Convatec Group PLC (CTEC) Earnings Call Transcript

Good morning, everybody. And thank you for joining us today for the ConvaTec full year 2019 Results presentation. For those of you who don't know me, I'm Mark Reynolds and I look after Investor Relations here at ConvaTec. A couple of housekeeping points before we kick off. Firstly, we're not anticipating a fire drill today, so if you do hear an alarm please follow a ConvaTec or UBS colleague out of the building. And secondly, can I draw your attention to the disclaimer on Page 2 of the presentation? And finally, when we come to the Q&A, please could you use the handheld microphones at your seats for the questions? And with that, I will hand you over to our Chairman, John McAdam, who will introduce today's presentation.

Thank you, Mark. Good morning and welcome to the ConvaTec 2019 full year results presentation. I'm delighted to be here today and to be joined by Karim, our CEO; and Frank, our CFO; who will provide strategic and financial updates shortly. As you'll hear in more detail from Frank, our financial performance is in line or slightly ahead of the mid-range of guidance provided in February 2020 – sorry, February 2019. As expected, we delivered modest organic revenue growth and profits declined year-on-year, largely due to the increased investment in the transformation. The transformation continues to move at pace and Karim will expand in more detail. It is still early days, but we are making strategic progress and today we will share our new company vision, strategy and operating model underpinned by a set of core values. Now against this context, the board has given consideration to the dividend and is recommending maintaining the full year dividend at $0.057 per share, reflecting the confidence we have in the future of the business. Now I'll hand over to Frank who will cover the 2019 financial performance. Frank, over to you.

Thanks, John, and good morning. Thanks for joining us today. So let me take you through our financial results in more detail. Starting with Slide 5, our 2019 performance was in line with our expectations. Group revenue for the year was $1.827 billion, declining 0.3% on a reported basis. And taking out the impact of FX and M&A, organic revenue growth was 2.3%. Adjusted gross margin was 59%, 120 basis points lower than last year. Taking out the impact of FX, we were down 80 basis points, which is the result of negative price and mix, partially offset by positive net productivity. I will provide further detail in a minute. Our operating costs as a percentage of sales increased, as expected. And this is reflecting the investments related to the transformation as well as the costs associated with the implementation of MDR. Together, these drove the majority of the total 290 basis points' increase. As a result, our adjusted EBIT margin was 19.4%, down 400 basis points from last year. And excluding the nonrecurring transformation investment as well as MDR, our EBIT rate was 21.9%, down 150 basis points. In total in 2019, we spent $64 million of nonrecurring investments in transformation. $40 million was operational cost, mainly OpEx. $20 million was CapEx and $4 million were costs excluded from adjusted EBIT. We continue to deliver strong cash conversion, achieving 98% versus 81% in 2018, mostly driven by favorable working capital movements. We're not expecting cash conversion to continue at this rate, given higher levels of transformation investments, associated CapEx and MDR in the coming year. Finally, debt leverage in the business has continued to come down to 2.5x from 2.7x last year. Moving to Slide 6, we experienced growth across all business units, as you can see here. Wound Care revenue growth was subdued, as expected. Ostomy Care growth improved against a weak comparator. And Continence & Critical Care grew about 4%, driven by HSG which continues to grow faster than the U.S. market. Finally, Infusion Care delivered a solid 4% growth in the year. Reported revenue declined 0.3% with the difference of 260 basis points between reported and organic growth, driven by FX headwinds. And this was a result of a weaker euro and British pound versus the dollar. Turning to each of the business units on Slide 7, in Advanced Wound Care we grew 0.5% organically in 2019 and we grew modestly in Q4, in line with our expectations. Organic growth in Q4 was 1.8%, negatively impacted