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Convatec Group Plc
Annual Report and Accounts 2022
Pioneering
trusted medical solutions
to improve the lives we touch
Welcome
We are Convatec
Pioneering
trusted medical solutions
to improve the lives we touch
Overview
1
Our 2022 highlights
2
About us
Strategic report
6
Who we are
8
Our business model
10
Chair’s statement
12
Investment case
14
Chief Executive Officer’s review
20
Key performance indicators
22
Operational review
30
Financial review
39
Non-financial information
statement
40
Responsible business review
75
The Task Force on Climate-related
Financial Disclosures
88
Risk management
92
Principal risks
98
Viability statement
Governance
102
Governance at a glance
103
Board statements
104
Chair’s governance letter
107
How we have applied the Code’s
core principles
110
Board of Directors
112
Convatec Executive
Leadership Team
114
How we are governed
116
Board activity and actions
123
Nomination Committee report
126
Audit and Risk Committee report
139
Directors’ Remuneration report
162
Directors’ report
165
Directors’ responsibilities statement
Financial statements
168
Consolidated financial statements
218
Company financial statements
224
Non-IFRS financial information
232
Independent auditor’s report
Additional information
241
ESG target definitions
243
Shareholder information
244
Glossary
In 2022 we have
continued to make
good progress
pivoting the
business to
sustainable and
profitable growth
Read more in our Chief Executive’s
review on pages 14 to 19
OUR 2022 HIGHLIGHTS
FINANCIAL
Group revenue
$2,073m
(2021: $2,038m)
Operating profit
$207m
(2021: $204m)
Adjusted
1
operating
profit
$404m
(2021: $362m)
Adjusted
1
operating
profit margin
19.5%
(2021: 17.7%)
Basic earnings per share
3.1¢
(2021: 5.9¢)
Adjusted
1
basic earnings
per share
12.7¢
(2021: 13.1¢)
STRATEGIC
FOCUS
–
Acquired Triad Life Sciences
–
Announced exit of hospital
care
–
9.6% revenue growth² in top
12 markets
INNOVATE
–
Launched InnovaMatrix
®
,
GentleCath Air™ for Men and
Extended Wear Infusion Set
SIMPLIFY
–
22.2% reduction in general
and administrative spend¹
BUILD
–
Pricing Centre of Excellence
(CoE) delivered improvement
–
Embedded Pricing, Sales and
Marketing CoEs
EXECUTE
–
13% reduction in complaints
per million
–
Manufacturing productivity
improvements
Read more about our
progress on our FISBE
strategy on pages 14 to 19
We also made considerable
progress embedding our
ESG framework, Convatec
Cares. See pages 40 to 74
1.
Certain financial measures in this Annual Report and Accounts, including
adjusted performance measures above, are not prepared in accordance
with IFRS. All adjusted performance measures are reconciled to the most
directly comparable measure prepared in accordance with IFRS on pages
224 to 228.
2. In constant currency.
Strategic report
Governance
Financial statements
Additional information
1
Convatec Group Plc Annual Report and Accounts 2022
Overview
OUR PROMISE: FOREVER CARING
Convatec at a glance
Overview
About us
Convatec is a global
medical solutions and
technologies company,
committed to the people
we serve – patients living
with chronic conditions,
their care givers and the
healthcare professionals
who support them.
Since 1964 we have
supported patients
in managing long-term
conditions, with leading
market positions in
Advanced Wound Care,
Ostomy Care, Continence
and Critical Care
and Infusion Care.
THE SCALE OF OUR BUSINESS
KEY FACTS
~850m
finished products
~10,000
colleagues
12
key markets
9
manufacturing locations
Advanced Wound Care: 30% $621m
Ostomy Care: 25% $522m
Continence & Critical Care: 26% $546m
Infusion Care: 19% $384m
Europe: 33% $689m
North America: 53% $1,090m
Rest of world: 14% $294m
Group-reported revenue
by category
Group-reported revenue
by geography
$2,073m
$2,073m
We are passionate
about serving and
supporting people
with deeply personal
and challenging
medical conditions.
We consistently
deliver excellent
work, say what we do
and do what we say.
We respect each
other. We help
colleagues around
us grow, develop and
thrive, so we can all
fulfil our potential.
We take personal
ownership of all our
work: taking the
initiative, innovating,
taking smart risks
and never settling
for second best.
We behave ethically,
are honest and
trustworthy, operate
with the highest
standards of integrity,
uphold policies and
make a positive
difference.
OUR VALUES
Improve
care
Deliver
results
Grow
together
Own it
Do what’s
right
Convatec Group Plc Annual Report and Accounts 2022
2
Advanced Wound Care (AWC)
Advanced dressings for the management
of acute and chronic wounds resulting from
ongoing conditions, such as diabetes, and
acute conditions resulting from traumatic
injury and burns.
Read more about this category on page 22
Continence & Critical Care (CCC)
Products and services for people with
urinary continence issues related to spinal
cord injuries, multiple sclerosis, spina bifida
and other causes, and products used in intensive
care units and hospital settings.
Read more about this category on page 26
Ostomy Care (OC)
Devices, accessories and services for people with
a stoma (a surgically created opening where bodily
waste is discharged), commonly resulting from
causes such as colorectal cancer, inflammatory
bowel disease and bladder cancer.
Read more about this category on page 24
Infusion Care (IC)
Disposable infusion sets for diabetes insulin
pumps, or for pumps used in continuous
subcutaneous infusion treatments for
conditions such as Parkinson’s disease.
Read more about this category on page 28
OUR CATEGORIES
Strategic report
Governance
Financial statements
Additional information
Overview
3
Convatec Group Plc Annual Report and Accounts 2022
What’s inside
Strategic report
We are determined to help address the
growing ‘care gap’ between the support
patients want and what healthcare
professionals can provide.
This gap is one that we can help bridge by providing layers of care to help
patients live fulfilling lives. A survey
1
conducted in 2022 found 87% of patients
with long-term conditions face stigma, while many nurses feel they lack the
time and resources to provide adequate support. Forever caring is our
promise to support healthcare teams and carers, as well as the patients they
care for. Health conditions can be unpredictable and unfair. We believe
healthcare should be the polar opposite.
Above all else, forever caring builds on our heritage as a business supporting
those with deeply personal and challenging medical conditions. As we bring
Convatec’s vision to life – pioneering trusted medical solutions to improve
the lives we touch – we know the needs of our patients and healthcare
providers continue to change, and we must continue to change with them.
1.
www.convatecgroup.com/media/press-releases/2022/convatec-makes-forever-caring-promise/
OUR JOURNEY TO FOREVER CARING
Convatec Group Plc Annual Report and Accounts 2022
4
Strategic
report
6
Who we are
8
Our business model
10
Chair’s statement
12
Investment case
14
Chief Executive Officer’s review
20
Key performance indicators
22
Operational review
30
Financial review
39
Non-financial information statement
40
Responsible business review
75
Task Force on Climate-related
Financial Disclosures
88
Risk management
92
Principal risks
98
Viability statement
Overview
Governance
Financial statements
Additional information
Strategic report
5
Convatec Group Plc Annual Report and Accounts 2022
OUR VISION
Pioneering
trusted medical solutions
to improve the lives we touch
OUR PROMISE
Forever caring
OUR VALUES
Focus
on strengthening
customer loyalty
in key markets and
categories
Innovate
to increase vitality
and velocity of
trusted medical
solutions
Build
and embed
mission-critical
capabilities and
winning culture
Execute
with excellence
while integrating
environmental,
social and
governance (ESG)
Simplify
to improve
productivity
across our
organisation
OUR STRATEGY: FISBE
Read more on page 15
Read more on page 2
OUR ESG FRAMEWORK: CONVATEC CARES
Read more on page 40
Customers
Delivering for our
customers
Colleagues
Enabling our
people to thrive
Commerce
Behaving ethically
and transparently
Communities
Protecting the
planet and supporting
communities
Who we are
Strategic report
How we realise
our vision
By delivering on our strategic intent of pivoting to sustainable
and profitable growth, we realise our vision and deliver lasting
value for our stakeholders.
Do what’s
right
Improve
care
Deliver
results
Grow
together
Own it
Convatec Group Plc Annual Report and Accounts 2022
6
We have continued to
successfully execute our FISBE
strategy, strengthening Convatec’s
competitive position and delivering
on our forever caring promise for
patients and customers
Karim Bitar
CEO
Financial statements
Additional information
7
Convatec Group Plc Annual Report and Accounts 2022
Governance
Overview
Strategic report
Our business model
Strategic report
Designed to enable us to deliver
on our promise and create value
for our stakeholders
Customers and patients are at the heart of what we do – we are
always thinking about how we can better support them.
OUR RESOURCES
AND RELATIONSHIPS
A talented and
diverse workforce
Category knowledge
and understanding
Innovation and
intellectual property
Relationships with
patients and healthcare
professionals
A robust quality function
and supply chain
Strong quality brands
Global sales and
marketing platform
Customer insights and
support programmes
Read more about our vision,
promise, strategy and values
on page 6
INPUTS
OUR BUSINESS MODEL
Convatec Group Plc Annual Report and Accounts 2022
8
1
Identify unmet
customer needs
or pain points
2
Human factor
design
11
Reinvest
and
distribute
3
Process and
solution
development
10
Generate
profit
4
Clinical
development
5
Regulatory
submission
6
Manufacture
with quality
and at scale
7
Commercialise
globally
8
Customer
support across
the continuum
of care
9
Measure and
learn
Our promise
Our vision
Our strategy
Our values
Our ESG framework
1. Identify unmet customer
needs or pain points
Consistently and
systematically map
customer journeys, to better
understand the needs of
patients and healthcare
providers
2. Human factor design
Design products and services
to improve the customer
experience or to meet an
unmet need
3. Process and solution
development
Leverage common R&D
technologies and design for
manufacturing expertise to
deliver optimum solutions
at scale and with attractive
cost profiles
4. Clinical development
Focus on medical strategy
and clinical development
to generate evidence of
improved patient outcomes,
health economic efficiency
and better patient access
5. Regulatory submission
Understand the regulatory
backdrop and work with
regulatory bodies to enable
access for patients
6. Manufacture with quality
and at scale
Leverage common
technologies and capabilities
to manufacture high-volume,
high-quality consumables at
the right price
7. Commercialise globally
Leverage global commercial
infrastructure to enhance
access for patients and
customers. Where feasible,
adopt a global approach to
brand launches
8. Customer support across
the continuum of care
Offer high-quality services
and tools which support the
patient across their
continuum of care
9. Measure and learn
Focus on measuring Net
Promoter Score and reviewing
complaints to ensure we are
delivering for patients – taking
any feedback into account as
we consider future innovations
10. Generate profit
Constantly explore ways to
improve productivity and
efficiency of how we operate
to deliver sustainable and
profitable growth
11. Reinvest and distribute
Utilise strong free cash flow
to reinvest in the business
(either organically or
inorganically) or return
capital to shareholders
Patients
Solutions to improve the
lives we touch
~850m
finished products
Healthcare professionals
(HCPs)
Providing value-added
solutions, support and
advice
230k
HCPs engaged in
medical education
Health plan contracts
Enabling healthcare
systems to reduce costs
and increase efficiency
>1,700
health plan contracts
Employees
Providing employment
and development
opportunities
~10,000
employees
Shareholders
Generating returns
for investors
$88.1m
cash dividends paid to
shareholders
Society
Making a positive
contribution through
community engagement
and paying tax
$52.9m
corporate tax paid
THE VALUE WE CREATE
Overview
Governance
Financial statements
Additional information
9
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Chair’s statement
A word from
the Chair
Dear Shareholder
Despite the global macroeconomic
challenges in 2022, Convatec has once
again delivered strong financial results
this year. Fundamental to this has been
the continued execution of our FISBE
strategy which has been key to
Convatec’s progress as it pivots to
sustainable and profitable growth.
Execution of our strategy
During 2022 we have further refined
our focus on the attractive chronic
care markets through the strategic
entry into the wound biologics
segment
1
via the acquisition of Triad
Life Sciences coupled with the decision
to withdraw from lower-growth,
lower-margin hospital care activities
and related industrial sales.
We have continued to strengthen our
competitive position. Our innovation
and technology agenda is gathering
momentum; as well as entering the
exciting wound biologics segment
1
,
we launched three new products
during the year and made a strategic
investment in BlueWind Medical Ltd,
a company developing an innovative
solution for the continence market.
Commercially we have been driving
improvements and developing the
resilience of our operations with
strategic infrastructure investments
and inventory building.
Towards the end of the year, the
Group also successfully concluded a
refinancing of our term and revolving
credit facilities, further reinforcing
Convatec’s financial strength into
the medium term.
2022 trading and dividend
Our reported revenue for the Group
was $2,073 million, up 1.7% against
2021 (6.9% higher on a constant
currency basis). Operating profit was
$207 million on a reported basis (2021:
$204 million) and $404 million on an
adjusted basis (2021: $362 million).
Despite the significant inflationary
headwinds during the year, we
improved our adjusted operating
profit margin to 19.5% (2021: 17.7%).
Strategic investments in M&A, higher
capex to support future growth and
inventory for resilience were key
drivers in an increase in net debt
although full year leverage
2
of
2.1x was in line with our guidance.
Given these results, Convatec’s
underlying financial strength and the
Board’s continuing confidence in the
Group’s future growth prospects, the
Board is pleased to recommend a final
dividend of 4.330 cents per share to be
paid on 25 May 2023 to shareholders
on the register at the close of business
on 11 April 2023. The final dividend will
be subject to shareholder approval at
our Annual General Meeting on 18 May
2023 and, if approved, will bring the
full year dividend to 6.047 cents per
share, an increase of 3% over 2021.
Board changes
There have been a number of changes
to the composition of the Board over
the last year. Jonny Mason joined
Convatec as Chief Financial Officer
Designate on 31 January 2022 and
became Chief Financial Officer and a
Director of the Company on 12 March
2022. Jonny replaced Frank Schulkes,
who stepped down as CFO and from
the Board on 11 March 2022. Jonny
has quickly settled into the role,
with Convatec benefiting from
his considerable experience
and knowledge.
Kim Lody and Sharon O’Keefe joined
the Board as independent Non-
Executive Directors on 1 February 2022
and 1 March 2022, respectively. Both
have brought considerable and
relevant healthcare experience and
insight, and have already contributed
a great deal to Board discussion
and debate.
Rick Anderson stepped down from
the Board on 3 March 2022, as did
Dr Regina Benjamin on 12 May 2022.
Sharon was also appointed in May
2022 as Convatec’s dedicated Non-
Executive Director workforce liaison
champion, meeting with colleagues
throughout the organisation since her
appointment, ensuring that the Board
is appropriately briefed and that
employee interests are considered
in decision-making.
Strategic report
1.
Wound biologics segment as defined by SmartTRAK. Includes skin
substitutes, active collagen dressings and topical drug delivery.
2. Net debt (excluding lease liabilities)/adjusted EBITDA.
Convatec Group Plc Annual Report and Accounts 2022
10
The progress we have made on Board
diversity over the last few years is very
encouraging, not only meeting the
FTSE Women Leaders Review gender
and Parker Review ethnic and cultural
targets, but also already meeting the
new diversity targets in the Listing
Rules. While remaining focused on
recruiting on merit and on the best
candidate for the role, it is the Board’s
intention to maintain both gender and
ethnic diversity levels on the Board at
least in line with these targets. We
remain equally committed to drive
overall diversity, equity and inclusion
in Convatec’s senior management and
throughout the Company, and further
information on this can be found later,
in the Responsible business review.
Following these Board changes early
in 2022, the Board considers that it
has an appropriate mix of skills,
knowledge, experience and diversity
on the Board to fulfil its vision and
support the delivery of the
Company’s strategy.
Culture, values and behaviours
Our values guide our colleagues’
everyday behaviours. As a Board we
are determined to reinforce a culture
that is shaped by these values: this
is essential as we strive to deliver our
vision of pioneering trusted medical
solutions to improve the lives we
touch. Throughout this Annual Report
we set out the progress we have made
over the last year in reinforcing a
responsible, engaging, inclusive
and high-performing culture – one
which delivers against our forever
caring promise.
The continued execution of our FISBE
strategy has been key to Convatec’s
progress as it pivots to sustainable
and proﬁtable growth.
Convatec Cares
During the year we saw the launch
of Convatec Cares, our evolved
Environmental, Social and Governance
(ESG) framework, which supports our
aim of pivoting to sustainable and
profitable growth and underpins
our long-term success. The framework
is built around four pillars:
–
Delivering for our customers
–
Enabling our people
–
Behaving ethically and
transparently; and
–
Protecting the planet and
supporting communities
There is detailed commentary against
each of these pillars in the Responsible
business review (pages 40 to 74), as
well as further insight into the ESG
framework, governance, metrics and
targets, together with information
on our stakeholders and why it is
important for Convatec to actively
engage with them.
Convatec remains committed to
the highest standards of corporate
governance. The Governance report
on pages 100 to 165 provides further
detail on Convatec’s wider governance
framework as well as further detail
on the Board’s stakeholder
engagement activities.
Looking ahead
The considerable progress that
Convatec has made since I became
Chair in 2019 would not have been
possible without the hard work, drive
and unwavering commitment of our
employees and leadership team, for
which I would like to thank them on
behalf of the Board.
I would also like to thank our
shareholders for their support,
many of whom met with me or other
members of the Board over the last
year. Amongst other things, their
input and engagement as part of
a consultation process helped us as
we developed a new Remuneration
Policy which is set out in the Directors’
Remuneration report, and which will
be put forward for approval at the
Annual General Meeting in May 2023.
Finally, the Board remains focused on
execution of the Group’s strategy as it
evolves, maintaining a sharp focus on
strategic delivery. This includes
oversight of the innovation pipeline
and the launch of new products.
While the macroeconomic
environment remains uncertain,
I believe the Group is well placed not
only to maintain its market-leading
status but to successfully deliver
sustainable and profitable growth
into the medium term.
Dr John McAdam CBE
Chair
8 March 2023
Overview
Governance
Financial statements
Additional information
11
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Investment case
Reasons
to invest
We believe that Convatec represents an attractive
defensive-growth opportunity for investors.
By pioneering trusted medical solutions to meet the
needs of patients suffering from chronic conditions
we generate attractive returns and strong free cash
flow which can be reinvested to benefit more patients,
our wider stakeholders and society as a whole.
We are focused on the
chronic care market:
>90%
of our revenues are from serving
chronic care patients. These
revenues are often recurring in
nature as patients rely on our
solutions
The chronic care market
is large:
$14bn
global market size
1
It is fast growing:
4-8% p.a.
¹
2. Chronic conditions are rising
Approximately one in three adults
globally suffer from multiple chronic
conditions (e.g. diabetes, cancer).
There are three global trends driving
structural growth and increasing
demand for our solutions.
1. An ageing global population
Global population aged 60+
3. People are now living longer
Average life expectancy
in the world (years)
Chronic care
is a large and
growing market
1
The business is
now growing
sustainably in
4-6% range
3
Organic sales growth
%
Adjusted operating profit growth
2
%
We have leading
positions
2
Infusion Care
#1 globally
Ostomy Care
#3 globally
2050
2020
2.1bn
1.0bn
2020
1950
73
47
2022
2021
5.6
5.3
4.2
2019
2.3
2018
0.2
2020
2018
-7.8
2019
-14.3
2020
0.9
2022
2021
11.6
5.4
Continence Care
#1 in the US
Advanced Wound Care
#2 globally
Source: United Nations, World
Population Prospects.
Source: The global burden of multiple chronic
conditions, Cother Hajat and Emma Stein.
Source: United Nations Population
Divisions estimates.
1.
Market size and growth based on
aggregate of category estimates,
internal analysis and publicly
available sources, including
SmartTRAK and Global Industry
Analysts Inc. reports. See pages
22 to 29 for detail.
Refer to operational reviews on
pages 22 to 29 for further detail.
2. APMs see pages 224 to 228.
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
12
Invest organically in opex and
capex
Progressive dividend
targeting payout ratio
of 35-45% of net profit
4
Bolt-on M&A
Any surplus capital
returned to shareholders
6
Target leverage³
~2x over time
This supports future
growth and serves
stakeholders
We expect to
expand our operating
proﬁt margin over
time by:
The business
generates strong
cash ﬂow
4
5
This results in attractive ﬁnancial outcomes
Sustainable
top-line
growth
MEDIUM-TERM TARGETS
OPPORTUNITY
4-6% organic
revenue
growth p.a.
Expanding
operating
profit
margin
2,4
Mid-20s
operating profit
margin
over time
Potential M&A
to enhance
growth
Strengthen
positions in
technology,
geography and
capability
Sustainable
and profitable
growth
Double digit
EPS
4
and FCF
2,4
CAGR
MEDIUM-TERM
OUTCOME
i.
Simplification and
productivity
–
Reduce adjusted G&A spend
to 7% of sales
–
Improve commercial
productivity
–
Increase automation
ii. Improving mix
–
Exiting lower-margin,
lower-growth business and
acquiring higher-growth,
higher-margin businesses
–
Natural benefit given our
faster-growth categories are
higher margin
–
Improving the mix within our
categories
iii.
Increasing operating
leverage as revenue grows
Adjusted EBITDA²
$500m
Adjusted free cash flow
(post-tax)²
$202.6m
2
APMs see pages 224 to 228.
2. APMs see pages 224 to 228.
3. Net debt (excluding lease liabilities) / adjusted EBITDA
2
.
4. Adjusted.
Overview
Governance
Financial statements
Additional information
13
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Chief Executive Officer’s review
Pivoting to
sustainable and
profitable growth
Strategic report
“Over the course of the
year we continued to
make progress with our
FISBE strategy,
launching three new
products and improving
our competitive
position. The resulting
financial performance
is further proof that
Convatec is pivoting
to sustainable and
profitable growth”
Karim Bitar
Chief Executive Officer
Convatec continued to successfully
execute its FISBE strategy, strengthening
its competitive position and delivering
on our forever caring promise for
patients and customers. The various
strategic initiatives actioned during the
period have enhanced the quality of the
business and improved our financial
performance and prospects.
Attractive growth prospects
Convatec operates in the structurally-
growing, attractive chronic care
markets. We focus on four categories.
These have a combined market size¹
of $14 billion p.a. and market growth
rates¹ of between 4-8% p.a. We are
leaders in the categories in which we
operate and expect to grow revenue
in line with or faster than each market.
We serve a diverse set of chronic
care markets, producing high-volume,
high-quality consumables resulting
in attractive recurring revenues. This
diversity provides resilience and
synergies, notably in areas such as:
biomaterial sciences, product and
clinical development, automated
manufacturing and shared supply
chain capabilities. Consistent with our
FISBE strategy we have been investing
in our innovation pipeline, building
mission-critical capabilities, expanding
capacity and increasing our resilience.
A chronic care focused business
well positioned to deliver
sustainable and profitable growth
We continued to make progress
executing our FISBE strategy, thereby
strengthening our competitive position
and our ability to consistently deliver
sustainable and profitable growth.
Over the course of 2022, through
acquisitions and exits, we further
focused the Group on chronic care
categories – entering the fast-growing
wound biologics² segment while
exiting our hospital care business.
Our continued focus on innovation
has resulted in three new products
being launched (2021: one new launch),
and the R&D function has been
strengthened by an increased
emphasis on intellectual property.
We continue to invest in building core
capabilities. Our Centres of Excellence
(COE) (in Marketing, Pricing and Sales)
are having a positive impact which,
coupled with our simplification and
productivity agenda, are driving
better results.
The progress made under FISBE 1.0
has resulted in a stronger, higher-
quality business. Further details on
the progress made under each pillar
can be found on pages 16 to 19. We
hosted an Innovation Day on 17 May
2022 and then a Capital Markets Event
in November where we outlined our
refreshed strategy, FISBE 2.0.
Footnotes within the CEO review are defined as follows:
1.
Market size and growth based on aggregate of category estimates, internal analysis and publicly available sources, including SmartTRAK and Global
Industry Analysts Inc. reports see pages 22 to 29 for detail.
2. Wound biologics segment as defined by SmartTRAK. Includes skin substitutes, active collagen dressings and topical drug delivery.
3. APM see pages 224 to 228.
Convatec Group Plc Annual Report and Accounts 2022
14
We delivered a strong financial
performance
Group reported revenue of $2,073
million rose 1.7% (2021: $2,038 million).
Adjusting for the significant FX
headwind, revenue grew 6.9% on a
constant currency basis and 5.6% on
an organic basis, slightly ahead of our
initial guidance.
Adjusted operating profit³ rose 11.6%
and 12.2% on a constant currency basis
despite significant COGS inflation of
8.6%. Adjusted operating profit³ margin
was 19.5% (2021: 17.7%) with mix / price,
operations productivity, significant G&A
spend reduction and 80bps of foreign
exchange tailwind more than offsetting
significant inflation and continued
investment in commercial capabilities.
Reported operating profit was broadly
flat over the previous year, as G&A
savings were partially offset by higher
operating expenses arising from selling
and distribution as well as costs related
to the exit of hospital care.
Adjusted diluted EPS³ was down 3.1%
with operating profit growth more than
offset by higher adjusted tax expenses
and finance expense from higher market
interest rates.
Reported diluted EPS was down 46.6%
impacted by higher adjusting items
mostly related to the exist of hospital
care and Triad Life Sciences acquisition.
Capital expenditure during 2022 was
$144.2 million as we continued to invest
for future growth, expanding our
manufacturing facilities in Infusion Care,
beginning to increase the automation at
our production facilities and developing
new digital technologies to deliver
enhanced customer experiences. We
were able to accelerate our plans,
making good progress on several
significant projects, notably the
expansion of capacity in Osted and
Reynosa for our Infusion Care business,
and beginning to increase automation
at our Deeside wound care facility. We
also invested in acquiring intellectual
property for our Ostomy Care
accessories portfolio.
Cash conversion was 55.6% (2021: 73.0%)
primarily reflecting increased capital
expenditure and the strategic decision
to build inventory for resilience, coupled
with the timing of receivables. We
expect phasing of some receivables to
reverse in H1 2023 while strategic capex
investment and inventory will remain
elevated in 2023.
Net debt⁴ increased by $187 million after
the acquisition of Triad Life Sciences
($173 million) and investment in
BlueWind Medical ($31 million).
Leverage⁵ was 2.1x (2021: 1.9x) in line with
our guidance. We continue to target
leverage⁵ of 2x over time but will be
comfortable going up to c.2.5x for
appropriate M&A opportunities.
Delivering continued
strategic progress
The execution of our FISBE strategy is
progressing well. We continue to make
progress in each of the five pillars as
we drive towards our vision of
pioneering trusted medical solutions
to improve the lives we touch. In
November, at our Capital Markets
Event, we announced that in 2023
our strategy will evolve to FISBE 2.0.
Focus
We further reshaped the business to
focus on our four chronic care categories
through bolt-on acquisitions, notably
the Triad Life Sciences acquisition which
gives us a foothold in the important
wound biologics² segment. This, coupled
with the withdrawal from non-core
hospital care activities and related
industrial sales, means that over 90% of
our revenue now comes from chronic
care markets.
We continued to focus and invest in our
12 key markets which cumulatively
delivered constant currency revenue
growth of 9.6%, ahead of the overall
Group growth.
Looking ahead to 2023, with FISBE 2.0,
we will become even more focused on
strengthening customer loyalty in our
key markets and categories, measuring
and tracking our net promoter scores.
We will continue to invest in the US and
China, our most important markets and
continue to evaluate appropriate bolt-on
M&A opportunities to further strengthen
the business in our core categories.
4.
Net debt excludes lease liabilities
5.
Net debt
2,4
/adjusted EBITDA
2
Overview
Governance
Financial statements
Additional information
15
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Chief Executive Officer’s review
continued
Strategic report
Innovate
Innovation remains at the heart of our
business. We have made significant
progress advancing our pipeline and
strengthened our technology &
innovation capabilities. The R&D
expenditure for the year increased
3.7% on a constant currency basis.
On a reported basis R&D expenditure
was $92 million (2021: $95 million), and
additional capital expenditure of
$14 million was incurred over the period.
We invested a further $10 million in
Intellectual Property licences relating
to accessories products, accounted for
as capital expenditure.
We began launching three new products
during 2022, a step up from our
historical level:
–
Advanced Tissue Technologies’ (ATT)
porcine placenta-derived
extracellular matrix product,
InnovaMatrix
®
, in the US, which has
contributed meaningfully to the
growth in AWC during 2022
–
GentleCath™ Air for Men, our new
hydrophilic compact male catheter
(utilising our proprietary FeelClean™
Technology), began rolling-out in
France and the UK, with plans to roll
out in the US and other key markets
in 2023, and has been well received
–
The Extended Wear Infusion Set
(EWIS), our innovative seven-day wear
technology improving value and use
to customers whilst also reducing its
environmental impact, available in
Europe and now the US
It is by continually refreshing our
product portfolio and ensuring it is
differentiated that we can deliver
sustained and profitable growth
over time.
In addition, we acquired a minority stake
in BlueWind Medical Ltd, the developer
of an innovative implantable tibial
neuromodulation device for the
over-active bladder segment, securing a
relationship with a company developing
a proprietary and differentiated
solution to treat over-active bladders in
the continence space
We have also made progress on product
sustainability as it relates to technology
& innovation, part of our wider ESG
agenda. Green Design Guidelines are an
important part of our development
process, and we are systematically
examining the environmental footprint
of our solutions and considering ways
to reduce waste.
We are developing a much richer
longer-term pipeline, as mentioned
at the Capital Markets Event, and have
further visibility on product launches
– for example, we‘re already working
on the next generation hydrofiber
®
technology platform.
We continue to pursue our R&D without
walls approach; as well as driving
organic projects we will pursue
inorganic activity. We will continue
leveraging the IDEAL process, launched
in 2021, and are seeking to improve cycle
time. Our goal is to more frequently
refresh our portfolio to provide an
improved customer experience. This
deeper and broader innovation pipeline
will underpin our growth in the future.
To measure progress against this
ambition we are targeting that by the
end of 2025, 30% of our revenue will be
generated from new products launched
in the previous five years.
In 2023, we will continue to strengthen
our product pipeline, innovation
capabilities and improve our cycle
time. In AWC we began the US rollout
of ConvaFoam in January 2023, which
will strengthen our competitive position
in the large foam segment. We intend
to roll out ATT’s new products,
InnovaBurn
®
and InnovaMatrix
®
PD,
for which we have already received
clearance. In CCC, we will be preparing
for the launch of GentleCath™ Air for
Women in late 2023/early 2024, ahead
of schedule, whilst in IC, during 2023,
we expect to launch tailored infusion
sets for Tandem’s new Mobi hybrid
micro-pump and for AbbVie’s
Parkinson’s therapy, both of which
are subject to regulatory approval.
The other major new products are
progressing well. The Esteem 2.0
ostomy product and AWC’s ConvaVac
are expected to launch in 2024.
Simplify
We made significant progress on our
simplification and productivity agenda
in 2022. Adjusted G&A³ expenditure was
reduced by 22.2% to $185 million, down
16.4% on a constant currency basis, or
8.9% of sales (2021: 11.7%) as positive
progress with initiatives brought
forward benefits. We transitioned more
finance and IT activities to our Global
Business Services (GBS) centres in
Lisbon and Bogota. 2022 was the first
complete year of GBS activity and we
have started to see early benefits of
standardised processes and
automation, lowering finance and IT
costs. An increasing number of activities
are also now being resourced by internal
talent, thus reducing spend on external
consultants. The foundations are now
in place to build additional in-house
expertise to further streamline
processes and reduce additional spend.
During 2022 we also initiated a review
of our facilities footprint and are in the
process of closing some underutilised
offices, replacing them with flexible
working alternatives which will improve
our colleagues’ experience.
In 2023, as part of FISBE 2.0, we will look
to improve productivity further across
the organisation, reducing low value
activity and driving economies of scale.
On the commercial front we will
leverage the Salesforce CoE and our
CRM system more broadly across the
organisation. In quality and operations,
we will increase automation and drive
our continuous improvement agenda.
In G&A we will expand the scope of GBS
and build more end-to-end processes.
For example, we have started our HR
transformation, which will see us
leverage central processes such as
payroll, training and onboarding
transitioning to GBS.
Convatec Group Plc Annual Report and Accounts 2022
16
SIMPLIFY
We have established and invested in
a Global Business Services function
(GBS), which enables us to deliver
economies of scale by centralising
expertise, and drive productivity
by standardising, simplifying and
automating processes.
In 2022 we have started seeing
benefits from redesigned processes.
The volume of transactions processed
through GBS increased to a substantial
scale. We served over 12,000
customers in nine different languages,
paid over 200,000 invoices and
delivered management accounting
reports for 70 countries from a single
location. Additionally, by reducing
reliance on external consultants, and
developing in-house expertise, we
were able to reduce G&A spend,
bringing it below 9% of sales.
We understand there is significant
further opportunity to improve the
working experience of colleagues and
to save costs. On an ongoing basis, we
are leveraging our GBS platform,
increasing the scope of activities as
well as geographic coverage. We are
adding more digital tools and more
automation, such as self-service apps.
Improving our
margin by reducing
G&A spend
Overview
Governance
Financial statements
Additional information
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
17
Chief Executive Officer’s review
continued
Strategic report
INTRODUCING CONVATEC‘S EXECUTIVE LEADERSHIP TEAM
11
4
5
6
7
8
9
10
3
2
1
1
Seth Segel – President & Chief
Operating Officer, Continence
Care & Home Services Group
5
Karim Bitar – Chief Executive Officer
9
Dr Divakar Ramakrishnan – Executive
Vice President, Chief Technology Officer
and Head of Research & Development
2
Anne Belcher – President & Chief
Operating Officer, Global
Emerging Markets
6
Jonny Mason – Chief Financial Officer
10
John Haller – Executive Vice President,
Chief Quality & Operations Officer
3
Kjersti Grimsrud – President
& Chief Operating Officer,
Infusion Care
7
Natalia Kozmina – Executive Vice
President, Chief Human Resources
Officer & ESG Stewardship
11
David Shepherd – President & Chief
Operating Officer, Advanced
Wound Care
4
Bruno Pinheiro – President & Chief
Operating Officer, Ostomy Care
8
Evelyn Douglas – Executive Vice
President, Chief of Corporate Strategy &
Business Development, General Counsel
& Company Secretary
Read more about their skills on pages 112 and 113.
Build
We strengthened the Convatec
Executive Leadership Team (CELT) during
2022. Jonny Mason joined us as CFO of
the Group during Q1, while Kjersti
Grimsrud took over leadership of our
Infusion Care business and
consequently Seth Segel added
Continence & Critical Care to his existing
HSG responsibilities. Anne Belcher
joined the Group from GSK to lead our
Global Emerging Markets business and
Bruno Pinheiro, who led our successful
LATAM business before acting as Interim
President for GEM, took over Ostomy
Care. John Haller joined us as EVP, Chief
Quality & Operations Officer, having
previously been at Stryker Corporation.
We developed and embedded our
Pricing CoE, which in collaboration with
our business units, achieved 50 bps of
pricing improvement on gross margin
over the period.
Our refreshed brand and new Company
promise of forever caring was launched
in May. It has been well received by
customers and HCPs. In the second half
of the year we rolled out new websites
and social media digital interfaces
reflecting the refreshed brand across
all of our focus markets.
Our Salesforce CoE has now
established a single CRM platform in
North America and Europe, and we
have begun rolling it out across GEM.
This is driving enhanced salesforce
productivity by increasing call rates
and improving account targeting.
Going forward we will leverage the
Marketing CoE more broadly across
the Group and build new capabilities,
particularly focused on customer
experience and measurement of Net
Promoter Scores.
Culture is a critical element in building
high performing teams and creating a
motivating work environment. Results
from our latest Organisational Health
Index (OHI) survey were strong,
sustaining our top performance from
2020. We will continue to cultivate
talent, recognise colleagues and focus
on Diversity, Equity & Inclusion (DE&I)
and Wellbeing over the next year.
Execute
We continue to execute well on our
strategic initiatives, following a
consistent methodology that
identifies metrics and tracks
milestones regularly.
We delivered positive manufacturing
productivity improvements in the face
of significant COGS inflation and
continued to improve the resilience of
the supply chain. We are committed to
sustaining our strong safety record
while improving the quality of our
products and services for our
customers. Complaints per million
decreased by 13% over the period.
Convatec Group Plc Annual Report and Accounts 2022
18
One year on since launching Convatec
Cares, our refreshed Environmental,
Social & Governance (ESG) approach,
we have made good progress
integrating ESG practices across our
business and value chain:
–
Elevated ESG through our strategic
planning process and engaging all
business units and functional areas on
priorities, targets and commitments
–
Emissions reduction: In line with our
net zero commitment, we reduced
Scope 1 and Scope 2 greenhouse gas
emissions by 32% in 2022. We are on
track to validate our Scope 1, 2 and 3
(near term) Science Based Targets in
2023. Our manufacturing sites
increasingly use renewable electricity,
and we expect that to reach 100% by
the end of 2023
–
Progress in DE&I and Wellbeing
approach where now 36% of our CELT
are women, 40% of our Board are
women, and we are on track to ensure
40% of our senior management (CELT
member plus their direct reports) are
women by the end of 2024
–
Elevated our focus on supply chain
sustainability, improving the average
EcoVadis score of our suppliers by 6.5%
–
We committed more than $2 million in
both product and cash donations in
2022, including a humanitarian relief
response for Ukraine valued at over
$1.5 million. This year, we’ve also
committed more than $100,000
in response to the earthquakes in
Turkey and Syria in both product
and cash donations.
We announced today a new $2 million
health partnership with Partners In
Health (PIH), a leading international NGO
focused on building equitable health
systems globally. The innovative
partnership expands recruitment and
support of Community Health Workers
and improves their training on chronic
conditions. Living in the communities
where they work, Community Health
Workers are trusted neighbours who
are able to provide high-quality health
services. Over three years, Convatec’s
support – through cash, product
donation and training – will enable PIH to
reach over 250,000 children and adults,
with a particular focus on programmes
in Mexico, Peru and the United States.
Group 2023 outlook
We are pleased with the growth
we achieved in 2022 and are focused
on pivoting to sustainable and
profitable growth.
