

And I explained during the presentation, our expectation that Wound is going to be negative in the second half. We expect a weaker Ostomy Care with destocking.

We expect a more normalized Critical Care performance in the second half and Continence as well as I see Infusion Care to continue to perform well. And that's basically what we see in the July numbers.

So it's very much in line with our expectation. However, we still have 5 months to go.

And COVID, of course, brings a level of uncertainty, unpredictability. So we are very prudent and we stay vigilant.

Great. Yes, Patrick, on the second question in regards to the sustainability of the Infusion Care business.

And you did provide the caveat that it can be a lumpy business because of the high concentration of customers. What I would say is 2 things: a, within the diabetes arena, which is currently where the business is focused on, clearly, performance of companies like Roche and Tandem Diabetes and Medtronic does impact us because we partner closely with these enterprises.

So I think looking at some of their offerings, it's certainly an important indicator. Having said that, you also know that there's also a large and growing disposable pump market.

And the question is, is that a threat? Or is that an opportunity for us in Infusion Care, and we could discuss that.

In addition, what we also need to be thinking about is, is there an opportunity to, frankly, leverage the Infusion Care platform beyond diabetes? And our view fundamentally is, absolutely, yes.

And so we're busily working on how can we leverage it more broadly. So I would say, it's a strong business, there is differentiation in our offering, and there is an opportunity to grow it both within diabetes, but also outside of the diabetes arena.

Can I add something to that? Because you were talking about the Tandem performance as sort of a proxy.

Of course, there is the dynamic if Tandem is taking share for, from a competitor. And we're also selling to that competitor, then, of course, you've got to be careful taking Tandem performance as a proxy for our business.

On top of that, if Tandem is replacing their own pump with a new version then, of course, there is also no additional growth for us. So I just want to make sure that you're not going to take that as a like-for-like because there is no like-for-like.

There are several dynamics here.

Of course. Nobody wants the double count.

If I could just add one more, please. Just curious, you guys are doing a lot of changes, I guess, at once, a lot of rationalization.

You've got an efficiency program. You've got sales force expansion, but there's a lot of tidying up of the business going on.

I guess, how do you manage running all those things at once? And if you were to select or could you select a couple of areas that you find, you spend the majority of your time on whether that's because you're choosing to prioritize them more because they're prioritized for you.

It's up to you, but sort of what's really absorbing the majority of your time out of this large collection of changes that are going through.

Yes. So look, I think the reality is that when you try to drive a transformation of this nature, no one individual can do it.

So what's critical is that you have a strong leadership team. And so one of the things that Frank and I have been really working on is to strengthen the executive leadership team and to further strengthen the leadership across ConvaTec, right?

So that really does absorb and take a significant amount of time because all of a sudden that you increase that leadership muscle tissue. Frankly, there's a lot more that you can get done, right?

The second thing I would say is the way you drive this is by moving into the new operating model, where you've got business units with very, very clear lines of accountability. There is only 1 individual who we hold to account for the Ostomy Care business.

That's Mani Gopal. There is only 1 individual we hold to account for refreshing the portfolio short term and then driving the differentiation longer term.

That's Divakar Ramakrishnan, right? So I can get more into that.

And then thirdly, I would just say, the way you do it is, we have a transformation office, where we have clear visibility on all of our initiatives. And we have a clear prioritization of those initiatives.

We know which ones are having the highest level of impact and when. And so you go back to the classic 80-20 rule, and that can help guide you as an executive leadership team as to, well, which ones are the initiatives that you want to be particularly focused on.

So that's what I would say to that question.

I have three questions, please. Firstly, on Ostomy.

Can you talk about whether you feel that inventory stocking is now more of a possibility in Q3 after we are seeing a rise in COVID-19 infections? You indicated that July was in line with your expectations.

But with that trend, could you actually see the opposite trend of restocking? Secondly, when it comes to the annual gross benefits, I think, the deferral of around $20 million for 2021.