by some phasing of revenue related to Q3 dynamics we discussed in October. Underlying growth was close to 3%. Our AQUACEL foam and antibiofilm Silver products drove the revenue growth. We also launched ConvaMax in the growing super absorber segment. And as expected, we saw continued challenges in our legacy products, in particular base AQUACEL dressings and skincare, with hydrocolloids posting modest growth in the year. We achieved solid performances in EMEA, APAC and Latin America, while the U.S. Wound business continued to be in transition, impacted by the move to a new specialized salesforce during the year. Expected productivity periods are 6 to 9 months, so we will start to see the benefits of this change in investment in 2020. [ Co ] rates in Q4 continue to rise quarter-on-quarter. Ostomy organic growth was 1.9% in 2019 and 5.2% in the fourth quarter, albeit against a weak prior year, in particular in Q4. The quarter growth rate also benefited from some one-off tailwinds, including tender timings and a provision throwback, only partially offset by some APAC distributor destocking. The underlying growth was close to 2.5-3%. For 2020, it is important to note that the Ostomy growth rate will be impacted by some SKU and market rationalizations. Overall, new patient starts in the U.S. have been declining, but the most recent data shows that NPS was slightly up in Q4, although this is only one data point and therefore not a trend. As we have communicated before, progress will take time given the nature of the business. Traction with our more recent Convex product launches such as Esteem+ Flex and Natura Accordion, remain positive while we continue to invest in and grow our me+ direct-to-consumer program. From a region point of view, we had a solid performance in a number of markets in EMEA, APAC and Latin America, while the U.S. remained a drag. Moving to Slide 8, in CCC revenue growth was 4.1% on an organic basis in 2019 and 3.8% in the fourth quarter, driven by good growth in the home services group. HSG continues to outgrow the overall U.S. continence market, albeit at a lower level of growth than in prior years. We have seen good volume growth with GentleCath Glide doing well. Finally, Infusion Care, revenue grew 4.1% in 2019 and as expected, we had a very strong final quarter with organic growth of 12.4%, given the change in inventory levels at our largest customer in 2018. We saw strong orders from our customers over the year, driven by continued growth in the insulin pump market. Moving on to gross margin and OpEx on Slide 9, starting on the left with gross margin, gross margin was 59% in the year, down 120 basis points from 2018. And if you adjust for FX and nonrecurring transformation costs, gross margin was down 50 basis points year-over-year. We saw a positive impact from net productivity gains, which helped partially offset the negative impact of price and mix. The operational excellence workstream delivered about $25 million in gross benefits, driven by procurement savings, scrap reductions and lean manufacturing improvements. And this was partially offset by commodity and labor inflation. Moving to OpEx on the right, our OpEx grew to 39.6% of revenues, up 290 basis points, largely driven by the nonrecurring investments in transformation and MDR. This accounted for 225 basis points, with the rest coming from recurring transformation investments of about $13 million, mainly in sales and marketing and then of course labor inflation. This was partially offset by cost savings. Our nonrecurring transformation investments in OpEx in 2019 were $35 million and these are costs like program and project management, system related costs, consultants, training, setup, et cetera, et cetera. Finally, moving to cash flow and net debt leverage on Slide 10, cash conversion reached 98% in 2019, up from 81% in 2018. As mentioned before, 2019 benefited from improved working capital, largely driven by inventory reductions. Based on increased transformation investment levels and MDR in 2020, I'm expecting that cash conversion rates for 2020 will come down to below 80%. As we discussed in October, we're very pleased we have refinanced the company successfully with a new 5-year deal. And then last point from me, net debt leverage in the business has continued to come down to 2.5x from 2.7x at the end of 2018. Thank you very much, handing over to Karim now.