We expect organic revenue growth to
be between 4.5 – 6%, consistent with
our medium-term targets shared at our
Capital Markets Event in November.
Growth will be H2 weighted because of
stronger comparatives in H1 2022,
especially in Infusion Care, and because
ATT will contribute to organic growth
following the anniversary of the
acquisition.
The reported revenue will be impacted
by the exit of hospital care and related
sales, which generated $102 million
in 2022.
We remain focused on expanding our
operating margin³ by growing revenue,
improving our mix/price and delivering
on our simplification and productivity
agenda. Inflation is expected to remain
a significant headwind in 2023 with
COGS inflation of 5-7%. In addition we
anticipate labour inflation in opex of
5-7% which is approximately double
that of 2022. On this basis, we expect
modest improvement in the adjusted
operating margin³ in 2023 to at least
19.7% on a constant currency basis.
Furthermore, our medium-term
target of mid-20s operating margin³
remains unchanged.
Based on current interest rates, we
expect adjusted net finance expense
for the full year to be $70-80 million.
The cash tax rate for the year is
expected to be around 19%, while
the adjusted book tax rate³ is
expected to be approximately 25%.
Capex will remain elevated at around
$120-140 million for the full year
reflecting the continued growth
investments we are making across
the Group and we intend to increase
inventory by c.$20 million to further
strengthen supply chain resilience.
We are confident about the future
prospects for the Group as we
continue to pivot to sustainable
and profitable growth.
Karim Bitar
Chief Executive Officer
8 March 2023
OUR FISBE STRATEGY IS EVOLVING
FISBE 1.0 (2019-2022)
FISBE 2.0 (2023 into the medium term)
Focus
on key categories and
markets
Focus
on
strengthening customer loyalty
in our
key markets and categories
Innovate
in our work and trusted
solutions
Innovate
To increase vitality and velocity
of
trusted
medical
solutions
Simplify
our organisation and
operations
Simplify
To improve productivity across
our organisation
Build
core capabilities
Build
And embed mission-critical
capabilities
and a winning culture
Execute
with excellence
Execute
With excellence
while integrating ESG
Overview
Governance
Financial statements
Additional information
19
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Key performance indicators
Strategic report
We are continuously
tracking our progress
We use a mix of financial and non-financial metrics
to measure delivery of our strategy.
FINANCIAL KPIs
Group revenue growth
1
$m
Adjusted operating profit margin
2
%
2022
2021
2020
+6.9%
+5.8%
+4.0%
$2,072.5m
$2,038.3m
$1,894.3m
2022
2021
2020
19.5%
17.7%
18.5%
Metric
Group revenue growth compares the revenue generated from the
sale of the Group’s products in the current year with the prior year.
Metric
Adjusted operating profit margin is adjusted operating profit
as a % of revenue.
Target: Mid 20s adjusted operating profit margin in the
medium term
Relevance to strategy
Group revenue performance reflects the growth of our business
and our progress towards achieving our ambition of delivering
attractive revenue growth year-on-year.
Relevance to strategy
Adjusted operating profit margin reflects how effectively we are
running our business – a key factor if we are to deliver sustainable
and profitable growth.
Focus
Innovate
Build
Execute
Focus
Innovate
Simplify
Build
2022 performance
–
6.9% increase on constant currency basis
–
AWC revenues grew 12.7% driven by strong organic growth
in GEM and Europe, supported by the contribution from the
Triad acquisition
–
OC revenues grew 2.8%, driven by strong growth in GEM and
robust performance in Europe
–
CCC revenues grew 2.6% driven by continued strength in new
patient starts and high customer retention, supported by Cure
Medical and Patient Care Medical acquisitions, partially offset
by a decline in Critical Care
–
IC revenues grew 10.2% driven by continued demand for our
innovative infusion sets by diabetes patients
2022 performance
–
Adjusted operating profit margin increased by 180bps to 19.5%
–
Pricing, mix and productivity improvements, combined with
significant G&A savings and an 80 bps foreign exchange tailwind
more than offset inflationary headwinds and increases in
strategic investments
1.
Revenue growth is stated at constant currency.
2.
Certain financial measures in this Annual Report and Accounts,
including the adjusted performance measure above, are not prepared
in accordance with IFRS. All adjusted performance measures are
reconciled to the most directly comparable measure prepared in
accordance with IFRS on pages 224 to 228.
Convatec Group Plc Annual Report and Accounts 2022
20
FINANCIAL KPIs
NON-FINANCIAL KPI
Adjusted free cash flow (post-tax)
2
%
Quality
(number of complaints per million (CPM) products sold)
$274.7m
$347.4m
2022
2021
2020
$202.6m
2022
2021
2020
-12.8%
-11.3%
-15.9%
41
47
53
Metric
Adjusted free cash flow (post-tax) is adjusted net cash
generated from operations (net of capital expenditure) less
income taxes paid.
For reconciliation see page 228.
Metric
CPM measures the number of complaints we receive per million
products sold.
Relevance to strategy
Adjusted free cash flow reflects how effectively we are able to
convert the profit we generate into available cash (after
accounting for working capital movements, making capital
investments and paying tax).
Relevance to strategy
CPM is a strong indication of our manufacturing quality and
is key to ensuring that we develop trusted medical solutions.
It is also a reflection of our core capabilities and our ability to
execute effectively.
This is also an ESG metric, see page 48.
Focus
Innovate
Simplify
Execute
Build
Innovate
Execute
2022 performance
–
Adjusted free cash flow decreased by 26%
–
Adjusted EBITDA increased by 7.7% driven by good revenue
growth and a reduction in operating costs
–
However, this was more than offset by higher capital
investment to support future growth and increased inventory
to improve resilience
2022 performance
–
Overall year-on-year reduction of 12.8% as the Quality CoE
begins to have a positive impact
–
Driven by implementation of continuous improvement across
our manufacturing and quality operations
Overview
Governance
Financial statements
Additional information
21
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Foam
Operational review
Strategic report
Advanced
Wound Care
Strong organic growth supported by entry
into the wound biologics segment
1
through
the acquisition of Triad Life Sciences.
ABOUT AWC
2022 performance
During 2022, the business achieved
strong growth in GEM and Europe
which more than offset a decline
in North America where our limited
position in the foam segment and
lower surgical volumes continued
to weigh on performance. As a result,
the business saw overall growth across
all segments globally.
Revenue of $621 million increased
4.8% on a reported basis or 12.7%
on a constant currency basis. This
performance reflected the acquisition
of Triad Life Sciences, now known as
Advanced Tissue Technologies (ATT)
which generated $35 million of revenue.
On an organic basis revenue rose by 6.8%.
We made continued strategic progress
in AWC during the period. In March
2022, we strengthened our position
with our entry into the wound
biologics
3
segment through the
acquisition of Triad Life Sciences. Our
commercial execution continued to
improve, as we leveraged our common
Customer Relationship Management
(CRM) platform in North America and
Europe. ConvaFoam was cleared for
launch at the end of 2022 and began
the US rollout in early 2023, which
will strengthen our competitive
position in the large and rapidly
growing foam segment.
In 2023 we will focus on:
–
Successfully launching ConvaFoam
in the US and preparing for a
European launch in 2024; driving
development of ConvaVac and
preparing to launch in 2024
–
Growing the InnovaMatrix
®
platform in the US and developing
the product outside the US.
–
Continuing to strengthen
commercial execution globally
2022 revenue
$621m
Market size
1
c. $7bn
Market growth
c. 5%
By category
Segment
2022
market size
($bn)
5-year
projected
CAGR
suNPWT
0.4
~20%
Biologics
2.2
~7%
Foams
1.8
~6%
Antimicrobials
0.9
~6%
Alignates and
fibre
0.3
~5%
Other AWDs
1.4
~2%
Category position
No. 2
Global advanced wound dressings
2
No. 1
Global antimicrobial dressings
Global alginate and fibre dressings
Global hydrocolloid dressings
Key competitors
• 3M
• Smith & Nephew
• Mölnlycke
1.
Size, growth and position information
contained in this Operational review are
estimates and are based on internal analysis
and publicly available sources, including
SmartTRAK and Global Industry Analysts
Inc. reports. AWC includes single-use
negative pressure wound therapy, biologics,
foams, antimicrobials and other advanced
wound dressings such as composite/island
dressings, alginate and fibre dressings
including contact layers, hydrocolloids,
films, super-absorbents and hydrogels.
2.
Excluding biologics, composite/island
dressings and film.
OUR KEY BRANDS
David Shepherd
President & Chief Operating
Officer, Advanced Wound Care
Convatec Group Plc Annual Report and Accounts 2022
22
3.
Wound biologics segment as defined by
SmartTRAK. Includes skin substitutes, active
collagen dressings and topical drug delivery.
INNOVATE
Acquisition of Triad Life Sciences
The acquisition of Triad Life Sciences
(now known as Advanced Tissue
Technologies, or ATT) has expanded
our AWC portfolio with biologically-
derived innovative products to
address unmet clinical needs in
surgical wounds, chronic wounds
and burns.
It has strengthened Convatec’s AWC
position in the US and secured access
to an innovative technology platform
that is highly complementary to
Convatec’s existing portfolio, enabling
the Group to meet a wider range of
needs of both patients and health
care practitioners.
The ATT commercial team has made
good progress selling InnovaMatrix
®
AC into Physician Offices in the US
aided by the reputation of Convatec
in the wound space. In 2023 we will
leverage our broader commercial
infrastructure in the US to serve more
patients. Additionally, following
regulatory clearances in 2022, we
intend to expand our portfolio with
both InnovaBurn
®
and InnovaMatrix
®
Powder in 2023.
The transaction has been immediately
accretive to sales growth and has an
attractive financial profile, supporting
our strategic intent of pivoting to
sustainable and profitable growth.
Read more about our full product suite
online www.convatecgroup.com/
our-categories/advanced-wound-
care/
Entry into the
wound biologics
segment
InnovaMatrix
®
AC
InnovaMatrix
®
powder
Overview
Governance
Financial statements
Additional information
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
23
Operational review
continued
Strategic report
Ostomy Care
Improving performance by supporting
patients across the continuum of care.
ABOUT OC
Bruno Pinheiro
President & Chief Operating
Officer, Ostomy Care
2022 performance
Under the new leadership of Bruno
Pinheiro, our OC business continued to
make good strategic progress during
2022. He and the team increased the
focus on driving an improved experience
across the continuum of care. The
highly-rated Home Services Group is
helping to grow the number of new
US ostomy patients, while in Europe,
during the year, we launched new digital
services to support both health care
professionals and patients better.
Revenue of $522 million declined
4.5% on a reported basis but increased
2.8% on a constant currency basis and
3.4% on an organic basis.
The business achieved continued
strong growth in GEM, particularly in
Latin America and China, while Europe
achieved a robust performance with
some pricing initiatives helping to
offset the continued planned
rationalisation of lower-margin
non-Convatec products at Amcare UK.
In North America, new patient starts
remained stable, supported by HSG
ostomy sales.
Overall, we have continued to improve
our mix and expand our margins.
We saw good demand for Convatec
products, for example our accessories
sales saw strong growth in 2022,
following the relaunch of the Esenta
brand. Across all geographies, revenue
from Convatec ostomy products grew
5.5% on an organic basis.
In 2023 we will focus on:
–
Driving new patient starts and
continuing collaboration with HSG
–
Improving consistency of
commercial execution across
the continuum of care
–
Preparing to launch Esteem 2.0
in H1 2024
2022 revenue
$522m
Market size*
c. $3bn
Market growth
c. 4%
Segment
2021
market size
($bn)
5-year
projected
CAGR
GEM
0.6
~6%
Europe
1.6
~3%
North America
0.8
~3%
Category position
No. 3
Global ostomy
No. 2
US
Key competitors
• Coloplast
• Hollister/Dansac
*
Size, growth and position information
contained in this Operational review are
estimates and are based on internal
analysis and publicly available sources.
OUR KEY BRANDS
Convatec Group Plc Annual Report and Accounts 2022
24
FOCUS
China and Latin America leading
the way
Our presence in the global
emerging markets has been a key driver
of growth in Ostomy Care during 2022.
Growing double digit, they now
account for ~25% of OC’s revenues.
Three of Convatec’s key focal markets
are in the Emerging Markets: China,
Brazil and Colombia,
We estimate that our growth in OC in
China in 2022, has been approximately
3x greater than the market. This has
been achieved by developing deeper
relationships with our existing hospital
clients, focusing on new hospital listings,
enhancing our e-commerce offering and
continuously upgrading customer
service. Furthermore, we worked with
the local government, pharmacies and
volunteers to deliver products during
the ongoing lock downs.
In Latin America, we expanded our
presence in Colombia and Brazil,
through a combination of our
Convacare clinics, direct distribution
to private hospitals and establishing
partnerships with isurance providers.
In 2023, we will continue to grow share
in the emerging markets with a focus
on patient access and loyalty.
Read more about our full product suite
online www.convatecgroup.com/
our-categories/ostomy-care/
Driving growth in
our key emerging
markets
Esenta
accessories
Moldable
Ostomy pouch
Overview
Governance
Financial statements
Additional information
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
25
Strategic report
Continence &
Critical Care
Continued strength in new patient starts
and high customer retention drove US
growth, supported by Cure and Patient
Care Medical acquisitions.
ABOUT CCC
Seth Segel
President & Chief Operating
Officer, Continence Care and
Home Services Group
2022 performance
Revenue of $546 million rose 0.6% on
a reported basis, 2.6% on a constant
currency basis and 3.6% on an organic
basis. A good operating performance
in Continence Care was supported by
contributions from the Cure Medical
and Patient Care Medical acquisitions,
as well as an improving pricing
environment in North America.
Continence Care achieved revenue of
$409 million in 2022, up 5.0% on an
organic basis, with continued strength
in new patient starts and high customer
retention. This was complemented
by good demand for our Cure and
GentleCath™ portfolios in the US and
Latin America, and our developing
presence in France and the UK following
the launch of the GentleCath™ Air for
Men compact catheter.
During 2022 the strategic decision was
taken to exit hospital care and related
industrial sales. The hospital care
activities, reported as part of CCC,
generated $72 million of revenue in
2022 (2021: $79 million). From 31 May,
when we closed the Belarus factory,
revenue has been excluded from
organic calculations. The related
industrial sales, reported as part
of IC, generated $26 million of
revenue in 2022 (2021: $22 million).
Critical Care revenue of $137 million
declined 1.3% on an organic basis with
Flexi-Seal™, which remains in the
Group portfolio, declining following
strong COVID-19 impacted
comparatives.
In 2023 Continence Care will
focus on:
–
Continuing to drive US growth via
–
Exceptional service,
–
Both Cure Medical and GentleCath™
portfolios (including the new
GentleCath™ Air for Men)
–
Expanding in Europe and Global
Emerging Markets
–
Preparing to launch GentleCath Air™
for Women in late 2023/early 2024
From 2023 onwards, Flexi-Seal™
(2022 revenue: $66 million), our
faecal management system, will
move from Critical Care to Ostomy
Care. The remaining industrial sales,
predominantly continence related
supplies for B2B customers (2022
revenue: $17 million), will move from
Infusion Care into Continence Care.
Going forward the CCC category will
be renamed Continence Care and
we will restate comparatives.
2022 revenue
$546m
Market size*
c. $2.2+bn
Geography
2022
market size
($mm)
US
900
EU4 (UK, France, Italy,
Germany)
700
Other EMEA
300
APAC
150
Latin America
100
Market growth
c. 4%
Category position
No. 1
~40% market share
Retailer in intermittent catheters
in the US (Home Services Group)
No. 2
~23% market share
Manufacturer of intermittent
catheters in the US
Key competitors
• Coloplast
• Hollister
• Bard
• Wellspect
*
Continence & Critical Care comprises the
global intermittent catheter segment plus
the faecal management segment.
Operational review
continued
OUR KEY BRANDS
Convatec Group Plc Annual Report and Accounts 2022
26
BUILD
How one lives with their medical
device is equally important to the
device itself
As long-time makers of catheters,
we know there are no “silver bullets”
that solve all customer needs. Users
have very different wants and select
a product based on diverse criteria.
Sometimes it is about the technology
and its impact on the anatomy.
Sometimes it is the packaging and
usability. Sometimes it is about the
portability. An important part of
offering solutions is helping customers
in their daily lives and having a broad
range of products with different
underlying technologies and designs.
During 2022 we expanded our
portfolio by leveraging our state-of-
the-art FeelClean™ technology and
brought to market a pocket-sized,
discreet GentleCath™ Air offering
for men. In addition, we continued
innovating on our Cure Medical
ready-to-use hydrogel platform,
which has been developed through
a long track record of user-driven,
rapid innovation.
Our broader portfolio enables us
to expand in key European markets,
where discreet catheters comprise
~45% of the catheters distributed.
During 2022 we enhanced our
presence in France, built a new team
in the UK and established our
foundational leadership in Italy. In
2023, we will also seek to bring these
solutions into established Convatec
Global Emerging Markets.
Read more about our full product suite
online www.convatecgroup.com/
our-categories/continence-critical-
care/
Expanding our
presence in
Continence Care
GentleCath
TM
Air for Men
GentleCath
TM
Glide
Overview
Governance
Financial statements
Additional information
Strategic report
Convatec Group Plc Annual Report and Accounts
2022
27
Strategic report
Infusion Care
Continued strong growth driven by
strong demand for our infusion sets
for diabetes patients.
ABOUT IC
Kjersti Grimsrud
President & Chief Operating
Officer, Infusion Care
2022 performance
Our Infusion Care business continued
to strengthen in 2022. To respond to
the underlying demand for automated
insulin delivery systems and their
accessories, during 2022, we built
additional capacity at our Osted,
Denmark and Reynosa, Mexico plants.
We continued to innovate, launching
our MioAdvance Extended Wear
Infusion Sets (EWIS) in the US, and
are diversifying our customer base
by growing applications outside of
diabetes, such as Parkinson’s.
Revenue of $384 million increased
7.5% on a reported basis, 10.2% on
a constant currency basis and 9.8%
on an organic basis. The difference
between constant currency and
organic growth was due to the impact
of the industrial sales exit. This strong
growth was primarily driven by
continued demand for our infusion
sets used by diabetic patients. Growth
was also supported by increasing
demand for differentiated infusion
sets for alternative therapies, such
as pain management, albeit off a
small base.
In 2023 we will focus on:
–
Scaling up production of
MioAdvance EWIS
–
Expanding the usage of infusion sets
for the delivery of other
subcutaneous therapies, including
launching with AbbVie, once
regulatory approval is received for
their Parkinson’s drug therapy
–
Successfully launching a tailored
infusion set for Tandem Mobi once
regulatory approval is received
2022 revenue
$384m
Market size*
c. $1.6+bn
Market growth
c. 8%
Automated Insulin Delivery
**
c. 6%
Parkinsons Disease
c. 8%
Pain management
c. 10%
Primary Immunoglobulin
deficiency
Key partners
• Beta Bionics
• Medtronic
• Roche
• Sooil
• Tandem
Category position
No. 1 globally
Infusion sets for insulin pumps
Key competitors
• Smiths
• Ypsomed
• Gerresheimer
• Apex Medical
*
Infusion Care comprises infusion set for
diabetes and biologic drug delivery
segment outside of diabetes.
**
Based on growth of the automated insulin
delivery market from 2022 to 2032.
Operational review
continued
OUR KEY BRANDS
Convatec Group Plc Annual Report and Accounts 2022
28
EXECUTE
Increasing capacity, enhancing
quality and developing resilience
We are the global leader in infusion
sets for subcutaneous drug delivery,
and the diabetes segment is our main
focus. Every single day, our product
supports more than 1 million people
living with diabetes. In order to serve
all these end users, we manufacture
and deliver more than 110 million
products each year.
During 2022 we expanded our
footprint and capacity in Denmark
and Mexico. We doubled our
manufacturing capacity at our plant in
Osted, Denmark. It is the most
advanced manufacturing site in the
overall Convatec network and all
electricity is from renewable sources.
We also continued to enhance our
quality metrics and develop resilience
by improving surge capacity to ensure
we deliver for our customers and
their patients.
In addition we have continued to
innovate, launching our extended wear
infusion sets in the US, which is better
for our patients and the environment.
Read more about our full product suite
online www.convatecgroup.com/
our-categories/infusion-care/
Increasing capacity
to respond to
strong demand
MioAdvance
Extended Wear
Infusion Set
Infusion Set
Osted facility
Overview
Governance
Financial statements
Additional information
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
29
Financial review
Strategic report
“The Group performed well in
2022, delivering good revenue
growth and expansion in the
adjusted operating profit margin
to 19.5%, notwithstanding the
significant inflationary headwinds.”
Jonny Mason
Chief Financial Officer
We made good progress in 2022
in executing our FISBE strategy and
demonstrated that we are pivoting
to sustainable and profitable growth.
Revenue grew by 1.7% on a reported
basis and 6.9% on a constant currency
basis. We delivered an adjusted
operating profit margin of 19.5%,
representing expansion of 180bps
over the previous year with mix/price,
operations productivity, significant
G&A spend reduction and 80bps
of foreign exchange tailwind more
than offsetting significant inflation
and continued investment in
commercial capabilities.
Adjusted basic earnings per share
reduced year-on-year primarily due
to adjusted operating profit growth
being more than offset by increases
in adjusted net finance, non-operating
and income tax expenses. These are
explained in further detail on page 32.
The competitive position of the Group
was further strengthened during the
year, entering the attractive wound
biologics
2
segment through our
acquisition of Triad Life Sciences,
whilst exiting the lower-margin
and lower-growth hospital care
and industrial sales activities. We
also made good progress with our
simplification and productivity
initiatives, most notably reducing
G&A spend in the year.
In November 2022, we successfully
refinanced our bank facilities with
$1.2 billion committed for five years
at slightly improved margins over
base rates compared to the previous
facilities. The Group’s $500.0 million
senior unsecured notes remain in
place and are committed until 2029.
The Group’s financial prospects are
attractive and we have confidence in
our ability, over the medium term, to
deliver sustainable annual mid-single-
digit organic revenue growth and to
expand our adjusted operating profit
margin into the mid-20s.
Reported revenue
growth
+1.7%
$2,072.5m
$2,038.3m
2021
2022
Reported operating
profit growth
+1.8%
$207.3m
$203.6m
2021
2022
Reported basic earnings
per share
3.1¢
(2021: 5.9¢)
Adjusted operating
profit margin growth
1
+180bps
19.5%
17.7%
2021
2022
Adjusted operating
profit growth
1
+11.6%
$403.7m
$361.7m
2021
2022
Adjusted basic earnings
per share
1
12.7¢
(2021: 13.1¢)
Reported and adjusted results
The Group’s financial performance, measured in accordance with IFRS, is set out in the Consolidated
Financial Statements and Notes thereto on pages 168 to 217 and referred to in this Annual Report as
“reported” measures.
The commentary in this Financial review includes discussion of the Group’s reported results and
alternative performance measures (or adjusted measures) (APMs). Management and the Board
use APMs as meaningful measures in monitoring the underlying performance of the business.
These measures are disclosed in accordance with the ESMA guidelines and are explained and
reconciled to the most directly comparable reported measures prepared in accordance with
IFRS on pages 224 to 228.
Constant currency growth
Management and the Board review revenue on a constant currency basis which removes the
effect of fluctuations in exchange rates to focus on the underlying revenue performance.
Constant currency information is calculated by applying the applicable prior period average
exchange rates to the Group’s reported revenue performance in the current period. Revenue
and the revenue growth on a constant currency basis are non-IFRS financial measures and
should not be viewed as replacements of IFRS reported revenue.
HIGHLIGHTS
1.
These non-IFRS financial measures are explained and reconciled to the most directly comparable
financial measures prepared in accordance with IFRS on pages 224 to 228.
2.
Wound biologics segment as defined by SmartTRAK. Includes skin substitutes, active collagen
dressings and topical drug delivery.
Convatec Group Plc Annual Report and Accounts 2022
30
Revenue
Group revenue for the year ended 31 December 2022 of $2,072.5 million (2021: $2,038.3 million) increased 1.7% year-on-year
on a reported basis or 6.9% on a constant currency basis.
The Group experienced significant foreign exchange headwinds of 5.2% on its reported revenue growth. The majority of the
Group’s 2022 revenue was denominated in US dollars (52%), however there are other significant currencies in which revenue
is denominated, notably EUR (20%), GBP (6%) and DKK (2%). These currencies depreciated significantly against the US dollar
during the year, as disclosed in Note 20 – Financial risk management to the Consolidated Financial Statements.
Adjusting for the foreign exchange headwind and acquisition and divestiture-related activities
2
, Group revenue grew by
5.6% on an organic basis. This was driven by continued strong growth in Advanced Wound Care and Infusion Care, with
good growth seen in Ostomy Care and Continence & Critical Care. Given the largely reimbursed markets that we serve,
there was limited opportunity to pass on the significant inflation we have seen in 2022. However, initiatives executed
through our Pricing Centre of Excellence have successfully delivered positive price impact on revenue. For more details
about category revenue performance, refer to the Operational reviews on pages 22 to 29.
2.
Acquisitions were Triad Life Sciences in 2022 and Cure Medical and Patient Care Medical in 2021. Divestiture-related activities in 2022 were the
discontinuation of hospital care, related industrial sales and associated Russia operations, whilst in 2021 it was the divestment of incontinence activities.
Revenue by category
2022
$m
2021
$m
Reported
growth
%
Foreign
exchange
impact
%
Constant
currency
growth
%
Organic
growth
%
Advanced Wound Care (AWC)
620.7
592.3
4.8%
(7.9)%
12.7%
6.8%
Ostomy Care (OC)
522.1
546.5
(4.5)%
(7.3)%
2.8%
3.4%
Continence & Critical Care (CCC)
546.3
542.9
0.6%
(2.0)%
2.6%
3.6%
Infusion Care (IC)
383.4
356.6
7.5%
(2.7)%
10.2%
9.8%
Total
2,072.5
2,038.3
1.7%
(5.2)%
6.9%
5.6%
AWC revenue grew 4.8% on a reported basis or 12.7% on a constant currency basis, supported by the contribution from the
Triad Life Sciences acquisition in March 2022, with strong organic growth of 6.8%.
OC revenue fell by 4.5% on a reported basis but increased 2.8% on a constant currency basis. We continued to see good
growth in Convatec products of 4.9% on a constant currency basis, driven by strong growth across the Global Emerging
Markets and Europe and supported by the launch of the Esenta accessories range. This was partially offset by the
planned product rationalisation and transitioning the portfolio away from the lower-margin non-Convatec Ostomy
products. The 60bps difference between constant currency growth and organic growth reflects the discontinuation
of Russia activities associated with the exit of hospital care.
CCC revenue grew 0.6% on a reported basis or 2.6% on a constant currency basis. Sales in Continence Care grew well by
6.0%, driven by our 180 Medical service business, which was supported by the acquisitions of Cure Medical and Patient
Care Medical in 2021 and early progress with catheter sales outside of the United States. This growth was partially offset
by a reduction in sales of Critical Care products, following the strategic decision to exit hospital care-related activities as
announced in May 2022, coupled with lower Flexi-Seal sales in 2022 following the strong COVID-driven performance in 2021.
IC revenue grew 7.5% on a reported basis or 10.2% on a constant currency basis, reflecting continued strong demand for our
innovative infusion sets for diabetes patients, coupled with promising progress in non-diabetes therapeutic areas such as
Parkinson’s disease, primary immune deficiencies and pain management.
See pages 22 to 29 for detail on the performance of each category.
Group financial performance
Reported
2022
$m
Reported
2021
$m
Adjusted
1
2022
$m
Adjusted
1
2021
$m
Revenue
2,072.5
2,038.3
2,072.5
2,038.3
Gross profit
1,103.9
1,123.1
1,245.6
1,233.3
Operating profit
207.3
203.6
403.7
361.7
Profit before income taxes
81.9
151.3
337.6
309.4
Net profit
62.9
117.6
256.8
263.0
Basic earnings per share (cents per share)
3.1¢
5.9¢
12.7¢
13.1¢
Diluted earnings per share (cents per share)
3.1¢
5.8¢
12.6¢
13.0¢
Dividend per share (cents)
6.047¢
5.871¢
1.
These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measures prepared in accordance with IFRS
on pages 224 to 228.
Overview
Governance
Financial statements
Additional information
31
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Financial review
continued
Strategic report
Revenue impact of strategic exits during 2022
The strategic exit of hospital care and industrial sales will
impact revenues as we move into 2023. The table below
shows the 2022 revenue attributable to these activities.
The ongoing activities are more focused on higher-margin
and higher-growth chronic-care categories.
2022
reported
$m
Impact
1
$m
2022 revenue
from ongoing
activities
$m
Advanced Wound Care
620.7
–
620.7
Ostomy Care
522.1
(4.9)
517.2
Continence & Critical Care
546.3
(71.8)
474.5
Infusion Care
383.4
(25.6)
357.8
Total
2,072.5
(102.3)
1,970.2
1.
Sales related to discontinuation from hospital care, related industrial
sales and associated Russia operations
Reported net profit
Reported operating profit was $207.3 million, an increase
of $3.7 million on the prior year. Reported gross margin
decreased year-on-year from 55.1% to 53.3%, driven by
inflationary headwinds on raw materials and freight.
The reported gross margin was also impacted by increases
in one-time divestiture and termination costs (primarily
relating to the exit from hospital care and industrial sales
activities) of $21.4 million and the release of the fair value
uplift of inventory arising from the acquisition of Triad
Life Sciences of $8.7 million. These were partly offset by
foreign exchange tailwinds and mix/price benefits.
Reported operating expenses decreased by $22.9 million,
which was primarily due to a reduction of $70.4 million in
general and administrative expenses, partly offset by
increases in selling and distribution expenses of $36.2
million and other operating expenses of $13.8 million.
The improvement in G&A reflected the Group’s increasing
focus on simplifying its global processes and improving
productivity. The increase in selling and distribution
expenses was primarily driven by increases in headcount
associated with higher revenue, the inclusion of acquired
businesses and inflationary impacts on distribution costs.
Other operating expenses of $13.8 million (2021: nil) largely
reflected impairments arising from the exit from hospital
care and related industrial sales activities in 2022.
Reported net finance costs and non-operating expenses
totalled $125.4 million (2021: $52.3 million). Reported net
finance costs increased by $24.2 million to $67.7 million,
reflecting an additional $8.6 million of net finance expenses
and $15.6 million (2021: nil) for the unwind of discount
relating to the contingent consideration arising from the
acquisitions of Cure Medical in 2021 and Triad Life Sciences
in 2022. Reported non-operating expenses of $57.7 million
(2021: $8.8 million) principally arose from the
remeasurement charges in the year relating to the
contingent consideration payable in respect of the Cure
Medical and Triad Life Sciences acquisitions of $29.5 million
(2021: nil), foreign exchange losses of $14.2 million (2021: loss
of $9.3 million), the recycling of cumulative translation
losses from reserves following the closure activities
associated with the hospital care and industrial sales exit
of $12.2 million (2021: nil) and a loss on divestiture-related
activities of $2.0 million (2021: $0.5 million gain).
After income tax expense of $19.0 million (2021: $33.7 million),
reported net profit was $62.9 million (2021: $117.6 million)
generating basic earnings per share of 3.1 cents (2021: 5.9 cents).
Adjusted net profit
Adjusted gross profit increased by 1.0% to $1,245.6 million
(2021: $1,233.3 million). The adjusted gross margin of 60.1%
was broadly flat to the previous year (2021: 60.5%), with the
significant inflationary pressures on both raw materials and
freight costs partly offset by foreign exchange tailwinds
and mix/price benefits.
The Group achieved adjusted operating profit of
$403.7 million (2021: $361.7 million) with an adjusted
operating profit margin of 19.5% (2021: 17.7%). There was a
decrease in operating expenses in the year, with adjusted
G&A reduced by $52.8 million, to 8.9% of revenue (2021: 11.7%).
This was partially offset by an increase of $25.7 million in
adjusted selling and distribution expenses.
Adjusted net profit fell 2.4% to $256.8 million (2021:
$263.0 million) given the $8.6 million increase in adjusted
net finance expense from higher market interest rates
coupled with a $34.4 million increase in the adjusted
income tax expense (which is explained below).
Adjusted basic and diluted EPS were 12.7 cents and 12.6 cents
respectively (2021: 13.1 cents and 13.0 cents), calculated on
the basic weighted average ordinary shares of 2,024 million
shares (2021: 2,009 million shares) and 2,040 million diluted
shares (2021: 2,026 million) respectively.
Taxation and tax strategy
Reported
2022
$m
Reported
2021
$m
Adjusted
2
2022
$m
Adjusted
2
2021
$m
Profit before
income taxes
81.9
151.3
337.6
309.4
Income tax
expense
(19.0)
(33.7)
(80.8)
(46.4)
Effective tax rate
23.2%
22.3%
23.9%
15.0%
2.
These non-IFRS financial measures are explained and reconciled to the
most directly comparable financial measure prepared in accordance
with IFRS on pages 224 to 228.
The Group’s reported income tax expense was $19.0 million
(2021: $33.7 million). The Group’s reported effective tax rate
of 23.2% for the year was higher than the prior year (2021:
22.3%) mainly due to the increase in US tax expenses
following the acquisition of Triad Life Sciences and non-
deductible contingent consideration relating to the
acquisition of both Triad Life Sciences and Cure Medical,
partially offset by the recognition of deferred tax assets
for previously unrecognised tax losses of $20.1 million in the
US (2021: $6.8 million related to recognition of deferred tax
assets following the acquisition of Cure Medical). For further
information, see Note 6 – Income taxes to the Consolidated
Financial Statements.
After adjusting items, the adjusted effective tax rate was
23.9% (2021: 15.0%). The increase in adjusted effective tax
rate was principally driven by the non-cash deferred tax
expenses due to the utilisation of US Federal tax losses
which are now fully recognised as deferred tax assets
following the acquisition of Triad Life Sciences, based on
stronger future taxable profitability forecasts, and the
impact of profit mix between jurisdictions in which the
Group has a taxable presence. The adjusted effective tax
rate of 23.9% was in line with guidance provided in the
interim results for the period ended 30 June 2022.
In 2021, the adjusted effective tax rate of 15.0% was
principally because of the lower incidence of taxes in the
US, and a net tax benefit in the UK for additional tax reliefs
claimed in respect of prior years. These factors were
partially offset by the impact of profit mix between
jurisdictions in which the Group has a taxable presence.
Convatec Group Plc Annual Report and Accounts 2022
32
Convatec is a responsible business and promotes the highest standards of compliance and ethical behaviour. Management
takes a responsible attitude to tax, recognising that it affects all of our stakeholders. The Group had on average more than
10,000 employees worldwide during 2022 and operated in over 100 countries through direct sales and local distributors.
As a result, our business activities generated a substantial amount of taxes. These included both corporate income taxes
and non-income taxes such as payroll taxes, property taxes, VAT/Sales and Use taxes, and other taxes. In order to provide
transparency on the Group’s approach to tax, the Global Tax Strategy has been published and is available on the corporate
website (www.convatecgroup.com/corporate-responsibility/socio-economic-contribution/tax-statement).
Alternative performance measures (APMs)
In line with the Group’s APM policy, the following adjustments were made to derive adjusted operating profit and adjusted
profit before tax.
Operating profit
$m
Finance expense
$m
Non-operating
expense
$m
2022
2021
2022
2021
2022
2021
Reported
207.3
203.6
(67.7)
(43.5)
(57.7)
(8.8)
Amortisation of acquired intangibles
131.3
130.4
–
–
–
–
Acquisitions and divestitures
56.6
17.8
15.6
–
43.7
–
Termination benefits and related costs
7.1
4.3
–
–
–
–
Impairment of assets
1.4
–
–
–
–
–
Litigation expenses
–
5.6
–
–
–
–
Adjusted
403.7
361.7
(52.1)
(43.5)
(14.0)
(8.8)
In line with the Group’s APM policy, adjustments made to derive adjusted operating profit in 2022 included the
amortisation of acquired intangibles of $131.3 million (2021: $130.4 million), of which $93.0 million (2021: $96.8 million)
resulted from intangible assets arising from the spin-out from Bristol-Myers Squibb in 2008 and will be fully amortised by
December 2026, divestiture-related costs of $39.7 million principally related to the exit from the hospital care and industrial
sales activities and acquisition-related costs of $16.9 million primarily related to the acquisition of Triad Life Sciences.
Termination costs of $7.1 million were in respect of the exit from hospital care and industrial sales activities and an
impairment charge of $1.4 million related to a legacy acquisition-related customer relationship asset.
In 2021, acquisition and divestiture costs of $17.8 million related to potential and actual strategic transactions which
were executed, aborted or in-flight and sought to improve the strategic positioning of the Group. Termination costs of
$4.3 million were in respect of the Group’s Transformation Initiative whilst litigation expenses of $5.6 million related to
a one-off claim that was also settled in 2021.
The adjustment of $15.6 million made to derive adjusted finance expenses in 2022 wholly related to the discount unwind
in respect of the contingent consideration payable on the Triad Life Sciences and Cure Medical acquisitions.
Adjustments made to derive adjusted non-operating expenses in 2022 included remeasurement charges of $29.5 million
in respect of the contingent consideration payable on the Triad Life Sciences and Cure Medical acquisitions and divestiture-
related costs of $14.2 million principally related to cumulative translation adjustments and a loss on disposal from the exit
of the hospital care and industrial sales activities.
Of the total of $255.7 million of adjusting items, $244.6 million were non-cash items. For further information on Non-IFRS
financial information, see pages 224 to 228.
The Board, through the Audit and Risk Committee, continuously reviews the Group’s APM policy to ensure that it remains
appropriate and represents the way in which the performance of the Group is managed.
Strategic transformation
During 2022, the Group completed the first phase of its FISBE strategy (FISBE 1.0), a global multi-year transformation
programme which commenced in 2019. FISBE 1.0 started to position the Group for sustainable and profitable growth
and in 2022, we saw improved organic revenue growth performance and adjusted operating profit margin growth.
Transformation costs associated with FISBE 1.0, treated as an adjusting item, were minimal in 2022 (2021: $4.3 million).