Is this a message to the sell-side to adjust the consensus downward on EBITDA? That would be helpful.

And then the third question is in relation to the EBIT margin. Can you comment on what the FX impact is on the EBIT margin for the first half?

You gave us the gross margin. And how are the foreign exchange movements that we're seeing now.

The strong ones against dollar-euro, dollar-pound, may impact your EBIT margins for the second half of this year.

Frank, do you want to take three questions?

Yes. Yes, sure.

So on Ostomy Care, we are expecting a destocking, and we have not seen really the opposite happening. That doesn't mean with, of course, the variation and the uncertainty around COVID that this not might happen later in the first half.

But we've not seen any signs of stocking activity in the marketplace. On 2021, of course, we're not into guidance mode for 2021.

But we have indeed reduced our gross benefits, $130 million to $150 million to, from $150 million to $70 million, $130 million to $150 million, based on some of the rephasing, the proactive rephasing we've done. So yes, there is going to be some negative impact in that sense, specifically for '21.

We're still committed to, of course, the total benefit, but it will come a little later. However, there are going to be a lot of other variables at play in 2021 that can help or hurt.

So at this moment, I really can't comment on that. And then finally, the EBIT FX.

So the FX impact was 40 basis points in gross margin. And it was 50 basis points in the, on the EBIT line in total.

Of course, foreign exchange rates are moving all the time. And as you know, a stronger euro will help our top line as well as our EBIT.

While a stronger pound, in fact, will do the opposite, given that we have more cost than margins in the U.K. And assuming that the Danish krone is sort of moving in parallel with the yield.

We sort of have a similar phenomenon there that a stronger krone is not really helping our total top line -- sorry, our bottom line. So it depends with indeed euro strengthening, that will help.

But if the pound as well as the krone strengthened as well then there will be a dampening effect. Does that answer your question, Michael?

Yes. If I just follow-up, did you say that the EBIT margin in the first half benefited 15 or 50 basis points?

5-0. 50.

5-0.

5-0. Yes.

That's the rate, yes. The rate.

Yes. Okay.

Thank you.

You’re welcome.

Good morning, thanks for taking my questions. I have two, please.

My first one is just how you're thinking about the Wound recovery. I think, Frank, a quarter ago, you sort of described the pace of recovery is accelerating, 3Q maybe still being negative but that kind of returning to growth in the fourth quarter.

Do you still expect to have positive growth fourth quarter? Or has your thinking on this change given some of your commentary earlier?

And then my second question is, of course, completely understandable that you've delayed some of the investments. But can you give us a bit of insight into which investments will actually take place this year versus what has pushed into 2021?

It'd be helpful to get a little bit of color on that. Thank you.

Okay. Yes.

On the Wound recovery, and I think all of you are seeing the surveys that are coming out, and there is pretty good data on the U.S. market.

And these surveys have been -- the outcomes of those surveys have been changing. The current view of life is that if you think about electives in Q3, that electives will still be only at 55% to 70% of pre-COVID levels in the U.S.

And then not come back to pre-COVID levels in Q4, but only 75% to 85%. And then even in 2021, it will not normalize to pre-COVID levels because probably the capacity will be very different with new protocols.

So if you take that into account and add to that, that we also still see a reduced level of hospital and wound clinic visits. We expect, therefore, that the first half is -- or second half is going to be negative.

And we're not really splitting between Q4 and Q3. But what we know today, what we see out of those surveys, I think it is prudent to assume that we're not going to see a positive number in the second half, in both quarters.

Okay. And then in terms of what we have proactively deferred, and I think Karim talked about that because of COVID.

There are certain areas, access to hospitals and customers in hospitals is very limited. Then it's logical that we're not adding at an accelerated pace, a new sales force.

So for instance, we have slowed down early in the year, some of the expansions in China, for instance. So I think in the area of proactively deferring.

That's several projects are commercial-type projects, okay? At the same time, as Karim also, sorry, please, go ahead.