I'm trying to get my screen up here to work. Okay, good morning. Great to be with you all here today, and I want to thank John and Frank for a very helpful introduction and a review of the financial performance. But what I thought I'd try to do this morning was to share with you a little bit of perspective. My guess is many of you are asking or wondering, Karim, what are some of your initial observations. What did you actually find, having now been at ConvaTec for approximately 4 months? And I'm here to tell you that I'm encouraged. And you might say, well, how are you drawing that conclusion? Fundamentally we worked with the ConvaTec executive leadership team during the course of the last four months or so to really try to assess what were the things that were working well at ConvaTec, what were the things that we can improve. We tried to look at the marketplace. What was happening from a customer perspective? What was happening from a competitive perspective? And then based on all that, we really drew the conclusion that there were some key things, such as execution and driving transformation that we absolutely wanted to go ahead and continue. But at the same time, we had to kind of broaden our perspective and really try to develop a vision, a strategy, an operating model, a set of core values which would help us pivot to sustainable and profitable growth. And so what I'm going to try to do now is to give you a sense of how did we draw those conclusions. What is it that we actually are continuing to do, based on what Rick had started off? And what are some of the things that we're adding, or are new or are changing? So as we try to pivot to sustainable profitable growth, what I'm going to try to do is give you some perspective as to what is the context. What is it that we actually found as an executive leadership team? And the first thing we found is that actually the end markets are very attractive and we'll talk more about them. They're large and they're growing. We also found though that the performance of our businesses was mixed or varied that when you looked at the intersection of different businesses in different geographies, in some instances we did very, very well and in some instances we didn't do so well. And so that begged the question, what is the root cause? Why were we not being able to go ahead and drive performance in a consistent manner across all geographies and across all businesses? And we identified 3 fundamental variables: organizational complexity, some limited capabilities and a P&L that was imbalanced. And I'll give you more flavor to what exactly do we mean by those 3 observations. To address the issue and move the ball forward, we mapped out a game plan. And that game plan basically consists of a clear vision, a strategy that defines what it is that we are going to do and what it is that we're not going to do, an operating model that helps us execute, and drive performance and delivery and then a set of core values that supports that. But let's go ahead and dig in at this point. So what you see here is basically 4 key markets that we compete in: Advanced Wound Care, Ostomy Care, Continence Care, Infusion Care. They're all large, right? They're all in the billions. You add them all up and we're roughly at $13 billion. All of these markets fundamentally are growing in mid-single-digits. Let's call it 4% to 5%. So the first conclusion observation we had is, the end markets in which we're competing in are fundamentally attractive. How have we been performing as ConvaTec in these markets? Well really our performance is very varied. If you look at Advanced Wound Care, in fact we had some geographies where we've been growing: Brazil, Germany. If you look at our R&D capabilities in the area of hydrofibers and you look at the AQUACEL franchise, there's some really good technology. There's some new innovation that's been occurring in the marketplace. But on the other hand, if you look at our performance in a key market like the U.S., we frankly have underperformed. If you look at the area of Ostomy Care, we've been quite challenged. You look at our R&D efforts, you look at our operational efforts and the product line could use from refreshing. We've had quality issues in operations. On the sales and service side, we've been challenged. We've been losing share of market in the United States. If you then look at the Continence Care business and the Critical Care business, and you actually start looking at both those businesses, you realize there's a little bit of a dichotomy. Critical Care hasn't been really growing all that much. Continence Care has been doing pretty darn well and doing particularly well in the United States, working with our home service group. And then you have Infusion Care, where you've got some tremendous R&D, some tremendous technology. The supply chain works well and we have good and strong brand equity with our end customers. So clearly you can see there's a fair amount of variance across our businesses when you intersect business and geography. Why is that the case? And by the way, that's spells opportunity. So I think we need to be very alert to the fact that this variance actually says, we can do better, we can improve. So 3 things, first of all, organizational complexity. And you might say, Karim, what did you actually observe? What did you actually see? What did you draw as a conclusion as an executive leadership team? Well what we found, first of all, is that we had a logjam. And you say, well, what do you mean by that at a practical level? Well in essence, historically at ConvaTec the power really resided with the geographies. So think North America, Latin America, Asia Pacific and Europe. The geographies had the power. And then we started building some franchises, some franchise heads. And then we had the functions and it became very unclear who's going to make the final decision. Who's going to make the final call? And so frankly that impedes your ability to execute and to drive results. The second observation was when you look at our capabilities along the value chain: R&D, and operations and sales and marketing, they were limited; limited in areas such as salesforce effectiveness. When you look at our ability in terms of clinical development and process development, very limited. There's a real need to strengthen those capabilities. And then you look at the P&L and you say, well, where have you been spending your money? And so here we have a benchmark. We look at our P&L in 2018 and we compare it to all of our peers, and we try to get a sense of what proportion of our revenues are we spending in R&D. What proportion of our revenues are we spending in G&A and sales and marketing? And you'll notice in our case on the G&A line we're spending about 11 points, 11 percentage points. The average is about 7. The bottom line is we're spending way too much in G&A. We need to be more efficient there. B, in R&D we're underspending 3%. To be a successful med-tech company that's innovation-driven, we have to invest significantly more in this area. If you look at sales and marketing, we're spending 23 points versus an average of about 26 points. We really have to invest significantly more in sales and marketing to be able to serve our customers, whether they be patients or caregivers. So how are we going to do this? Well, we kind of analyzed internally what was occurring, but we also needed to assess the marketplace. And when we looked at the marketplace, we very quickly drew a conclusion that the patient groups that we're talking about, they're very distinct. They're very different patient groups. So if I suffer from colon cancer