FISBE 1.0 strengthened the Group, with the business becoming more focused on chronic care, developing a deeper and
broader innovation pipeline, notably delivering three new product launches during 2022, and improving commercial
and operational execution, for example the significant reduction in complaints per million across the past three years.
The Group has explored and executed acquisitions and divestitures to strengthen the strategic positioning of the Group
and increase its focus on the four key categories. During 2022, this included the acquisition of Triad Life Sciences, the equity
investment in the preference shares of BlueWind Medical Ltd (BlueWind Medical), the strategic decision to withdraw from
hospital care activities and related industrial sales as announced on 12 May 2022 and other potential transactions. Further
details are provided in Note 10 – Investment in financial assets, Note 26 – Acquisitions, Note 27 – Divestitures and the
Non-IFRS financial information section to the Consolidated Financial Statements.
Overview
Governance
Financial statements
Additional information
33
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
As announced at the Capital Markets Event on 17 November
2022, following the completion of FISBE 1.0, our strategy
is now evolving to deliver the pivot (FISBE 2.0). This is
discussed further on pages 15 to 19. Medium-term targets
associated with FISBE 2.0 include delivering sustainable
mid-single-digit organic revenue growth per annum and
expanding the adjusted operating margin into the mid-
20s. This is to be delivered through simplification and
productivity initiatives, improving the product margin
mix and operating leverage. Furthermore, there may be
potential M&A opportunities to further strengthen the
Group. The outcome of delivering on these targets will
be sustainable and profitable growth with double-digit
adjusted EPS and adjusted free cash flow compound
annual growth over the medium term.
Acquisitions and investments
As noted above, in line with our strategic transformation
and consistent with the “Focus” pillar of FISBE (see page 16),
we acquired Triad Life Sciences, a US-based medical device
company, on 14 March 2022 for an initial consideration of
$125.3 million. The acquisition of Triad Life Sciences
strengthens the Group’s Advanced Wound Care position
in the US, securing access to a complementary and
innovative technology platform that enhances advanced
wound management and patient outcomes. In addition
to the initial consideration, there is further contingent
consideration payable of up to $325.0 million, based on
the achievement of two short-term milestones (totalling
$50.0 million) and sales performance during the first two
years post-completion (maximum earnout of $275.0 million
based on stretching financial performance over the period).
The two short-term milestones were successfully achieved
in 2022, resulting in $50.0 million being paid during the year.
Based on the latest available information, the discounted
fair value of the remaining contingent consideration as at
31 December 2022 was $130.8 million. Refer to Note 26 –
Acquisitions to the Consolidated Financial Statements
for further details.
Management have identified that reasonably possible
changes in certain key assumptions and forecasts may
cause the calculated fair value of the contingent
consideration to vary materially within the next financial
year and accordingly, management have deemed this
to be a key estimate. See Note 1.4 – Critical accounting
judgements and key sources of estimation uncertainty to
the Consolidated Financial Statements for further details.
The Group also has contingent consideration of up to
$10.0 million in respect of the acquisition of Cure Medical
in 2021, which is based upon post-acquisition performance
targets and due to be paid within three years of the
acquisition date. Based on the latest available information,
the discounted fair value of the remaining contingent
consideration as at 31 December 2022 was $9.2 million
(2021: $3.1 million).
On 9 May 2022, the Group invested $30.7 million in
preference shares of BlueWind Medical, inclusive of
transaction costs. This represents an investment into an
innovative technology in the large and growing overactive
bladder market, related to the Continence space. Refer to
Note 10 – Investment in financial assets to the Consolidated
Financial Statements for further details.
Strategic decision to exit from hospital care and
industrial sales
On 12 May 2022, it was announced that the Group would
be withdrawing from its hospital care activities and
related industrial sales during the remainder of 2022.
The withdrawal from these lower-margin and lower-growth
activities is consistent with the Group’s FISBE strategy,
with the Group focusing on higher-growth chronic care
markets with higher margins and higher levels of
recurring revenue.
The manufacturing plant in Belarus, which produced
hospital care goods, ceased manufacturing on 31 May 2022
alongside the discontinuation of associated Russia
activities. The remainder of the hospital care and industrial
sales activities were mostly phased out in the second half
of 2022. The majority of the exit and closure activities have
been completed at the end of the year, with minimal
residual sales expected in 2023. Further details are
provided in Note 27 – Divestitures to the Consolidated
Financial Statements.
Dividends
Dividends are distributed based on the distributable
reserves of the Company, which are primarily derived
from the dividends received from subsidiary companies
and are not based directly on the Group’s retained earnings.
The distributable reserves of the Company at 31 December
2022 were $1,562.9 million (2021: $1,590.3 million).
The Board declared an interim dividend of 1.717 cents per
share in August 2022 and has recommended a final 2022
dividend of 4.330 cents per share, which would bring the
full year dividend to 6.047 cents per share (2021: 5.871 cents
per share), an increase of 3% and a pay-out ratio when
compared to adjusted net profit of 48%. Our stated policy
is a pay-out ratio of 35% to 45% of adjusted net profit but
this is interpreted flexibly over time to reflect the underlying
performance of the business and the Board’s confidence in
its future growth prospects.
Further information about the Group’s dividend policy and
dividends paid can be found on page 162 and information
on capital maintenance and the available distributable
reserves position can be found on page 200.
Sources of cash and free cash flow
Sources of cash
One of the Group’s primary sources of cash is net cash
generated from operations.
Net cash generated from operations
Reported
2022
$m
Reported
2021
$m
EBITDA
1
432.0
420.1
Share-based payments
16.7
16.4
Working capital movement
(62.5)
(31.6)
(Loss) on foreign exchange derivatives
(1.7)
(4.3)
Net cash generated from operations
384.5
400.6
1.
EBITDA is reconciled to the most directly comparable financial measure
prepared in accordance with IFRS in the cash conversion table on page 228.
Reported net cash generated from operations decreased
by $16.1 million to $384.5 million during the year, mainly
due to working capital movements. The increase in working
capital in the year ended 31 December 2022 was driven by
increased inventory levels of $36.3 million to build resilience
across the Group and increases in trade and other
receivables of $63.6 million due to sales phasing and the
timing of receipts. This was partially offset by increases in
trade and other payables of $40.7 million primarily due to
the increase in derivative financial liabilities as a result of
the mark to market (MTM) valuations at the year end and
an increase in restructuring provisions.
Financial review
continued
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
34
Free cash flow
Adjusted free cash flow (post-tax), is one of the four key financial performance indicators we use to monitor the delivery
of our strategy.
Reported
2022
$m
Reported
2021
$m
Adjusted
1
2022
$m
Adjusted
1
2021
$m
EBITDA
432.0
420.1
500.0
464.2
Share-based payments
16.7
16.4
–
–
Working capital movement
(62.5)
(31.6)
(98.6)
(32.3)
(Loss) on foreign exchange derivatives
(1.7)
(4.3)
(1.7)
(3.9)
Capital expenditure (net)
(144.2)
(94.1)
(144.2)
(94.1)
Net cash generated from operations, net of capital expenditure
240.3
306.5
255.5
333.9
Cash conversion
55.6%
73.0%
51.1%
71.9%
Income taxes paid
(52.9)
(59.2)
(52.9)
(59.2)
Free cash ﬂow (post-tax)
187.4
247.3
202.6
274.7
1.
Adjusted free cash flow, adjusted EBITDA, adjusted working capital and adjusted non-cash items are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS in the cash conversion table on page 228.
Adjusted free cash flow (post-tax), was $202.6 million (2021: $274.7 million). The $35.8 million increase in adjusted EBITDA,
primarily driven by a reduction in adjusted operating costs (see commentary in Adjusted net profit section), was more than
offset by the $50.1 million increase in capital programmes as well as the increase in working capital.
Cash conversion was 55.6% (2021: 73.0%) and adjusted cash conversion was 51.1% (2021: 71.9%). The decline in the ratio in
2022 primarily reflected the strategic decision to increase capital expenditure and build inventory for resilience, coupled
with the timing of receipts from customers.
The $1.7 million loss (2021: $4.3 million loss) from foreign exchange derivatives was a result of hedging activity to help
mitigate the impact on underlying exposures from volatility in foreign exchange rates.
Liquidity and net debt
Net debt bridge ($m)
1,200
1,000
800
600
400
0
Net debt
3
1 January
2022
EBITDA
2,4
Working
capital
4
& FX
on derivatives
Capital
expenditure
Acquisitions
and
divestitures
Investment
in ﬁnancial
assets
Debt
servicing
Tax & others
4
Dividends
Net debt
3
31 December
2022
Reported
432.0
(64.2)
(144.2)
(173.4)
(30.7)
(77.2)
(41.1)
(88.1)
(881.2)
500.0
(100.3)
(144.2)
(173.4)
(30.7)
(77.2)
(73.0)
(88.1)
(1,068.1)
2.
Reported and Adjusted EBITDA are reconciled to the most directly comparable financial measure prepared in accordance with IFRS in the cash
conversion table on page 228 and reconciliation of earnings to adjusted earnings table on page 226 respectively.
3.
Net debt is calculated as the carrying value of current and non-current borrowings, net of cash and cash equivalents and excluding lease liabilities.
4.
EBITDA, working capital and tax & others are on an adjusted basis. The reported numbers are disclosed within the grey bar above and commented on
further below.
Adjusted EBITDA was $500.0 million and excludes $39.2 million in respect of working capital movements arising from
acquisitions and divestitures, primarily driven by the Triad Life Sciences acquisition and the exit from hospital care and related
industrial sales during the year. Other items excluded to derive adjusted EBITDA were $5.0 million of acquisition and divestiture
expenses, $10.2 million of termination costs and $16.7 million of share-based payments, offset by a decrease in termination
accruals of $3.1 million. These numbers can be seen within the non-IFRS financial information section on page 228.
Adjusted working capital & FX on derivatives of $100.3 million included the $39.2 million working capital movement arising
from acquisitions and divestitures as explained above. A reconciliation of adjusted working capital to reported working
capital is shown in the Non-IFRS financial information section on page 228.
The Group continued to make significant investments to strengthen and grow the business such as expanding the manufacturing
facilities in its Infusion Care business, adding more automation to our production lines and developing new digital technologies to
deliver enhanced customer experiences. Consequently, capital expenditure during 2022 was $144.2 million.
Overview
Governance
Financial statements
Additional information
35
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Financial review
continued
Strategic report
The Group made several strategic investments in 2022 to strengthen its competitive position, including the acquisition of
Triad Life Sciences for an initial consideration of $123.3 million and two additional payments totalling $50.0 million for the
successful achievement of two milestones in 2022 in relation to that acquisition. The Group also made a $30.7 million equity
investment in BlueWind Medical, inclusive of transaction costs.
Debt servicing payments of $77.2 million are comprised of net interest payments of $49.9 million, lease payments of
$20.7 million and the amortisation of financing fees of $6.6 million.
Tax & others of $73.0 million, on an adjusted basis, consisted of income taxes paid of $52.9 million, foreign exchange on cash
and cash equivalents of $15.9 million, $5.0 million of acquisition and divestiture expenses and $10.2 million of termination
costs, offset by foreign exchange on borrowings of $11.0 million. Excluding $5.0 million of acquisition and divestiture
expenses, $10.2 million of termination costs and $16.7 million of share-based payments, tax & others, on a reported basis,
was $41.1 million.
Dividend cash payments of $88.1 million were made to shareholders in the year. This represented 78.2% of total dividends
declared in the year, with the remaining 21.8% electing to settle via scrip dividends.
Borrowings and net debt
$463.4m
($852.5m)
1
($90.5m )
($492.1m)
1
$143.8m
($88.3m)
($493.1m)
1
Cash and cash equivalents
Lease liabilities
Senior notes
Credit facilities
2021
2022
2021
2022
2021
2022
2021
2022
Net debt excluding leases $1,068.1m
(2021: $881.2m)
500
250
0
-1,000
-750
-250
-500
Net debt/
adjusted EBITDA
At 31 December 2021
1.9x
Net debt/
adjusted EBITDA
At 31 December 2022
2.1x
($718.8m)
1
1.
Senior notes of $493.1 million (2021: $492.1 million) are stated net of financing fees of $6.9 million (2021: $7.9 million). Credit facilities of $718.8 million
(2021: $852.5 million) are stated net of financing fees of $8.4 million (2021: $5.4 million).
As at 31 December 2022, the Group’s cash and cash equivalents were $143.8 million (31 December 2021: $463.4 million) and
the debt outstanding on borrowings was $1,211.9 million (31 December 2021: $1,344.6 million).
The Group successfully refinanced its bank facilities in November 2022, with $1.2 billion committed for five years at slightly
improved margins over base rates compared to the previous facilities, comprising a multicurrency revolving credit facility
of $950.0 million and a term loan of $250.0 million, both with maturity in November 2027. The Group’s $500.0 million senior
unsecured notes, issued in October 2021, remain in place with maturity in October 2029.
As at 31 December 2022, $472.8 million of the multicurrency revolving credit facility remained undrawn. This, combined
with cash of $143.8 million, provided the Group with total liquidity of $616.6 million at 31 December 2022 (31 December
2021: $663.4 million). Of this, $19.2 million was held in territories where there are restrictions related to repatriation
(31 December 2021: $37.5 million).
At 31 December 2022, the Group had total interest-bearing liabilities, including IFRS 16 lease liabilities, of $1,300.2 million
(2021: $1,435.1 million). Offsetting cash of $143.8 million (2021: $463.4 million) and excluding lease liabilities, net debt was
$1,068.1 million (2021: $881.2 million), equivalent to 2.1x adjusted EBITDA (2021: 1.9x adjusted EBITDA), with the increase
primarily driven by strategic investments such as the acquisition of Triad Life Sciences, equity investment in BlueWind
Medical and increased investment in capital expenditure.
For further information on borrowings see Note 21 – Borrowings to the Consolidated Financial Statements.
Convatec Group Plc Annual Report and Accounts 2022
36
Covenants
At 31 December 2022, the Group was in compliance with all financial and non-financial covenants associated with the
Group’s outstanding debt.
The Group has two financial covenants, being net leverage and interest cover, each of which is defined, where applicable,
within the borrowing documentation. The table below summarises the Group’s most restrictive covenant thresholds and
position as at 31 December 2022 and 2021.
Maximum
covenant net
leverage
1
Covenant
net
leverage
1
Minimum
covenant
interest
cover
1
Covenant
interest
cover
1
31 December 2022
3.50x
2.28x
3.5x
9.9x
31 December 2021
3.50x
1.97x
3.5x
11.7x
1.
Net leverage is net debt/adjusted EBITDA and interest cover is adjusted EBITDA/interest expense (net) in accordance with the definitions contained
in underlying borrowing documentation and are not the same as the definitions of these measures presented in the Adjusted Performance Measures
section on pages 224 to 228 and applied in the commentary in this Financial review.
Group financial position
At 31 December
2022
$m
2021
$m
Change
$m
Intangible assets and goodwill
2,149.5
2,058.5
91.0
Other non-current assets
553.2
504.7
48.5
Cash and cash equivalents
143.8
463.4
(319.6)
Other current assets
745.5
647.4
98.1
Total assets
3,592.0
3,674.0
(82.0)
Current liabilities
(533.1)
(569.2)
36.1
Non-current liabilities
(1,449.2)
(1,410.0)
(39.2)
Equity
(1,609.7)
(1,694.8)
85.1
Total equity and liabilities
(3,592.0)
(3,674.0)
82.0
Intangible assets and goodwill
Intangible assets and goodwill increased by $91.0 million to $2,149.5 million (2021: $2,058.5 million). This was primarily due
to intangible assets and goodwill arising from the Triad Life Sciences acquisition of $284.7 million combined with intangible
asset additions of $44.6 million, partially offset by the in-year amortisation of intangible assets of $147.4 million, the net
effect of foreign exchange of $84.7 million and an impairment charge of $5.7 million against intangible assets.
We regularly review our trading performance to establish whether there were any triggers that would require an
impairment review of goodwill or other intangible assets. During 2022, there was an impairment of $4.3 million in respect of
a product-related intangible asset which has been phased out as part of the hospital care exit. There was also a $1.4 million
impairment relating to a legacy acquisition-related customer relationship intangible asset as part of the rationalisation of
activities in the portfolio.
The annual Cash Generating Unit (CGU) impairment review was conducted on the CGU groups and, taking into
consideration our future forecasts and reasonably possible scenarios, significant headroom remained in the carrying
value of all CGU groups in comparison to the sensitised recoverable value. No impairment was recognised against goodwill
or indefinite lived intangible assets during the year. In addition, management considered the severe but plausible
downside scenarios used in the Viability assessment and headroom remained on the carrying value of all CGU groups.
Further information on goodwill and other intangible assets can be found in Note 9 – Intangible assets and goodwill to
the Consolidated Financial Statements.
Other non-current assets
Other non-current assets, including property, plant and equipment (PP&E), right-of-use assets, investment in financial assets,
deferred tax assets, restricted cash and other assets increased by $48.5 million to $553.2 million (2021: $504.7 million). The
increase reflected the continued investment in our manufacturing facilities, with additions in PP&E of $100.0 million offset
by depreciation of $39.7 million, the net effect of foreign exchange of $17.9 million and impairments of $7.4 million. Included
within other non-current assets was the investment made in May 2022 in the preference shares of BlueWind Medical. This was
held at fair value of $30.7 million, which has not changed since the date of investment. Restricted cash reduced by $6.3 million
primarily due to the reclassification of escrow amounts arising from the acquisitions of Cure Medical and Patient Care Medical
in 2021 to current assets whilst ROU assets have reduced by $4.2 million.
Current assets excluding cash and cash equivalents
Current assets, excluding cash and cash equivalents, increased by $98.1 million to $745.5 million (2021: $647.4 million),
driven by increases in trade and other receivables of $40.5 million, inventory of $28.1 million and restricted cash of
$17.8 million. The increase in trade and other receivables, net of foreign exchange effects of $17.2 million, was mainly
due to sales phasing and the timing of receipts whilst the increase in inventories, net of foreign exchange effects of
$19.0 million, was largely attributable to the ramp up of inventory in order to build resilience across the Group.
Restricted cash increased by $17.8 million to $18.2 million, driven by escrow amounts arising from the acquisition of Triad
Life Sciences in 2022 and the reclassification of escrow amounts arising from the acquisitions of Cure Medical and Patient
Care Medical in 2021 from non-current assets to current assets.
Overview
Governance
Financial statements
Additional information
37
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Current liabilities
Current liabilities decreased by $36.1 million to $533.1 million
(2021: $569.2 million), reflecting a $144.8 million decrease
in the current portion of borrowings as a result of a change
in profile of the Group’s borrowings under the new credit
facilities, largely offset by a $95.2 million increase in
provisions primarily driven by the contingent consideration
payable on the Triad Life Sciences acquisition and an
increase of $20.8 million in derivative financial liabilities,
due to movements in the MTM valuations at the year end.
Non-current liabilities
Non-current liabilities increased by $39.2 million to
$1,449.2 million (2021: $1,410.0 million). This included an
increase in non-current borrowings of $12.1 million, resulting
from a change in profile of the Group’s borrowings under
the new credit facilities and an increase in provisions of
$51.4 million driven by the contingent consideration payable
on the Triad Life Sciences and Cure Medical acquisitions.
This was partially offset by a reduction in other non-current
liabilities primarily due to a reduction in the Group’s pension
obligations and the reclassification of escrow amounts
from non-current liabilities to current liabilities.
Going concern
In preparing their assessment of going concern, the
Directors considered available cash resources, access to
committed funding, financial performance and forecast
performance, including continued implementation of
the FISBE strategy, together with the Group’s financial
covenant compliance requirements and principal risks
and uncertainties.
Management also applied the same severe but plausible
downside scenarios utilised in the preparation of the
Viability statement. Under each scenario, the Group
retained significant liquidity and covenant headroom
throughout the going concern period, i.e. 12 months
from the date of this report. A reverse stress test, before
mitigation, was also considered to demonstrate what
reduction in revenue would be required in the next
12 months to create conditions which may lead to a
potential covenant breach. For a breach of covenants to
occur in the next 12 months, before mitigation, the Group
would need to experience a sustained revenue reduction
of more than 10% across all categories and markets. This
was considered implausible given the Group’s strong global
market position, diversified portfolio of products and the
mitigations available to the Board and management. For
further information on the Viability statement, see pages
98 and 99 and for Going concern, see Note 1.2 to the
Consolidated Financial Statements.
Accordingly, the Directors continue to adopt the
going concern basis in preparing the Consolidated
Financial Statements.
Financial control environment
The Group continues to closely monitor the financial and IT
general control environment, using a single system for the
self-certification of effectiveness of key financial controls
across our operations globally. The response rate remained
high throughout the year. The Global Financial Controls
(GFC) team, acting as the second line of defence, monitors
responses and reviews all notified control failures to ensure
that there is no risk of material financial misstatement.
Focused support and training is given to Global Business
Services (GBS) and market finance teams to review controls
and ensure that the control framework continues to
operate effectively. A similar self-certification process is
operated by the IT governance, risk and compliance team
for IT controls covering cyber, privacy and financial systems.
The global financial control framework was refreshed
in 2022 to increase focus on material risk, with the
introduction of a less resource-intensive framework for
the smaller operating entities, and additional controls to
address new risk areas identified. The control frameworks
will continue to evolve to respond to the development of
corporate governance requirements in the UK.
Independent assurance on these control frameworks is
provided by the Internal Audit team, with a review of the
global financial controls and the IT general controls
performed in the year, in addition to sample testing
carried out by the GFC and IT Governance teams and
reviews of financial controls of specific markets and GBS.
Jonny Mason
Chief Financial Officer
8 March 2023
Financial review
continued
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
38
Non-financial
information statement
Key non-financial matter
Policies and processes we implement
Page
Environmental matters
Climate change and environmental strategy
Pages 40 to 74
Employees
Our vision and values
Page 6
Code of Conduct
Page 62
Diversity, Equity & Inclusion and Wellbeing
Page 59
Our people strategy
Page 56
Employee induction, training and development programmes
Page 58
Employee engagement
Page 58
Diversity targets and review of metrics
Page 60
Human rights
Human Rights and Labour Standards
Page 63
Modern Slavery Act Statement
Page 63
Social and community matters
Community engagement
Pages 71 to 74
Anti-corruption and anti-bribery
Third Party Compliance Manual
Page 63
Compliance helpline and website
Page 62
Principal risks and impact
of business activity
Pages 92 to 97
Non-financial key
performance indicator
Page 21
Our business model
Page 8
In accordance with the requirements of Section 414CB of the Companies Act 2006, the information below is provided
to help our stakeholders understand our position in relation to key non-financial matters including, where appropriate,
the relevant policies and processes we operate.
Overview
Governance
Financial statements
Additional information
39
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Responsible business review
Realising our vision,
responsibly
Our approach to Environmental, Social and Governance
(ESG) aims to drive the actions necessary to help us to
realise our vision whilst acting in a way that engenders
trust with all our stakeholders.
Q
There’s continued momentum
behind ESG. How do you approach
ESG at Convatec?
A
Improving lives is at the heart of
our business: we help people
through our products and services.
Importantly, the way in which we
conduct business also adds value.
That’s why we launched our ESG
framework, Convatec Cares, last
year – it’s structured to align what
we do and how we do it, allowing us
to be more than the sum of our
parts. Embedding ESG throughout
our organisation is a strategic
priority for us and I’m proud of the
progress we’ve made. Our
commitment is to ensure that
words are backed up with actions
and outcomes – recognising the
benefits to all stakeholders in
doing so.
Q
Among the hundreds of possible
ESG data points that a company
can be ranked on, how do you
decide what to prioritise?
A
Navigating the complexity of ESG
considerations can be challenging.
This is why we rely on stakeholder
feedback – gathered formally
through an independent
materiality assessment every 18
months, and informally through
regular stakeholder interactions.
This way, we prioritise the things
that matter most to the business
as well as those around us.
Q
The nature of ESG is cross-
disciplinary and cross –
functional. What’s your
approach to ESG governance
at Convatec?
A
Our ESG framework allows us to
bring teams together and
organise our initiatives to drive
value, while also defining clear
and accountable ownership.
Our CELT-led ESG Steering
Committee has oversight of
ESG strategy, oversees sub-
committees and working
groups on key focus areas and
updates the Board to ensure
visibility, engagement, support
and challenge at all levels.
Strategic report
ESG practices are central to Convatec’s
long-term success by enabling our pivot
to sustainable and proﬁtable growth
and bringing our vision to life.
Q&A
Karim Bitar, CEO
Chair, ESG Steering Committee
Convatec Group Plc Annual Report and Accounts 2022
40
V
A
L
U
E
S
F
I
S
B
E
S
T
R
A
T
E
G
Y
C
U
S
T
O
M
E
R
S
C
O
L
L
E
A
G
U
E
S
C
O
M
M
U
N
I
T
I
E
S
C
O
M
M
E
R
C
E
F
O
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V
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CONVATEC CARES: OUR ESG FRAMEWORK
ESG PILLARS
Delivering for
our customers
with innovative products,
services and solutions
that are patient-centric
and informed by
healthcare professional
(HCP) needs and which
improve lives
Enabling our people
to thrive
by protecting
their health and safety and
using their talent for good
Behaving ethically and
transparently
to protect and enhance
our reputation with all
our stakeholders
Protecting the planet
and supporting
communities
through the way we
operate and the
contribution we make
to the world around us
Based on our materiality matrix
(page 46), our ESG framework
Convatec Cares sets out the
commitments and activities
across the Company that will
help us pivot to sustainable
and profitable growth. It
focuses on the topics that are
most material for the Group
and our stakeholders.
ESG mission
Underpinned by our values
(page 2) our ESG mission is to
drive progress towards our
vision of pioneering trusted
medical solutions to improve
the lives we touch by aligning
and enabling ESG-related
initiatives for the benefit of
our customers, colleagues,
community and shareholders.
Our ESG framework is built
around four ESG pillars.
Pioneering
trusted medical
solutions
to improve the
lives we touch
→ To find out more
about Convatec Cares,
watch our short video
www.convatecgroup.com/
sustainability/our-frameworks-and-targets/
Overview
Governance
Financial statements
Additional information
41
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Responsible business review
continued
ESG GOVERNANCE: BOARD AND MANAGEMENT
ROLE OF THE BOARD
ROLE OF
MANAGEMENT
INTEGRATION INTO
OUR FISBE STRATEGY
Our Board has ultimate oversight of ESG, including climate-related risks and
opportunities, at Convatec. The Executive Director responsible for these issues
is our CEO, Karim Bitar. As a Board member, he brings together continuity and
responsibility for our ESG strategy. The Board reviews progress in respect of
the execution of our ESG strategy, including two formal touchpoints for ESG
updates, as described below.
See pages 105 and 117 for information about the Board’s activities in this area
during 2022.
Role of the Audit and Risk Committee
The Board’s Audit and Risk Committee (ARC) is responsible for reviewing and
approving our ESG and Task Force on Climate-related Financial Disclosures
(TCFD) reporting, in terms of data integrity and compliance with regulatory
requirements, as well as for oversight of the annual assurance of the
Responsible business review (page 74).
See page 133 for more information on the ARC’s activities in this area.
Our ESG Steering Committee is chaired by the CEO and includes six members of our
Convatec Executive Leadership Team (CELT). The Chief Human Resources Officer is
the day-to-day CELT sponsor for ESG, providing ESG stewardship across the Group
with the support of the CEO.
The Committee oversees the formulation and delivery of the ESG strategy and
meets three times a year. It drives the strategy, progress and required actions to
manage our ESG-related risks and capitalise on opportunities. This is then reported
to CELT for discussion, review and challenge. The Committee updates the Board
twice a year. Together, these measures ensure that all members of CELT understand
our business response to ESG topics and are committed to delivering against our
commitments to become a more sustainable business.
The Committee oversees three sub-groups, which are composed of leaders across
the business. The TCFD Working Group, which includes leaders from risk, finance
and operations, met quarterly in 2022 to advance the essential work needed to meet
TCFD requirements. The Human Rights Committee, which comprises leaders from
HR, legal, compliance, procurement and supply chain, monitors progress on
protecting labour and human rights in our operations and supply chain and met
twice in 2022. In 2022, we formed a Diversity, Equity & Inclusion (DE&I) and Wellbeing
Council, which meets annually. In 2023, we intend to launch a working group on
product sustainability.
Our central ESG team works across the Group to bring together stakeholder
activities, initiatives and priorities, and support the work of the Committee. We also
have a dedicated Environmental, Health and Safety (EHS) team within our Global
Quality & Operations function. They work across our manufacturing and R&D
facilities to deliver environmental management systems in line with our corporate
requirements, aligned with ISO 14001, and remain aligned to Group ESG priorities.
In 2022, ESG was elevated through our Company-wide strategic planning process.
Leaders from each business unit and functional area prioritised our ESG targets,
integrated them with business plans, internal targets, commitments and actions,
and allocated resources against them. The process was designed to prioritise the
risks and opportunities presented by our ESG commitments, as well as clarify the
necessary processes and activities needed to deliver on our targets.
Given the importance, complexity and dynamic nature of ESG considerations,
the strategic planning process also clarified various roles and responsibilities for
positioning the Group to meet our targets. This strategic planning cycle ensures
appropriate financial and operational plans are in place.
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
42
OUR ESG STEERING COMMITTEE
Responsibilities
–
Custodian of ESG strategy and objectives, including
our approach to key sustainability topics such as:
– Our impact on the environment and communities,
including transition planning
– Engagement with the workforce and the Group’s
DE&I and Wellbeing approach, as well as protection
of human rights in the supply chain
–
Leads on relevant key stakeholder engagement
across Convatec (and beyond)
–
Establishes and oversees sub-groups to drive
execution and focus in particular areas
Details on the relevant skills and experience of our
CELT members can be found online on pages 112 and
113. The VP, Internal Audit & Enterprise Risk regularly
attends the ESG Steering Committee, with particular
focus on climate-related risks and opportunities.
In 2023, the ESG Steering Committee will facilitate our
ESG agenda through a wider focus on transition
planning, Scope 3 emissions, the supply chain, and
progress through innovation and strategic community
partnerships, while supporting data-driven decision-
making and embedding ESG in our FISBE strategy. See
page 74 for information on our ESG assurance scope.
1. Not members of CELT
1
CEO (Chair)
5
EVP, Chief Technology
Officer and Head of R&D
2
CFO
6
EVP, Chief Human
Resources Officer
& ESG Stewardship
3
EVP, Chief of Global
Quality & Operations
7
Head of Investor
Relations & Corporate
Communications
1
4
EVP, Chief of Corporate
Strategy & Business
Development, General
Counsel & Company
Secretary
8
Head of Global
Communications,
Engagement & ESG
1
The Board
ESG Steering
Committee
Human Rights Committee
DE&I and Wellbeing Council
TCFD working group
Strategic planning
process
ESG strategic pillar
owners and leaders to
drive progress,
performance,
compliance and
metrics
Audit and
Risk
Committee
ESG Steering
Committee
1
2
3
4
5
6
7
8
Overview
Governance
Financial statements
Additional information
43
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Responsible business review
continued
Stakeholder
Importance of stakeholders and
their key needs
How we engage
Outcomes
The people who use our products and rely on our services
Customers/
patients
Our products and services are
delivered for our customers and
patients, who have chronic
conditions. They need:
–
Safe, effective, accessible
and innovative products
–
Support and information
–
Direct-to-consumer channels
–
Home delivery companies
–
Specialist nurses and call centres
–
Targeted consumer research
–
Responding to specific
consumer questions, feedback
and complaints
–
Incorporation of relevant consumer
feedback in our research and
development processes
–
Service provision reviews based
on customer feedback, and
implementation of enhancements
as required
–
Tracking and management of
customer issues
Direct enablers who help us deliver
Healthcare
professionals
Healthcare professionals provide
valuable insight into our product
development and help to ensure that
our products reach a wide range of
patients. They need:
–
Products and services that meet
patients’ needs and benefit the
healthcare delivery system
–
Fair pricing
–
Ongoing clinical and commercial
dialogue
–
Targeted research
–
Specialist training programmes
–
Advisory boards
–
Key opinion leader meetings
–
Product and service insights inform
our development processes and our
day-to-day operations
Our people
Our employees bring our vision,
values and FISBE strategy to life,
fostering an inclusive and supportive
culture that enables them to deliver
for customers and patients. They
need:
–
Safe, healthy, ethical and fair
working environment
–
Focus on DE&I and wellbeing
–
Ability to make a difference to the
people who rely on our products
and services
–
Career growth opportunities
–
Attractive reward and recognition
–
Group-wide interaction via our
intranet, our MyConvatec app
and regular town hall meetings
–
Employee recognition activities
–
DE&I and wellbeing initiatives,
including Employee Resource
Groups
–
Customer stories
–
Group-wide employee surveys
–
Union representation and works
councils (where relevant)
–
Board-level engagement
programme
–
Performance reviews
–
Independent third-party managed
whistleblower hotline (Compliance
Helpline/website)
–
Incorporation of insights to shape
our people strategy, talent
processes and development/
training programmes
–
Cadence of employee
communications and engagement
–
Read more about how we enable
our people to thrive on pages 56-61
Suppliers and
other supply
chain partners
Our suppliers and partners are critical
to Convatec’s ability to deliver our
products and services to our
customers and patients. They need:
–
Long-term relationships
–
Fair pricing and commercial terms
–
Predictable business
–
Transparency on suppliers’
expected ESG standards audits
–
Commercial dialogue
–
Supplier assessments
–
Development of valuable
partnerships to address
consumers’ needs
–
Supplier awards
–
Read more on behaving ethically
and transparently on pages 62-65
Channel
partners1
Our channel partners are critical to
ensure that Convatec’s products and
services are available to those with
chronic conditions. They need:
–
Effective, competitively priced
products
–
Fair pricing and commercial terms
–
Continuity of supply
–
Commercial dialogue
–
Marketing activities
–
Tender processes
–
Distributor due diligence and
compliance training
–
Quarterly reviews with partners
–
Continued inclusion in tender
processes
–
Development of valuable
relationships to address
consumer needs
Strategic report
Engaging stakeholders
We proactively engage with our stakeholders to understand their issues, build
positive relationships and inform Company practices and decision-making.
1. Including distributors, large buying organisations, integrated delivery networks, hospitals and national and regional payors
Convatec Group Plc Annual Report and Accounts 2022
44
Stakeholder
Importance of stakeholders and
their key needs
How we engage
Outcomes
B2B customers
Our B2B customers are critical to
ensuring that Convatec’s innovative
products can be used with other
companies’ own products to address
patient needs. They need:
–
Innovative products for use with
their own products
–
Long-term relationships
–
Fair pricing and commercial terms
–
Continuity of supply
–
Commercial dialogue and
partnership
–
Development of long-term
partnerships focused on addressing
patient needs
Investors and
debt providers
Our investors and debt providers are
critical to supporting and maintaining
Convatec’s ability to operate and
deliver, as well as our high standing
and reputation in the financial
markets. They need:
–
A clear corporate strategy and
delivery on that strategy
– Sustainable returns
–
Responsible business practices
–
Cash flow to pay dividends and
service debt obligations
–
Annual General Meeting
–
Capital Markets Event
–
Technology & Innovation Event
–
Active investor relations
programme: in 2022 we hosted
more than 250 investor meetings
including two multi-day roadshows
and participation in 6 conferences
–
Post-roadshow investor surveys
plus feedback from corporate
brokers
–
Relationship-led engagement with
debt providers
–
Board members accessibility
–
Quality materials to ensure the
capital markets appreciate the
health of the business and its
future prospects
–
Strategy, Board composition
and succession planning and
remuneration policy take into
account feedback from investors
–
Read more about our capital
allocation policy on page 13
Evaluators who hold us to account for our performance
Regulators
Regulatory bodies are critical to our
license to operate and ability to
deliver for customers. They need:
–
Adherence to legislation and
regulation
–
Proactive engagement when
challenges arise
–
Regular and ad hoc dialogue in
relation to product approvals and
other matters
–
Implementation of responsible
and diligent business practices
–
Compliance with legislation
and regulation
–
Input into relevant industry
consultations
Governments
Governments set out legislative and
other frameworks which underpin our
work. They need:
–
Responsible business practices
– Employment
–
Income generation via taxes
–
Ad hoc dialogue in relation to
specific matters, including fiscal
(e.g. taxation), employment (e.g.
apprenticeships) and corporate
governance
–
Making a socio-economic
contribution to a range of
stakeholders, including through
paying taxes as described on page 71
Communities
Communities are core to our people
and planet commitments. They need:
–
Employment opportunities
–
Medical education
–
Active management of
environmental impact from
operations
–
Ad hoc dialogue in relation to
specific matters
–
Support for a range of medical
education initiatives
–
Charitable partnerships and
donations, including NGO partners
–
Enhancing the communities where
we operate
–
Building our reputation in our
communities and across broader
society
Industry bodies
Industry bodies help us to ensure that
our interests are understood and
effectively communicated. They need:
–
High-quality input into industry
policies and standards
development
–
Proactive engagement in relation to
relevant issues
–
Membership of several industry
bodies, including Association of
British HealthTech Industries,
MedTech Europe and AdvaMed
–
Participation in discussions in
relation to industry issues,
including best practice
–
Contributing to improved
understanding of key industry
issues
–
Helping to shape relevant agendas
and standards
Convatec Group Plc Section 172 statement
Section 172 of the Companies Act 2006 (the Act) requires each of our Directors to act in a way that he or she considers,
in good faith, would most likely promote Convatec’s success for the benefit of its shareholders as a whole, having regard
to other stakeholders. Section 172 requires our Directors to have specific regard, amongst others, to the matters set out
in section 172(1)(a-f) of the Act. On pages 118 to 121 we explain how our Board engages with stakeholders to gain an
understanding of stakeholder issues and, during the year, discharged its duty pursuant to section 172 of the Act.
On these pages, we identify our stakeholders and how Convatec engages with them, further detailing within our
ESG Materiality Matrix (page 46) what we believe to be the key issues to our stakeholders. As we continue our journey
to pivot to sustainable and profitable growth, we are mindful of the importance of staying aware and responsive to
stakeholder needs.