No. Go ahead [indiscernible].

At the same time, we're upping our investments in the digital arena. And we continue to execute projects as planned, in for instance, operational excellence.

So that's in the supply chain and in the plans.

Just to add, Veronika, just to give you, to give you a little more color. I mean to keep it simple, I would say, investments in R&D, we're pressing right ahead.

We're not holding back, if anything, we're upping the ante. Investments in quality and operations, which Frank alluded to.

Again, we're pressing right ahead. There's a series of efficiency plays to be put in place.

There's a series of plays, frankly, to improve resilience, okay, in the post-COVID-19 world, which we're going ahead and doing. That can be increases in inventory, increases in capacity, et cetera, et cetera, right?

Initiatives in G&A to lower our G&A, we need to do that. We are continuing to do that.

We gave you the example of what was happening in Lisbon, right, the whole GBS situation. So frankly, the aspect where we're maybe re looking at the mix is particularly on the commercial arena, right, particularly a reflection of how much access can you actually have to payers and the providers.

And so there's a need to shift the mix at a rapid pace to be much more digitally oriented. So I hope that color helps you.

Yes. That's helpful.

I was actually just going to quickly follow-up on the U.S. Wound Care sales force expansion, just to check see whether any of that has slowed down.

And I guess how you're thinking given that about the pace of recovery in the U.S. wound care market because that's been a big priority for you guys over the last 12, 18 months.

Yes. Honestly, what we've done there is we had already fundamentally deployed the majority of the folks that were going to be part of our 3 dedicated sales forces, right?

And so 1 was much more focused on the chronic side, 1 more on the surgical side, and 1 in the long-term care side. So what we really are doing is 2 things: a, is to ensure that we're upskilling all those folks.

So significant investments in training and development. And a lot of it, frankly, is being done in the context of the virtual world.

And so we're just adapting to that new world, right? The second thing that we're also doing is not only improving the training, but frankly, starting to experiment with many more digital approaches.

So can we actually get our reps to sort of be hybrid reps. Now this is just experimentation, again, right?

But the organization is embracing this idea. And so I can tell you, there's a significant portion now of contacts that are actually being carried out with the health care professional in a virtual manner.

Then you get into the question of, are you doing it often enough? Is it that impactful?

And we're learning that, Veronika. So I'm not prepared to tell you that it's comparable to what we have done historically.

But I do think that in the commercial arena, on a global basis, in post-COVID-19 environment, that we'll be leveraging digital capabilities to interface with our customers a lot more so. That's what we see happening.

I have a couple. So first, just to follow up on Wound Care.

Specifically in this business, are there any green shoots that you're seeing by product or geography or where you're seeing the more significant improvement sequentially? And related to this, could you talk about the difference in performance between the chronic care and acute and post-acute side of the Wound business and how this is trending throughout Q2 and into the Q3.

Secondly, could you talk about what you're seeing from a new patient perspective in Ostomy? Are surgeries starting to ramp again?

And where do you think we are relative to pre-COVID levels? And then finally, on the guidance, given the strong results in the first half, can you update us on what you're assuming for the top and bottom end of the guidance in terms of growth?

And whether this is largely a function of the recovery in Wound?

Frank, do you want to start? And then I'll join.

Yes. So In wounds, we, first, on the product side, I think because of COVID, there has been a pretty significant decline as we saw in the second quarter.

But I would say, within that environment, our AAA, or Ag+ brand has performed and continue to perform very well. Of course, all the brands that are related to surgical, specifically [indiscernible] being pushed down, which is very logical because of electives coming down very significantly.

And then there are several regions. Specifically, I can highlight, Latin America continues to do very well.

And we have seen very strong growth in that specific area in Wound. Then if we talk about chronic, surgical.

The surgical business is a much smaller business as a percentage of the total the chronic business. It's 10%, 15% of the total.

However, the electives have gone down very substantially. While the chronic business is 85% of our business or so.