and I hope that happens to no one, but ultimately if I have to use an ostomy bag, guess what? That's a very, very different patient than a diabetes patient who's actually using an insulin pump. And when you look at the various caregivers across the board, you'll realize that if I'm in Ostomy Care, we're dealing typically with a stoma nurse. If it's Advanced Wound Care, it's a wound nurse. If I'm dealing with a diabetes patient it's a diabetologist or endocrinologist. If it's Continence Care, it's probably a home care provider. These are very distinct patient groups, very distinct providers and so the implication is there's a real opportunity to tailor your approach to those customer groups. So let's see how are we going to approach the whole transformation. How are we going to pivot to sustainable and profitable growth? So I shared with you we wanted to sort of widen the lens. Originally the transformation office that Rick had put in place which is terrific, focused very much on operational improvements, focused very much on how do we improve operations. How do we improve sales and marketing? How do we improve business services? We hadn't really lifted ourselves up and said, how do we systemically look at the entire enterprise. And so what we've done now is to say, we need clarity in terms of a vision, in terms of a strategy, in terms of an operating model, in terms of core values. And I'm going to share with you how is it that we're going to approach this. First of all, we work with our employees, over 900 of them, and we align around a common vision, “Pioneering trusted medical solutions to improve the lives we touch.” This is really going to guide the entire direction of where ConvaTec is going. And you might say, well, what do these 10 words really mean? Pioneering means we're going to be R&D-driven, we're going to be innovation-driven across the entire enterprise, first and foremost. The second thing is we're not going to be a device company. We're going to be a solutions company. We're going to integrate the device or the product with service, think real people, and with digital. We're going to weave those 3 things together, but we're going to make sure that these solutions are trusted, that we validated these solutions, that we run the clinical trials; because no patient wants to be a guinea pig, right? They've got to be reliable. And why do we do that? Because we want to improve the lives of the people we touch. All of our offerings literally physically touch a patient. But we touch them more than just physically. We touch them emotionally, socially, psychologically; and there's a real opportunity there as we think through from a design perspective, what is the solution we want to provide. Now the question is, how do you take this vision and make it reality, tangible, meaningful? We've developed a strategic framework that basically says, there are 5 key pillars. The first thing we're going to do is we're going to focus. We're going to focus on key categories, product categories, and on key markets. We've identified 12 key markets we're going to focus on, and I'll talk to you more about that. Four key categories we're going to go ahead and play to win: Advanced Wound Care, Ostomy Care, Continence Care and Infusion Care. In terms of innovation, we've decided that we're going to significantly increase our investment in innovation. In fact, we're creating a whole separate function. At Lilly last month, we were able to recruit a very talented Head of Innovation and R&D, Divakar Ramakrishnan. I've known Divakar for quite some time. He's an incredibly talented individual. He has a PhD in chemical engineering with a Harvard MBA. This fellow basically ran all of Lilly's device business, was a Chief Digital Officer, and prior to that had run all the process development across all of Lilly. He's truly unique in the sense that not only does he understand product development in the device world and digital, but also process development. Process development meaning, you need to understand how to make something that you can make efficiently and reliably with quality. You can't only think about the design from a patient perspective. So you need process development and product development, and then you're going to have to combine that with clinical. That's the way you come up with a solution. And he happens to be very marketplace oriented and frankly just collaborative by nature, so delighted that he's leading that effort and building this new function. Thirdly, we need to simplify our operations. What we need to do is to make sure that our operations are customer centric, that they're focused on those distinct customer groups, those distinct patient types, those distinct providers. We need to make sure that we're a lot more agile, that we can respond much more quickly to these customer needs. And lastly, we want one single point of accountability. If I'm an Ostomy Care patient, I want to make sure that there's one individual at ConvaTec that we can hold to account for how that business is doing, and that's Mani Gopal, or David Shepherd in the case of Advanced Wound Care, et cetera, et cetera. Fourthly, we need to build some capabilities. We need to build some capabilities in areas like process development, in areas like clinical development, in areas like quality and salesforce effectiveness. We have not invested in building that muscle tissue and we need to be cognizant of that. And lastly, we need to execute like there's no tomorrow. One of the great things that Rick did was to put in place a transformation office with a heavy, heavy focus on executing whereby there's real clarity as to what is the business case. Who does what by when? Metrics and milestones, and every week we check that that execution is there. We're going to be relentless and sustain that endeavor. Because that's going to help the strategy frankly come to life. So focus, we're going to invest in 12 key markets, the U.S.A. and China are must-win. They're amongst these top 12 markets. There are an additional 40 markets where we're going to compete and we're going to go ahead and invest in. There's about 3 dozen markets where fundamentally we're either going to exit, places like Venezuela, places like Uganda; or frankly serve those markets in an indirect manner by distributors or via agents. Solutions, we're going to need to build out our clinical development capabilities. We need to combine devices with services with digital. Again, I'm delighted that literally this week we named our Chief Medical Officer and Chief Innovation Officer, Dr. Jacob Agris. Jacob, to give you a sense, is a neurovascular surgeon trained at the NIH, and he also happens to have a PhD in electrical engineering. So he and Divakar will be working very, very closely as we go ahead and really up the ante on the innovation front and really truly deliver on this concept of solutions. So how is it that we're going to simplify our operations? Well, as we thought about it, I told you that we're striving to be a lot more customer centric, a lot more agile, a lot more accountability, and a heavy focus on innovation. So here is the structural side of the new operating model. First of all, we've got 6 global business units, 4 of them you'll notice are the product categories, right? There's one single point of accountability. That individual, for example, Kjersi, is responsible from patient all the way back to R&D. She makes the call across the entire value chain, whatever needs to happen. Global emerging markets, we've merged together Asia Pacific, with Latin America, with Africa and the Middle East. Those markets are very similar in terms of