The Directors acknowledge that every decision made will not necessarily result in a positive outcome for all stakeholders;
however, the Board aims to make well-considered decisions consistent with our vision, values and our strategic priorities.
Overview
Governance
Financial statements
Additional information
45
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Responsible business review
continued
We understand the importance of
operating responsibly and generating
value sustainably. As we pivot to
sustainable and profitable growth,
our focus is on the operational,
people-led and environmental
issues that are most material to
us and our stakeholders.
During 2022, we were guided by our
materiality matrix developed in 2021,
which (through research with internal
and external stakeholder input)
identified the top 18 issues important
to the business and our customers,
colleagues, communities and
shareholders. These are:
To stay aware of and responsive to our
stakeholders’ needs, we will conduct
our next materiality assessment in
2023 to support the continued
evolution of our ESG priorities.
In line with best practice, we intend to
use a double materiality approach to
consider not just the potential impacts
of ESG issues on our business success
(financial materiality), but also the
impacts of the business and its value
chain on people and the planet
(impact materiality).
IDENTIFYING KEY ISSUES FOR STAKEHOLDERS
Environmental topics
Social topics
Governance topics
1
Product safety
11
Waste (operational)
2
Health and safety
12
DE&I
3
Talent attraction and growth
13
Responsible and resilient
supply chain
4
Colleague wellbeing
14
Advocacy and community
relations
5
Integration of ESG into core
business process
15
Board-level accountability
for ESG performance
6
Sustainable product design
16
Data security and privacy
7
Carbon and energy
(operational)
17
Water (operational)
8
Labour standards/Modern
slavery
18
Biodiversity impacts on
plant and animal life
9
Customer access
10
Business ethics
Strategic report
2022 ESG MATERIALITY MATRIX
Stakeholder importance
Business impact
0
1
1
2
3
4
5
2
3
4
5
18
17
16
15
12
14
9
8
4
3
2
11
7
6
10
5
13
1
Convatec Group Plc Annual Report and Accounts 2022
46
SUPPORTING THE UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS
We support the United Nations Sustainable Development
Goals (SDGs) which aim to align governments, businesses
and the third sector in their efforts to end poverty, fight
inequality and address climate change. Convatec joins over
15,000 companies as a participant in the UN Global Compact
(UNGC) in which we pledge to follow the UNGC’s ten
principles on human rights, labour, environment and
anti-corruption. Our UNGC Annual Communication on
SDG target
Contributing activity and policies
SDG 3.4
: By 2030, reduce by one third premature
mortality from non-communicable diseases
through prevention and treatment and promote
mental health and well-being
SDG 3.8
: Achieve universal health coverage,
including financial risk protection, access to
quality essential health-care services and access
to safe, effective, quality and affordable
essential medicines and vaccines for all
–
Patients and HCPs served
–
Improving efficacy and safety of our products through
innovation
–
Supporting wellbeing of colleagues (page 59)
–
Improving access to products and services by focusing on
affordability (page 55), supply chain (page 55) and education
(pages 54 and 73)
–
Vitality index target (page 48)
–
Quality target (reducing complaints per million) (page 48)
–
Target to reduce voluntary turnover (page 48)
4.4
: By 2030, substantially increase the number
of youth and adults who have relevant skills,
including technical and vocational skills, for
employment, decent jobs and entrepreneurship
–
Apprenticeship programmes (page 59)
–
Building capabilities of our people (page 58)
–
Medical education (page 73)
–
NGO partnerships (pages 71 to 73)
8.5
: By 2030, achieve full and productive
employment and decent work for all women
and men, including for young people and
persons with disabilities, and equal pay for
work of equal value
8.7
: Take immediate and effective measures to
eradicate forced labour, end modern slavery and
human trafficking and secure the prohibition and
elimination of the worst forms of child labour,
including recruitment and use of child soldiers,
and by 2025 end child labour in all its forms
8.8
: Protect labour rights and promote safe and
secure working environments for all workers,
including migrant workers, in particular women
migrants, and those in precarious employment
–
Strengthened engagement, audit and risk assessment
of suppliers (page 63)
–
Expanding apprenticeship programmes (page 59)
–
Ensured 100% of our locations at or above the living wage
(page 61)
–
Health and safety programming (page 61)
–
Updated Code of Conduct; Human Rights & Labour Standards
Policy; and Global Third Party Manual
–
Human Resources policies
10.2
: By 2030, empower and promote the social,
economic and political inclusion of all,
irrespective of age, sex, disability, race, ethnicity,
origin, religion or economic or other status
10.4
: Adopt policies, especially fiscal, wage and
social protection policies, and progressively
achieve greater equality
–
Diversity, equity & inclusion and wellbeing commitments
(page 59)
–
Strengthened and expanded our employee resource groups
(page 60)
–
Our products and services help people with chronic conditions
regain increased mobility and ability to partake in societal
activities
–
Updated hiring practices to reduce barriers and increase
diversity (pages 59 and 60)
–
Maintain a target for women in senior leadership
–
Gender pay gap reporting
12.5
: By 2030, substantially reduce waste
generation through prevention, reduction,
recycling and reuse
12.6
: Encourage companies, especially large and
transnational companies, to adopt sustainable
practices and to integrate sustainability
information into their reporting cycle
–
Waste, water and packaging waste reduction plans developed
(pages 69 and 70)
–
Scope 1 and 2 Science Based Targets (SBTs) developed to
inform emissions reduction plans (page 68)
–
Launched digital product sustainability tool as part of green
design guidelines (GDGs) (page 51)
–
Our product life-cycle analysis programme and GDGs support
the development of more sustainable products
13.3
: Improve education, awareness-raising and
human and institutional capacity on climate
change mitigation, adaptation, impact reduction
and early warning
–
Increased depth of internal communications on climate
change topics such as COP27, driving tips, and the SBT process
to engage employees in our commitments
–
Included educational resources as part of ESG Steering
Committee meetings and Board updates
–
Working with our suppliers on emissions reductions
–
Setting SBTs
Progress can be found at www.convatecgroup.com/
sustainability/esg-reports-and-data and on the
UNGC website.
Though all 17 goals are interlinked and are important to
us and our stakeholders, our business operations and
ESG framework explicitly link to six goals where we can
contribute to a more sustainable future:
Overview
Governance
Financial statements
Additional information
47
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Responsible business review
continued
Our ESG targets
Our ESG targets serve as milestones on our ESG
journey and ensure we execute against our Convatec
Cares framework. We track our progress throughout
the year and report to management and the Board.
Delivering for our customers
Target
Progress in 2022
Status
Read more
1
Quality
: Align existing quality metrics to industry best practice and
continue focusing on product safety by Q4 2022
Reviewed legacy product quality
disclosures to bring 2022 approach
into line with industry practice
Page 52
Quality target
: Reduce complaints per million (CPM) by 8% for 2023
against a 2022 baseline
13% reduction against 2021
Page 53
2
Product vitality
: Vitality Index of 30% by Q4 2025
26% (25% in 2021). Includes product
acquisitions.
Page 50
3
Product development
: Implement Green Design Guidelines as part of
product development process and expand user base to at least 50
users by Q4 2022
Incorporated GDGs into new
product development process and
106 users added to GDG platform
Page 50
Product development
: Expand use of GDG digital tools, with at least
five new product launches assessed by Q4 2023
Implemented and tested
assessment process
Page 51
Enabling our people to thrive
Target
Progress in 2022
Status
Read more
4
Health and safety
:
4.1 Increase our Operations Hazard Observation Rate to above 200 per
200,000 hours worked by Q4 2022
234 per 200,000 hours worked
(190 in 2021)
Page 61
Health and safety
: Maintain an annual Operations Hazard Observation
Rate above 200 per 200,000 hours worked
See above
Page 61
4.2 Sustain Operations Lost Time Injury Rate below 0.22 by Q4 2025
0.20 per 200,000 hours worked
(0.3 in 2021)
Page 61
5
Diversity, equity & inclusion and wellbeing
:
5.1 Reach at least 40% females in combined CELT and senior
management by Q4 2024
38% (32% in 2021)
Page 60
5.2 Reduce voluntary turnover to less than 10% by Q4 2023
12.9% in 2022 (11% in 2021)
Page 60
PROGRESS KEY
Achieved
New
In Progress
Complete definitions for each target are provided on pages 241 and 242. The 2022 progress
against a select set of metrics have been reviewed as part of the assurance process. For
further details please see the assurance statement on page 74 and basis of reporting at
www.convatecgroup.com/sustainability/esg-reports-and-data.
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
48
Behaving ethically and transparently
Target
Progress in 2022
Status
Read more
6
Human rights
: Complete the review, update and publication of our
Human Rights and Labour Standards Policy and our Supplier Code
of Conduct, by Q4 2022
Updated and republished
Page 63
Human rights
: Launch annual compulsory training programme on
Human Rights for all employees by Q4 2023
Providers identified to develop
Human Rights education module for
employees that is consistent with
our policy
Page 63
Human rights
: Strengthen our risk management practices focused on
labour standards and modern slavery through our procurement and
supply chain, including through the introduction of a new responsible
supplier assessment platform by Q2 2023
Conducted due diligence and
competitive process to assess
potential solutions, resulting in
contract award
Page 63
7
Code of conduct
: Ensure at least 95% of employees trained on an
annual basis by Q4 2023 and in subsequent years
On track (96% trained in 2022)
Page 62
8
Procurement and supply chain
: Ensure that 80% of Convatec’s
spend is with suppliers with whom we have engaged to request
their participation in our EcoVadis platform by Q4 2023
66% of spend supported by
suppliers engaged to participate
with EcoVadis
EcoVadis participation requested
in 23 of 33 request for proposal/
request for information events
Page 64
Protecting the planet and supporting communities
Target
Progress in 2022
Status
Read more
9
Emission reduction
:
9.1 Achieve net zero carbon (in line with our SBTi target) by 2045
Page 66
9.2 Complete the Scope 3 materiality assessment and develop the
measurement strategy by Q4 2022, with the intention of publishing
our Scope 3 GHG inventory by Q4 2023
Scope 3 materiality study
completed and measurement
strategy developed
Page 69
9.3 Reduce our combined Scope 1 and 2 greenhouse gas (GHG)
emissions by 5%, against a 2021 baseline by Q4 2022
Scope 1 and 2 GHG emissions
reduced by 32%
Page 68
10
Science-based target commitment
:
10.1 Set quantitative targets for Scope 1 and 2 GHG emissions, against
a 2021 baseline, aligned with the SBT criteria by Q4 2022
Scope 1 and 2 SBTs proposed
Page 68
Reduce our combined Scope 1 and 2 emissions by 70% in line with our
SBTs by 2030
See 9.3 above
Page 68
10.2 Set quantitative targets for Scope 3 GHG emissions, against a
2021 baseline, aligned with the SBT criteria by Q4 2023
Scope 3 materiality study
completed
Page 69
10.3 Achieve validated SBT for Scope 1, 2 and 3 emissions by Q4 2023
Scope 1 and 2 SBTs proposed
Page 68
11
Community contributions
:
11.1 Establish new NGO partnership(s) and funding commitments
by Q4 2022
$250,000 donated to the Disaster
Emergencies Committee (DEC)
through ongoing partnership
$220,000 supporting NGO
partnerships around our
manufacturing sites
Page 73
Contribute at least $2 million in cash and in-kind support to our
community partners to improve lives by Q4 2025
See above
Page 73
11.2 Contribute responsibly to a range of HCP and patient education
programmes. Set specific targets for 2023-25 on reach and impact
Over 231k HCPs and patients
participated in educational
programming led by Convatec. In
process of setting impact metrics
(see below)
Pages
73 and 74
Continue to expand the reach of our HCP education programmes,
including through the development of a global medical education
digital platform and recategorisation of activity to improve impact
by Q4 2023
Ongoing development of Medical
Education Centre of Excellence
strategy
Pages
73 and 74
Overview
Governance
Financial statements
Additional information
49
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Responsible business review – customers
Strategic report
Q
How is Convatec delivering the
’Pioneering’ aspect of its vision?
A
Chronic care patient needs are large
and growing. To realise our vision, we
strengthened our technology and
innovation capabilities so that we can
continue to launch new products and
services, supported by a strong
pipeline. In 2022, we made good
progress through the launch of
three new products as well as the
acquisition of Triad Life Sciences
which provides a key technology
platform for us. Together with
investments such as BlueWind
Medical Ltd (see page 120), these are
all examples of how we are improving
the lives we touch.
Q
How does Convatec engender trust
with its customers through its
products and services?
A
We made a promise to be forever
caring. This means that we will never
stop listening, learning and improving
our solutions for customers and
patients. Today, we are working more
closely than ever before with our
customers – from the people living
with difficult chronic conditions, to the
healthcare professionals (HCPs), care
givers and businesses that support
them. We put their needs at the heart
of our innovation so that more people
can live their lives to the fullest. We’re
deploying new capabilities such as
human centred design and human
factors engineering, as we embed our
innovation mindset with forever caring
at its heart and prioritise quality and
efficacy. This in turn builds trust.
Q
With ageing populations and
increased rates of chronic
conditions around the globe, how
are you adjusting to the shifting
nature of healthcare to meet
patient and caregiver needs?
A
To close the care gap, we need more
than medical products. This is why we
see our solutions as having three
components: product, digital offerings,
and services. The people whose lives we
touch, patients, caregivers and HCPs, all
want actionable insight in addition to
our products. We need to be thinking
about solutions which help us stay in line
with a dynamic healthcare landscape,
including the rise in care being delivered
outside a hospital setting.
Q&A
Dr. Divakar Ramakrishnan
EVP, Chief Technology
Officer & Head of Research
& Development
DELIVERING
FOR OUR
CUSTOMERS
2022 highlights
–
Launched three key new
products, with an additional
five in the pipeline.
–
Rolled out our digital
sustainability tool, part of our
Green Design Guidelines (GDG),
enabling research and
development colleagues to
enhance focus on sustainability
in product development.
–
Entered the wound biologics
segment
1
and overactive
bladder markets through
strategic investments.
–
Implemented enhanced key
performance indicators that
increase specificity for our quality
system, and which prioritise
timeliness, ageing, and
effectiveness of our actions
in the quality system.
2023 priorities
–
Expand the use of our digital
sustainability tool and GDG,
with at least five strategic
projects assessed.
–
Launch at least three new
products and expand our
product pipeline in support
of our ESG vitality target.
–
Continue focus on product safety.
Producing innovative
products, services and
solutions that improve
lives, are patient-
centric and informed
by HCP needs.
Innovation journey
To fulfil our vision and drive growth,
we are continuing to strengthen our
research and development (R&D)
capabilities, alongside bringing new
products to market. We have invested
$92 million in 2022 in R&D and continued
to make progress towards our goal
of reaching and sustaining 30% new
product vitality by 2025, supported
by strategic acquisitions. Our approach
to innovation continues to build
momentum in the following ways:
–
Increased investment
: We have
more than doubled spend on R&D
investment in new products and
capabilities since 2019, enabling
our new operating model which
integrates R&D teams across
functions to leverage shared
capabilities with cross-functional
reviews, new product development
process gate reviews and semi-
annual portfolio reviews.
–
Innovation mindset
: We recognise
that the users of our solutions are
people, not just patients. Our
solutions therefore involve digital
and service offers as well as our
products. We also understand that
many of our products are produced
and used in high volume and must
be of the highest quality.
–
Simplified processes
: We use a
single business and product
development process across all four
product categories, from ideation
through to launch, that we refer to
as IDEAL. This process goes beyond
R&D and involves commercial,
technical and operations teams.
–
Leadership and competencies
:
With a new operating model, we
attracted global talent for R&D,
medical, regulatory, intellectual
property and portfolio management.
We maintain four major technology
centres: one in the US (Boston), and
the others close to our manufacturing
facilities in the UK, Denmark and
Slovakia.
1.
As defined by SmartTRAK: see page 22
Convatec Group Plc Annual Report and Accounts 2022
50
–
Portfolio management
: Our
investment must be properly
managed in order to maximise value
for all our stakeholders. It starts
with detailed regular reviews as
described above. We look through
all projects to prioritise where
resources are best deployed. In
between reviews, we have our
budget and strategic planning
process and regular engagement
with the Board.
–
Continuous improvement
: While
proud of our progress, scaling up
investment and output has not been
without challenge. We take every
opportunity to iterate the IDEAL
process and new methodologies
such as low volume production
ahead of high volume automated
manufacturing. This helps ensure
we’re embedding a continuous
improvement philosophy in our
innovation mindset.
New products and solutions
In 2022, we delivered on our plan to
launch three new products. These
products offer significant benefits for
the user. For example, our GentleCath
Air™ for Men uses third-generation
catheter technology, which means it
does not use a coating that can cause
trauma and deposit in the urethra.
The InnovaMatrix® AC, derived from
porcine placenta, is designed for
hard-to-heal wounds. The MioAdvance
extended wear infusion set (EWIS)
reduces the user’s body burden by
50%, as described on the right.
During 2022, a total of 83 patent filings
were made (2021: 33) and ideation has
been supported by new capabilities in
preclinical research that looks at
underlying physiological processes,
enabling our engineers to create highly
targeted solutions to address the
most challenging problems. We
believe sharing the success of our
solutions with our people really
matters. In 2022, we developed a new
intellectual property recognition
programme to recognise creative and
innovative thinking and celebrate our
commitment to innovations as a core
part of our culture.
Preclinical studies
In 2022, we opened a dedicated space,
Convatec User Insights and Evidence
Suites, to hold controlled studies with
healthy volunteers. The space, based
at our Deeside, Wales facility, allows
for more face-to-face research with
volunteers visiting to ensure we fully
appreciate how their usage impacts
the device and consequently future
designs. This can take the format
of a wear test in order to better
understand the device’s performance.
Additional data such as performance
and safety information can be
collected during these wear studies.
This information supplements existing
preclinical data on the device such as
the biocompatibility of the materials
used. This format is designed to
develop new knowledge and support
future designs of Convatec products.
Strategic investments
In 2022, we acquired Triad Life
Sciences, enabling us to progress into
the wound biologics segment
1
through
Triad’s technology, know-how and
innovative products. Now named
Advanced Tissue Technologies (ATT),
these complement our existing AWC
portfolio and capabilities, enabling
us to meet a wider range of needs
for both patients and healthcare
practitioners. For more information on
Advanced Wound Care, see page 22.
We identified that overactive bladder
(OAB), which is related to our
continence care activities, is a chronic
segment where there is potential to
radically improve outcomes for
patients, and in 2022, we made a
minority investment in BlueWind
CASE STUDY:
MIOADVANCE EXTENDED WEAR INFUSION SET
Convatec has developed and
manufactured the first and only
infusion set labelled for up to seven
days’ wear. An infusion set delivers
insulin from an insulin pump to the
body and typically requires a set
change every two to three days.
Developed in partnership with
Medtronic, our device provides
significant benefits for people
around the world with diabetes,
with an estimated 50% reduction
in set changes required. The device
was launched for use in 2022 in the
US and several European countries.
The technology is a major
innovation in infusion sets,
consisting of a novel inserter
system and infusion set. The
extended wear set uses advanced
materials that help reduce insulin
preservative loss and maintain
insulin flow and stability, to double
the wear time of the infusion set.
Additionally, use of the set is
estimated to result in annual cost
savings on insulin of up to 25%, due
to a reduced number of infusion set
and reservoir changes that result in
unrecoverable insulin, as well as
around 2kg less plastic waste per
year for each patient.
Medical Ltd. BlueWind is the developer
of RENOVA iStim
TM
, an implantable
neuromodulation device for the
treatment of urge incontinence alone
or in combination with urinary urgency
and/or urinary frequency. We believe
the technology is an important step
towards people maintaining greater,
daily control over their own treatment.
Sustainable product design
Our new product development (NPD)
processes include a review of the
proposed materials against certain
externally compiled lists of
’substances of concern’, including the
requirements of California Proposition
65 and REACH25. This approach is
consolidated within our Ethical Issues
and NPD policy.
As well as focusing on our key product
development priorities, we are
strengthening our focus on more
sustainable product portfolios. In
2021, we launched the pilot of a digital
tool for our GDG, which cover a range
of aspects including consideration of
carbon footprint, water footprint,
circularity, substances of concern and
non-quantitative ’red flags’ (e.g.
potential use of substances which
1.
As defined by SmartTRAK: see page 22
Overview
Governance
Financial statements
Additional information
51
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Responsible business review – customers
continued
Strategic report
are fully legal, but could be seen as
less favourable to the wider
environment). This tool can also assess
the sustainability of new products
compared to existing products.
In 2022, we developed an extensive
raw material database and an
additional 29 existing products were
incorporated into our digital tool to
offer a baseline for comparison
when assessing new products. Our
ESG target to expand the user base
to 50 trained users by Q4 2022 was
achieved, and the GDGs have been
integrated into our IDEAL process to
ensure the selection of materials that
reduce the future environmental
impact of our products and packaging.
Given our focus on patient safety
and the regulatory framework in
place for MedTech products, it is
not straightforward to change device
form and components. Extensive
requalification and reapproval of
products are necessary after any
change before modified products
can be launched. It can also be
problematic to include recycled
content in device materials due to
regulatory constraints regarding
quality and traceability.
Product quality
Product quality is key for our
customers and vital in earning
Convatec a reputation as a trusted
provider. In 2021, we set an ESG target
to align existing quality metrics to
industry standards and our continued
focus on product safety and efficacy.
In 2022, we delivered on that
commitment by:
–
Baselined quality metrics to industry
standards. We’ve enhanced and
implemented new key performance
indicators that provide more
granularity and proactive insights
on the state of the quality system,
prioritising timeliness, ageing, and
effectiveness, which has enabled
us to improve our overall efficiency
in problem solving.
–
Established goals to increase level
of compliance in response to the
market, and implemented company-
wide training. We are set to launch
training for specific roles in 2023.
–
Prepared a strategy to decrease
response time to our customers
via speed of execution within
our quality system.
CASE STUDY:
SUSTAINABLE FLOW WRAP PACKAGING
Currently around 45 million ostomy
wafers are produced each year
across the nine different
production lines at the Haina,
Dominican Republic, ostomy
facility. Historically, these have been
packaged using PVC and a paper-
plastic hybrid backing, which
cannot be recycled and creates
waste product.
In 2022, we conducted a study of
flow-wrapped wafers with users
and healthcare professionals in four
countries, and concluded that
changing to a flexible flow wrap
would not affect usability. Rather,
the advantages of flow wrap for our
HCPs and customers are substantial
in that packs are easier to open and
store and are visually improved,
thanks to the incorporation of the
Convatec colour-coding system
developed to help HCPs pick the
appropriate size.
Before and after: previous packaging on the left,
next to the new streamlined version
Early in 2023, we will begin to
package ostomy wafers in flow
wrap instead of PVC. As well as
contributing to our environmental
waste reduction goals, since
production is more energy efficient
and the packaging has 80% less
plastic by weight, it also uses
fewer carbon-intensive raw
materials. Further Scope 3
emissions exist in the processing
of the waste, both from production
and end-of-life processing.
Convatec Group Plc Annual Report and Accounts 2022
52
While we continuously monitor
customer feedback and have reduced
complaints rates during 2022, our first
priority continues to be ensuring
patient safety and that we take any
necessary action with urgency. We
have set a new ESG target to reduce
complaints per million (CPM) and will
place particular focus on those related
to adverse events. In 2023, we will be
segmenting our overall complaint
rates to provide clearer distinction on
how we are improving and maintaining
the overall product safety profile of
our products, as defined by our risk
management systems. This will
introduce greater visibility to a quality
performance target of continued
improvement in overall events.
Product safety is also a key priority for
our customers and for our reputation
as a trusted provider. In 2022, we
successfully achieved recertification
of our quality system. Regulators
consider most of the products and
solutions we develop to be of low risk
to users. Nevertheless, we have a
rigorous and robust supplier audit
mechanism and quality management
system. Notified bodies, such as the
British Standards Institute (BSI) also
review our quality processes and
procedures. In 2022, we established
a new quality compliance programme,
focused on continuously improving
our overall quality compliance profile
through a rigorous corporate internal
audit programme. This is already
delivering results, strengthening core
capabilities, and continuously
enhancing our overall quality culture.
We conducted a total of 153 audits
on suppliers during 2022 (2021: 187).
Our ability to perform onsite audits
improved in 2022, so we prioritised
onsite follow-ups with our critical
suppliers. We performed fewer audits
compared to 2021, due to the exit of
our hospital care business, which saw
a reduction in our supply base.
In rare circumstances it may be
considered necessary to conduct a
product recall, following a detailed
internal quality investigation. Recalls
are controlled by standard operating
procedures, all of which underwent
continuous improvements in 2022 as
part of our focus to elevate standards
across the quality system. In 2022, we
executed 11 product recalls (2021: 8).
While there was no risk of harm to
patients, the distributed products did
not meet the elevated requirements
of the quality system.
Use of animals in research
We believe strongly in avoiding the use
of live animals in research and testing
unless absolutely necessary. Every
effort is made to conduct as much of
our research with bench work and
cell cultures. If there is a critical need
to conduct animal studies then the
highest of ethical standards are
followed. Any discomfort to an
animal is avoided and all work is
undertaken in certified facilities
with veterinarian observation.
All medical devices are required to
show biocompatibility prior to
approval and use, per ISO 10993-
1:2018. This requirement is enforced by
government authorities and is part of
the registration process for medical
devices. As part of this requirement,
certain biological risks are required
to be evaluated and mitigated through
the use of testing. In some cases, this
can be done through analytical or
in vitro methods; however, some
biological risks are only able to be
evaluated though the use of defined
and prescribed animal tests.
As such, when mandated by the
intended use of the device and the
registering competent authorities, we
will execute the critical biocompatible
verification tests required by the ISO
standards to ensure patient safety
and registration requirements.
We do not willingly perform any
animal testing in the development
or functional verification of our
devices, as described in our Ethical
Issues and New Product Development
Policy which can be found at
www.convatecgroup.com/investors/
governance/our-policies-and-
statements/.
In 2022, four rats were used to
support studies in burn healing
research. These studies were
conducted at the University of
Memphis Biomedical Engineering
Department and were cleared with
their Institutional Animal Care and
Use Committee.
In 2022, as part of the acquisition of
Triad Life Sciences and subsequent
formation of Convatec Advanced
Tissue Technologies, we now engage
in studies that use porcine placentas.
These are derived naturally through
the birthing process and provided in
partnership with a farm. The placentas
are subsequently stored at ultra-low
temperatures until required. No swine
are killed in the process.
Colleagues celebrate Quality
Month in Reynosa in October 2022
QUALITY MONTH
Overview
Governance
Financial statements
Additional information
53
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Strategic report
CASE STUDY: SERVICES
In a historically product-
focused industry, we
recognise that support
services are an essential
part of our forever caring
promise. In 2022, we grew
many of our service
offerings.
me+™
Our me+™ programme operates
throughout Asia, Latin America,
Europe and the US and aims to
support people managing chronic
conditions to help them enjoy their
lives. The programme provides
access to phone support and a
range of online resources covering
lifestyle tips and advice, educational
and guided recovery tools and
peer-to-peer support related to
ostomy care and continence care.
In the US, the me+™ programme
has expanded its offering to include
ostomy care telehealth and supplier
connections.
In the past year, we launched two
mobile phone applications to
increase accessibility of me+™
services. The Ostomy Nurse
Solutions (ONS) app helps carers
choose which product a patient
needs and order samples directly.
The My Ostomy Journey (MOJ) app is
designed to support the daily needs
of those using the product, including
tracking pouch changes, fluid intake
and food diary, as well as offering
easy access to me+ support.
We continued to offer and expand
virtual support services, including
our virtual telehealth service in the
US, available in English and Spanish.
These services continue to provide
valuable support to many patients
and consumers, with 99% of people
that have used the service saying
that they would recommend it to
someone else.
We have increased investment
in digital capability in the US
and Poland, playing a key role in
connecting people living with an
ostomy throughout their journey
and improving the experience of
customers when using our
products and services.
Home Services Group
In 2022, we expanded the reach of
our Homes Services Group (HSG),
which incorporates Amcare™ in the
UK and 180 Medical across the US.
A dedicated provider of support
and solutions to the stoma,
continence and wound care
communities, HSG has played an
important role in our commitment
to delivering for customers.
180 Medical expanded its digital
offerings in 2022. The number of online
chats with customers and potential
customers more than doubled during
the year. 180 Medical’s e-script platform
grew to 24% of our facility and doctor
referral volume. The 180 Medical
Customer Portal has also undergone
updates in 2022 so that customers have
more oversight of their accounts, and
can confirm orders, view and track
shipments, pay bills, request changes,
update contact information, and
even complete certain kinds of
documentation by themselves.
180 Medical’s customer-focused team
structures were updated in 2022 to
streamline the intake process,
reducing hold times and allowing our
team members to specialise more
within their roles. Now we have
employees dedicated solely to new
patient intake and new patient setups.
We have a team focused on handling
outbound calls and tasks, and one
focused entirely on handling calls from
existing patients. Our patient advocate
programme continues to improve our
customers’ ability to speak to other
users of the products.
Amcare™’s move to a cloud-based
platform that empowers Customer
Services Teams by reducing order
processing times and creating a
work-queue system has led us to
more efficiencies in our processes
in 2022. We now ship more than
10,000 orders to our customers
each month, with over 99% of
shipments delivered next day.
As we head towards 2023, we
will continue to develop the
capabilities, tailoring this bespoke
system to match our needs. We
have added further technology
systems to our operation to
enhance our capabilities and
efficiencies to better serve our
employees and customers. When
combined with our continued
training and education of our
employees, these system
investments have ushered in a
new era of culture and technology
to Amcare™ and our UK and
Ireland operations.
The emphasis on customer support
services in 2022 increased the Net
Promoter Scores (NPS) of HSG. The
Amcare™ NPS for existing
customers rose from 40 to 61, and
for new customers from 40 to 71.
180 Medical attained an NPS score
of 79 in 2022. In addition, 180
Medical reached a major milestone
of over 9,000 excellent reviews on
Trustpilot, which is an overall 4.8
out of five stars.
Responsible business review – customers
continued
Convatec Group Plc Annual Report and Accounts 2022
54
Reliability of supply
Satisfying and exceeding our customer
expectations continues to be a top
priority. Throughout 2022, we’ve
continued to make strong progress
to ensure product availability and
reliable delivery. Close collaboration
across all relevant functions is enabled
by our Sales and Operations process.
This key capability enables us to plan
for short, medium and long-term
requirements, anticipating demand
scenarios and to ensure production,
inventory and logistics readiness. This
is supported by a rigorously managed
performance framework overseeing
end-to-end reliability.
When it comes to resilience, in the
short term, we have and will continue
to invest in strategic inventory,
including raw materials and finished
goods in adequate quantities, so that
our customers can be secure in the
knowledge that products will be
delivered, despite the global context
of supply chain challenges. In 2022,
impacts to shipping lanes placed
particular pressure on raw material
and finished goods transportation.
We’re continuing to expand our efforts
to establish dual source raw material
and manufacturing options. We’ve
added capacity throughout the
network so that we can produce
sufficient products to insulate our
customers against future supply chain
disruptions. Overall, notwithstanding
supply chain pressures, we
significantly reduced and stabilised
lead-times associated with moving
finished goods to key market
warehouses. Our resilience plans
mitigated impacts wherever possible,
which includes building safety stock of
raw and finished good materials and
adjusting transportation methods in
key markets. We also effectively
established a number of new shipping
lanes and alternatives modes of
transport to ensure ongoing flexibility
to move product without delay.
We are in the process of globalising
the real-time tracking system of our
end-to-end supply chain, giving
visibility of inbound shipments,
inter-site movements and downstream
deliveries to customers. This enables
our customers to track their orders
right through to delivery. Wherever
possible, we work with logistics
partners to secure freight capacity
and increase end-to-end inventory
levels to derisk any interruption in
supply to our customers.
Access to healthcare
Access to healthcare is a basic
human right that should be available
to all who need it. This fundamental
principle is integrated in our
vision and we run our business
to ensure the following:
1.
Availability
: We continue to evolve
our sales channels to best meet our
customers’ needs. Progressing
patient and HCP support, in 2022,
Ostomy Care launched two mobile
apps (page 54). In GEM, our
healthcare practitioner medical
educational training programmes,
such as Convatec’s Asia-Pacific
Education programme (CAPE),
ultimately expand access to
products in markets that are rapidly
developing and where access has
been historically limited.
2.
Adaptability
: Based on feedback
from users and healthcare
professionals our products
address a broad range of patient
needs reflecting the different
challenges that individual users
experience. Getting the range of
products right relies on research
and stakeholder engagement
(see pages 44 and 45).
3.
Usability
: Products may ’do a job’
medically, but given the social and
emotional context of the people
we serve, we need to provide
solutions which go beyond the
provision of a functional device.
To lower access barriers, we help
patients identify the device which
best suits their needs, provide
easy-to-follow literature, videos
and online support and deliver
millions of products a year.
4.
Affordability
: Affordability is
a key issue which we strive to
address through competitive
pricing and innovation to increase
product effectiveness and, as a
result, reduce healthcare costs
and improve patients’ lives.
In 2022 we launched a global
Pricing Centre of Excellence
which considers the role of
economic affordability in
product availability.
Data privacy
We operate a privacy governance
framework to ensure that we protect
and properly process personal data
and comply with all privacy
regulations including the European
Union General Data Protection
Regulation (GDPR) and the California
Consumer Privacy Act (CCPA).
This framework includes policies,
procedures, controls and records
that operate across our business on
a global basis. The implementation
of this framework is supported by
mandatory employee training, which
forms part of our induction process
for new employees and annual
updates for existing employees,
underpinned by our Group compliance
programme. Its effectiveness is
overseen by several internal
governance groups, including our
Cybersecurity Steering Committee.
Our various data policies, procedures
and controls are regularly assessed by
our internal audit team. In particular
markets, trained privacy champions,
supported by third-party experts,
provide first-line local support on
privacy matters. This framework is
continually reviewed to ensure any
changes in legislation are incorporated
and is regularly reviewed for
effectiveness by the ARC.
Our new data privacy governance
structure ensures global leadership
of privacy and compliance Group-
wide by setting out the roles and
responsibilities for managing the
collection, use, retention and
disclosure of personal data across the
organisation. This is achieved by
implementing executive leadership
and sponsorship for critical personal
data classes, by assigning four CELT
leaders accountable for ensuring that
the use of four critical personal data
classes across the organisation is
properly governed.
From time to time, we may experience
theft or inadvertent disclosure of data.
In 2022, there were no reportable
issues to data protection authorities
and no significant volume of data
subject access requests were received.
For further information on our
information systems, security and
privacy risk, see page 93.
Overview
Governance
Financial statements
Additional information
55
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
ENABLING
OUR PEOPLE
TO THRIVE
–
Improving career pathways
(page
59): This work brings to life a new,
consistent career framework,
helping colleagues around the world
understand more clearly where their
role currently fits, and informs their
future career planning and
development.
–
Simplifying global payroll offering
:
Strengthening payroll compliance,
efficiency and consistency,
governance and insight through
improved automation.
2022 highlights
–
Maintained a strong performance
on McKinsey’s global
Organisational Health Index
(OHI), outperforming peers and
the industry in many areas.
–
Expanded our Total Safety
Leadership training to further
enhance our focus on health
and safety.
–
Rolled out new career pathways
globally – a new career
architecture and grading
framework.
2023 priorities
–
Continued progress towards our
target of 40% women in
leadership positions.
–
Roll out a range of new DE&I and
Wellbeing programmes, starting
with mentoring.
–
Expand range and accessibility
of leadership and development
programmes.
Protecting the health
and safety of our people
and using their talent
for good
At the end of 2022 we employed
10,036
1
people (2021: 10,142). Employee
turnover in 2022 was 28.1%
2
(2021: 19%),
largely driven by our exit from the
hospital care category. As a result of
this, we closed our factory in Minsk,
Belarus in May 2022. Voluntary
turnover in 2022 was 12.9% (2021: 11%).
Information on our employee profile
is illustrated in the graphs on the
following pages, while our definitions
for employee count and gender
diversity is detailed on page 60.
While our employees are spread across
our global footprint, based in 46
countries, approximately 58% of our
workforce is employed at our nine
manufacturing locations (2021: 59%).
In addition to our facilities in the
Dominican Republic, Mexico and
Slovakia, we have manufacturing
operations in the UK (two locations),
Denmark (two locations) and the
Netherlands. Of countries with no
manufacturing operations, the US has
the largest concentration of employees.
Our people strategy
Our people mission is to “
create a
stimulating, inclusive and rewarding
environment for our people to thrive
and grow together, for the benefit
of our customers, colleagues,
communities and shareholders
.”
To do this we focus on:
–
Aligning talent to value and building
a diverse talent workforce
–
Building high-performing teams
–
Embedding our values-based
culture across the Group
–
Developing our reputation as
a best-in-class employer with
a compelling employer value
proposition, whilst raising our
profile in the communities we serve
As we focus on employee experience,
we remain committed to giving our
people access to a range of services
and data directly through convenient,
intuitive and responsive tools. In 2022,
we expanded our HR transformation
programme launched in 2021, in which
we focus on:
–
Processes
: We have worked
extensively with HR teams to
develop and agree a single,
standardised way of working in HR
across most areas of our operation
for the first time. These standard
processes were put into effect as
we implemented changes and
improvements to Workday and
progressed HR transformation.
Responsible business review – colleagues
Strategic report
1
Includes eight Non-Executive Directors.
For full breakdown, see page 60.
2
This includes voluntary and involuntary
turnover.
Q
How are you fostering an
inclusive culture at Convatec?
A
We’ve worked hard to create
a working environment that
allows everyone to be
themselves and feel supported
to grow. In March 2022, we
launched our integrated
strategic framework that serves
as a central, Company-wide
starting point for our DE&I
and Wellbeing journey. We
appointed CELT sponsors for
each of our Employee Resource
Groups (ERGs) and continue to
support colleagues through
flexible working.
Additionally, in 2022 a range of
initiatives have driven our
employee engagement efforts,
including a campaign to embed
our new forever caring promise,
alongside our vision, values and
strategy (the Big Conversation),
a new employee recognition
platform, Convatec Champions,
and a series of global town halls,
all seeking to foster an
engaging, inclusive and winning
culture.