We've seen there a reduction that is less substantial, but still probably around 10%, 20%. And therefore, if you do the math of the reduction in wound that we've experienced in the second quarter, it's probably, and again, this is a little bit an art versus a science, but our estimate is that the surgical impact on the total Wound business was probably 1/4 of that and 3/4 was the impact on chronic.

Again, because the chronic business is much bigger. And then if you move to the second half, of course, it all comes down to how fast surgical and possibly wound clinic visits are going to recover.

And as I said before, we're not going to see any levels close to pre COVID in surgical. So that will in percent numbers, reduction probably be the lowest.

However, again, because of the relative size, it's not necessarily going to be biggest impact in terms of dollars. Then new patients starts in Ostomy Care.

We have indeed seen a reduction in surgeries. And therefore, an overall, the reduction in the market of new patient starts.

The impact on the revenue is very, very limited because, of course, it's very small part of the market. And at this moment, we see a recovery of surgeries.

It's still going to be below. But at the same time, I have to tell you that the data on the Wound business and the electives there is much further developed than what we can see on the ostomy side.

But we see a slight recovery in procedures. But again, the impact on revenue is very, very limited because it's 5% or 10% max of the total revenue base.

What's happened in the acute? The majority of revenue is in the [indiscernible] And then -- was there a third question?

Yes. Guidance.

Well, we -- guidance for 2020, we, as I said, on -- given what we've seen in the first half and given how we're seeing dynamics in the second half in the different business units as well as our cost profile that I think I explained in the presentation. We are operating within the parameters of our guidance.

And that is 2% to 3.5% top line, 16% to 18% all in for the EBIT rate. And we believe that, that is a prudent outlook and a prudent guidance for the year.

Hassan, that's the answer to your question?

Yes. Thank you.

Maybe just a follow-up on the guidance. Just curious to see what you think are the largest upside and downside risks mainly to the top line.

And if that is mainly a function of the Wound business?

I would say -- I would answer positive to that question. Indeed, I think Wound, of course, because of exposures to COVID, it's probably the biggest variable in that equation.

Karim, you want to add something to that or you...

Yes. No, no, no.

I would concur it. It's -- we've got the highest level of sensitivity to a post-COVID-19 world right now.

That's what we're experiencing. I think that's a fair comment.

If there are more questions?

Thanks. That's all.

Good morning guys. And just got two.

So you've delivered 4% kind of constant currency growth now for two halves, including one through a pandemic at better-than-expected margins. So with increased focus on digital, e-commerce in China.

I'm just wondering whether 4% organic kind of midterm is really a baseline target. Or Karim, do you think this business should be capable of more than that?

Yes. What I would say, I think 4% is spot on.

I think it's the right target. In my mind, we need six semesters in a row to be able to say, hey, you're actually sustainably and profitably doing what you're asked to do.

So I think it'd be way premature at this point to be saying, hey, the number is higher. Now obviously, we've always signaled 4-plus with the idea that let's get to 4%, and then we can revisit the question, Paul.

But I would say right now I think one will be jumping the gun. And so I'd rather just sort of stay grounded, do what we need to do in terms of the focused markets and category.

Do what we need to do on the innovation side, refresh that portfolio, drive differentiation long term. We need to embed the new operating model, we just got it in place for six months.

That's very, very early still. There's a series of capabilities, which we've not had for a long time.

So we're just starting to invest. I'm trying to instill an executing culture that takes a little while, right?

So I think it's early days. And I would stick with -- I think the 4% is a good target.

Let's get it done, let's get it done consistently. That's Frank and I's focus.

Okay. Thank you.

And just finally, on the bits of the jigsaw, you're moving around to skincare has gone kind of not critical care is not part of your focus area. So just wondering kind of what your intentions are there and whether there are additional pieces of the jigsaw you'd like to bring in?

Yes. Look, I mean, it's very clear to us, what are the areas of focus that we've said, Advanced Wound Care, Ostomy Care, Continence Care and Infusion Care.