the challenges they have. Home service group is a segment which is very, very important and so therefore we want to elevate the importance of how the home service group collaborates with those 4 product categories. Because there's a real benefit to doing that as we think about solution. So this is really a key, key service arm as we drive the whole solution concept. Two, notice that innovation and technology, totally separate function, single leadership under Divakar Ramakrishnan. And then lastly, quality, what have we done? We're integrating quality with the operations and with regulatory to build in quality up front. And then finally you've got your customer supporting functions. Hopefully you're getting a sense that it's a lot more customer centric, this model. It's more agile. There's more accountability and we're elevating the importance of innovation, consistent with our strategic framework. We need to go ahead and build some core capabilities across the value chain: process development, clinical development and R&D for sure. In areas such as supply chain, we need to work on quality. In areas such as marketing, we need to make sure that we're leveraging the whole digital platform arena. In an area like sales, we need to have salesforce effectiveness, be very, very consistent; single platforms for CRM applications, single platforms for improving our service capability, et cetera, et cetera. And lastly for FISB: focus, innovate, simplify and build; you have to execute. We've got to execute all of these initiatives. And so we have a transformation office. We have over a hundred initiatives underway. As an example, we're in the midst right now of increasing our footprint in U.S. Advanced Wound Care. We've got dedicated salesforces now. We used to have just one single one and now we're dedicating it across 3 key segments: the acute segment, the chronic care segment, the long-term or home care segment. CRM, we literally during the course of this year or '19 I should say, have been implementing one standardized customer relationship management system across Europe. And now we'll be rolling that out on a global basis. We need to drive new product introductions, and I could keep on going on with more and more examples. But just know that these hundred-plus initiatives, we literally have who, what, when, what metrics and milestones; and we track it on a weekly basis so that we can ensure that we increase our do-say ratio. It is very, very clear to me and the executive leadership team that ultimately what we need to do is to deliver, and deliver and deliver. Okay, so what are the core values that are going to underpin the vision, the strategy, the operating model? We've identified 5 core values. First and foremost if you start about 12 o'clock or 1 o'clock, however way you want to look at your clock, it's improve care. We're going to be obsessive about improving patient care. That's at the center of everything we do. We need to focus on what are the unique patient needs. How can we develop solutions for them in collaboration with caregivers? The second thing is, we need to deliver results. We need to deliver results for our patients. We need to deliver results for our shareholders. Thirdly, we need to grow together. We need to develop and grow our employees, invest in our employees, work on teamwork so that we can go ahead and serve. Fourthly, we want to create a real sense of taking the initiative, owning it. Don't wait. And then lastly, we want to make sure that we do the right thing. We do the right thing by patients, we do the right thing by colleagues, we do the right thing by our communities, we do the right thing by shareholders. Now if you sum all of this up, you say, okay Karim, I've understood. Pioneering trusted medical solutions to improve the lives we touch. I understand FISB. You're going to focus. You're going to innovate. You're going to simplify. You're going to build capabilities and you're going to execute like there's no tomorrow. But we have to sit down as a team and assess from an investment perspective, what's going to be required to get the job done? And what we were able to conclude was that there was some significant opportunities. Some of the investments that we had planned on making were really good. So for example, GBS, global business services, where we can drive efficiency, in human resources and in finance. We absolutely are going to continue doing that. So you see that in the original $150 million. But we've bumped that up to $210 million. And you say, well, why do you need the $60 million more? Well, as we reorient the model to these business units and the innovation function, et cetera, there's going to be some need for some nonrecurring investment. Not only as we reorient that model, but there are opportunities frankly that we see, for example, to drive quality and efficiency in operations where we can invest a lot more in automation. We've really held back on those kinds of activities for a variety of reasons. The second thing is that there are some recurring spend where we see significant opportunity also. So there we're saying we want to invest $75 million as opposed to roughly $50 million. We see some real opportunities. We see some opportunities on R&D frankly to refresh the entire portfolio. So we need to invest in process development, in the clinical trials to be able to get regulatory approval, to be able to get reimbursement and access. On the sales and marketing side, there's a real opportunity to go ahead and invest in markets like China. It's a huge opportunity. Strengthen our position in the United States. Invest in applications and IT systems that can improve our service. If you want to improve service, believe me, the engine of service is having IT and application platforms that support that. And that's exactly what we're going to be doing. And then you say, well great. We're going to invest all this money, Karim. What benefit are we going to derive from it? And what you see me telling you is that we've bumped up the benefit from $130 million to $150 million all the way up to $150 million to $170 million. Now this is in 2021. And so it’s important to note that these investments are going to bear even more fruit beyond 2021. So at this point, let me try to summarize where we're at. Hopefully what you've gotten a sense from in the discussion with Frank and I today is that in terms of financial performance, we're on track. Revenues grew 2.3%. Profits were down, as expected. In terms of the transformation, hopefully you're getting a sense that it's very much at pace. This new operating model, we've already started implementing it. We've rolled it out in February. It's up and running, to give you a sense. So this isn't just a bunch of talk about things that we will do. The hundred initiatives, they're actively occurring right at this point. So what's going to be happening with the transformation, which is all focused on how do I go ahead and pivot to sustainable and profitable growth; that pace of execution and drive is just going to continue at a relentless pace. And then you might say, well Karim, what should we be expecting in terms of financial outcomes in 2020? Well, we're expecting to go ahead and grow revenues. We're going to grow our revenues between 2% to 3.2% in constant currency in 2020. And our EBIT margin in constant currency is going to be somewhere between 16% and 18%. On that note, I'm going to say thank you to everybody. So I think at this point, we're going to shift gears and we're going to open it up for questions. If I could just ask you to just let us know who you are and then share your question with us.