Q
How are you continuously
improving employee
experience?
A
Historically, some of our systems
and processes have been
difficult to navigate and
fragmented due to disparate
systems, manual ways of
Q&A
Natalia Kozmina
EVP, Chief Human Resources
Officer & ESG Stewardship
Convatec Group Plc Annual Report and Accounts 2022
56
We are seeing the value of our HR
transformation, from strengthened
business partnering and core
capabilities. We are unlocking
efficiencies by making Workday more
widely available in order to strengthen
our data-driven approach and simplify
processes, while creating a stronger
platform to support our people to
grow. Notwithstanding, we continue
to navigate a backdrop of dynamic
talent and labour market
considerations, including the
impacts of flexible and hybrid working,
automation and digitalisation, and
managing employee wellbeing and
mental health.
Building a winning culture
Our people strategy was designed to
help shape an engaging, inclusive and
high-performing culture that enables
all our people to give their best and
fulfil their potential wherever they
work. Our values guide our behaviours
and how we run our business every
day. They are embedded in our
policies and processes, including our
performance reviews, which assess
both the ’what’ and ’how’ of each
employee’s contribution.
2022 saw us redouble efforts to
strengthen employee engagement.
We hosted our first Global Town Hall,
in which all offices and manufacturing
sites around the globe joined in a live
update and conversation with CELT.
Reports are regularly provided to the
Board for feedback to help assess and
CASE STUDY: BLACK EXECUTIVE LEADERSHIP
PROGRAMME
In 2022, a second Convatec cohort finished the Black Executive Leadership
Programme (BELP). The BELP, in association with McKinsey, was launched
in February 2021 to build core leadership and management capabilities for
our black leaders across Convatec, as well as establish an expanded
network of peers across industries for continuous engagement and
learning. Upon successful completion of the prestigious programme, each
participant was assigned a Convatec executive sponsor for additional
capacity building and developmental leadership opportunities.
monitor culture, including progress on
our people strategy, Organisational
Health Index (OHI) results, and
engagement on talent and succession
planning (see page 58).
Recognising and appreciating
colleagues and the contribution they
make is important, and so in 2022 we
launched Convatec Champions – a
more impactful way of recognising
colleagues across the Company. Built
on a best-in-class digital platform,
any colleague can nominate another
colleague for recognition via an
interactive platform to recognise good
work and behaviours aligned to our
promise and values.
–
Refreshing the HR operating model
:
Moving forward, our model with
employee experience at its heart
will set out how HR people partners,
Centres of Excellence teams (Total
Rewards & Recognition; Talent
Management, Acquisition, Learning
& Development), HR Service Delivery
and HR Business Partners all come
together, and how our Global
Business Services capability will
support and make easier day-to-day
HR solutions that benefit everyone.
working and dated tools. This
has prompted us to optimise
the service experience for
employees through
simplification and digitisation.
As part of this, we are shifting
to more global processes and
standard ways of working,
so that we can bring greater
consistency to how HR and other
functions support the business
and significantly improve
colleague and line manager
experiences. This includes
making better use of our digital
tools including Workday (our
people data system) so that it
is more widely available and
will help shift us to greater
levels of being data driven.
Q
What are you doing to build
high-performing teams?
A
We are committed to deliver
business value by attracting,
developing and retaining the best
talent. In 2022, we refreshed our
employer brand, enhanced our
performance management and
succession planning approach
and continued to invest in
best-in-class recruitment
practices to attract the best
talent. As part of our learning and
development programme, we
launched a set of team principles
across the Group this year as a
starting point to foster a high-
performance culture at Convatec.
“The programme
enabled me to
develop new
skills and learn
from colleagues’
experiences.”
BELP participant
Overview
Governance
Financial statements
Additional information
57
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
GLOBAL LEADERS MEETING
Strengthened employee
engagement
In 2022, we hosted our second
iteration of the Big Conversation,
an initiative designed to demonstrate
how we come together as one
company through our vision, strategy,
promise and values. Colleagues who
participated have given the Big
Conversation an employee Net
Promotor Score (eNPS) of 62 and
rated the value of the conversation
at 4.7 out of 5.
In October 2022, we conducted our
third OHI survey, having completed
the previous assessment in 2020, in
partnership with McKinsey & Co. We
achieved our strongest response to
date with 90% of colleagues sharing
feedback on what is working well
and what can be improved.
We are proud to have maintained our
strong position on the global index,
achieving an overall score of 75
(November 2020: 76), effectively
sustaining our top quartile position.
Our last survey in 2020 saw us deliver
an 18-point increase on the first OHI
in 2019, which McKinsey noted as a
significant improvement. In 2022,
to sustain that level (despite the
challenges of the last two years
and the level of change within the
organisation), is considered positive.
The most recent OHI benchmark data
positions Convatec as one of the
top-performing medical products,
devices and services companies.
We made significant improvements in
most of the areas that were identified
as priorities following feedback
received in the 2020 survey. For
example, scores on customer focus,
employee engagement and reward
and recognition have all risen by
between two and four points. As we
set a clear path to become even
more focused on the customers and
patients we serve, we are seeing
progress towards that, with increased
confidence in some important areas
of FISBE, especially Focus (including
strategic clarity and shared vision) and
Building capabilities. During 2023, to
address the survey’s findings and the
areas that require improvement, each
CELT member has developed an action
plan and at a Group level we will be
focusing on innovation, simplification
and work environment.
Building high-performing teams
This year we launched a global
high-performing teams programme
for our Global Leadership Team,
building on work CELT has been doing
with the University of Michigan Ross
Business School since 2021. In May
2022, as part of the first Global
Leaders Meeting that brought together
our top 100 leaders for the first time
since 2018, we commenced a six-month
learning journey with the Michigan
team. The journey focuses on building
capabilities to embed the five
principles of high-performing teams
(team principles) within Convatec.
The learning journey will continue
into 2023 with a focus on leadership
capability to build an inclusive culture,
and extend to a broader population
of people leaders in the business.
Strengthening core capabilities
In 2022, we launched our first Learning
Excellence Academy curriculum which
outlines learning and development
opportunities available to all
colleagues and teams. Through this
work, we’ve highlighted strategic
and leadership capabilities as well
as functional development
opportunities. In addition, we
strengthened our focus on leadership
and management training to ensure
managers have easy access to
processes and tools needed to
lead their direct reports.
To ensure we have the relevant
manufacturing skills and
competencies, we created a globally
consistent Core Training Matrix for
our key manufacturing sites. We have
mapped all the required training
needs, by process and positions and
the timing at which each training
should be delivered; this is
complementary to the existing quality/
regulatory matrix already in place. Full
deployment will be completed, for all
manufacturing across sites by 2023.
All training is designed to improve our
ability to deliver for customers,
consistent with our forever caring
promise. For example, all colleagues
and contractors must complete
complaint handling training,
available in several languages.
In addition, a range of resources
support employee growth and
development throughout their
careers, including a portal to access
formal, self-directed, and innovative
content that is available to equip
employees with the knowledge and
skills to develop and perform
effectively. Categorised into three
levels of leadership communities, from
aspiring leaders to strategic leaders,
it provides employees with skills such
as personal effectiveness, managing
change and strategic leadership
and delegation.
Our Continuous Improvement team
received international recognition in
Problem Solving & Decision Making,
where we were nominated in six
different categories and received
awards in three categories. The
Kepner-Tregoe (KT) Excellence Awards
are given to individuals, teams, and
organisations that distinguish
themselves as being the best in the
world in the application of critical
thinking skills to improve business
system performance.
Responsible business review – colleagues
continued
Strategic report
Top 100 leaders gather in Boston
Convatec Group Plc Annual Report and Accounts 2022
58
OUR APPROACH: DE&I AND WELLBEING
Next generation talent
Part of building core capabilities is
engaging with and training the next
generation. Partnering with Coleg
Cambria, we have built an
apprenticeship programme for our
manufacturing site in Wales, UK.
The three-year apprenticeship
programme, aimed at students and
young adults aged 16+, adds value
through approaching multiskilling in
a structured way. The recruitment
process seeks to dismantle barriers
(such as requiring previous experience)
by assessing applicants on topics like
communication, teamwork, and ability
to follow instructions. In 2022, our
Deeside site had eight apprentices in
engineering and manufacturing, and
more are in the pipeline for 2023. The
programme also allows Convatec
colleagues to engage in meaningful
mentorship opportunities.
In 2022, the Michalovce site in Slovakia
partnered with Technical University
Košice. Through this partnership
Convatec supports Biomedical
Engineering students on their
diploma theses, recruits students
and participates in career days.
To encourage innovation among
students, Convatec hosted a
hackathon in Denmark, where
university students could participate
in competitions and workshops to
develop infusion care solutions related
to product design, digital support and
sustainability.
In the spirit of next-generation
development, we sent three ’rising
stars’ to the One Young World Summit
in Manchester, UK, an annual summit
where young leaders from around the
world work together on social action
programmes. We will support the
summit again in 2023.
Career pathways
Career development is a core element
of our people mission. In Q4, we
reorganised our career pathways
framework as the first step to better
support development and progression
and offer a new common, globally
consistent and clearer approach. The
revised methodology simplifies the
sizing, organising and internal titling
of all roles to help colleagues self-
navigate their own career
development and understand what
it takes to move from one role to
another. Over time this common
approach will also enable greater data
and insights to ensure more equitable
pay practices as part of our employee
’deal’, comprising of contractual,
experiential, and emotional elements.
Diversity, Equity & Inclusion
(DE&I) and Wellbeing
Our colleagues represent multiple
nationalities, as well as the many
cultures, religions, races, sexual
orientations, backgrounds and beliefs.
We recognise that we will only ’grow
together’ and ’improve care’ if we
harness the power of our differences
and encourage diverse thinking.
Our colleagues should feel included,
valued and respected – not just
because it’s the right thing to do, but
because people are the best versions
of themselves when they feel they are
being treated fairly and respectfully.
Diverse opinions and perspectives
spark innovation. We cannot expect
to meet diverse customer needs
without embracing the diversity of our
colleagues.
Our Company-wide DE&I and
Wellbeing framework, rolled out
in 2022, has four priority areas:
1
Cultivate an inclusive culture
for our colleagues
–
Inclusion was built into high –
performing teams training for CELT
and the global leadership team
–
DE&I goals were set for all people
leaders as part of 2022 objectives
setting process
–
Our third OHI survey included
DE&I and Wellbeing questions to
strengthen our benchmark to
practices moving forward
2
Build a diverse workforce with
greater gender and ethnic
diversity across our leadership
–
Diversity metrics were established
for senior management roles
–
Employee Resource Groups (ERGs)
had a CELT sponsor appointed and
our new DE&I and Wellbeing Council
was formed
–
Expanded our management
accelerator programme for black
leaders into Europe from the US
last year
3
Support wellbeing as a priority
for colleagues
–
Strengthened our employee
assistance programme, including
a focus on financial wellbeing
–
Rolled out global digital recognition
platform, Convatec Champions
–
Ongoing support for hybrid and
flexible working through ’Our Work
Life’ approach
4
Enhance our reputation
through leveraging our scale,
partnerships and programmes
–
Strengthen reporting, such as the
steps we take towards meeting our
ESG target of 40% females in senior
management (CELT+1) by Q4 2024
–
Black Executive Leadership
Programme (page 57)
–
Partnering with local colleges for
apprenticeships recruitment
(page 59)
For more on our DE&I and Wellbeing
journey, click here www.convatecgroup.
com/sustainability/enabling-our-
people/dei-spotlight-page/.
Pioneering
trusted medical
solutions
to improve the
lives we touch
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Overview
Governance
Financial statements
Additional information
59
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Strategic report
As at 31 December 2022, women
represented 40% of our Board
membership, 38% of our senior
management team and 36% of CELT.
Our DE&I and Wellbeing target is to
reach at least a combined 40% females
in senior management and CELT roles
by Q4 2024, and our current progress
in 2022 is 38% for senior management
and CELT combined (32% in 2021). Our
gender diversity profile as at 31
December 2022 is below.
Our gender pay gap
In 2022, the remuneration committee
reviewed our UK gender pay ratio. The
median hourly pay difference between
our UK male and female employees (all
UK-based entities) at 5 April 2022 was
12.2%, which is below the UK median
pay gap of 14.9% (Source: Office for
National Statistics). Further
information about our pay data is
included in our Gender Pay Gap
Report, which can be found at
www.convatecgroup.com/
sustainability/esg-reports-and-data.
Since 2021, we have enhanced our
disclosure to include all UK-based
entities, including those not in scope
of the statutory requirement.
Male
Female
Total
Number
%
Number
%
Board
1,2
10
6
60
4
40
CELT
2
11
7
64
4
36
Senior management
3
81
50
62
31
38
Other employees
9,936
3,750
38
6,186
62
Total
1, 4
10,036
3,813
38
6,225
62
Responsible business review – colleagues
continued
Increasing diversity
We track employee diversity through
our HR systems, and the Board will
continue to review our diversity profile
on an annual basis. In 2022, we have
improved the process flow on our
HR systems, expanding fields and
providing colleagues with greater
control to update their personal
information if they choose, including
in fields such as pronouns, ethnicity,
gender identity and disability.
In 2022, we increased membership
and governance of our three ERGs,
which include LGBTQIA+ (Pride), Black
Employees and Women’s Network. To
build employee engagement, the ERGs
promoted and celebrated key
moments on the calendar such as
Pride Month, Black History Month and
International Women’s Day, as well as
hosting speaker sessions, leadership
opportunities, and photo
competitions. Our ERGs have CELT-
level sponsorship which includes
engagement, mentorship, and
strategic support. ERGs also engage
in community partnerships, working
with universities such as HBCUs and
charities such as those that engage
with OKC Pride.
1.
Includes eight Non-Executive Directors
2. The CEO and the CFO are included as members of the Board and CELT
3.
Includes direct reports of CELT, excluding administrative staff. The percentage of women in CELT
and senior management combined in 2022 is 38%
4.
Excludes freelancers, independent contractors or other outsourced and non-permanent
workers who are hired on a project or temporary basis
OUR PEOPLE: AT A GLANCE
Employees
Agency staff and independent
contractors
Americas
APAC
EMEA
Europe
North America
Rest of World
Geographical
areas 2019–2021
Geographical
areas 2022
< 30
30–50
> 50
< 30
30–50
> 50
Male
Female
< 30
30–50
> 50
Male
Female
Employees and contractors
Employees by age band
Leavers and hires by age band
Leavers and hires by gender
Hires
Hires
Leavers
Leavers
Employees by geography
10,036
350
319
341
314
10,142
9,914
9,197
2019
2020
2021
2022
14%
38%
48%
42%
41%
6%
41%
8%
50%
7%
52%
53%
2019
2020
2021
2022
58%
21%
21%
20%
17%
61%
17%
60%
20%
61%
22%
22%
2019
2020
2021
2022
1,219
1,219
283
283
153
164
920
796
1,147
808
1,169
865
2019
2020
2021
2022
1,514
862
569
319
221
215
961
683
989
436
750
856
2019
2020
2021
2022
1,176
1,545
1,216
1,293
1,145
1,010
837
804
2019
2020
2021
2022
1,257
1,688
1,129
828
1,147
862
579
885
2019
2020
2021
2022
Convatec Group Plc Annual Report and Accounts 2022
60
Cost of living
In response to rising pressures on
the cost of living in the UK and US,
we undertook a supplementary
mid-year pay review and made salary
adjustments for employees in our
lower grades. The out of cycle pay
awards recognised the rise in the
cost of living and inflationary
pressures in these countries. For
employees globally we continue with
our annual salary review increases.
In 2023, we will prioritise supporting
employees in lower grades globally.
In addition, we raised awareness of
financial wellbeing support available
as part of our global employee
assistance programme (EAP), which
included a range of educational
sessions open to all colleagues.
Paying a living wage
We are committed to providing fair
pay for our employees, and in 2022,
we conduced a global living wage
assessment to ensure that 100% of
our locations continue to pay at or
above the national or local living wage.
Following our accreditation by the UK
Living Wage Foundation in November
2017, we have also been confirmed as
a ’real living wage’ employer in the
UK for the sixth consecutive year
and continued to work with our
contractors to ensure they pay their
employees at the same rates. We
require all our contractors
to comply with local laws on
employment rights. We understand
concerns from our employees about
the rising cost of living.
As a company, we actively look at ways
to support our colleagues in line with
our core values and our forever caring
promise. Through various channels,
we shared the resources offered by
our EAP, including financial planning
support. Mindful of the pressures for
many people and families, we have
expanded support for those hardest-
hit by rising inflation and assessed
the issue during our 2023 annual
budgeting process.
Health and safety
In the relatively higher-risk locations
such as our manufacturing and R&D
sites, we have a dedicated
Environment, Health and Safety (EHS)
team. Our global EHS team leads the
development of the EHS strategy,
policies and standards; audits
performance; supports the site teams
to improve working practices; and
ensures both legislative and company
requirements are met. The global EHS
team reports to the Chief Global
Quality & Operations Officer, who is a
member of CELT and the ESG Steering
Committee. EHS performance is
reported to senior management on
a monthly basis, with updates provided
to CELT and the Board during the year.
During 2022, we maintained our focus
on key initiatives such as electrical
safety, machinery and equipment
safety, and developing safety-specific
standard work instructions (SWI),
delivering improvements and
increased engagement with all
operations colleagues. The
improvements realised through safety
SWI were well received and are now an
integral part of our ongoing
operations and training plans.
Our manufacturing sites in Rhymney,
Deeside and Michalovce maintained
their ISO 14001 (Environmental)
certification, while Deeside and
Michalovce also have ISO 45001
(Occupational Health & Safety
Management) certification. These
types of accreditations further
demonstrate our responsible business
commitments. We keep under review
the benefit of investing further in
voluntary certifications and standards
for other locations.
During 2022 there were no fatalities.
The target of reducing our Operation’s
Lost Time Injury Rate (LTIR) per
200,000 hours worked to below
0.22 by 2025 is on track. In addition,
we have also achieved our target of
increasing the Operations Hazard
Observation Rate to above 200 per
200,000 hours worked by Q4 2022,
attaining a rate of 234 in 2022,
reflecting the increased engagement
and proactive approach of eliminating
hazards before anyone has been hurt.
Our H&S performance table
¹
2022
2021
2020
2019
Fatalities
0
0
0
0
Group Lost Time Injury Rate
2
0.18
0.26
0.21
0.27
Group Hazard Observation Rate
2
196
148
138
86
Operations Lost Time Injury Rate
0.20
0.30
0.23
0.30
Operations Hazard
Observation Rate
234
190
173
96
Lost Time Injuries
13
18
15
16
1
The data is based on OSHA definitions and rates are calculated based on 200,000 hours worked, as
described in our basis of reporting (page 241).
2
Lower rates are desirable for Lost Time Injury Rates; higher rates are desirable for Hazard
Observation Rates.
In line with our values, and our
forever caring promise, we want to
do all we can to help keep our
people and their families safe.
Our Fleet Safety Programme is
designed to help us enhance safety
for all our drivers (not just
colleagues travelling on Company
business). We are currently working
with expert partners in North
America and EMEA to enhance
existing safety programmes in
these regions, combining training
modules, driver assessments and
other support.
These programmes were
strengthened for company drivers
during 2022 and will be opened to
all employees during 2023.
Read how we are using electric
vehicles on page 69
CASE STUDY: GLOBAL FLEET SAFETY
Overview
Governance
Financial statements
Additional information
61
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
BEHAVING
ETHICALLY AND
TRANSPARENTLY
During Ethics & Compliance Week we
launched our refreshed Code of Ethics
and Business Conduct and raised
awareness of a range of ethical
decision-making resources. Last year,
we set a target for at least 95% of
employees to be trained on the Code
of Conduct annually by Q4 2023 and
we achieved that target in 2022.
2022 highlights
–
Achieved Code of Ethics and
Business Conduct training
completion among 96%
of employees.
–
Updated and refreshed our Code
of Ethics and Business Conduct,
Global Third Party Compliance
Manual and Human Rights and
Labour Standards Policy.
–
Continued our global business
risk mitigation efforts.
–
Strengthened audit process in
procurement and supply chain
–
Improved average EcoVadis
supplier ratings by 6.5%.
2023 priorities
–
Update global ethics and
compliance policies and
employee education.
–
Strengthen our risk management
activities with a particular focus
on third parties and adherence
to labour standards and modern
slavery-related matters within
our supply chain.
–
Continue expansion of
EcoVadis platform to include
additional suppliers.
Protecting and
enhancing our
reputation across all our
stakeholders and with
our supply chain
Ethics and compliance
governance
CELT meets with our Head of Ethics
and Compliance on a quarterly basis
to review the compliance programme,
including its risk assessment and
mitigation efforts; investigative and
monitoring oversight; and policy
development and educational
delivery. The Audit and Risk Committee
also meets with the Head of Ethics and
Compliance biannually. This helps
assure that ethics and compliance
concerns are discussed and actioned
at the highest levels of the Company.
Regular corporate-wide and localised
communications and education assure
that all of our people are aware of the
ethics standards expected of them.
Our extensive ethics and compliance
programme incorporates several
policies and procedures including:
–
Maintaining a Code of Ethics and
Business Conduct (Code of Conduct)
that is updated regularly and
mandating annual training for all
employees either online, with
electronic acknowledgement of
completion, or through participation
in town hall meetings.
–
Making available an independently
provided Compliance Helpline and
web link for employees and third
parties (convatec.ethicspoint.com),
to seek guidance and to report
suspected deviations or policy
breaches.
–
Making it easy for issues to be
reported by colleagues, reviewed by
our Ethics & Compliance team and
where appropriate, that any
resulting investigation and outcome
of any significant issues are overseen
by the ARC (see page 132).
–
Serving as a second line of defence
by regular onsite or computer-based
monitoring of business activities to
assure that they are consistent with
policy, the Code of Conduct or
industry best practices.
–
Providing a third line of defence
through our risk assessment
process, which involves direct
engagement with global market
or functional leaders, and our
commitment when areas of concern
are identified, to work with those
leaders on an ongoing basis to
improve business practices,
where needed.
Strategic report
Q
How are you staying ahead of
ethical business practices in a
fast-moving industry, with a
range of factors beyond your
control impacting your
business?
A
We regularly review and update
our policies, procedures and
practices to consider and include
the most current issues, and
accompany these with clear
communication and training so
our teams know what’s expected
of them. We also believe it must
be as easy as possible to identify
and resolve any potential
concerns, which is why we
maintain a compliance helpline.
To keep a pulse on the external
environment, we also utilise a
range of ratings and disclosure
programmes to help us identify
risks and opportunities.
Q
A growing trend in ESG is
addressing sustainability topics
further out in the supply chain.
What is the role of partnerships
in ensuring Convatec meets its
commitments to ethics and
transparency?
A
We can be transparent about how
we behave in our own operations,
but we also are working to
understand how our partners in
Q&A
Evelyn Douglas
EVP, Chief of Corporate Strategy
& Business Development, General
Counsel & Company Secretary
Responsible business review – commerce
Convatec Group Plc Annual Report and Accounts 2022
62
Although we believe that our conflict-
of-interest measures operated
effectively in 2022, we piloted a
web-based survey mechanism that
invites managers to identify actual or
potential conflicts of interest. We are
planning on expanding the scope of
survey participants to most office-
based management level employees
by 2024.
We are committed to creating a
working environment where everyone
is treated fairly with respect, dignity
and consideration and where there are
opportunities for all. We used the
platform of International Human
Rights Day on 10 December to launch
our refreshed Human Rights and
Labour Standards Policy, which
incorporates principles and guidelines
set out in the United Nations Universal
Declaration of Human Rights, Modern
Slavery Act and the UN Guiding
Principles on Business and Human
Rights, addresses a range of issues
including equal opportunities,
anti-harassment and dignity at work.
As a policy that underpins the way we
work with each other, with partners,
and with suppliers, it was updated in
2022 to include:
–
explanation of our process for
evaluating suppliers to ensure
they align with our principles
and practices
–
articulation of our approach to
labour standards, including
compliance with relevant laws and
regulations in the countries in which
we operate
–
explanation of the Convatec Human
Rights Committee and its role in
monitoring implementation of the
policy and leading any additional
steps required.
In 2022, our cross-functional Human
Rights Committee, a sub-group of our
ESG Steering Committee, continued
driving forward this important agenda.
Chaired by Natalia Kozmina, EVP, Chief
Human Resources Officer & ESG
Stewardship, and including colleagues
from legal, compliance, supply chain,
and HR, the Committee reviewed and
updated our human rights-related
policies and practices and identified
strategies to strengthen supplier
due diligence.
Our Code of Conduct, Human Rights
and Labour Standards Policy, and
Modern Slavery Act Statement can be
found here: www.convatecgroup.
com/investors/governance/our-
policies-and-statements/.
We also engage with stakeholders on
ethical topics within our sector. During
2022, we continued to participate in a
number of AdvaMed meetings and
discussions regarding key legal,
ethical and compliance issues,
including HCP interactions. AdvaMed
is the largest medical device industry
organisation in the US and a global
leader in harmonising MedTech
industry codes on ethics and assuring
transparent interactions with
healthcare professionals.
Transparency, ratings,
disclosures and memberships
Being transparent with our
stakeholders about how we run our
business is a vital part of building
strong, long-term relationships based
on trust. Our disclosures and reporting
are assessed and scored by a range of
external ESG analysts and other
organisations, and we use this
information to benchmark our
progress. See page 65 for more on
our approach to disclosures and
memberships.
Supplier due diligence
To help protect against the risk of a
third party acting unethically, our
compliance team conducts a range of
due diligence and compliance audits.
When we execute distributor
agreements, they contain appropriate
assurances that the distributors will
deliver both online and live
compliance training programmes to
their staff, based on our Global Third
Party Compliance Manual. Using a
risk-based approach, we conduct due
diligence on distributors when they
are initially engaged, and every three
years thereafter, using an external due
diligence web tool.
We require that new suppliers agree
to adhere to the manual, which covers
a range of topics including
commitments to the International
Labour Organisation conventions and
the Principles of the UN Global
Compact and environmental
protections. It extends our Code of
Conduct and our Human Rights and
Labour Standards Policy to the supply
chain which, before 2022, were
addressed in our Supplier Code of
Conduct. The manual is introduced to
all existing supplier contracts as these
are renewed. A copy of the manual is
available at www.convatecgroup. com/
investors/governance/our-policies-
and-statements/.
We monitor and assess suppliers using
third-party risk platforms, which
provide in-depth, real-time coverage
of a range of factors that could impact
on supplier performance (including
geopolitical, climatic and civil unrest),
as well as events that may have been
caused by our suppliers (for example
major pollution and strike incidents).
We also operate processes that are
designed to ensure vendors are
engaged promptly when a risk event
occurs and that these events are
tracked through to satisfactory
closure of the potential risk.
the supply chain tackle ethics and
transparency around issues such
as environmental protection and
human rights. In 2022 we
expanded our practices with the
help of EcoVadis, and that will
continue to evolve in 2023 with
strengthened due diligence and
risk assessment through our
value chain.
Q
How does Convatec ensure that
ethics permeates everything
it does?
A
Doing what’s right and owning it
are two of the values that we
must live out every day, and we
start by setting the tone from
the top that we take this
seriously. As an example, during
our annual Ethics & Compliance
Week, CELT members showed
their support of Convatec’s
compliance tools and their role
in enabling a culture of doing
what’s right through a series
of communications and virtual
events. We are investing in our
business practices, including
regular annual training for all
colleagues, to ensure that our
decisions at all levels continue
to embody these values and to
embed ethical behaviour in
everything we do.
Overview
Governance
Financial statements
Additional information
63
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Working responsibly with
partners
We aim to build long-term, mutually
beneficial relationships with third
parties along the value chain,
including suppliers of materials and
services, transport and logistics
companies, and distribution
businesses. Led by our Global
Procurement and Supply Chain
teams, we are clear that relationships
with third parties must be consistent
with our vision and values, and the
regulatory framework which
underpins our ethical
business practices.
We believe that developing a more
sustainable supply chain will benefit
our business over the long term
through increased efficiency, product
improvements, reduced risk and deeper,
more collaborative relationships.
Our spend is concentrated towards a
relatively small number of suppliers.
For example:
–
Ten suppliers represent
approximately 80% of our contract
manufacturing spend
–
Three suppliers represent
approximately 70% of our logistics
spend, while
–
Our raw materials supply chain
is more diverse, with 45 suppliers
representing approximately 80%
of our total raw material spend
Like many medical device companies,
our products are often sold by third
parties, such as distributors.
We endeavour to select partners who
can support our sustainability efforts.
For example, in 2021 and 2022,
Convatec Colombia contracted a new
partner to take on the removal and
recycling of paper and cardboard
material involved in local logistics
(e.g. product deliveries). Through the
partnerships, Convatec was able to
deliver over five tonnes of material for
efficient recycling, transformation and
reuse. The Convatec Quality Assurance
and Regulatory Affairs team is now
working with the partner to implement
standards, such as harmonising
metrics of recycling process (i.e.
Convatec box sizes), and develop
strategies for aligning with new
laws and trends.
We also work with our suppliers to
support and improve their
sustainability efforts. For example,
proactive engagement with a key
direct material supplier has resulted
in a 61% increase year-on-year in their
EcoVadis rating (see below).
Strategic report
CASE STUDY: LABOUR STANDARDS AND MODERN SLAVERY
In 2022, we made good progress towards our
ESG target of engaging with suppliers who
represent 80% of Convatec’s spend by Q4 2023.
Utilising the EcoVadis platform helps identify
improvement areas to focus on with our supply
chain partners. We take a proactive role in
supporting key suppliers to take actions that
can prompt feedback from their assessment
score, as part of our overall approach to
responsible supply chain stewardship. In
2022, these actions have helped contribute
to a 6.5% increase in the average score of our
rated partners.
As an example, led by our Global Procurement
team, we worked with a key small and medium
sized (SME) provider of roll stock that we use in
our adhesive foam products. Following their
assessment, we reviewed their action plan and
supported them to make improvements. This
included sharing good practice materials and
policy examples to strengthen their focus on
labour standards and human rights,
environmental and ethical practices. This work
resulted in the supplier meeting our
expectations for a partner of this nature and
them creating a revised employee handbook
for their employees. Overall, this practice led to
a 61% increase to their EcoVadis rating from 2021
to 2022, which as well as enhancing their
relationship with Convatec, also strengthens
their commercial position in the market.
Responsible business review – commerce
continued
Convatec Group Plc Annual Report and Accounts 2022
64
EXECUTE
Convatec has been included in
Sustainalytics’ 2023 Top-Rated ESG
Risk Rating Companies List for our
progress in 2022. Note, in 2021
Sustainalytics changed its
methodology for better comparability
of scores across industries. We now
follow the Risk Rating metric.
In 2022, Convatec received a rating of
AAA (on a scale of AAA-CCC) in the
MSCI ESG Ratings assessment. We
achieved above industry average
scores on human capital development
– which considers topics such as
efforts to attract and retain talent
(see page 59) and governance – that
assesses strategic oversight of
company management (page 114).
During the year, we achieved a B
score with ISS.
Disclosures
The landscape of ESG ratings and
disclosures is complex and constantly
evolving. We continue to disclose
against various reporting schemes
Ratings, disclosures
and memberships
that we believe offer most value to all
our stakeholders and keep our
approach under regular review. In 2022,
we disclosed against Carbon Disclosure
Project (CDP) (see page 68), SASB and
GRI (see www.convatecgroup.com/
sustainability/esg-reports-and-data/),
Workforce Disclosure Initiative, FTSE
Women Leaders Review, and
maintained UK Living Wage Foundation
accreditation. Our TCFD disclosure is
found on page 75.
Memberships
In addition to the disclosures below,
we have maintained UN Global
Compact (UNGC) membership since
2018, reporting annually against the
ten principles of the UNGC (page 47).
We also support MedTech Europe’s
sector engagement on sustainability
and are members of the Asia Pacific
Medical Technology Association
(APACMed), the Association of British
HealthTech Industries (ABHI) and the
All-Party Parliamentary Corporate
Responsibility Group.
Ratings
Rating organisation
2018
2019
2020
2021
2022
ISS
C
B-
B-
B
B
Sustainalytics Overall
Performance
72/100
74/100
73/100
Not
available
Not
available
Sustainalytics Risk
Rating
1
16.5
15.3
15.2
14.6
14.5
MSCI ²
A
A
AA
AA
AAA
1.
As at 1 September 2022. Lower scores are desirable for Risk Rating while higher scores are desirable
for Overall Performance.
2.
Disclaimer: The use by Convatec of any MSCI ESG Research LLC or its affiliates (MSCI) data, and the
use of MSCI logos, trademarks, service marks or index names herein, do not constitute a
sponsorship, endorsement, recommendation or promotion of Convatec by MSCI. MSCI services and
data are the property of MSCI or its information providers, and are provided ’as-is’ and without
warranty. MSCI names and logos are trademarks or service marks of MSCI.
Overview
Governance
Financial statements
Additional information
65
Convatec Group Plc Annual Report and Accounts
2022
Strategic report
Q
How will Convatec meet its net zero
carbon target?
A
We’ve started by focusing on our
operations, setting emissions
reduction targets and expanding
our renewable energy
infrastructure in our manufacturing
sites. With our net zero target now
in place, we have begun the SBT
process to inform the reduction
targets we need to meet to reach
net zero before 2045.
Q
How is Convatec working with its
supply chain to advance its
environmental strategy?
A
While we can more easily manage
things we control directly, we cannot
meet our targets without working
with partners in our supply chain.
In 2022 we finished a Scope 3
materiality study that confirmed
over 90% of our emissions are Scope
3. To reduce these, we are working
with expert partners to set SBTs, and
regularly meet with suppliers and
distributors about their
environmental strategies.
Q
Apart from environmental work,
how does Convatec contribute to
its communities?
A
We believe developing strong
partnerships in the communities
where we operate is important in
’doing what’s right’, and this year we
elevated the voice of the community
in our programmes and
commitments. In addition to our
support of humanitarian relief in
Ukraine, we also developed
partnerships around our
manufacturing communities
during Forever Caring Month and
encouraged colleagues to use
their volunteering days.
Q&A
John Haller
EVP, Chief Global Quality
& Operations Officer
PROTECTING THE
PLANET AND
SUPPORTING
COMMUNITIES
2022 highlights
–
Set Scope 1 and 2 SBTs,
completed Scope 3 materiality
assessment, and determined
Scope 3 baseline.
–
Reduced Scope 1 and 2
greenhouse gas emissions
by 32%.
–
Deployed a $1.5 million disaster
relief response in Ukraine,
including cash and product.
2023 priorities
–
Set Scope 3 SBTs.
–
Validate all SBTs.
–
Launch multi-year non-
governmental organisation
(NGO) partnership.
The way we operate and
the contribution we
make to the world
around us
Our net zero transition
We understand the importance of the
2015 Paris Agreement and the need for
change in order to achieve net zero
carbon emissions by 2045. To ensure
that we follow the climate science and
build on our progress made to date in
reducing emissions, we committed to
validating science-based targets (SBT)
by the end of 2023. As such, our key
focus this year has been to quantify
our baseline Scope 3 emissions, whilst
developing the carbon emission
reduction pathway for our operational
emissions, setting 1.5°C SBTi aligned
Scope 1 and 2 targets in this report to
be achieved by 2030.
Our net zero transition strategy areas
of focus are:
–
Governance – to facilitate and
ensure coherent action across the
Group to reduce the Group’s impact
on the environment
–
Carbon and energy – to achieve
validated Scope 1, 2 and 3 SBTs to
ensure carbon emissions reductions
in our own operations are in line with
the Paris Accord. Increase energy
efficiency to improve our production
efficiency and develop a pipeline of
decarbonisation projects globally
–
Sustainable product design and
supply chain – to ensure innovation
in product design to reduce the
cradle-to-grave carbon footprint,
including assessing our value chain
Scope 3 emissions
–
Waste – to reduce the amount of
production waste leaving our plants
and to reach zero waste to landfill
by 2030
–
Water – to achieve sustainable water
withdrawal at high water-stressed
locations and develop our water
management practices at all
locations
See also: EHS policy statement at
www.convatecgroup.com/investors/
governance/our-policies-and-
statements and our TCFD disclosure
on page 75.
Strategic report
Responsible business review – communities
Convatec Group Plc Annual Report and Accounts 2022
66
Energy consumption
In 2022, total energy consumption across the Group was 137,614 MWh
(2021:141,960 MWh).
Energy intensity
Our overall energy intensity ratio has
reduced by 4.7% in 2022. We have
reduced the energy intensity ratio at
our manufacturing sites by 1.7%
(GWh/$m revenue) in 2022 through
implementation of our energy
efficiency programme. During 2022,
17 new energy efficiency projects have
been delivered across our sites, with a
further 12 projects being evaluated,
awaiting approval and funding, or
being implemented.
Total energy consumption (by function) (MWh)
¹,²
2022
2021
2020
2019
Manufacturing locations
103,131
103,207
95,523
97,233
Non-manufacturing locations
9,770
10,736
6,205
7,279
Company vehicles
24,713
28,017
–
–
Total energy consumption
137,614
141,960
101,728
104,512
Total UK energy consumption
25,856
25,339
10,381
–
Total energy consumption (by fuel source) (MWh)
¹,²
2022
2021
2020
2019
Non-renewable electricity
22,748
43,252
66,047
66,833
Renewable electricity
50,999
31,869
10,607
11,528
Natural gas
38,609
38,130
24,766
16,699
Green gas
–
–
–
8,546
District heating
464
642
254
828
Diesel
82
51
53
78
Company vehicles
24,713
28,017
–
–
Total energy consumption
137,615
141,961
101,727
104,512
Energy intensity (GWh/$m revenue)
¹,²
2022
2021
2020
2019
Energy intensity
0.066
0.070
0.054
0.057
1.
2.4% is estimated for 2022 data; 2021: 2.7%
2. See our basis of reporting (link on page 241) for our 2021 methodology restatement
Our energy transition
Since the launch of our energy, utilities
and waste programme in 2019, 66
efficiency projects have been fully
implemented, with a further 11 awaiting
approval and 12 at feasibility stage.