So we're very committed to going ahead and doing that. So we just need to make sure that we focus on those categories.

In terms of the inorganic strategy, I just think we shared this with you back in February, we're very focused on either opportunity to strengthen the current categories that we work in. So we're fundamentally always actively exploring for bolt-on opportunities that could be maybe technology in nature.

They could help maybe add some critical mass or allow us to access some core capabilities. So we're building strength in that arena to proactively do that.

And that's the way we're going to go ahead and approach it.

I've got two questions, please. Firstly, just in Ostomy.

I just wondered if you've seen any impact from Coloplast entering the Premier GPO from April. Secondly, just on R&D.

It looks like your innovation is focused on new products. One of your key competitors, obviously, focusing, investing more in clinical trials to prove clinical benefit of their products.

Just wondering if that was something you were considering as well. And then finally, just in terms of the outlook for price, from some companies that they're expecting or potentially fearing an increase in pricing pressure post COVID.

Just want to get your thoughts on that, please.

Okay. So I say number 1 and 3 or you want to start?

Sure. Go for it, Frank.

No, no, you go.

Yes. So in discussions with our sales force, we have not really seen any impact of [indiscernible] entering the Premier GPO.

So there is really nothing to report there, no impact seen. And then I will go right on to number 3, and then we'll go back to the second question.

There are some requests out there from some customers for certain reductions in price. I would say nothing has materialized yet.

But I think it is logical to assume that there might be some additional price pressure in the customer base going forward given, of course, that the COVID put a lot of extra pressure on the health care system. But to be honest, nothing really materialized in terms of a material impact.

It's just something that is on the radar screen. Of course, we will respond in a very disciplined way to those types of requests.

I hope that answers your question.

Yes. Look, I would just add a small comment to the pricing question.

So look, it's really a key variable that we're very cognitive of. So we have our antennas up.

I do think that health care systems in time will face even more pressure just based on the whole sort of amount of money being put out there. And at some point, you're going to have to sort of pay it back, right?

So I think we're going to see more pressure there. We are in the midst of building a pricing center of excellence to think through pricing strategically and actively and to help us manage that much more proactively.

So it's sort of top of mind is a variable that we want to go ahead and focus on. On clinical trials, we're absolutely committed to a trial.

I mean we recruited our Chief Medical Officer, Dr. Jacob Agris.

And so in our minds, when I talk about new products and product development. There are three components to doing that well.

One is the traditional way of thinking about it, which is, hey, I've got a new idea that could be quite appealing to a patient, let me go ahead and develop that. The two areas where ConvaTec has not dedicated sufficient effort and energy, a, has been this whole area of process development or design for manufacturing.

You can use those two terms interchangeably. Upfront, a [indiscernible], thinking through how you build in quality and how do you design.

How you produce the single unit disposable device so that you can produce it very, very efficiently. And then thirdly, you got to have the clinical data.

You've got to be able to demonstrate that you're actually improving a clinical outcome. You have to have the clinical data to show that from a health economics perspective, you're actually contributing to stripping out cost and driving efficiency.

And so to me, product development, process development and clinical development are all intertwined and fundamental to our ability to refresh our portfolio and frankly develop a more differentiated portfolio longer term.

Actually, I only have one question left, on the general stocking. Could you discuss your assessment, particularly when it comes to Wound Care and also infusion devices?

I understand in Continence and Ostomy, you anticipate more destocking effects. So I guess, the channel is still overstocked.

Is that the case as well in Wound Care and infusion devices in your view? And should we expect some kind of headwinds here?

Okay. Sure.

Frank, do you want to try that?

Yes, sure. I don't think there is a lot of stocking happening in the Wound Care business.

Of course, a lot of that has been flushed out really in the second quarter. Given that COVID hit and levels have come down.

If we look at distributor inventory levels. They're really at pretty low levels.