Sebastian Walker from UBS. So a couple of questions from me please, so just in terms of the growth acceleration you're guiding for in 2020. Could you comment on what are the key drivers of that, and then maybe could you comment on some potential headwinds that we should be thinking about in 2020? And then on the --

Just take one at a time.

One at a time? Yeah, absolutely.

It's too much to remember all that stuff, right? Yeah, so we probably need to click through the different global business units to get the right perspective. So starting with wounds, as you heard, I think it's absolutely critical that we are going to start to see the returns and benefits of the change of our model in the U.S. We moved to a more specialized salesforce and that investment should start to give returns in 2020. So that is a very important element of growth for the wound business. At the same time, as you know, we're going to face the full year effect of the French reimbursement cuts. And we're also facing in Germany the fact that Silver will very likely not be reimbursed anymore starting sort of mid-year. But that will probably have an impact for the full year. So on the positive side, we expect to start to see returns on the U.S. wound business, but there are some headwinds that you can see. In Ostomy Care, we did about 1.9% for the year in 2019. And as we have discussed several times, Ostomy Care, the character of that business is that the trajectory up or down is relatively slow. You don't change the trajectory overnight. So we expect very slow over the next several years, an improvement there. At the same time, we are going to see a negative impact in 2020 because as part of simplification and focus we are going to cut SKUs and we're going to go out of certain markets. Overall, that will have an impact to probably north of 100 basis points for that business. In CCC, I expect a pretty normal year. You can expect growth rates that we've seen in the past. Also there though, there will be markets or the impact of market in SKU rationalizations. And then finally in IC, we have of course seen in 2018 quite some dynamic related to our biggest customer, the Animas exit in 2019. So we expect that 2020 will be a more normalized year and we should see okay to good growth rates in that business, in line with the growth that we see in the overall pump market. Does that answer your question?

Yes, that's helpful. And then Karim, maybe just thinking about the recurring OpEx spend and the additional recurring OpEx spend in 2020. Can you maybe comment on we saw wound investments last year? Is there anything tangible you can point to for 2020 and what kind of time period we should expect a return on those investments? And I'll try and squeeze one in, which is just you haven't talked about kind of any M&A. I mean there have been some discussions in the past about a Critical Care disposal. What are your thoughts on that?

Yes, so look, I think on the investment in R&D and in sales and marketing, there's a series of investments that sort of are already in-flight. So for example, on the Advanced Wound Care side, we're in the midst of rolling out AAA for surgical covered dressings, right? So this is sort of a very new and advanced hydrofiber. It's got the silver in there, but it's also got the whole antibiofilm aspect to it too. So we're very, very excited about this, and it's one of the new product launches. And clearly the transformation has been investing there. So I think there's going to be more of those kinds of opportunities. Frankly, we need to let Divakar get situated. And what I anticipate is that during the second half of 2020, we'll be able to be a lot more explicit as to what is your R&D strategy, where exactly are you going to spend it and how are you going to spend it. So really what we've tried to do in the first several months was to really develop a strategy framework to guide us. But then my expectation frankly is that each and every business unit will be able to in detail outline, well, what are we doing to focus, and what are we doing to innovate, and what are we doing to simplify, and what are we doing to build capabilities and what are we doing to execute. So I think what's fair to say is that there are more opportunities frankly than funds available, which is a good thing. And so what Frank and I will be needing to think through is, how do we frankly prioritize those investments. On the M&A question, what I would say is the following, is that fundamentally we want to drive an organic growth strategy. I mean that's what we want to be about, right? And so really on the inorganic side, we really see the inorganic side as there's an opportunity to try to win in certain key franchises or businesses, if there's some bolt-on opportunities whether they be technology-driven, capability-driven or geographic; we'll seriously consider those. But those will be sort of in addition, if that makes sense. So I hope I answered your question.

[Indiscernible] divestitures.

Yes, sorry. On divestitures, so look, as we look in the entire portfolio, we're doing this within the product categories. Are there opportunities to rationalize the portfolio? I think it's just good business practice to drive efficiency and take out complexity. And then within product categories, we're always assessing and analyzing. And so what I would just say, that's something that we are doing and we'll continue to do proactively.

It's James Mainwaring from Stifel. I would just like to sort of get a bit more detail on the China strategy. I mean that's sort of kind region has been, sort of area has been reasonably sort of underpenetrated. And I just wanted to get a sense of what sort of business model you'd be looking to there; is that kind of investment on sort of boots on the ground in your distribution model? Is that sort of a partnership, or more kind of indirect to begin with and what sort of time frame that kind of investment would be over?