The knowledge gained across our
global operations facilities’ teams
through the sharing of project
feasibilities and implementation
results have provided a solid
foundation to develop our net zero
energy transition. By maintaining a
clear focus on the Scope 1 and 2 SBT
reductions required, a pathway for
Scope 1 and 2 emissions reductions
has been developed. The most
impactful levers were considered
by site teams during this process,
carefully applying those that would be
suitable at a particular site. See below
for our identified Scope 1 and 2 levers.
Each lever was assessed and
categorised appropriately by site
facilities teams and the global
energy and environment team. Under
the energy efficiency levers, the suite
of projects built up from 2019 was
referenced at each site as well as
other sources such as mandatory
Energy Savings Opportunity Scheme
(ESOS) audits, energy audits and
consultant reports.
LEVERS WE USE FOR EMISSIONS REDUCTION
Scope 1
Scope 2
Improve the energy
efficiency of natural
gas powered heating
systems
Implement emerging
natural gas replacement
technology – e.g.
hydrogen
Improve the energy
efficiency of existing
plant and machinery
Smart metering
systems
Install refrigerant leak
detection systems
Reduce usage of
onsite gas power
generation/cooking
systems
Install solar panels
Replace natural gas
heating systems with
electric heat pumps
Electrification of
leased vehicle fleet
Replace district
heating equipment
with electric heat
pump technology
Purchase green gas or
’biogas’ certificates
Purchase renewable
energy certificates
Procure a ’power
purchase agreement’
to guarantee the
renewable source
Overview
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Financial statements
Additional information
67
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Energy efficiency
It is vital that we reduce the energy
we use, as the cleanest kWh of
energy possible is the one not used.
We continue to identify projects to
improve our energy efficiency.
Information about some of the
energy-saving initiatives implemented
during 2022 is included below.
Our greenhouse gas emissions
Our greenhouse gas (GHG) reporting
follows the methodologies set out
in ’The Greenhouse Gas Protocol:
A Corporate Accounting and Reporting
Standard (Revised Edition)’, developed
by the World Business Council for
Sustainable Development and the
World Resources Institute. We
participated in the Carbon Disclosure
Project (CDP) and our response is
available on the CDP website. Our
disclosure score, published in
December 2022 is C (2021: B). The score
is representative of activity in 2021,
and since then we have set out our ESG
framework, enhanced our governance
and greatly improved the volume,
consistency and sophistication of our
date and carbon reporting processes.
This year, we completed a SBT
readiness assessment of our
Scope 1 and 2 baseline emissions.
Improvements in the data are
included in our basis of reporting
document (page 241) and this includes
the restatement of previous years’
data due to a materiality of 35%
variance of overall reported emissions
in our baseline year (2021).
Our GHG emissions relate to
consumption of natural gas, diesel,
electricity, district heating and
refrigerant gases, used to power, heat
and cool our facilities and production
processes. Our company vehicles are
also included. This data is provided by
service providers and employees.
Our 2022 GHG emissions under the
market-based method totalled
24,653 tonnes CO
2
e. In 2022, a
reduction in market-based GHG
emissions of 34.4% was achieved at
our manufacturing locations, through
improved energy efficiency and
sourcing of renewable electricity at
an additional two of our nine global
locations. Our fleet of 1,157 vehicles
generated emissions of 6,096 tonnes
CO
2
e. In 2022, our refrigerant gas
emissions amounted to 746 (2021: 615)
tonnes CO
2
e, emitted, with 12.4% of
those emissions estimated.
We seek to reduce our Scope 1
emissions through our energy
efficiency programme, including
initiatives such as the implementation
of emerging technologies like heat
pumps and hydrogen to replace our
natural gas-fuelled processes. In 2022
we have commissioned a study into
our process and comfort heating
systems by a third-party provider to
understand the technologies available
to us, the associated emissions
reductions, business case and
also market readiness.
Strategic report
Facilities
Initiative
Energy consumption
reduction (MWh)/%
Deeside
HVAC ductwork leakage
resolution
66/(1%)
Rhymney
Chilled water link and air
change rate reduction
92/(1%)
Sunderland – Amcare
LED lights
22/(6%)
Haina
Improved practices
during downtime
periods, phase 1 roof
mounted solar PV, and
HVAC replacements
1,537/(8%)
Osted
LED lights
63/(1%)
Michalovce
Installation of
absorption chillers
and optimisation
of compressed air
distribution networks
600/(2%)
Reynosa
Two-way valve control of
HVAC fans and pumping
systems
883/(5%)
GHG (market-based method) (tonnes CO
2
e)
¹,²
2022
2021
2020
2019
Scope 1 (Global)
14,395
14,931
5,608
5,046
Scope 1 (UK)
3,202
3,107
2,012
2,053
Scope 2 (Global)
10,258
21,255
24,650
24,016
Scope 2 (UK)
70
29
-
-
Total GHG emissions
24,653
36,186
30,258
29,062
Total UK
3,272
3,136
2,012
2,053
GHG (location-based method) (tonnes CO
2
e)
¹,²
2022
2021
2020
2019
Scope 1 (Global)
14,395
14,931
5,608
5,046
Scope 1 (UK)
3,202
3,107
2,012
2,053
Scope 2 (Global)
23,210
25,872
27,169
27,318
Scope 2 (UK)
2,200
2,348
2,433
2,847
Total (Global) GHG emissions
37,605
40,803
32,777
32,364
Total UK
5,402
5,455
4,445
4,900
GHG emission intensity (tonnes/$m revenue)
¹,²
2022
2021
2020
2019
GHG emission intensity
(location basis)
18.1
20.0
17.3
16.7
GHG emission intensity
(location basis, UK)
2.6
2.7
2.3
2.7
GHG emission intensity
(market basis)
11.9
17.8
16.0
14.9
GHG emission intensity
(market basis, UK)
1.6
1.5
1.1
1.1
1.
Please refer to our updated methodology for 2021 and 2022 in our Basis of reporting document
(link on page 241).
2. In 2022, 2.6% of total Scope 1 and 2 emissions is estimated; 2021: 3.3%.
Responsible business review – communities
continued
Convatec Group Plc Annual Report and Accounts 2022
68
Vehicle emissions
Convatec’s team in Brazil are replacing
current petrol and diesel vehicles with
electric vehicles (EVs) to distribute
Convatec products to hospitals and
clinics in the urban area of São Paulo,
in partnership with DHL.
Each EV saves approximately five
tonnes of CO
2
and 1,900 litres of diesel
per year compared to non-EVs. To
support employees who use EVs, we
have installed charging stations for
personal use at our Deeside facility.
Renewable energy
As part of our proposed aligned Scope
1 and 2 SBTi targets, we have
committed to procuring 80% of our
electricity from renewable sources by
2025, reaching 100% by 2030. We now
expect to achieve the 80% target by
the end of 2023.
During 2022, we actively progressed
renewable energy programmes across
our manufacturing operations sites.
In Mexico, we purchased international
Renewable Energy Certificates (iRECs)
certificates from certified in-country
solar and wind sources to match our
annual electricity consumption.
Renewable energy accounted for
approximately 37% of total energy
consumption in 2022 compared to
22% in 2021. Information about the
methodology we use for disclosing
renewable energy in relation to our
Scope 1 and 2 emissions can be found
on page 241.
Scope 3 carbon materiality study
We engaged teams across the business
to collect data in each of the 15 Scope 3
categories. A high-level screening
was conducted in partnership with
UL Solutions, to assess the materiality
of each category and quantify those
deemed to be material.
The headline result of the study was
that 95% of total emissions arise in our
value chain. The methodology used
was based on the GHG protocol
framework. (Source: GHG protocol;
Scope 3 standard)
Data was collected from a variety of
different sources:
–
Supplier-based spend data
–
Convatec life cycle analysis studies
–
Supplier primary data (through
direct Requests for Information
(RFIs) or existing platforms such as
CDP)
–
Convatec’s existing environmental
data collection platform
(UL Solutions)
–
Convatec-owned information
(e.g. shipment files)
–
Convatec company expense and
travel agent system
–
Interviews with internal product
experts in each business unit
The total emissions of each material
category is reported below and a link
to the methodology used is found on
page 241.
Water
During 2022, working with expert
partners, we have completed a water
risk assessment (using WRI Aqueduct
3.0 Water Risk Atlas and Ecolab Smart
Water Navigator) to understand the
relative sustainability of our water use
and the inherent risks to our
operations in each global location.
An assessment of the incoming water
(quality and quantity) risks and
outgoing water (quality) risks has been
undertaken to inform the study. The
results show that although our site in
Haina, Dominican Republic, has the
highest potential overall water risk,
associated with the physical (quality),
regulatory and reputational risks, the
water withdrawal risk is low. Whereas
our manufacturing site in Reynosa,
Mexico, despite having low-medium
overall water risks, is the only site with
high baseline water stress and
consequently a medium water
withdrawal risk. As such, this site is
prioritised for target setting for water
withdrawal. According to the 2021
data, of the total amount of water
withdrawn, only 7% is calculated as
consumed within our operations.
As part of our net zero transition, we
have also developed a suite of water
reduction projects globally to reduce
our water withdrawal. Projects
considered during the development
of the environmental roadmap include
rainwater harvesting, grey water
recovery, cooling tower efficiency
improvements and control of water
appliances in toilets and kitchens.
In 2022, we withdrew approximately
169 megalitres of water (2021: 176
megalitres), all of which was provided
by municipal water suppliers or other
public or private water utilities. The
majority of water (95%) is withdrawn
at our manufacturing sites in the
Dominican Republic, Mexico, Slovakia
and the UK. No water is abstracted
directly from lakes, rivers or other
bodies of water. Data is compiled from
invoiced amounts and meter readings.
A small percentage of water is treated
on site (2022: 0.01%, 2021: 0.04%).
CASE STUDY:
EXPANDING CAPABILITIES
ON RENEWABLE ENERGY
In Q4 2022, we completed the
first phase of our first roof-
mounted solar photovoltaic
installations, generating green
electricity to power a portion
of our manufacturing plants’
electricity usage in Haina,
Dominican Republic. This project
provides increased resilience
from energy price and power
grid fluctuations, whilst also
reducing the amount of grid-
supplied electricity required.
This project generated 109 MWh
of green electricity in 2022. Once
completed, this project is
expected to reduce our total
electricity consumption by 1,558
MWh, which equates to an
estimated location-based
emissions reduction of 875
tonnes of CO
2
.
Scope 3 emissions
2022
2021
Category 1: Purchased goods and services
295,482
299,007
Category 2: Capital goods
51,301
31,562
Category 3: Fuel and energy related activities
8,214
8,732
Categories 4 and 9: Transport and distribution
82,421
62,802
Category 5: Waste generated in operations
3,055
5,200
Category 6: Business travel
2,328
1,202
Category 7: Employee commuting
3,352
3,820
Category 12: End of life treatment of sold products
40,020
39,670
Total
510,824
488,182
Overview
Governance
Financial statements
Additional information
69
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
5,641 tonnes of water (2021: 5,391
tonnes) are tankered offsite as
hazardous waste, the vast majority
relates to our Rhymney site in the UK
where, as part of the production
process, water becomes contaminated
with Industrial Denatured Alcohol (IDA)
and is segregated for further
processing. After processing, a
significant proportion of the IDA is
recovered and reused at the site. The
remaining treated water is returned to
the environment via a sewer as part of
a permitted discharge. Other
uncontaminated wastewater is
discharged via a sewer.
As set out in our Environmental
Policy statement, we are committed
to understanding, quantifying and
minimising our waste (hazardous
and non-hazardous), and water
consumption. We are also intensifying
our focus on initiatives which will drive
a reduction in waste generated by our
product, packaging and non-
manufacturing activities.
Water use
(megalitres purchased)
2021
2022
2020
2019
2018
2017
169
146
158
166
170
176
1.
2022 data includes an additional R&D site.
Waste
During 2022, we have undertaken
analysis of our waste processing
and disposal practices, completing
a study of the waste generated from
our manufacturing plants and the
fate of each type. We have identified
preliminary goals, including
provisional targets which will be
finalised and subject to SBT validation
alongside our Scope 3 target at the
end of 2023. We are also developing
roadmaps with site manufacturing
teams, reaffirming baselines and
opportunities for reducing waste and
minimising environmental impact.
The table below shows our waste
recycling and disposal performance
over the last five years for both
hazardous and non-hazardous waste.
Non-hazardous waste represents
69% (2021: 74%) of the total waste
generated and the chart indicates the
proportion of this waste recycled is
26% (2021: 18%) and the proportion
disposed of to landfill is 47% (2021:
66%). The change in the split between
recycling and landfill seen during 2021
compared to 2020 is attributable to
increased recycling levels in the
Dominican Republic, Slovakia and
the UK.
Hazardous waste represents 31% (2021:
26%) of total waste generated and 99%
(2021: 99%) of this is recycled. The vast
majority of hazardous waste (97%,
2021: 95%) is generated at our Rhymney
site and its treatment is described in
the previous section. Of the remainder,
1% (2021: 1%) is disposed of to landfill.
Following our decision to exit hospital
care, we worked with a number of
partners to donate products,
minimising waste and disposal of
products we no longer sell.
Environmental impacts in the
value chain
As well as the environmental impact
of our own operations, the delivery,
use and disposal of our products also
creates impacts along the value chain,
including the sourcing of raw
materials, sterilisation, supplier
manufacturing, packaging, logistics
and transport. To minimise this
’indirect’ environmental impact we
will be assessing the environmental
performance of key suppliers,
reporting value chain impacts and
assessing product and packaging
performance.
As explained on page 63, we assess
suppliers’ environmental performance
against our Supplier Code of Conduct
(SCoC) and we require new suppliers
to sign our SCoC. No supply contracts
were terminated on the basis of the
environmental assessments
conducted in 2022.
Strategic report
CASE STUDY:
INCINERATION OF
OSTOMY PRODUCTION
WASTE FOR ENERGY
RECOVERY IN
MICHALOVCE
During 2022, we completed a
project to ensure that all Ostomy
production scrap which cannot
be recycled is incinerated for
energy recovery. This project will
reduce the amount of waste sent
to landfill annually by 300
tonnes (5% of waste sent to
landfill globally in 2022). A
certified waste provider was
commissioned for this work,
following Slovakian
environmental legislation for the
incineration for energy recovery
process. This project will also
reduce Scope 3 emissions by 133
tCO
2
e per annum, due to the
improved carbon emissions
related to the new process
implemented.
Waste recycled (tonnes)
¹
2022
2021
2020
2019
Non-hazardous waste
Disposed of
9,655
13,599
11,806
10,060
Recycled
3,425
2,990
2,120
3,671
Generated
13,080
16,589
13,926
13,731
Hazardous waste
Disposed of
69
82
72
78
Recycled
5,789
5,606
5,337
5,716
Generated
5,858
5,688
5,409
5,794
Total Generated
18,938
22,277
19,335
19,525
Fate of non-hazardous waste generated (%)
¹
2022
2021
2020
2019
Recycled
26%
18%
15%
27%
Incineration (with energy recovery)
27%
16%
10%
8%
Incineration (without energy
recovery)
0%
0%
0%
6%
Landfill
47%
66%
75%
59%
1.
Data restated as per the basis of reporting,
Responsible business review – communities
continued
Convatec Group Plc Annual Report and Accounts 2022
70
Environmental impact of
products and packaging
Our products are the most visible
element of our environmental
performance and encapsulate
accumulated environmental impacts
along the value chain, from extraction
of raw materials, through manufacture
and logistics, use by customers, and
final disposal.
By better understanding where the
most significant impacts are created,
we are better able to focus on the
priorities for attention. In previous
years we have undertaken projects
to build our knowledge in this key area.
As highlighted above, we need to do
more work and this will be a key
priority in 2023 and is captured in our
ESG targets on pages 48 and 49.
Our new product development
process and Green Design Guidelines
help to facilitate this progress further,
as described on pages 51 and 52.
We are in the process of establishing
an environmental strategy delivery
team collaborating across operations
and a review of the carbon impact of
our packaging will be considered as
part of this initiative.
Socio-economic contribution
to society
Through running our business, we aim
to make a socio-economic contribution
to society. This contribution, which is
important to a range of stakeholders,
is summarised in the table below.
Using the volunteering policy
launched in 2021, colleagues
engaged in a range of charitable
activity throughout 2022. We
celebrated and shared their stories
during Forever Caring Month, an
initiative that encouraged
colleagues to demonstrate our
forever caring promise in their
communities. Throughout
November and December,
colleagues shared and celebrated
their volunteering stories and how
it contributed to growing pride and
trust with communities. As part of
the initiative, Convatec also
partnered with charities around our
nine manufacturing sites with over
$220,000 donated on issues most
important to us and our
communities. Over 1,000 lives were
impacted through programming
supported by our contribution.
2022
$m
2021
$m
2020
$m
2019
$m
Direct economic value generated
2,072.5
2,038.3
1,910.8
1,827.2
Economic value distributed
Operating costs
1
990.4
962.3
891.7
890.0
Employee wages and benefits
648.5
650.1
579.7
515.0
Payments to providers of capital
2
312.8
262.7
254.0
351.2
Payments to governments
3
45.7
47.6
56.3
38.2
Community investment
4
0.7
1.5
0.7
0.5
Economic value retained
74.4
114.1
128.4
32.3
1.
Operating costs exclude depreciation, amortisation, impairment charges, asset write-offs and operating taxes. Employee wages and benefits, payments
to governments and community investments are normally part of operating costs, but have been excluded as they appear on separate lines in the table.
2.
Payments to providers of capital have been included on an accruals basis and include interest paid on long-term debt, capital and interest payments on
right-of-use assets, net debt repayment, dividends and own share reserve purchase paid to Convatec shareholders.
3.
Payments to governments include corporate income taxes, sales taxes, real estate taxes and other taxes, but exclude employer portion of payroll taxes,
as they are included in employee wages and benefits.
4. Calculated as costs associated with charitable community donations. Excludes product donations. See page 73 for calculation of value to communities.
CASE STUDY: FOREVER CARING MONTH
Reducing hunger and food waste:
volunteering in Hong Kong
Overview
Governance
Financial statements
Additional information
71
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
BUILD
Strategic report
With the onset of war in Ukraine, we
coordinated a tiered response valued
over $1.5 million to support
humanitarian relief. This included:
–
Monetary donation
– In line with our
commitments as a member of the
UNGC and industry best practice, we
donated $250,000 to the Disasters
Emergency Committee (DEC), who
support the on-the-ground work of
their 15 member organisations.
–
Product donation
– In partnership
with the Polish Red Cross and the
Ukraine-Slovakia SOS, we donated
over $1.2 million worth of Convatec
products from across our portfolio.
We know that managing chronic
conditions can be stressful at the
best of times, and that people
affected by the war need support
Disaster relief in Ukraine: our approach
over many months. A small working
group comprised of Convatec
colleagues from across the business
met weekly through March – April
2022 to coordinate the effort,
determining culturally appropriate
products, necessary translations and
brokering the charity partnerships.
–
Support of our people
–
Geopolitical events in the region
were stressful to many colleagues
globally. Throughout 2022, a series
of communications and updates
to colleagues informed them of
the actions the Group was taking.
To support their mental health
and wellbeing, EAP resources were
made available alongside additional
wellbeing resources. We also
encouraged colleagues to use
volunteering days to support
charities that they have access to
through our global volunteering
policy. Many colleagues did so in
a range of ways such as driving
refugees to host families, fundraising
for charities, or spending time on
the phone to help displaced people
access medical products.
Our response to the war in Ukraine
demonstrates the importance
of coordinating centralised action
to maximise impact, and the value
of having processes to ensure
quick responses in instances
of future disasters.
Responsible business review – communities
continued
Courtesy of the DEC
“We are delighted to be working with
Convatec. Your generosity and support
has enabled our members to immediately
respond on the ground in Ukraine and
neighbouring countries with food, shelter
and protection.”
Disasters Emergency Committee
Convatec Group Plc Annual Report and Accounts 2022
72
Contribution to governments
We are fully committed to meeting
our legal tax obligations in each of
the countries in which we operate.
We fully support and embrace greater
transparency with tax authorities
and the initiatives being introduced
by the Organisation for Economic
Cooperation and Development (OECD)
and governments to ensure clarity and
adherence to the tax laws of each
jurisdiction in which we operate.
Our Tax Policy is available at
www.convatecgroup.com/investors/
governance/our-policies-and-
statements/.
Supporting communities
Our forever caring promise is a
commitment we make to customers
and those we serve every day. It’s also
a promise we make to the communities
in which we operate.
In recent months, we’ve made good
progress refreshing our approach
to support communities. In recognising
that the way in which we operate
enhances the contribution we make
to local communities, we are
developing stronger partnerships with
select non-governmental organisations
(NGOs) to ensure that partnerships
can be targeted to achieve maximum
impact. We will develop these
partnerships over the long term in
the places where we operate, and
whose activities focus on issues of
healthcare access/equity, education,
or disaster relief.
From a Group-level perspective, our
approach is to support partnerships
on issues that closely align with our
vision and values, and where the
majority of our people and impact
is made.
It is also the case that team-driven
volunteering and charity work in any
community is valuable and also an
important part of our impact. Our
two-day volunteering policy makes
it easy for colleagues to engage in
community service. Business units,
functions and our ERGs also contribute
to further local market activities as well.
Partnerships
In line with our ESG commitment to
establish new NGO partnerships and
funding commitments, in 2022:
–
We partnered with the Disasters
Emergency Committee (DEC), to
support their efforts for Ukraine
relief, including through three
donations and employee appeals
throughout the year (see left).
–
We launched Forever Caring Month,
supporting eight partner charities
near our manufacturing sites
(see page 71).
Medical education
In line with our forever caring promise,
we support HCPs through our medical
educational programming. We provide
grants to support HCPs and third
parties (such as regional bodies,
associations, educational and hospital
institutions) engaging with
educational and scientific meetings,
programmes, workshops, events,
activities and public education,
non-contingent on the use of Convatec
products. In 2021, we set a target to
contribute responsibly to a range of
HCP and patient education
programmes, and we delivered on this
in several ways throughout 2022.
In celebration of 25 years of our
Hydrofiber® dressing AQUACEL™,
we pledged $250,000 to fund medical
education in partnership with the
Welsh Wound Innovation Centre
(WWIC). Throughout 2022, WWIC
hosted four courses, in a four-day
online format, covering topics
including wound assessment, pressure
ulcers/injuries and hard-to-heal
wounds. WWIC have educated over 631
delegates from 12 countries, exceeding
our original goals for the programme.
2022 VALUE TO COMMUNITIES
In line with our forever caring promise
and company values, we supported
our communities through:
$500,000+
to community partners through
programming and disaster relief
$1.3 million+
Products valued at $1.3 million+
donated to charity partners
1
$185,000+
in medical education grants supporting
over 4,600 HCPs
1.
Product value calculated using regional average
sale price. Includes contribution from products
with shortened shelf lives.
Overview
Governance
Financial statements
Additional information
73
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
STATEMENTS
Strategic report
Responsible business review – communities
continued
To support future medical education
programming, we advanced our
multi-channel education capabilities
for both HCP and patient programmes
within AWC via our Wound Hygiene
integrated medical education and
communication programmes.
Educational publications, webinars and
symposia, podcasts and competency-
based skills training have to date, been
implemented in 38 countries
worldwide. A global resource centre,
woundhygiene.com provides both
theoretical and practical information
for HCPs, with plans to expand to
patient education in early 2023.
In 2022, our Convatec Asia-Pacific
Education (CAPE) activities expanded
in several dimensions. Our digital
ConvaTeach platform – a multi-
channel, global education tool that
connects HCPs across regions and
disciplines – was improved through
the development of new training
materials, case compendiums and
new features and expanded to an
additional 1,000 new users by
launching in China in July 2022.
We held a CAPE Summit as a virtual
conference covering AWC and OC,
with Continuing Medical Education
(CME) accreditation supported by
multiple leading experts in their field
from countries across our Global
Emerging Markets (GEM). The summit
was attended by over 1,800
participants over two days. The
number of total HCPs touched through
our 2022 CAPE virtual and in-person
programmes reached over 231,000
across the GEM region through nearly
7,000 events in 2022.
In 2022, we tracked GEM, AWC, OC
and CC&C medical education activity
centrally. In 2023, as part of launching
a new Medical Education Centre of
Excellence, we intend to develop a new
Global Professional Medical Education
digital platform to capture metrics
across the Group. The platform will
help us integrate the work of business
leads and regional educational
programmes, which will strengthen
our HCP offering digitally and non-
digitally in all business areas. In 2023,
we also intend to develop a new
patient education programme in AWC.
Independent assurance
In line with our commitment to transparency, we commissioned Deloitte
LLP to perform limited assurance procedures on selected key
performance indicators as detailed in our Responsible business review
2022. The assurance was completed in accordance with the International
Standard on Assurance Engagements 3000 (revised) (ISAE 3000) and
3410 (ISAE 3410). Details of the procedures performed are oulined with
Deloitte’s independent assurance opinion, which can be located at www.
convatecgroup.com/investors/governance/our-policies-and-statements/.
Performance data
The scope of Deloitte’s work covered the following 2022 disclosures
(performance data) from the review:
–
Greenhouse gas emissions: Scope 1 (14,395 tonnes CO
2
e); Scope 2
(market based) (10,258 tonnes CO
2
e ); Scope 2 (location based)
(23,210 tonnes CO
2
e ) (page 68)
–
Emission intensity (location based: 18.1 tonnes CO
2
e/$million
revenue and market based:
11.9 tonnes CO
2
e/$million revenue) (page 68)
–
Energy consumption (137,615 MWh) (page 67)
–
Energy intensity (0.066 MWh/$million revenue) (page 67)
–
Health and safety: operations lost time injuries and rate (0.20)
and hazard observation rate (234) (page 61)
–
DE&I and Wellbeing: percentage of females in senior management
and CELT (38%) (page 60)
Convatec’s basis of reporting for the above metrics can be found
at www.convatecgroup.com/sustainability/esg-reports-and-data/.
We regularly assess the scope of our ESG assurance and covered metrics.
Deloitte’s full Assurance Statement, including opinion and basis
of opinion is available at www.convatecgroup.com/sustainability/esg-
reports-and-data/.
Completeness of information
The information contained in the Responsible business review section of
our 2022 Annual Report and Accounts covers all operations over which we
had financial control for the 2022 financial and calendar year. It also covers
all of the issues identified in our ESG framework and places emphasis on
the most material issues.
Where a reported KPI does not relate to the entire organisation for the
whole year, the scope of its boundaries is indicated. Businesses acquired or
disposed of during the year are not included in our reporting for that year
except where disclosed otherwise.
Convatec Group Plc Annual Report and Accounts 2022
74
TCFD disclosure
STATEMENT OF COMPLIANCE
We are committed to continued adoption and alignment with the recommendations of the Task Force on Climate-related
Financial Disclosures (TCFD). In compliance with the FCA Listing Rule LR 9.8.6R(8) on climate-related disclosure, the table
below summarises where we are reporting consistently against the recommendations. Where we are working to strengthen
our response, we have indicated what the gap is and how we intend to close the gap. Further supporting information can
be viewed in our ESG section of the annual report under the ‘Protecting the planet and supporting communities’ pillar on
pages 66 to 74.
Recommendation
Status
Page
GOVERNANCE
a) Board oversight
Comply
76
b) Management’s role
Comply
76
STRATEGY
a) Climate-related risks and opportunities
Comply
77
b) The impact of climate-related risks and opportunities
–
Transition plan: In 2022, Convatec focused on measures we could take to reduce the
environmental impact of our direct operational emissions. In 2023, we will develop our
transition plan which will incorporate decarbonisation measures as well as plans to align
our strategy and wider business activities with 1.5C in a sustainable way.
Explain
(partial
disclosure)
78
c) The resilience of the organisation’s strategy
–
Strategic and financial planning: Convatec has started to assess the potential future
financial impact of climate risks and opportunities and in 2022 we have completed a
physical climate risk analysis. As we move forward, we recognise the need to develop
our quantified transition plan and we intend to incorporate findings from physical and
transition quantitative climate scenario analysis into our strategic planning cycle in 2023
to strengthen our response to climate change.
Explain
(partial
disclosure)
85
RISK MANAGEMENT
a) Identifying and assessing climate-related risks
Comply
85
b) Managing climate-related risks
Comply
85
c) Integration into overall risk management
Comply
86
METRICS AND TARGETS
a) Climate metrics
–
Cross-industry metrics: In 2022, Convatec undertook a qualitative climate scenario
analysis to assess the potential significance of climate risks and opportunities and
began quantification of the physical financial impact. In 2023, once we have developed
our transition plan, we will be in a better position to fully report against the climate risk
and opportunity categories. In 2023, there will be ESG objectives in the personal objectives
of each CELT member for bonus purposes. In respect of the two executive directors, the new
Executive Remuneration Policy (which will go to the AGM for approval) will include an ESG
objective, contributing to 5% of their overall bonus.
Explain
(partial
disclosure)
87
b) GHG emissions
Comply
87
c) Climate targets
Comply
87
The Task Force on Climate-related
Financial Disclosures
Overview
Governance
Financial statements
Additional information
75
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Strategy and risk management
Our strategy includes emissions/environment as an ESG
priority aspect. In the next strategic planning cycle, we will
also include outcomes from the climate scenario analysis.
Major capital expenditure
In 2022, climate was added as a factor in M&A due diligence
and decision-making. During 2023, we will include climate
consideration in capital allocation.
Business plans and budgeting
Our strategic plan is used to inform the development of the
annual business plan and budget.
Goals and targets
We have committed to reduce our environmental impact
across emissions, waste, water and product life cycles and
we are developing plans to deliver on these targets.
Performance monitoring
We have KPIs associated with our environmental ambition
and we report our annual performance alongside four years
of historical data.
CONSIDERATION OF
CLIMATE ACROSS
BUSINESS PROCESSES
TCFD disclosure
continued
Governance
Summary of disclosure
–
The Board has oversight of all
climate-related matters, with the
CEO carrying overall responsibility.
–
The ARC is responsible for reviewing
and approving Convatec’s ESG and
TCFD Disclosures and monitoring
the integrity of the targets and
related metrics.
–
In addition to the above two bodies,
climate risks and opportunities are
further assessed and managed by
the ESG Steering Committee and
CELT, who feed upwards to the ARC
and Board on climate actions and
cascade the organisation’s climate
objectives for implementation and
delivery by their teams.
Next steps
–
Following the identification and
assessment of climate-related risks
and opportunities in 2022, during
2023 we will incorporate their
consideration as part of our
business strategy planning and
financial planning processes.
–
Given that our response to climate
change is dependent on many parts
of the business, we plan to devote
more time to climate matters in
relevant Board committees, in
addition to those already assigned
to the ARC.
Governance structure for
climate-related matters
The Board has oversight of all climate-
related issues within the organisation,
with the CEO ultimately responsible for
the implementation of climate-related
actions across business units and
functions. Implementation is guided
and promoted by CELT members who
are responsible for driving progress,
performance, compliance, and metrics
against the four ESG strategic pillars.
The Board discusses climate-related
matters in its meetings including two
deep-dive sessions during the year, and
is supported by Board and Management
committees to aid its understanding
and provide relevant information to
the Board:
–
The ARC is responsible for reviewing
and approving Convatec’s ESG and
TCFD reporting for data integrity,
management of risks and
compliance with relevant
regulatory requirements.
–
The Remuneration Committee has
oversight of the incorporation of
ESG objectives in remuneration
going forward.
–
CELT has delegated responsibility
from the Board to set the direction of
Convatec’s strategy, ensure climate-
related issues have appropriate
management in place, and cascade
this through the organisation.
–
The ESG Steering Committee and
the TCFD Working Group support the
implementation of the Group’s vision,
in line with our FISBE strategy, and are
supported by the organisation’s
strategic planning process.
See pages 42 and 43 for further detail
on ESG governance structures.
Climate-related governance
principles over internal
processes, supply chains,
and capital allocation
The organisation follows a bottom-up
approach when it comes to internally
responding to climate-related issues.
Each business unit and functional area
has an individual risk register which
includes impacts of climate-related
risks. In addition, the TCFD Working
Group has conducted a climate
scenario analysis in 2022, which takes
a top-down assessment of climate risks
and opportunities across the Group.
We have a risk management process
to address our principal risks and
uncertainties, including the
Environment and Communities risk,
which incorporates climate change
strategy as one of the key principal
risk drivers, including transition
risks. Several members of senior
management have a climate-related
personal objective attached to the
individual performance elements
of their remuneration.
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
76
Engage with functions
across
the business to build awareness
of how climate change may
impact operations and identify
whether climate risks and
opportunities are already
being managed.
Integrate
results of physical risks analysis into
impairment testing, and in business continuity
and risk management plans. Incorporate priority
transition risks and opportunities into the
strategic-planning process
Using results from the qualitative scoring
assessment of
transition risks and
opportunities
to prioritise those for
quantitative
climate scenario analysis
, accounting for
methodical limitations
Use outcomes of identification and assessment
to inform decision-making on
response options
based on the significance of potential impacts
and those identified as priority in the near term
Contextualise
identified risks
and opportunities based on our
business operations and market
landscape to better understand
the cause and consequence and
controls to be put in place.
Conduct climate scenario
analysis, to qualitatively
assess
transition risks and opportunities
and to
quantify
the potential
financial impact of the physical
risk of selected critical sites within
our value chain.
2
3
2022 PRIORITIES
2023 NEXT STEPS
1
Strategy
Summary of disclosure
–
Engagement with Group and
operating functions to understand
the relevance of climate-related
matters to the business and the
relative level of potential impact in
comparison to climate risks as well
as other business risks.
–
Identification and assessment
(including scoring and ranking)
of climate risks and opportunities
using climate scenario analysis.
–
Potential future financial impact of
physical climate risks are assessed
for productivity loss and damage to
Convatec-controlled assets across
International Panel on Climate
Change (IPCC) scenario pathways.
–
Transition risks and opportunities
are qualitatively assessed against
three climate scenarios, and across
short-, medium- and long-term
time horizons.
Next steps
–
Complete climate scenario analysis
by quantifying the financial impact
from priority transition risks and
opportunities (where data and
methodologies allow).
–
Incorporation of the climate
analysis outcomes into the Group’s
strategic planning process in 2023,
which will inform a range of financial
planning decisions.
–
Continue to develop near- and
long-term transition plans to
achieve our net zero goals and
demonstrate alignment of our
product portfolio and strategy
to a low-carbon economy across
the value chain and the local
communities we operate in.
Approach to climate scenario
analysis
In 2022, we identified three priorities
to progress the existing identification
and assessment of climate-related
risks and opportunities. These
actions enable us to embed climate
considerations in business planning
processes. In the future, the
integration of climate-related
matters will be underpinned by
financial impact calculations and
increased awareness and capabilities
across teams to manage climate risks
and opportunities.
We use both a qualitative and
quantitative approach to climate
scenario analysis. The methodology
we apply for these assessments is
described in more detail in the Risk
Management section (page 85). Before
conducting these assessments, we
reviewed the risks and opportunities
identified last year and built upon
these through further research and
stakeholder engagement. This
exercise gave us confidence that
potential risks and opportunities have
been identified and documented. We
also increased awareness across the
Group of potential climate impacts
to our business activities.
In the first instance, we use a
qualitative approach to screen the
relevance and potential impact of
identified risks and opportunities.
Where the results indicate relatively
high levels of impact, and where data
and methodologies allow, we will seek
to quantify the potential financial
impact. In these cases, we refer to the
qualitative assessment results and will
identify suitable risk indicators to
monitor exposure over time.
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Financial statements
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77
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Strategic report
Size of impa
Likelihood
M3
M2
P2
P1
P3
P4
T4
T5
R1
R3
R4
T3
M5
RISK MATRIX: CONSOLIDATED RISK SCORES ACROSS TIME HORIZONS AND
CLIMATE SCENARIOS
R2
Ph1
T2
Ph2
M4
Ph3
M1
T1
Key:
High vulnerability
Medium vulnerability
Low vulnerability
Introduction to climate scenarios
The future is increasingly uncertain over the long time horizons used in climate scenario analysis. In our climate scenario
analysis, we draw upon scenarios from the IPCC, the International Energy Agency (IEA) and the Network for Greening the
Financial System (NGFS) to inform the assessment of climate impacts. The table below summarises the specific scenario
sources we have used.
Ambitious policy
Middle of the road
High warming
Scenario storyline
Paris-aligned scenario, where
global CO
2
emissions are cut
severely, with ambitious and
gradual efforts to limit
temperature rise.
Slower, less ambitious policy
action OR a time lag before
sudden ambitious action.
Emissions remain stagnant in the
near-term with notable shifts
occurring between 2030 – 2050.
Limited to no action, with
society continuing along past
trends and emissions increasing
significantly resulting in
extreme warming.
Scenario sources
–
NGFS Orderly transition
–
REMIND-MAgPie Net Zero
scenario
–
IEA Net Zero scenario
–
IPPC’s SSP1-2.6
–
NGFS Disorderly transition
–
REMIND-MAgPie Delayed
Transition scenario
–
IEA Announced Pledges
scenario
–
IPPC’s SSP2-4.5
–
NGFS Hot House World
–
REMIND-MAgPie Current
Policy scenario
–
IEA Stated Policies scenario
–
IPPC’s SSP5 8.5
Temperature outcome (2100)
1.4°C – 1.8°C
1.6°C – 2.7°C
2.5°C – 4.4°C
The time horizons used for this
assessment are short term (0 to one
year) to reflect baseline risk and align
with our business plan, medium term
(one to five years) to align with the
strategic planning cycle into which
climate matters will ultimately be
integrated, and long term (five years to
2050) to align with global goals for net
zero and as 2050 is a common end-
year for scenario projections.
Risk and opportunity assessment
In our qualitative assessment, we draw
upon data from climate scenarios as
an evidence-based approach to
understanding how climate issues will
manifest over time, across scenarios.
As such, we score each risk identified
against vulnerability, impact and
likelihood; and opportunity against
size and ability to execute (see detailed
methodology on page 84). This
assessment is granular, and the
outcome provides Convatec with
detail on the significance of each risk
at different intersects of time and
future climate scenarios.