I wouldn't say very low, but low levels, if you look at history. So I don't think there is any stocking activity going on in Wound.

In the Infusion Care business. First and foremost, I want to highlight again, it is quite a lumpy business.

Our customers are doing well. The pump market is growing.

But at the same time, we have to assume that our key customers are building some additional, let's call it, resilience in their own supply chain. But this is not, I would say, a stocking that is short-term type stocking, right, where you see a boost in 1 quarter and then you see a destocking happening in the second quarter.

I think this is much more a fundamental move towards a little bit more resilience within their own supply chains. Does that answer your question, Chris?

Yes. And maybe I could have a follow-up.

Since we previously talked about GPOs. I understand there are some other discussions coming up health trust, I think, it's ongoing, and then in addition is there kind of any change in strategy here from your side with respect to that part of the business or kind of -- and how would you describe kind of the competitive situation at the moment in this channel?

Well, discussions indeed are going on. And there is really, at this moment, nothing to report in relation to that.

I don't see any difference competitive behavior, like we've seen in other GPO type of discussion. So it's indeed very limited what I can tell you at this stage, Chris.

Okay.

I would add, Chris, that on the whole GPO IDN arena, that an area where we are building more capabilities. So we've made some pretty significant change in leadership about nine months ago that are starting to bear fruit.

And the way that bears fruit is we're thinking much more about our portfolio. We're being much more strategic as to how do you leverage our portfolio, and is a much more -- I think they are much more too strong.

I would say we're starting to increase the level of coordination and integration between the commercial organizations, meaning the sales and marketing organizations of Ostomy Care, of Continence Care and Advanced Wound Care in the U.S. with the organization that handles our interface with GPOs and IDNs.

So yes, I'll be good at that back.

Okay. Thank you.

I appreciate your comments.

Bye Chris.

Thank you. Just two left for me, please.

Just first question would be on your product rationalization in Ostomy. Can you just talk about the impact in the second half of 2020 and also in 2021?

And then my second question is on the new catheter launch in Europe. Can you just talk about some update there?

Sorry, I didn't hear the second question. Could you repeat that?

It's about the new catheters that you're planning to launch in Europe. Can you just talk about the progress and the update that?

Yes. Okay.

Maybe, Frank, do you want to take the first one? I'll take the second one.

Yes, sure. So on rationalization of the portfolio, in fact, there are two areas there.

First, as Karim mentioned, some -- I mentioned in my presentation, is really the contract rationalization that we've been doing in the first half, and that will also have an impact in the second half. Overall, on the ostomy growth, there probably was an impact of about 60, 70 basis points.

Then on the SKU rationalization, it's early days. Programs are being developed.

We are with the Ostomy team working through the financial case. For us, the rationale is very clear, we believe it's better for patients.

We'll be able to provide better products, and it drives simplicity and productivity in the business. So early days.

More to come in '21 and '22.

Look, on GCR GentleCath Air, this is a compact offering. I would say we're sort of sorting through that.

I think I was quite open with you guys in terms of the challenges that we've had from a quality perspective and also from an ability to efficiently produce the product. So I would say that we're very much in transition, i.e., trying to sort through that.

So I think what you'll basically be seeing in '20 and 2021, that we'll continue to pilot and scale up the product, particularly with the focus on brands. And those learnings then will be utilized to help us really understand what are we fully capable of.

So I would say that we're very much in that piloting phase, continuous improvement phase. And I think that will be the case for roughly the next 18 months.

And then thereafter, I think that we'll have a lot more clarity as to how we can go ahead and further grow the GCR offering in a more substantive manner.

Super good. So look, I'm just going to once again thank everybody on Frank and my behalf.

And I think, Mark, maybe you've got some closing statements you'd like to make.

I was just going to say there are no other questions on webcast either. And, but if you have any follow ups, then please do contact me on [email protected].

Super. Thank you very much, everybody.

Have a wonderful day.

Yes. Thank you very much.

Have a good day. Bye-bye.