Yes, so look, I think with China it's very clear that it's a large opportunity. You don't need to be a rocket scientist to draw that conclusion. But there is significant growth that's going to be occurring in China. There's growth in terms of demand, but there's also from a technological develop perspective. So clearly we want to have our own presence there. We have about already a couple hundred people on the ground. But when you look at the proportion of revenues and profits that we generate from global emerging markets relative to our peer group, it's too low. It's absolutely too low. And so we have not frankly invested in what I'll call a direct primary demand realization model. We've historically been over-reliant on the indirect distribution model. Now obviously that primary demand realization approach, you cannot do that across all markets. But when I listed for you 12 key markets we're going to focus on, I can tell you 5 of them are in emerging markets. And so there's a significant opportunity. Now what you're going to need to do is to be very, very astute and think through, okay, well who am I actually going to target? Am I going to target all 10,000 hospitals in China or maybe there's a subset that I need to really target in and I need to really win it. Am I going to do this all on my own or am I going to maybe collaborate? Well, you need to assess those options. And so I don't want to sort of jump the gun. But we've got a very, very talented leader in Supratim Bose who is very seasoned, very experienced in sort of running global emerging markets. And he's frankly built up a really formidable team now during the course of last year in all of our geographies. And so I think that we'll be able to provide a lot more clarity in terms of what will be our commercial go-to-market strategies. But I think it will be a combination of being present on the ground, being highly targeted, and also trying to think creatively about the whole alliance piece of it.

Veronika Dubajova here from Goldman Sachs. First big picture question, if I can Karim, just thinking beyond 2020 obviously you've outlined a desire to invest more into the ongoing business. But I'm just curious. I think your predecessor talked about 2 things. One, 2020 would be the margin trough. So I'm curious if you can confirm that's still how you're thinking about it. And two, your predecessor talked about accelerating the margin improvement and getting back into the mid to high 20s. Is that still a realistic proposition and how are you thinking about the time frame towards that, if you can maybe help us think through the margin profile beyond 2020 into the medium term?

Yes, so maybe on the first question, is 2020 going to be the trough year, and then what are the prospects for margin expansion above and beyond that; maybe I'll let Frank take a stab at it, and then I'll add to it.

Yes, so we indeed have communicated this in 2019 and we believe that 2020 is going to be at the bottom. Our focus I think is very clear. We are investing now to really get the revenue growth engine going, with the associated EBIT dollars. So our focus is invest to get revenue growth going and then drive EBIT dollar growth in the future. And that is starting in 2021, given that 2020 is the bottom. And then beyond that period, margin expansion will follow. We're not at this moment putting a specific timeline on that. I think our first focus is revenue growth and associated EBIT dollar growth for this business.

I would just totally reaffirm what Frank said, which bottom line, we need to get to revenue growth, at least commensurate with what the market benchmarks are. I think we all know them in this room. And frankly once you achieve that, thereafter you can frankly start thinking about margin expansion opportunities. But fundamentally it's going to be drive the revenue line so you can see earnings growth, and then come back to the whole margin expansion side of it.

That's very clear. And then my follow-up is on the sort of $75 million of ongoing transformation investments you're making. Can you help us understand proportionately what's going into R&D and what's going into selling and marketing? And then as you think about the R&D and G&A, I think frankly ConvaTec has not really brought a meaningful innovation into the market for a while. So I'd just be curious from your seat to understand when do you think we start to see an improved R&D cadence out of the organization and when can we start looking forward to some new differentiated portfolio and product offerings?

So I'm going to let Frank take the first part of the question, and I'll try to answer the second part.

Yes, sure. So I would say when we look at all the programs that we are managing, the majority of that $75 million will go into more commercial programs, sales and marketing, more firepower on the target in the, for instance, key core markets that Karim talked about. And then there is a smaller portion of that going into product development at this stage. And I think Karim has been very clear with Divakar coming in, we will be able to provide more detail or more direction of travel and a quantification of that later, when Divakar has really laid out his strategy around product development. But I think the intention is clear. Product development, R&D investments are going up and we're going to partially fund that through, for instance, the G&A angle.

I mean what I'd say, Veronika, look, we're trying to be very practical, right? So the reality is when you look at the value chain, where are you going to get the fastest response to the marketplace? It's going to be frankly in the marketing and sales and service, right? So short term, there's going to be a propensity toward doing that. For you to refresh a product portfolio, particularly with the history and context we have, it's hard work. There's some heavy lifting to be done. So I don't want to kid anybody and say, oh yeah, within the next several months we're going to have refreshed the portfolio. That's just not real. So the reality is that I think that's going to be much more of a medium term game. And so there'll be some low-hanging fruit within the current offerings. So I call those sort of, you know, can we come up with version 1.1 or 1.2 pretty quickly? And we've got it very clear in our mind, whether it be in Continence Care, whether it be in Infusion; I mean very, very clear in our mind. So I think those, the 1.1, the 1.2 types of improvements in the next 24 months realistically. And it will vary depending upon which one I'm talking about. If you want to move into what I'll call more of the 2.0 or 3.0, you're going to be much more in a 24 to 48 month time frame period. That's the reality.

It's Paul Cuddon from Numis. Just two questions, you've raised the gross benefit target to 150 to 170, but could you just flesh out really what that means. Give us a baseline assumption that you’re using to make that calculation and kind of where you see that being generated. And then I've got one other after that.