The matrices below describe the
climate-related risks and
opportunities considered material
to the business, and the relative
significance of these.
In the risk matrix, each risk position is
based on the aggregate score for each
scoring criterion (vulnerability, impact
and likelihood) consolidated across all
time horizons and climate scenarios.
While it is important to understand
the possible shift of risk impact over
time and climate scenario, this
aggregate view helps to simplify
the results and supports the overall
prioritisation of the risks.
TCFD disclosure
continued
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
78
Key:
Products and markets
Resource and energy
Resilience
Our assessment of climate-related risks shows that there is potential for significant impacts from hazards across TCFD
risk categories including market changes, policy intervention, technological developments, and physical climate change
events. We recognise that managing and reducing the impact of our direct operations is important, but the next step and
greater challenge for the Group will be to consider our value chain impact, especially the materials we use which will
require significant investment in R&D.
Higher magnitude, higher likelihood
Higher magnitude, lower likelihood
–
M1. Increase in price for purchased goods and services
–
M5. Limited availability of renewable energy
–
P2. Increased pricing of GHG emissions applied to direct operations
–
P4. Increase in regulation on raw materials used in our products
–
T1. Cost to invest in climate mitigation and adaptation of operations
–
T2. Restricted access to alternative materials due to efficacy priorities
–
Ph1. Increase in repair costs, and loss of productivity at manufacturing sites
due to extreme and gradual weather changes
–
R3. Customers opt for suppliers providing ‘more
sustainable’ products
–
R4. Sudden and rapid change in consumer perception
of materials used
Lower magnitude, higher likelihood
Lower magnitude, lower likelihood
–
M2. Change and volatility in energy prices, increase the operating costs of
direct operations
–
M4. Higher costs to procure sustainable materials
–
P1. Additional costs to comply with evolving regulations and exposure to
climate-related litigation
–
P3. Increase in regulations that affect our manufacturing processes
–
R1. Increased investor concern and scrutiny over climate credentials
–
R2. Customers request greater climate ambition and transparency
–
T5. Gap in the use of AI which is fast developing as a critical tool to manage
climate risk
–
Ph2. Delays in receiving goods or unfilled orders from suppliers disrupted by
climatic events
–
Ph3. Disruption in transportation both upstream and downstream due to
extreme weather conditions
–
M3. Increased competition to buy oil and gas
by-products (e.g. chemicals, plastics)
–
T3. Increased competition for IP ownership on new
low-emission products and materials
–
T4. Unsuitable or ineffective use of data to inform
decision-making on climate issues
In the opportunity matrix, each position is based on the aggregate score for each scoring criterion (size of opportunity and
ability to execute), consolidated across all time horizons and climate scenarios. Similar to the risk matrix, this aggregated
view helps to simplify where the Group should concentrate its efforts going forward.
The results of our assessment, shown below, represent the relative opportunity against each other. Whilst, the matrix shows
the spread of opportunity, we believe we have a high ability to execute across all opportunities. The identified opportunities
align with our business strategy which means, whilst we may face some barriers related to the cost and development of
technology, plans are being developed or are in place to take action. Over time the significance of realising these
opportunities becomes even more important as the likelihood and magnitude of transition and physical risks increase.
Size of opportunity
Ability to execute
RE4
RE3
RE2
RE1
PM1
OR1
OR3
OR2
OPPORTUNITY MATRIX: CONSOLIDATED OPPORTUNITY SCORES ACROSS TIME HORIZONS
AND CLIMATE SCENARIOS
Overview
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Financial statements
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Our climate-related risks and
opportunities described
The identified risks and opportunities
to our business can be grouped into
four broad areas of impact which help
to understand the relationship
between different risks as well as
associated opportunities:
1.
Supply chain and raw materials
used
2.
Direct operations and processes
3.
Stakeholder expectations
4.
Physical damage and disruption
The grouping of each individual risk
and opportunity driver into the
respective broad areas of business
impact are set out in the analyses
below.
The table below describes these key
impact areas and provides the average
score of all risks and all opportunities
that feed into it. This score provides an
indication of the potential financial
impact to Convatec, showing how the
impacts may vary over time and
climate scenarios.
Relative risk impact
Relative opportunity impact
Scenario
Time period
Low
Low
A = Ambitious
S = Short term (0-1 years)
Medium
Medium
M = Middle of the road
M = Medium term (2-5 years)
High
High
H = High warming
L = Long term (6+ years to
2050)
Supply chain and raw materials used:
The largest proportion of emissions in our value chain are derived from the materials we use, the majority of which come from
petrochemicals. Exploring the feasibility of more sustainable alternative materials across our product portfolios is an important
potential means to reduce the embodied GHG emissions and to manage transition risks associated with a change in material availability
and price.
Risk drivers
–
Suppliers face increased costs as we transition to a low-carbon economy, which may be passed
on to Convatec.
–
Possible bottlenecks for any sustainable material alternatives as demand increases.
–
Period of increased competition for petrochemical-based materials as road transport demand
for oil declines.
–
Regulation (e.g. taxes on single-use plastics), as well as sudden shifts in consumer perception of
materials, could inhibit the use of certain materials.
–
Limited options to use sustainable materials without compromising product efficacy, or restricted
access to solutions if competitors patent designs.
Includes: M1, M3, M4, P4, T2,T3, R4, R5 – see Risk Matrix above
Assessment
Scenarios
Time
A
S
M
L
M
H
Opportunity drivers
–
Implementation of Convatec’s GDG tool to inform where to focus appraisal of alternative lower-
emission material options in the design/redesign phase to promote alignment of our product
portfolio with the low-carbon transition.
–
Lower emission materials may also increase diversity and resilience of supply, e.g. by reducing
reliance on petrochemicals.
Assessment
Scenarios
Time
A
S
M
L
M
H
Possible strategic and financial impact
–
Unable to deliver products on time or, in the
worst cases, at all, as material shortages mean
we cannot manufacture products.
–
Increased costs for procurement, which could
impact profit margins, or result in loss of sales
if products are not priced competitively.
–
Large investment costs in R&D to identify and
use sustainable material alternatives and to
also achieve regulatory compliance.
Possible management response
–
Develop a supplier engagement strategy
to increase the volume of suppliers with
green credentials.
–
Continue rollout of the GDG and associated
Footprinter tool, ultimately using it for
emission measurement and design decisions.
–
Invest in suitable resources to monitor trends
in material alternatives and availability.
Possible metrics and targets
Emissions from raw material
purchases, with the goal to reduce
embodied emissions of products
TCFD disclosure
continued
Strategic report
Greater size of opportunity, greater ability to execute
Greater size of opportunity, smaller ability to execute
–
PM1. Development of lower emission and sustainable materials
in products
–
OR3. Collaboration in industry and lobbying of governments to
address climate impacts
–
RE2. Investment in onsite renewable generations or PPA
Smaller size of opportunity, greater ability to execute
Smaller size of opportunity, smaller ability to execute
–
RE1. Implementing energy efficiency projects in offices and
manufacturing plants
–
OR1. Increase resilience in the supply chain to be able to better
absorb climate-related shocks
–
OR2. Use of data to manage climate risk and seize opportunities
–
RE3. Decarbonisation of heat to reduce reliance on fossil fuels
in manufacturing operations
–
RE4. Reduce water intensity of operations
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80
Direct operations and processes:
In a transition to a low-carbon economy, we will be affected by global and national policy interventions aimed at increasing the cost of
emitting carbon. While we are not currently subject to global carbon pricing mechanisms, we may face a change in the cost of energy
consumption as well as restrictions on environmentally intensive processes such as sterilisation. During the energy transition, there is
uncertainty about how the supply of renewable sources will meet the exponential increase in demand and we could be faced with
limitations in procuring renewable energy.
Risk drivers
–
Incentives to shift to low-carbon energy driven by changes in energy prices and the introduction or
expansion of carbon pricing mechanisms in regions we operate in.
–
In the energy transition there may be limited availability of renewable energy due to a lack of
procurement opportunities, extreme costs and constraints in the availability of renewable sources.
–
Resource and financial investment into the implementation of low-emission and renewable
technologies are required to achieve decarbonisation through the value chain.
Includes: M2, M5, P2, P3, T1
Assessment
Scenarios
Time
A
S
M
L
M
H
Opportunity drivers
–
Continued implementation of energy efficiency and GHG reduction measures (e.g. LED light lamps,
low GWP refrigerant charged cooling systems).
–
Increasing the number of sites with self-generation renewables will decrease our exposure to
potential future increases and volatility of electricity prices.
–
Switching from natural gas to lower-carbon or renewable energy sources for heating will reduce our
exposure to future increases in the cost of consumption of fossil fuels.
Includes: RE1, RE2, RE3
Assessment
Scenarios
Time
A
S
M
L
M
H
Possible strategic and financial impact
–
Increased operational costs if we are not able
to decarbonise and reduce reliance on
carbon-intensive fuel and chemical sources.
–
Large upfront costs to direct capital towards
decarbonisation.
–
Operational cost savings through the
implementation of efficiency measures and
avoided transition costs.
Possible management response
–
Introduction of a bespoke carbon price to
use within capital allocation to support the
direction of investment towards projects
that avoid GHG emissions or deliver
GHG reductions.
Possible metrics and targets
Non-renewable energy – aim to
reach 100% renewable electricity
by 2030.
Scope 1 and 2 SBT.
Stakeholder expectations:
We recognise that managing climate-related risks and opportunities is essential for delivering long-term value and building climate
resilience. Stakeholder expectations on transparency, ambition level and performance against ESG and climate matters is evolving
rapidly.
Risk drivers
–
Increased volume of legislation and reporting requirements will require us to direct appropriate
resources to respond and manage increasing stakeholder scrutiny.
–
Ineffective or limited use of data and AI could result in us having a limited understanding of baseline
impacts and the direction of travel of climate performance. As a result, if we do not have suitable
data, we will not be able to make informed decisions in regard to climate action.
–
Stakeholder (including investors and customers) requests for climate information are exponential,
with high expectations to be ambitious, transparent in disclosure and to appropriately manage
risks and opportunities. For example, the NHS has laid out a supplier roadmap to net zero which
sets out requirements to 2030.
Includes: P1, T4, T5, R1, R2
Assessment
Scenarios
Time
A
S
M
L
M
H
Opportunity drivers
We are best placed to respond to stakeholder expectations if we are able to manage our climate risks
appropriately, for example:
–
Diversifying our supply chain with supplier duality to better absorb climate-related shocks,
including product scarcity, price volatility, and extreme weather.
–
Continued investment, use and roll-out of data management tools and software, e.g. increasing
supplier engagement through EcoVadis and use of TransVoyant to reduce and monitor distribution
costs and increase the efficiency of logistics.
–
Implementation of GDG Footprinter tool to improve reporting of emissions impact across the
product portfolio.
–
Collaboration in industry and lobbying of governments, to drive innovation and identify sustainable
solutions which support the decarbonisation of the sector while meeting the needs of patients.
Includes: OR1, OR2, OR3
Assessment
Scenarios
Time
A
S
M
L
M
H
Possible strategic and financial impact
–
Limited tender opportunities if we do not meet
the ‘rules of engagement’.
–
Customers switch to alternative suppliers, and
we lose sales and market share.
–
Limited access to capital if investors switch to
better climate-performing stocks.
Possible management response
–
Frequent review of investor priorities through
consistent engagement to ensure we meet
expectations.
–
Reviewing performance and reporting on
progress against environmental targets.
Possible metrics and targets
Benchmarking of our ESG metrics
and targets against government
regulations, peers and key
stakeholders to ensure we
meet our commitments and
reduction targets.
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Financial statements
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Physical damage and disruption:
In the future gradual climate changes and an increase in the frequency of extreme weather events will have an impact across our value
chain. While we are aware of the physical climate hazards most prevalent across our manufacturing sites and can implement adaptation
and controls to reduce the risk, we have less influence over how suppliers are managing climate risk.
Risk drivers
–
Damage and disruption at manufacturing sites due to extreme and gradual weather changes.
–
Delays in receiving goods from suppliers due to disruption from climatic events at supplier sites.
–
Disruption in transportation both upstream and downstream due to extreme weather conditions,
which, for example, may prevent travel on roads (snowstorms) or unloading/loading at ports
(storms).
–
Rising temperatures and increased frequency of heat wave events.
–
Water security reduces due to increasing demand and a shrinking supply of water, especially
considering the decline in water quality.
–
Floods and storms (e.g., hurricanes) increase in severity and frequency, driven predominantly by the
increased likelihood of extreme precipitation events.
Includes:
Assessment
Scenarios
Time
A
S
M
L
M
H
Opportunity drivers
–
Implementation of water efficiency measures including replenishment initiatives and exploring
alternative water sources at priority sites (especially those in high water stress regions – Haina and
Reynosa). This will mitigate the potential impact of degrading water quality and water availability
due to climate change.
Includes: RE4
Assessment
Scenarios
Time
A
S
M
L
M
H
Possible strategic and financial impact
–
Increased costs to manage damage and
disruption at manufacturing sites.
–
Unable to meet customer orders on time due
to unforeseen disruption in the value chain
both at supplier sites and in logistics.
–
Forced to move operations to an alternative
location.
–
Loss of revenue and missed growth targets.
Possible management response
–
Conduct deep-dive physical risk assessments
to understand cause of risk to identify
appropriate adaptation response.
–
Introduce suitable adaptation measures to
reduce risk, i.e. flood defences, temperature
control at heat-stressed sites.
Possible metrics and targets
Capital expenditure on climate
adaptation. 100% of high risk sites
to have implemented business
continuity plans.
Identify efficiency metrics and
develop monitoring to track
impact on performance.
Physical risk impact assessment
Historically, we have undertaken
physical climate risk assessments
across our property portfolio to
maintain our capability to manage and
respond to events. The outputs of the
analysis inform our business continuity
plans for our manufacturing sites and
key suppliers. This year, we conducted
a quantitative climate scenario
analysis to understand how our owned
and controlled operations may be
financially impacted by climate change
over longer time horizons, and under
different temperature outcome
scenarios. Four locations and seven
assets were included in the
assessment scope due to their
contribution to Group revenue, or
due to their locational exposure to
higher physical climate risks.
Our assessment of physical climate
change impacts has two elements.
The first is to understand the actual
financial losses and disruption in the
past year, and secondly, to assess the
potential future financial impacts
considering a range of climate hazards
and forward-looking climate scenarios.
Actual physical impact
assessment:
Our assessment of actual impacts was
based on our experiences across our
manufacturing sites over the last year.
In the past year, we have closed our
plant in Haina for one day as a result of
Tropical Storm Fiona. This follows
established protocols that prioritise
the safety of our workforce and ensure
we can make the facility storm impact
ready. Our business continuity plans
were implemented to carefully
manage the impact on our business
and the financial impact was negligible
with any productivity impact mitigated
by using plant downtime when the
facility was back open or utilising
safety stock to ensure there was no
impact on patients or customers. As
part of our annual production
planning process, we incorporate a
number of days into the production
schedule to allow for potential
disruption and plant closure due to
adverse weather events.
Forward-looking physical impact
assessment:
For the forward-looking assessment,
we modelled the potential impact of
productivity loss as well as asset
damage driven by 12 climate indicators
which can be categorised to hazards
including flood, heat stress, storms,
and water stress.
Hazard: climate variable mapping
Water stress
: Monthly Mean
Precipitation
Wildfire
: Keetch-Byram Drought
Index (KBDI) Fire Risk
Heat stress
: Monthly Mean
Temperature, Monthly Relative
Humidity, Air Heatwave Days,
Cooling Degree Days, Maximum
Temperature Days Higher 35ºC
Storms
: Heating Degree Days,
Extreme Wind Speed, Extreme
Precipitation
Floods
: Mean Sea Level Rise,
Extreme Water Level, Riverine
Flood Depth
The analysis was based on data from
Climate Insights, a tool owned and
developed by CLIMsystems (part of
SLR). The data from the Climate
Insights tool, shows the potential
future change in climate variables
based on global climate models
(GCMs) of the coupled model
intercomparison project (CMIP6) for
the periods from 2010 to 2055 with
a five-year step under the selected
scenarios of SSP1-1.9, SSP2-4.5 and
SSP5-8.5 (see page 78 for scenario
description). The climate data
provided is then correlated to our
business data, including revenue
generation and building value, to
provide an annual assessment of
the potential value at risk (VaR)
experienced from repair costs for
asset damage, and revenue loss due
to decreased productivity driven by
the likes of employee efficiency and
site closures. As such, it is not a
forecast of potential annual costs or
revenue losses but is a helpful
indication of the potential impacts
from physical climate change events
which are likely to increase over time.
The analysis does not take account of
any mitigation actions that the
business would implement.
TCFD disclosure
continued
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
82
Physical Hazards
The analysis shows an increase in
exposure to climate change over
time, in response to expected
increases in global temperatures.
Across the Group’s key assets, floods
and storm-related damages account
for the most significant impact.
The diagram below indicates which
physical hazards are most likely to
impact each site assessed in 2050
using the SSP-8.5 upper global
warming scenario. For example, at
our manufacturing site at Deeside,
flooding could cause the greatest risk
of financial losses due to damage and
productivity loss. However, heat stress
will become a more prevalent issue in
the longer-term at our sites in warmer
climates including our Reynosa site
in Mexico and Haina site in the
Dominican Republic.
Financial impact assessment
Here, we report the aggregate potential
financial impact across all seven sites,
for both damages and productivity
loss. To provide a ‘worst-case’ view for
the purpose of ensuring appropriate
risk controls, the financial results
reported do not account for mitigation
and adaptation measures which will
reduce our exposure and impact.
We present the assessment results
in absolute terms and as a cumulative
year-over-year (YOY) change. Whilst
the absolute financial impacts provide
a useful benchmark for the potential
significance of climate-related
disruption in the future, the YOY
change from the 2023 baseline is
useful to understand the potential
change over time from what we
consider the status quo today.
–
Absolute impact at point in time
:
Climate-adjusted value at risk for a
given year, indicates the extent and
probability of potential losses in
the future.
–
YOY cumulative change from
baseline
: We have considered the
potential increase in losses over
time, and as such have calculated
the delta of future years against
this year as a baseline. We have
presented this as the net present
value of the cumulative cash flow
impact for the period 2023-2050,
discounted at the Group WACC.
Damage to assets
Absolute
YOY
2030
(50th percentile)
2050
(50th percentile)
NPV
2023-2050
(5th – 95th percentile)
Scenario
Ambitious policy
$11.5m
$11.9m
Up to $4.2m
Middle of the road
$11.5m
$12.1m
Up to $5.1m
Hot House World
$11.6m
$12.4m
Up to $6.2m
Productivity loss at assets
Absolute
YOY
2030
(50th percentile)
2050
(50th percentile)
NPV
2023-2050
(5th – 95th percentile)
Scenario
Ambitious policy
$29.3m
$32.6m
$7.3m to $23.7m
Middle of the road
$29.3m
$35.5m
$11.3m to $29.3m
Hot House World
$29.9m
$38.4m
$15.9m to $37.6m
SIGNIFICANCE OF CLIMATE HAZARDS DRIVING IMPACT IN 2050, SSP5-8.5
Deeside
UK
(two sites, total size 19k m²)
Haina
Dominican Republic
(two sites, total size 225k m²)
Reynosa
Mexico
(two sites, total size 172k m²)
Osted
Denmark
(one site, total size 8k m²)
57%
Proportion of overall
Group financial impact
by site, NPV:
Water
stress
Wildfire
Heat
stress
Storm
Flood
19%
18%
6%
KEY:
Overview
Governance
Financial statements
Additional information
83
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
CLIMATE RISK AND OPPORTUNITY SCORING CRITERIA
Climate scenarios
Time horizons
Risk score
Opportunity score
Vulnerability
Size of
opportunity
Ability to
execute
Hazard
Likelihood
Magnitude
Chance of
occurring
Adaptive capacity
Ability to adjust or respond
Sensitivity
Degree to which systems could be affected
Exposure
Presence of systems that could be affected
Size of impact
We assess the likelihood, magnitude,
size of opportunity and ability to
execute across three climate
scenarios and short-, medium- and
long-term horizons.
Strategic report
TCFD disclosure
continued
As the analysis in the tables and
graphs demonstrate, the most
significant physical climate-related
risks to the Group’s key assets arise
from floods and storm-related events.
It is important to note that these
financial results do not account for
mitigation and adaption measures
which will allow us to reduce our
exposure and potential impact over
time. Our risk assessment process
allows us to analyse our physical
climate-related risks at each site
and we have a planned programme of
capital investment to develop further
resilience measures at each key
location which will allow us to mitigate
and reduce any potential financial
impact, i.e. flood defences, enhanced
temperature control systems and
building reinforcement measures.
The analysis of the risks and which
sites are potentially most impacted by
which climate-related risks will be
used to help prioritise investment
decisions. As we go through our
strategic planning cycle in 2023, the
analysis will inform our discussions
and help ensure we are evaluating
climate-related physical risks on an
ongoing basis and developing plans
to mitigate and minimise the impact
on our business.
In addition to the capital investment
programmes to mitigate the risks of
physical climate-related risks on our
business, we also consider other
adaption measures across our broader
operations and supply chain to help
reduce the potential impact of risks
going forward, i.e. levels of safety
stock holding to minimise any impact
of production downtime, alternative
production locations for key product
lines and different sources of raw
material suppliers.
In the event that we do experience an
impact on our business from extreme
weather events, we operate global
insurance programmes that provide
levels of financial cover against
property damage and business
interruption from the impacts of
natural catastrophe events such
as floods and windstorm.
Absolute climate risk adjusted ﬁnancial impact at point in time, SSP2-4.5, 50th percentile
£0
$10,000,000
$
20,000,000
$
30,000,000
$
40,000,000
Absolute potential ﬁnancial impact in 2030
from all physical hazards in upper global
warming scenario
Absolute potential ﬁnancial impact in 2050
from all physical hazards in upper global
warming scenario
2030
By value driver
2030
By location
2030
By Climate
hazard
2050
By value driver
2030
By location
2030
By Climate
hazard
$
50,000,000
$
60,000,000
Flood
Heat stress
Storms
Water stress
Wildﬁre
Damages
Damages
Productivity
Productivity
United
Kingdom
United
Kingdom
Mexico
Mexico
Dominican
Republic
Dominican
Republic
Denmark
Denmark
Convatec Group Plc Annual Report and Accounts 2022
84
Resilience and transition plan
One of the major challenges we face
as a medical products provider is to
increase the delivery of sustainable
solutions. There are two main
elements to this challenge which will
feature in our transition plan, to be
developed during 2023.
1.
Mapping, measuring and
monitoring our supply chain is
core to understanding our wider
impacts on the environment and
to identify areas where we have
stronger levels of influence to
limit impacts and achieve shared
goals. We use software solutions
including TransVoyant and
EcoVadis to collate data on
different aspects, and as a result,
have been able to implement
efficiencies within logistics and
collaborate with suppliers which
have aligned ESG goals to us. The
use of these solutions gives the
Group confidence in its data
integrity and will become
increasingly important in
decision-making to reduce GHG
emissions as we head towards
our target achievement dates.
2.
The GDG (for more detail see page
50) provide us with a framework of
environmental factors to be
considered as part of new product
design and redesign. The
associated Footprinter tool
provides an overall environmental
impact score as well as for each
factor, which helps to indicate the
trade-off between different
material options. This tool was
launched in Q4 2022, and in the
future will become a vital resource
to understand emission hotspots
in our product portfolio.
Ultimately the tool will be
incorporated with other design
tools and processes to improve
the data accuracy of emissions
reporting and transition to
lower-impact products. We expect
this integration to occur over
several years.
We are committed to delivering
medical solutions, in an
environmentally and socially
conscious way. In 2022, our first
priority was to identify measures to
reduce our operational impact in the
manufacture of products. In 2023, we
will explore opportunities to manage
our Scope 3 emissions and develop a
supplier engagement strategy. The
actions identified will feature in our
transition plan. In 2022 we committed
$3 million in climate mitigation and
have identified an estimated
approximate $40 million of mitigation
and adaptation projects across eight
manufacturing sites that have or will
be starting from 2022 to 2031.
Risk management
Risk management approach
Climate-related issues are considered
within the Environment and
Communities principal risk which sits
under the Strategic Risks category of
risks in our Group risk management
framework (page 97). This is in
recognition of the strategic
importance the business places on the
need to align with a net zero transition.
The Environment and Communities
principal risk includes risks associated
with the failure to adopt, transition to,
and integrate a low-carbon economy
strategy through core business
activities, to meet stakeholder
expectations and net carbon
zero targets.
The approach to identify, assess and
manage this risk on an ongoing basis
follows our overall Group risk
management approach which is
described within the Risk Management
section of this report (pages 88 to 97).
The identification of additional
mitigations to reduce risk exposure on
an ongoing basis is developed by risk
owners in each relevant area of the
business. Agreed mitigating actions
are included in the annual strategic
planning process and ESG strategy.
Scenario based climate risk
assessment
We further developed our assessment
of climate risks by undertaking
periodic comprehensive climate
scenario analysis. This includes the
identification and assessment of
transition and physical climate risks
and associated opportunities, across
future climate scenarios, and time
horizons (see pages 78 to 82).
Climate risks and opportunities were
identified through detailed business
workshops in 2021 from interviews
with internal experts, climate policy
and regulation research and inputs
from climate scenario models
(including IPCC, NGFS and IEA). Follow
up workshops have been held over the
course of 2022 to refresh the climate
risks and opportunities to ensure that
they remain relevant to the current
business operations and practices,
and will be held on a periodic basis
going forward. The strategy section
sets out the results of the current view
of our scenario-based climate-related
risks and opportunities.
The business has reviewed the risks
and opportunities identified within the
scenario-based assessment, and
where applicable factored them into
the group principal risk management
process. Consensus was achieved on
the principal climate risks and
opportunities through a workshop
with relevant business teams
(including Investor Relations, Finance,
Risk Management, Strategy, Innovation
and Operations) aimed at first refining
and then prioritising risks by financial
impact and likelihood.
Next steps
–
Integration
: In 2023, we will
complete the quantification of
transition financial impacts from
material climate risks. In parallel, the
business will work towards
integrating the assessment into the
ERM and strategy planning process.
This will include development of key
climate risk indicators and
tolerances to provide guidance to
risk management decisions.
–
Climate risk governance
: As part of
our risk management process, we
will assign risk owners that will be
accountable for determining what
appropriate controls and
management responses are
required.
–
Risk controls
: Integration of climate
risks into our ERM Framework will
help to ensure appropriate control
measures are put into place that are
based on the perceived materiality
of climate risk and our ability to
influence. Although some of these
measures are already outlined in our
current decarbonisation plans (see
page 66), by fully integrating climate
risks, we will be able to continuously
monitor the sufficiency of control
measures as part of our business
planning process.
Climate risk governance
We recognise the importance of
identifying and monitoring climate-
related risks, which feature as drivers
of our Environment and Communities
principal risk. This includes those risks
associated with global climate change,
and more broadly, the ability to
demonstrate a move to a greener
future and deliver positive outcomes
for the communities our operations
directly impact.
Overview
Governance
Financial statements
Additional information
85
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
The Board undertakes a bi-annual
assessment of the Group’s
principal risks. The CELT is supported
by the Group risk team and a network
of risk champions across the business,
who are tasked with maintaining
identification, assessment,
management and awareness of key
risks and control measures on an
ongoing basis throughout the year.
Ownership and management of all
risks is assigned to relevant members
of CELT, who are responsible for
ensuring the operating effectiveness
of the internal control processes and
for implementing effective key
risk-mitigation plans. Environment and
Communities is owned by the EVP,
Chief Human Resources Officer & ESG
Stewardship. CELT is supported by the
Group risk team and a network of risk
champions across the business, who
are tasked with maintaining awareness
of key risks and control measures.
Scenario based climate risk
assessment approach
We have worked with our climate
strategy adviser, Corporate Citizenship
(part of SLR), to further develop our
climate risk and opportunity
assessment approach. Initiated in
2022, the work will assist the
integration of climate considerations
into our risk management process.
Risk identification was based on a
range of sources including a review
of regulatory requirements related
to climate change, climate policy and
climate scenario research, review of
peer disclosures and interviews with
internal experts. Once risks were
identified and scored, they were then
validated in a workshop with senior
stakeholders representing all relevant
Group functions. These risks were then
presented to the ARC for review and,
where appropriate, incorporated into
the group principal risk assessment.
Central to the assessment of climate
risks (and opportunities), is the need to
account for a range of possible future
climate pathways. Climate scenario
analysis is undertaken to respond to
this uncertainty and complexity by
creating a range of hypothetical
futures. Thinking about a range of
future scenarios supports strategic
and risk management decision-
making, taking into account a range of
different potential outcomes. In
accordance with the TCFD
implementation guidance, the climate
scenario analysis process seeks to
assess climate impacts through a
combination of both qualitative and
quantitative measures (where data
and methodologies allow).
The following diagram describes the
qualitative assessment criteria used to
score and rank the identified climate-
related risks and opportunities. To
assess the potential impact to its
business and cashflows, identified
climate-related risks have been
assessed against likelihood of
occurrence, magnitude of impact and
vulnerability, where vulnerability is a
function of exposure, sensitivity and
adaptive capacity. Sensitivity reflects
the predisposition of organisations,
assets, societies, processes, or
systems to be adversely affected
by risk. Adaptive capacity refers to
characteristics or actions that may
reduce the level of risk posed by a hazard
and thereby alleviate vulnerability.
Climate opportunities have been
scored based on the potential size of
opportunity through avoided costs or
increased revenue, as well as the
ability to realise the opportunity. Each
term is scored on a five-point scale and
scoring thresholds are defined for
each indicator to ensure a consistent
and comparable approach is applied
across all impacts, climate scenarios
and time horizons. The potentially
subjective nature of qualitative scoring
is countered by reference to sector
and policy research, interviews with
internal experts, as well as climate
scenario databases including the IPCC
WGI Interactive Atlas and NGFS IIASA
Scenario Explorer.
The output is the prioritisation of
possible impacts on which the
business agrees to focus control
measures and investment. Where
methodologies allow, we have sought
to better understand the business
impact from a selection of priority
physical and transition impacts
through the quantification of potential
financial impact across different
climate scenarios (see page 83).
By interpreting climate impacts into
corporate financial terms, the business
can integrate climate considerations
into financial planning and strengthen
the case for investment in mitigation
and adaptation measures.
Strategic report
TCFD disclosure
continued
CLIMATE RISK MANAGEMENT PROCESS
Identify
Assess and
prioritise
Quantify
gross/net
impact
Risk
tolerance
determined
Indentify
controls and
actions
Function
and category
risk register
Group risk
register
CLIMATE SCENARIO
ANALYSIS
CLIMATE RISK
RESPONSE
CLIMATE RISK
REGISTER
Climate Key Risk
Indicators
RISK MANAGEMENT GOVERNANCE
Board, CELT, ARC, Function leadership, Risk champions, Risk owners, ERM team, IA
Convatec Group Plc Annual Report and Accounts 2022
86
Metrics and targets
Summary of disclosure on
priority activity in 2022
–
Complete GHG inventory reported
for Scope 1, 2 and 3, alongside
additional climate metrics
including energy and water use,
and waste generation.
Next steps for 2023
–
Formalise risk monitoring of existing
climate metrics and targets and
assess whether additional metrics
are required in order to sufficiently
manage risk.
–
Propose GHG near-term reduction
targets to SBTi for validation,
confirming that we are aligned
with the latest climate science
and pathways under the Paris
Agreement.
–
Review alignment against the
TCFD cross-industry climate-related
metric categories to meet full
alignment with the TCFD
recommendations as well as in
recognition of Convatec’s support
to provide relevant and comparable
information to stakeholders.
We use a range of metrics to
understand our baseline impact on
the environment. There are four key
areas that we monitor: emissions,
energy use, waste and water. As
disclosed on pages 66 to 71, some of
these metrics are used to measure our
exposure to certain risks and to track
performance over time. For example,
if a performance trend was upward
this would indicate the potential
impact may be greater and therefore
highlight that additional action and
mitigation are needed. Further
information on our performance
against climate metrics are included
on pages 66 to 71, while the detail
below shows our alignment against
the TCFD cross-industry climate-
related metric categories.
–
Scopes 1-3 emissions
: The Group’s
operational emissions are calculated
and reported annually, and for the
first time we are reporting a
complete Scope 3 inventory
(page 69).
–
Climate-related risks
: In 2022,
we undertook qualitative and
quantitative climate scenario
analysis for transition and physical
risks respectively. Internally we are
using the results of this assessment
to inform the appropriate response
for priority risks.
–
Climate-related opportunities
:
A qualitative climate scenario
analysis was conducted for
opportunities. Internally we are
using the assessment results to
prioritise the areas which could have
the greatest impact, and to inform
management response options for
identified opportunities.
–
Capital deployment
: We have an
estimated capex spend of circa $40
million of mitigation and adaptation
projects across eight manufacturing
sites that have or will be starting
from 2022 to 2031.
–
Remuneration
: In 2023, there will
be ESG objectives in the personal
objectives of each CELT member for
bonus purposes. In respect of the
two executive directors, the new
Executive Remuneration Policy
(which will go to the AGM for
approval) will include an ESG
objective, contributing to 5%
of their overall bonus.
While measuring and monitoring
our environmental performance is
valuable, having associated targets
keeps us responsible for the active
management of climate impacts. For
2023, we are launching new targets
across our key environmental impact
areas. These targets reflect our
strategy and mission to limit the
negative impact we have on the planet
and to play our part in reducing the
likelihood of an extremely high
warming future scenario.
–
Emissions
: We have set net zero
targets internally, which will align
our business with the Paris
Agreement. We have proposed GHG
near-term reductions targets for
submission to SBTi for validation in
the current year. This target aligns
Convatec with global climate goals
and with customer requests
to report a science-based target.
–
Energy
: Procure 80% renewable
energy by 2025 and 100% by 2030.
This target will reduce our exposure
to potential future increases in the
overall cost of consumption for
fossil fuels.
–
Water
: To deliver on our targets for
water consumption reduction at
high water-stressed locations and
develop our water management
practices at all locations.
–
Waste
: To deliver on our targets to
reduce the amount of production
waste leaving our plants to be zero
waste to landfill by 2030.
In 2023, we will continue our work
to understand what resources and
financial investments are needed in
the near term in order to enact change
and meet these targets. As part of
this, we will leverage the different
tools and software implemented
across Convatec to understand where
the largest impact areas are and what
the drivers are. This information will
support the identification of suitable
measures that address the root cause
in order to have the greatest impact.
For further information on measures
implemented in the last year to manage
our impacts, see pages 66 to 71.
Overview
Governance
Financial statements
Additional information
87
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Strategic enterprise level
Operational exposure management
Board risk
appetite
statements
Business risks and tolerance
Articulation into principal risks
RISK MANAGEMENT FRAMEWORK
Risk management
Strategic report
Helping to develop a more
resilient business through
effective risk management
Risk culture
The Board is responsible for risk
management and promotes a
transparent and accountable culture.
It does not inhibit sensible risk-taking
that is critical to growth and delivery
of the Group’s vision and strategy, but
it does set the boundaries for such
risk-taking. The Board and its
committees set the tone for CELT and
other senior management to promote
and cascade this culture through the
Group and with external stakeholders.
The Board, its committees and CELT
ensure that our risk management
systems are robust, effective and take
account of appropriate exposures. The
Board supports effective risk
management across the Group by
implementing and overseeing a
framework of appropriate and
effective controls that enable risk to
be assessed and managed.
The risk-related responsibilities
of the Board’s committees
Audit and Risk Committee (ARC)
Monitors and reviews all risk
management processes, including the
effectiveness of risk identification,
appetite, mitigation and control
measures.
Nomination Committee
Oversight to ensure that the Group has
a talented, diverse and effective Board
and CELT, combining extensive
corporate experience with knowledge
of our markets and regulatory
environment, as well as a pipeline of
future senior talent capable of
identifying and managing risk to
enable effective strategy delivery.
Remuneration Committee
Oversees the implementation of
appropriate reward arrangements to
drive a high-performing culture that
manages risk in line with our risk
appetite.
Our risk appetite
The Board sets the level of risk we are
prepared to accept to deliver our
strategy and realise our vision. In 2022,
we formally reviewed our risk appetite
and the risk tolerance levels of each
principal risk. Our risk appetite is
defined through four risk appetite
statements, which are detailed on this
page, and each principal risk is aligned
to one of the four statements, with risk
tolerance levels set in line with the
current and forecast business
environment. On an ongoing basis, the
ARC monitors the level of risk to which
the Group is exposed and how the
business continues to mitigate the risk
and operate within the stated risk
appetite levels. In 2023, we will
continue to enhance our approach to
risk appetite through embedding
identified metrics and obtaining
assurance over the key controls for
each of our principal risks to support
the Group to operate within our risk
appetite, and as a management tool
for business decisions.
Board risk appetite statements
Seek
Risk is taken in order to choose strategic
options that offer potentially higher
business rewards and/or there is
confidence in the level of robust systems
of internal control to respond effectively
and limit the duration of potential impact.
Accept
Risks that arise from events that are
outside realistic boundaries for
Convatec’s immediate direct influence
and control. A focus is required to build a
reasonable level of resilience to impacts
on strategic objectives.
Manage
Risk is accepted by Convatec in order to
achieve strategic objectives, and where
the risk is able to be managed to a level
that would not result in material impact
to strategic objectives.
Cautious
Risks arising from Convatec’s people,
processes, and systems that are
controllable and where there is no
appetite for risk taking in this area. The
objective is to eliminate the risk or to
reduce it to an absolute minimal level of
tolerance.
Convatec Group Plc Annual Report and Accounts 2022
88
Risk management framework
We continue to strengthen our risk management approach
through the development of a process that is based upon
ISO 31000, Risk Management, and complies with the
requirements of the UK Corporate Governance Code.