Yes, so as I said before, we are tracking all the projects here and the benefits are going to fall in the specific work streams that we have identified before. So we are going to raise our investments, for instance, in the area of commercial activity, more feet on the street. So that will result in a higher growth rate in terms of revenue and associated dollars. We're also investing more because we see opportunity, for instance, in automation as Karim mentioned, in the overall operational area supply chain area. So there will be some more favorability coming out in specifically cost of goods sold and some of that in OpEx. And then finally we're also going to expand in GBS. We're going to expand the scope. Although the payback of that will be typically a little longer. So we will not see a lot of that in '21. But as Karim also mentioned, '21 is not the end station. It's just a moment in time. And we will see the benefits continue to grow beyond '21 and '22.

Okay, and then the home services group, you've obviously pulled it out as a separate division now. So to what extent does the home services mandate extend outside of the U.S.? And assuming that it does, there are a lot of homes just generally around the world. So how do you do that organically versus inorganically?

Yes, it's a great question. So the short answer is the mandate does extend beyond the United States, and the mandate within the United States is broad. Today it's been heavily focused on Continence Care. What does that mean in practical terms? We're in the midst of developing that. So again, what I would expect in future sessions to be able to better articulate for you exactly in terms of where you want to compete, what categories and what geographies, and how are you going to go about doing that. But clearly we've got a formidable capability there, right? So coming in new, the levels of service that we can provide our patients are truly world-class. And so some of you may be familiar with a metric called Net Promoter Score, which basically measures customer loyalty. And when you go visit with the folks at 180 Medical, which is part of the home service group based in Oklahoma City, I spent a couple of days with these folks during my visits. You're really, really impressed as to how they think about service. So they've literally broken down the whole service model, just like you would an assembly line. And so you'll have some systems, some IT systems, and you have some very unique people who will deal with 1,500 payers. They're all very calm. They're all very analytical. They're all very detail-oriented. And then you'll shift to the folks that actually deal with the patients. You'd want to be best friends with these folks. So you can imagine that these folks have been selected in a certain way. And so you get Net Promoter Scores that frankly are higher than Apple and are far higher than Disney. So the level of customer loyalty is really, really high. So the question is, how can we leverage this capability? How can we leverage it across our portfolio and are there opportunities above and beyond the United States? The honest answer today is that's a question mark. But clearly by elevating it, it gives us the ability to assess what are those opportunities and how can we frankly leverage this whole service aspect.

It's Amy Walker at Peel Hunt. I'll try for two as well, if I can please. Just to pick up on Paul's HSG question, you mentioned I think, Frank, that it had been outperforming the market growth in the U.S. But it sounded as though it's starting to mature now. On what timeline do you think that maturity comes to fruition and it sort of -- is it about penetration? Is there more you can do? How much longer can it outperform the market?

Yes, that's very tough to answer. Let me explain why rates have come down. And part of that is just simple math. When you grow bigger, 1 percentage growth means in terms of dollars a lot more. But I think my view of life is that I think HSG will be able to outgrow the market for some time, and we're not talking about massive outgrowth. But because of the model that Karim just described to the very high customer loyalty, very high penetration in insurance contracts. However, it will be indeed coming down and eventually get close to market. But for me, it's very hard to pinpoint to a certain date on that. I don't know if you have certain views, Karim, on that.

No, I would just say, look, for me from a short to medium term, I can't look out long term right now. But I think there's definitely growth there. Now what we've basically done is we've focused on one category, Continence Care; one geography, the U.S.A. So within that intersection, I can see where the question is coming from, but I think there is significant opportunity above and beyond that.

And the second question is, just on execution and accountability which were key themes in your presentation; can you tell us what some of the main key performance indicators you both personally at the C-suite level are tracking? For each franchise, if they're different, and how concentrated those are within the businesses? Is it you're tracking a lot of small things that you hope will aggregate over time or is it 2 or 3 major things that you're concerning yourself with?

Yes, there are a handful. We bucket them in terms of voice of the customer, voice of the employee and voice of the business. And to give you a flavor for what we might be looking at in terms of voice of the customer, new patient starts. That's a really important metric to us. It gives us sense of what's going to be happening in the future and it's a really good lead indicator. Net Promoter Score, what kind of customer loyalty might we have? Quality, so we've got some very basic or single quality metric, right? So those are just let's hear from the customer, how are we doing? Voice of the employee is really simple. I mean what's the level of engagement? We're going to be measuring that once a year. We've got third-party benchmarks and we can measure how much clarity is there across the entire organization as to where the heck we're going? Are our employees feeling that we're building capabilities? Are they feeling motivated, engaged? So that's a really, really important voice of the employee metric. A classic other one would be health and safety. And so we have a very important metric there. And then voice of the business, I mean we want to see the top line grow. And so we've got metrics around top line growth and how's our top line doing versus the competition, which you would expect. How are we doing on things like EBIT growth? How are we doing on generating free cash flow? So it's very, very clear to us and those metrics are consistent across all the 6 business units.