Our process undertakes a continuous bottom-up review of
risk (current and emerging), across each area of our
business, to identify the main threats to delivery of our
strategy. The resulting business risk profile is used to inform
our biannual principal risk update process, working with
subject matter experts from the business and supported by
the CELT sponsor(s). We identify, assess and prioritise our
business and principal risks in accordance with our defined
risk assessment criteria. Risk ratings are used to prioritise
our risks and are a product of the expected impact and the
likelihood of that impact to occur as a result of an event,
taking into consideration identified risk controls and certain
additional risk mitigation measures that have been
implemented and are monitored to further reduce our risk
exposure and ensure alignment with our risk appetite.
Consequently, this process results in our principal risks
being managed at the residual risk level rather than
inherent risk. The ARC oversees the risk management
process each quarter. For further information see page 131.
Governance and oversight
The work of the Board and the ARC is underpinned by a formal
structure of delegated authority and supported by Group
policies covering key areas of operation, including risk
management. The diagram below shows the key roles,
responsibilities and overall arrangements for collecting,
monitoring and reviewing risk information.
Leadership Teams
–
Identify new and emerging risks to the Group’s
strategy.
–
Review management of their specific risks on a
quarterly basis against the Group’s risk appetite.
–
Identify additional mitigations to reduce risk exposure
on an ongoing basis.
–
Assign senior business representatives (Risk
Champions) for each category and function to take a
lead role in the identification of risk, and updating risk
information for senior management oversight.
Risk information top down
Risk information bottom up
Principal risks:
Risks with potential material
consequences at a Group level or where the risk is
connected and may trigger a succession of events that,
in aggregate, become material to the Group. Risks may
materialise individually, simultaneously or in
combination to impact the delivery of our strategic
priorities and the long-term value of Convatec.
Business risks:
Risks identified from any aspect of the
Group that are relevant to one or more categories,
functions and/or Centres of Excellence, and can be
owned at that level.
OUR RISK MANAGEMENT PROCESS
Strategy and objectives
Risk reporting
Monitoring and challenge
Risk analysis
Risk identification
Risk description
Risk assessment
Risk categorisation
Risk response
Tolerate
Treat
Terminate
Transfer
Convatec Executive Leadership Team (CELT)
–
Sponsors a coordinated approach to establishing and
embedding enterprise risk management.
–
Employs a central risk team to establish and facilitate
the risk management process across the Group to
provide risk information for management oversight
and decision.
–
Manages the principal risks appropriately to operate
within the Group’s risk appetite.
–
Ensures that risk recognition and appetite are integral
to determining strategy.
–
Delivers strategy by managing risks.
Audit and Risk Committee (ARC)
–
Considers the risk environment through reporting from
management, internal audit and the external auditor
and considering external developments (e.g.
geopolitical events).
–
Reviews, and reports to the Board on the effectiveness
of the internal control environment and risk
management systems.
–
Sets the internal audit annual plan and external audit
scope to provide assurance on a materiality basis that
the Group operates within the Board’s approved risk
appetite through appropriate and effective controls
and mitigations.
Board
–
Sets the Group’s risk appetite.
–
Ensures appropriate risk management and internal
control systems are in place to enable the
identification and robust assessment of the principal
and emerging risks.
–
Ensures effective processes exist to manage the
principal risks and takes a balanced view of those risks
against Convatec’s strategy and risk appetite.
–
Assesses the Group’s prospects and resilience through
the Viability statement.
–
Sets the ‘tone from the top’ and the culture for
managing risk.
–
Sets strategic priorities in light of the Group’s risk
profile.
Overview
Governance
Financial statements
Additional information
89
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Risk management
continued
Strategic report
2022 risk landscape
Our principal risks remain consistent with those identified
in 2021, although our overall risk profile has moved to reflect
the challenges from the macroeconomic environment,
including global inflationary cost pressures, the ongoing
supply chain and commercial impact of the Russian
invasion into Ukraine and the continuing fallout from the
COVID-19 pandemic. Since 2020, the risk profile has been
elevated as a result of these global forces, and we have
continued to manage the challenges facing the wider
business landscape and build further resilience into our
operations. As such we remain well placed to successfully
deliver our strategy. To support our objectives and mitigate
specific external events we increased our focus in certain
areas as detailed below.
Strategic risks
In 2022, we continued to drive good momentum in the
business through strengthening our competitive position
and financial performance as we execute our FISBE strategy,
seek to improve efficiencies across the business and deliver
acquisitions and divestment to support our strategic
growth aims in our key markets. We responded quickly
and decisively to stand up a rapid-response team and take
action to the growing crisis in Ukraine and its effect on our
manufacturing and commercial operations. In our product
development pipeline, we successfully delivered three key
products to our targeted markets and continue to focus on
improving pipeline delivery through our defined innovation
framework. Our ESG agenda continues to develop to
achieve our net-zero commitment and science-based target
initiative as well as the recommendations of the TCFD.
Operational risks
The current climate, driven by global inflationary pressures,
continues to bring challenge to the business. We have
experienced external supply chain pressures in cost
inflation for raw materials, freight and on all other aspects
of the business cost base, as well as through constraints
in our global supply chain. The business continues to
effectively manage and respond to the issues faced and
to work closely with third parties on potential areas of
exposure to minimise any possible impact, including
through building appropriate strategic inventory. The rising
cost of living and competition for talent is placing upward
pressure on our people risk and we are heavily focused on
programmes of initiatives that we have put in place to
support the continued attraction, recruitment and
retention of key talent, roles and skills. Over the course
of 2022, we have continued to improve the robustness of
our IT infrastructure and cybersecurity, data management
and privacy framework in line with the changing
business environment.
Financial risks
We continued to positively manage the adverse effects of
the macroeconomic environment on our businesses and
overall drove continued strong revenue growth in 2022.
Over the year, we continued to improve margin by
simplifying our business, driving efficiencies through our
cost base and improving margin through mix. Through
refinancing our bank facilities in November 2022 with
$1.2 billion committed for five years at slightly improved
margins over base rates we continued to strengthen our
balance sheet and reflect our stronger credit standing.
Tax governance continued to be strengthened through
effective implementation of transformational change and
managing the impact of changes in tax law and regulation.
Compliance risks
We continued to strengthen and adapt our compliance
framework as we grow in mature markets and target
investment in emerging markets. We took steps to ensure
the maintenance of ongoing compliance in our markets,
including the continued provision of ethics training and
focused global compliance resources and initiatives. During
the period, we identified exposures and addressed risks of
non-compliance through implementation of appropriate
mitigation programmes. We continued to progress
improvements in our third-party risk management and
contract procurement to maintain expected standards
of compliance within our third-party partners. Third-party
activity continued to be monitored and managed through
due diligence by our Compliance team and an independent,
expert third party. The Russian invasion of Ukraine
introduced additional sanction framework requirements
that we responded to, met and continue to monitor
across the relevant parts of our business and supply
chain affected.
2023 anticipated risks
We expect certain risks to impact in 2023 and have put
in place mitigation measures to reduce any adverse
implications for the Group’s financial results, operations,
reputation and strategy. While these specific risks are
embedded in many of our principal risks, further details
are provided below.
Global inflationary pressures
Our operating and financial performance is influenced,
amongst other factors, by the economic conditions of the
countries and markets in which we operate, and our ability
to manage exposure to volatile economic measures.
Pressure from economic deterioration, inflation and
recessionary impacts can all contribute to challenging
market conditions. Recent global economic conditions have
meant that global inflationary pressure has increased,
resulting in rises in our manufacturing and operating cost
base. Whilst the management of our supply chain is a core
competence, we monitor the evolving situation and have
taken appropriate steps to prepare for foreseeable
challenges in the current environment over high inflation
on commodities, lead times and shortages for raw materials
and manufactured goods, fluctuations and adverse
movement in shipping costs, congestion and capacity
constraints, which are all expected to continue into 2023.
Security of energy supply
Our manufacturing operations are reliant on energy
supplies from national infrastructure (electricity and gas) in
the countries in which we are based. In turn, these countries
are in part reliant on supplies from other parts of the world.
Electricity and gas prices and availability will be increasingly
shaped in 2023 by international forces, including the effects
of sanctions regimes against energy exporters such as
Russia, combined with the additional challenge of
transitioning to lower carbon generation. Any break in this
supply chain, for example as a result of unplanned outages
in-country, or as a result of heightening energy costs, could
jeopardise our revenues and/or manufacturing productivity
and impact supply to customers.
Convatec Group Plc Annual Report and Accounts 2022
90
Attraction, recruitment and retention
Our success is dependent on maintaining and growing
the capability and capacity of members of our senior
management teams and workforce, specifically attracting,
retaining and recruiting key talent and skills in critical roles,
certain customer-facing employees as well as technical
experts focused on the development of new products and
technologies. The rising cost of living for our workforce and
competition for talent across our markets is intensifying
the challenges in retaining and/or recruiting key talent and
skills across our business. We expect this pressure to
continue into 2023 and programmes of work are in progress
to reduce our exposure to workforce engagement and
talent attraction and retention risks.
New market growth and product delivery
We expect to launch new products for AWC and IC in 2023
and products across all of our categories continuing into
2024. Delivery of our product pipeline is supported by our
product development and launch process, which acts
end-to-end to govern our actions and milestones from
ideation through development to scale-up and finally
approval and launch in a consistent manner. We continue
to focus on our 12 key markets around the world, with
a particular emphasis on China and the US. In 2023, from
a markets perspective, we will continue to invest in China
as a key market going forward and continue to grow our
market share in the US. We will continue to strengthen our
competitive position by evaluating potential partnerships
and acquisitions. Any delays or failure to meet market
expectations in our growth plans, however, may result
in a lack of stakeholder confidence to deliver against
stated plans.
Emerging risks
On a biannual basis, our Enterprise Risk Management
(ERM) team engages with senior management to identify
any emerging risks that relate to new or changing
conditions in our market environment, which may impact
the Group beyond the horizon of our long-term Viability
statement. In 2022, we re-evaluated our emerging risk
model with each area of the business against the principal
risks and revised the key exposures to expand upon the
previous disclosure. In 2023, we will develop this model
further to enhance our measurement of these key
exposures, the resilience in place and identify relevant
metrics to aid with detection. As at the date of this report,
the following emerging risks have been identified:
Medical advances
Technology and innovation are essential if we are to meet
customer demands. If we do not develop the right
products, have access to the right technology or deploy
it effectively within our key markets, or adjust to medical
and surgical advancements and improvements in detection,
cure and prevention (including in the development of smart
‘artificial device’ technology) we may lose market share in
multiple key markets to existing and new-entrant competitors.
Future material and operational restrictions
Our future business is dependent on our ability to
anticipate and/or adapt to future health, safety and
environmental legislation, concerns, studies or the loss of
stakeholder confidence in the materials and processes used
in the manufacture of current and future products, or
where there is a proven greener alternative, for example
single-use plastics.
Long-term third-party management
Our current and future products rely on regulated
manufacturing processes and approved supply chains.
We are dependent on our ability to effectively manage the
security of supply in our key raw materials and unfinished
goods, critical services and manufacturing energy supply to
avoid any future chronic sourcing issues/cessation in service
by single or sole source suppliers for key product lines.
Future market environment
Our ambition to drive growth and further develop our
business is reliant on our ability to adapt to future market
and healthcare models, market competition and major
unforeseen economic events. The value of customer data
has increased and any shortfall in our ability to adapt to an
increase in the management of customer data, expanding
data commercialisation capability and technology and
widening range of virtual capability allows for potential
disintermediation and/or bundling of other products and
services by emerging, non-traditional competitors entering
the market.
Other factors
For further information relevant to our risk profile see:
–
Our business model – pages 8 and 9
–
Key performance indicators – pages 20 and 21
–
Operational review – pages 22 to 29
–
Responsible business review – pages 40 to 74
–
The Task Force on Climate-related Financial Disclosures
– pages 75 to 87
–
Viability statement – pages 98 and 99
–
Governance – pages 102 to 165
Overview
Governance
Financial statements
Additional information
91
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Key:
1.
Operational Resilience and Quality
2
Information Systems, Security and Privacy
3
Innovation and Regulatory
4
Customer and Markets
5
Political and Economic Environment
6
People
7
Legal and Compliance
8
Strategy and Change Management
9
Environment and Communities
10
Tax and Treasury
Risk category:
Strategic
Operational
Financial
Compliance
Increased
Unchanged
Decreased
Impact
Likelihood
1
2
3
4
5
6
7
8
9
10
The Board reviews and agrees our principal risks on a
biannual basis, taking account of our risk appetite together
with our evolving strategy, current business environment
and any emerging risks. Our principal risks are set out over
the following pages in order of priority (based on the rating
of residual likelihood and impact, as described opposite).
They are also reflected in the key adverse scenarios
underlying the Viability statement (see pages 98 to 99).
Risk heatmap
The graphic below summarises our assessment of the
expected impact and the likelihood of that impact to happen
as a result of our principal risks occurring after taking into
consideration the mitigating actions and effective controls
in place to manage each risk, with an indication of the change
in the risk profile since December 2021.
Principal risks
Strategic report
Below is an overview of the Group’s principal risks that could impact the
delivery of our strategy and the realisation of our vision, in order of priority.
The Board has oversight of all principal risks that the Group faces.
2022 RISK MANAGEMENT CASE STUDY
The Russian invasion of Ukraine, supported by Belarus, and
the resultant sanction framework implemented by the US,
EU and UK (amongst others) required the Group to consider
the complexities and risks associated with our presence in
Russia and Belarus.
We responded quickly to the evolving situation in Ukraine
and the surrounding region when it first emerged at the
beginning of 2022. A rapid response team (RRT), comprising
of CELT members and senior leadership was formed to take
real-time strategic decisions on behalf of the Group. The
RRT was supported by a cross-functional senior leadership
working group to manage events on a day-to-day basis and
provide a structure to form recommendations for the
Group to consider.
Risk identification and assessment:
–
Short term – focus on maintaining the security of supply
for our manufacturing plants, sustain product supply to
our customers and respond promptly to the emerging
statutory framework of sanctions.
–
Medium to long term – existing and future operational
and commercial presence in Russia and Belarus; supply
chain management; compliance with all laws and
regulation in an evolving environment; and financial
exposure and obligations.
Risk response:
–
Assessment of current level of operational and supply
chain preparedness and resilience to short-term impacts
on customers; and
–
Sanction framework checks in place with shareholder
register, Compliance, Treasury, banking partners, supply
chain and finance teams.
Risk monitoring
:
–
Working group in place with dedicated workstreams; and
–
Continued assessment of potential impacts to the
business with appropriate mitigation plans.
On 12 May 2022, it was announced that the Group would be
withdrawing from its hospital care activities and related
industrial sales during the remainder of 2022. The
withdrawal from these low-margin activities is consistent
with the Group’s FISBE strategy, with the Group focusing on
higher-growth chronic care markets with improved margins
and higher levels of recurring revenue. Given the geopolitical
situation in the region, the manufacturing plant in Belarus
which produces hospital care goods ceased manufacturing
on 31 May 2022 alongside the discontinuation of associated
Russia activities. The remainder of the hospital care and
industrial sales activities were mostly phased out in the
second half of 2022.
Convatec Group Plc Annual Report and Accounts 2022
92
1. Operational resilience and quality
Risk
Supply and manufacture of products and packaging are reliant on the resilience of supply chain partners and manufacturing assets, and
robust clinical and quality system processes. We invest in and develop our assets, systems and processes to provide a level of operational
integrity and performance. Failure to respond to events, including geopolitical issues and any increase in extreme weather patterns from
climate change, that result in production and/or supply chain delays, adverse product quality and health, safety and environmental
incidents could result in underperformance, a requirement to recall a product, reputational harm or a loss of stakeholder confidence
in our ability to deliver our strategic ambitions.
Key drivers
Risk mitigation
–
Business continuity management.
–
Supply chain resilience capabilities.
–
Quality standards and resolution of existing and emerging
quality issues within the supply chain, manufacturing and
packaging processes.
–
Health and safety of employees and contractors. Protection of
the environment.
–
Maintaining manufacturing plant performance.
–
Single source or sole suppliers for raw materials and services.
–
Executive-led operational business continuity governance group
provides high-level oversight. Business continuity plans for
manufacturing facilities, inventory movement and our key supply
chain to maintain capability to respond rapidly and appropriately
to any incident.
–
Procurement and supply chain processes to monitor, manage
and provide assurance to supply-based risk across our markets,
inventory, energy security, key suppliers and supply routes, ports
and countries of operation.
–
Dedicated engineering, health, safety and environment, and
quality project teams and processes to prioritise and address risk
to manufacturing processes, facilities and people.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Operational
Appetite:
Manage
Accountability:
John Haller, EVP, Chief
Global Quality & Operations Officer
Link to strategy:
Increase the efficiency and effectiveness of
operations to support future market and
customer demands.
2022: no material change
Read more on pages 40 to 87
2. Information systems, security and privacy
Risk
Failure to ensure that our systems, data management and related controls supporting our global business are effective, available,
integral and secure, and recoverable, including those of our third-party partners, could adversely affect our ability to maintain continuity
in our operations and the trust of our customers and other stakeholders. Information security breaches can lead to data theft, fraud or
accidental disclosure and result in non-compliance with global data protection laws. Any real or perceived failure to comply with laws
and regulations, or to adjust to a change in conditions and increase in scrutiny, could result in adverse consequences such as penalties,
regulatory investigation, a decrease in corporate trust from stakeholders or additional compliance measures.
Key drivers
Risk mitigation
–
Data management and privacy.
–
Cyber security.
–
IT and network resilience, business continuity and disaster
recovery arrangements.
–
IT network alignment to business needs.
– Digitisation.
–
Data optimisation.
–
Cybersecurity leadership council, ethics committee and privacy
leadership team provide governance and oversight with policies,
methodologies, training and accountability framework in place
to manage the protection and use of personal data.
–
Global Information Security and Compliance function supports
the business with an IT general control framework in place to
protect systems and data. Independent cyber assessment and
data review programme in place.
–
Regularly evaluate, improve and test the resilience of our
infrastructure and security incident response and recovery plan
for continued effectiveness and proportionality.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Operational
Appetite:
Manage
Accountability:
Jonny Mason,
Chief Financial Officer
Link to strategy:
Enhance the efficiency and resilience of our
IT systems and processes to support
effective delivery of our operations.
2022: no material change
Read more on pages 55 & 99
Overview
Governance
Financial statements
Additional information
93
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Principal risks
continued
Strategic report
3. Innovation and regulatory
Risk
Failure to invest in and develop safe, effective, profitable and sustainable long-life products to meet customer and market expectations,
fill unmet medical needs or respond to disruptive new technologies, could result in lost market share, underperformance and a lack of
stakeholder confidence to deliver in line with expectations. We are subject to oversight by a number of regulatory jurisdictions that
continue to implement significant obligations and scrutinise how we operate. Failure to fulfil emerging obligations, provide safe clinical
processes, or produce products and packaging that meet stringent and transparent customer, environmental and performance criteria,
or operate inadequate or environmentally inappropriate manufacturing and quality systems could impact our ability to supply or a
requirement to recall product(s), with the potential for regulatory action and/or liability claims, due to non-compliance with regulatory
bodies, a failure to meet stakeholder expectations or patient harm from faulty products.
Key drivers
Risk mitigation
–
Product innovation transition from end-of-life technology and
ageing products.
–
Compliance with regulatory frameworks and anticipation of
emerging regulatory environment.
–
Disruptive and new technologies. Changing customer and
market needs.
–
Maintaining legal manufacture structure, authorised
representatives and assurance process for pre-market,
manufacture, and post-market compliance.
–
Managing safe clinical services for sustainable growth.
–
Sustainable approach to responsible products, packaging
and development.
–
Central Technology & Innovation team provides strategic
direction for continued R&D investment, product development,
medical education, regulatory approval and new product
reimbursement and launches to cultivate the product pipeline.
–
Product portfolio reviews provide oversight on short-, medium
– and long-term innovations and the balance across product
categories and market regions.
–
Regulatory teams and regulatory intelligence process supports
the business to meet the latest standards and expectations in
all our jurisdictions and manages our relationship with
regulatory bodies.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Strategic
Appetite:
Cautious
Accountability:
Dr Divakar Ramakrishnan,
Chief Technology Officer & Head of
Research & Development
Link to strategy:
Create a leading and responsive position in
the regulatory environment, and through a
sustainable development pipeline, improve
the long-term customer experience, meet
market demands and capture growth
opportunities in our markets.
2022: decreased – delivery of three key new
products, the increased robustness of our
development pipeline and the continued
delivery of the EU-MDR Compliance
programme.
Read more on pages 50 to 55
4. Customer and markets
Risk
Growth and value in our markets rely on our product portfolio, future innovation, M&A pipeline and digital strategy delivering to
expectations and meeting customer demands, along with a competitive pricing strategy. There is continued pressure on pricing and
cost containment from rising global inflation rates and large and consolidating buying groups, as well as on reimbursement rates for
products sold into the home care setting from government or commercial payers managing and reducing their costs. Competitor
behaviour, attractiveness and effectiveness of our portfolio from market trends or public perception, and maintaining a low-cost
base, all increase competition for sales and reduce prices and margins. Failure to identify, react or plan effectively to changes in
market conditions, competition, customer demand, expectations and behaviours could result in suboptimal decisions,
underperformance and adverse results.
Key drivers
Risk mitigation
–
Local or national government healthcare budget provisions.
–
Operational, contracting and price review process.
–
Product portfolio rationalisation.
–
Competitive markets and behaviours and consolidation of
buying groups.
–
Changes in customer buying patterns and service level
expectations.
–
Manufacturing costs in a low-margin driven pricing environment
and as a result of changes in consumer and government
behaviour/attitude to sustainability.
–
Key market and geographies focus supported by the Global
Pricing CoE established in key regions to adapt to changing
market conditions and provide insight and information in a timely
manner to respond to increases in risk, with regular pricing
analysis and reviews undertaken.
–
Executive operational reviews in place to drive manufacturing
cost efficiencies and focus through dedicated R&D and
technology innovation teams on new product development
and launch.
–
Market environment monitored and key strategic markets, such
as China, assessed for further growth opportunities. Supply
chain team manages and mitigates market and region challenges
and logistics.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Financial
Appetite:
Manage
Accountability:
Presidents and
Chief Operating Officers
Link to strategy:
Grow portfolio and market share through
cost efficient, innovative products that
strengthen the relationship with our
customer base.
2022: no material change
Read more on pages 22 to 29
Convatec Group Plc Annual Report and Accounts 2022
94
5. Political and economic environment
Risk
Our global operations and markets are subject to various political interventions and changes to corporate governance requirements,
particularly in relation to global inflationary and supply chain pressures, security of raw material and energy supply, healthcare system
reform, regulatory reform, governance of industry operations, amendment to existing tax and disclosure regimes and fiscal terms, and
protection of consumers and business customers. Continuing volatility in the international political climate increases the possibility of
tariff structure changes, sanctions or other trade limiting actions. A failure to identify and adapt to these factors could impact sourcing
commodities and services, as well as our ability to maintain a presence in current and future markets and countries.
Key drivers
Risk mitigation
–
Financial markets, inflationary and supply chain pressures and
macroeconomics.
–
National healthcare reforms, political movements and trends
–
Geopolitics and security of the supply chain.
–
Uncertainties effected by global pandemics, interstate conflict
and social unrest affecting key markets.
–
Compliance with sanction frameworks.
–
Adverse national trading relationships, customs duties
and tariffs.
–
Compliance, IR, Legal, Regulatory and Tax teams support the
business, liaise with external stakeholders and respond to
changing requirements where appropriate.
–
Global supply chain function manages our presence in markets
and across regions. Third-party contracts in place to maintain
the security of supply. Monitoring of supply chain through
implemented systems and third-party partners.
–
Dialogue with governments in relation to specific matters.
Membership of appropriate industry bodies and participation
on industry issues including development and implementation
of best practice. External support via third-party consultants
to identify and manage risks present to our operations.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Strategic
Appetite:
Accept
Accountability:
Jonny Mason,
Chief Financial Officer
Link to strategy:
Effective minimisation of political and
macroeconomic disruption will enable
us to identify areas for operational
improvement, deliver further value and
maintain our competitive market positions.
2022: increased – global inflationary
pressure challenges on all aspects of the
business cost base as well as global supply
chain constraints.
Read more on pages 12 to 13
6. People
Risk
Failure to effectively recruit, retain and develop a diverse and inclusive workforce with strong succession to align the right talent,
particularly in our senior management and through the development of the talent pipeline, to enable key business imperatives.
Intensifying global cost of living and inflationary pressures increases the challenge in retaining and/or recruiting key talent and skills.
Failing to successfully manage transformation and/or the effects of high business disruption could impact employee effectiveness,
engagement and wellbeing and adversely affect our ability to transform our business, achieve our strategic objectives and deliver growth.
Key drivers
Risk mitigation
–
Attraction, recruitment and retention of key skills and
capabilities, including salary and remuneration inflation
challenges in critical areas.
–
Effective succession and knowledge management planning
strategy for senior leadership and key roles.
–
Mental and occupational health and wellbeing of the workforce.
–
Resource planning, people capability and capacity, including the
speed and volume of management change.
–
Performance and development management, diversity, equal
opportunities and labour relations.
–
Company culture, values and workforce engagement.
–
Executive and senior leadership focus on maintaining a diverse
and effective leadership team with a pipeline of senior future
talent and retention and development of key skills across the
organisation. Continuing focus on ERGs.
–
Talent to value approach embedded in the strategic planning
process. Talent management reviews create pipeline of talent
for critical and leadership roles.
–
OHI and employee pulse surveys in place. Implementation of
appropriate reward arrangements to attract and retain top,
senior talent, maintain strength in key skills and respond to
regional cost of living issues.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Operational
Appetite:
Manage
Accountability:
Natalia Kozmina,
EVP, Chief Human Resources Officer & ESG
Stewardship
Link to strategy:
Create a sustainable level of expertise
and key skills across the Group.
2022: increased – rising cost of living
challenges for our workforce and increased
competition for talent across our markets
challenges retention and recruitment of key
talent and skills
Read more on pages 56 to 61
Overview
Governance
Financial statements
Additional information
95
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Principal risks
continued
Strategic report
7. Legal and compliance
Risk
Our business is subject to a complex environment of laws and regulations across multiple jurisdictions. Any real or perceived failure to
comply with required and/or new and emerging laws, regulations and sanctions or to adjust to a change in conditions and increase in
scrutiny, or exposure to litigation from contractual obligations or intellectual property could result in adverse consequences such as
penalties, government investigation, a decrease in corporate trust from stakeholders, competitive disadvantage or additional
compliance measures.
Key drivers
Risk mitigation
–
Market conduct compliance.
–
Legal obligations in relation to customer conduct, including sales
practices and distributor activity.
–
Product and patient liability.
–
Commercial litigation.
–
Financial crime.
–
Complexity and transparency of IP and patent environment,
including in tax and operations.
–
Our Code of Conduct, Group policies and standards govern how we
conduct our affairs through our values and culture. Executive-level
Compliance Steering Committee and Audit & Risk Committee
provide oversight to the Group on annual compliance assurance
programme, mandatory training, compliance initiatives and
emerging exposures. Independent whistleblower process in place.
–
In-house legal counsel team with external counsel engaged when
appropriate. Contract database, contract approval process and
Grant of Authority scheme in place. Third-party risk control
framework for onboarding due diligence process and distributor
training. Patent counsel manages patent protection and ongoing
market IP monitoring processes.
–
Sanction framework checks in place with shareholder register,
Compliance, Treasury, banking partners, supply chain and
finance teams.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Compliance
Appetite:
Cautious
Accountability:
Evelyn Douglas, EVP, Chief
of Corporate Strategy & Business
Development, General Counsel & Company
Secretary
Link to strategy:
Create an industry-leading legal and
compliance approach to our obligations
and stakeholder expectations.
2022: no material change
Read more on pages 62 to 65
8. Strategy and change management
Risk
Delivery of our strategy will involve growth in a number of networks, simplifying the business and achieving efficiencies, maintaining
a low-cost base and divestments to position ourselves to deliver targets whilst sustaining a stable platform for investment. Any failure
to ensure that we deliver material growth in key markets, integrate M&A activity and establish strategic partnerships, contend with new
market entrants and maximise the value of data could fail to create shareholder value, erode investor confidence, and have a significant
impact on the Group’s revenues and profits. The successful delivery of business change is fundamental to our future success. Large-scale
change initiatives carry complexity and a material delay or challenge to our change programme and the realisation of planned benefits
may affect objectives, strategic growth, investor confidence and cause financial loss.
Key drivers
Risk mitigation
–
Transformation execution.
–
Programme management and governance.
–
Mergers & acquisitions and divestures.
–
Strategic partnerships.
–
Strategy definition and execution.
–
Investor relations and stakeholder management.
–
The Board approves the Group strategic plan setting the strategic
direction and confirming strategic choices that are embedded in
targets across the business.
–
Central strategy team supports the business delivering against
the embedded strategic planning process and timetable to define
clear delegated targets in business plans.
–
Central Financial Planning, Performance & Delivery function
provides overarching global oversight to delivery of change
management and efficiencies programme. The function works
to ensure capital is allocated in line with strategy and towards
projects best able to deliver expected business benefits.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Strategic
Appetite:
Seek
Accountability:
Evelyn Douglas,
EVP, Chief of Corporate Strategy &
Business Development, General Counsel
& Company Secretary
Link to strategy:
Create a continuous streamlined
business model that assesses value-
adding opportunities, maximises
investment returns and delivers strategy
to meet stakeholder expectations.
2022: no material change
Read more on pages 15 to 19
Convatec Group Plc Annual Report and Accounts 2022
96
9. Environment and communities
Risk
Long-term success relies on addressing the challenges to the sustainability of our operations (including environmental and social
aspects), supply chain resilience, products and the ability to manage the impact of climate change, developing trends in the political
environment and increasing pressure and scrutiny from external groups, society, customers and communities in which we operate.
The level of requirements and expectation from stakeholders is increasing, which requires a robust, transparent and equitable level
of sustainable corporate culture to underpin the way in which the Group operates. Failure to implement appropriate plans across
environmental, social and governance aspects, including incorporating the recommendations of the TCFD and SBTi and deliver on a
net zero commitment, could hinder efforts to mitigate long-term risks and bring a range of reputational and commercial impacts to
the business across a range of stakeholders.
Key drivers
Risk mitigation
–
Environmental and climate change strategy delivering our net
zero commitment and Science-Based Targets initiative.
–
Recommendations of the TCFD and emerging ESG reporting
requirements and standards.
–
Responsible and sustainable behaviours across the supply chain.
–
Product impacts and sustainable product design.
–
Sustainable corporate culture in DE&I and transparent ways
of working.
–
Community investment programme.
–
Executive ESG Steering Committee, including functions from
across the business, provides oversight and direction on Group
strategy and execution.
–
ESG framework implemented, aligned to our Group reporting
and regulatory requirements, with published policies and
independent third-party expert assurance in place.
–
Supply chain partners managed through contracts, supplier
code of conduct and performance monitoring with third-party
assurance process in place for key suppliers.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Strategic
Appetite:
Manage
Accountability:
Natalia Kozmina, EVP,
Chief Human Resources Officer & ESG
Stewardship
Link to strategy:
Achieve an effective balance between
short-term needs and delivery versus
longer-term requirements and
commitments, in response to anticipated
exposures from changes and events in
the climate, the environment and society.
2022: no material change
Read more on pages 66 to 74
10. Tax and treasury
Risk
Our business operates across multiple jurisdictions with complex tax laws and regulations and it manufactures and/or operates across
markets with multiple currencies. Changes in tax law and regulations as well as any organisational change that affects the Group’s tax
operations framework, may impact tax liabilities and increase filing and disclosure requirements and obligations. Failure to manage
tax compliance, inflationary pressures, fluctuations in interest and foreign exchange movements, counterparty exposure, the cost of
and access to financing or a deterioration in cash-flow and liquidity as a result of impacts to our revenue, costs and/or global financial
systems could drive reductions in stakeholder trust, financial performance and future investment.
Key drivers
Risk mitigation
–
Multiple tax jurisdictions and emerging changes to tax law
and regulations.
–
Complex global tax regulatory environment and complex
Group trading structure and intra-group trading. Unprovided
tax liabilities.
–
Global economic environment, including exposure from
interest and foreign exchange rates.
–
Financial obligations, cashflow management, access to funding
and credit rating.
–
Counterparty exposure.
–
Financial reporting and controls in key processes.
–
Central global tax function monitor changes in tax laws and
regulations, as well as support during major internal projects,
to advise the business regularly on obligations, requirements
and future improvements to the tax governance framework.
–
Central global tax function works with the business and
Finance team in major jurisdictions to understand tax changes
and provide support.
–
Central corporate Treasury function manages the capital
structure that supports strategy, liquidity access to meet
financial obligations and liquidity reserve. Refinancing of our
bank facilities for five years completed in 2022. Interest rate
hedging strategy in place.
Risk details and link to strategy
Opportunity
Risk profile change
Category:
Financial
Appetite:
Manage
Accountability:
Jonny Mason,
Chief Financial Officer
Link to strategy:
Robust tax arrangements, financial
performance and balance sheet to
increase stakeholder and shareholder
confidence.
2022: no material change
Read more on pages 30 to 38
Overview
Governance
Financial statements
Additional information
97
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
Convatec Group Plc Annual Report and Accounts 2022
98
Viability statement
Strategic report
The Group’s future
prospects and viability
An understanding of the Group’s
strategy, to pivot to sustainable and
profitable growth, and its business
model (pages 16 to 19 and pages 8 and
9), are central in allowing the Board to
assess the Group’s prospects, liquidity,
resilience and viability. The principal
and emerging risks being addressed
by the Company (see pages 91 to 97)
are reflected in the determination of
the Group’s strategy and its successful
implementation.
Assessment of future prospects
The Group’s annual planning process
consists of monthly monitoring of
progress against the financial budget
and key objectives for the current year
by CELT and the Board, reforecasting
throughout the year in respect of the
expected outcome for the current year,
preparing a detailed budget for the
following year and updating a rolling
five-year strategic plan, following a
detailed review by the Board, which
forms the main basis on which to assess
the longer-term prospects of the Group.
In 2022, the Board approved a detailed
operational plan and execution model
to deliver sustainable and profitable
growth over the medium to long term.
The Board subsequently approved the
financial plan that underpins
the Group’s five-year strategic plan.
The financial plan forecasts the Group’s
profitability, cash flows and funding
requirements for the relevant period.
Our strategy is consumer-centric,
agile, focuses on innovation and
ensures clear accountability. It has been
developed from strategic plans for each
of our business units and functional
areas, supplemented by items managed
at a Group level and assumptions such
as macroeconomic activity, market
sector growth forecasts, competitor
activity and exchange rates. This has
then been supplemented by CELT’s
plans for improving the operational
effectiveness and execution of all
elements of the Group.
Key factors affecting the Board’s
view of the Group’s prospects over
the period of the viability assessment
and the longer term are:
–
The fundamentals of our markets,
products and brands remain sound,
as does our current and future
strategy of leveraging our product
portfolio for growth in attractive
segments and geographies,
developing and commercialising
new technologies and services and
striving to reduce complexity and
increase efficiency.
–
Established positions in large,
structurally growing markets; strong
brands and a range of differentiated
products; a well-diversified business
platform across a range of market
segments and geographies; and
cash generation capabilities.
–
Refinancing of the Group’s bank
facilities with $1.2 billion committed
for 5 years in addition to the
Group’s $500 million 2029 senior
unsecured notes.
–
The five strategic pillars that will
support the delivery of the strategy,
which are set out on page 15.
The key assumptions considered in the
strategic plan, on which this viability
assessment is based, include:
–
Our markets remain structurally
sound and continue to grow at
existing levels with no significant
change to re-imbursement
environments.
–
Margin improvement is driven by
successful execution of our
operational excellence programmes
in order to deliver productivity gains
in excess of pricing and other
headwinds.
–
Although the persistence of
COVID-19 remains uncertain,
impacts on operations remain
limited and have been embedded
into the assumptions for the
strategic planning cycle.
–
Climate risk has been considered
but is not expected to have an
impact during the viability period
of three years.
–
Through the execution of our
strategy, we simplify our business,
remove excess costs and re-invest
in future innovation.
–
Maintaining the existing dividend
policy over the viability period.
Viability assessment
Throughout the year, the Board has
undertaken a robust assessment of the
principal risks affecting the Group and
also emerging risks, particularly those
that could threaten the business model
and the Group’s viability over an
extended period, including an
assessment of the likelihood of them
materialising. These risks and the actions
being taken to manage or mitigate these
risks are explained in detail on pages 93
to 97. This analysis has then been
applied to allow the Board to assess
the prospects, liquidity, resilience and
viability of the Group.
The directors are of the view that the
appropriate period of assessment
remains a three-year period from January
2023 to December 2025 (“the Viability
Period”). Although the Directors have no
reason to believe that the Group will not
be viable over a longer period, the Board
has chosen to conduct the assessment
for this three-year period because:
–
Our R&D and production cycles tend
to be of a duration of less than three
years with key innovation pipeline
programs targeting launch within
the Viability Period.
–
Significant capital investments are
being made over the next year to
realise the Group’s strategy over the
medium to long term. The Group’s
business model means that its capital
investment is discretionary and it
has the ability to respond in a timely
manner to reasonably possible
Group specific and market events and
therefore does not require a longer
time horizon assessment.
–
Implicitly, it is harder to accurately
forecast the latter years of a five-
year plan.
The viability assessment has
consisted of stress testing the
forecasts underlying the strategic
plan by modelling severe but
plausible scenarios in which a number
of the Group’s principal risks and
uncertainties materialise within the
Viability Period. We have modelled
scenarios which group together
principal risks where we believe
interdependencies exist between
risks, in addition to scenarios
where unconnected risks occur
simultaneously. These scenarios
focused on both external factors,
such as the possible impact of,
economic recession in some markets
leading to higher interest rates and
increased inflation headwinds, and
internal factors, such as a regulatory
breach resulting in a loss of revenues.
We continue to strengthen and develop
the link between the Group’s principal
risks and the viability assessment and
scenarios. The Group’s principal risks
are updated through the lens of our risk
appetite together with assessing our
evolving strategy, current business
environment and any emerging risks.
We reviewed the severe but plausible
risk events from each principal risk
and prioritised those by relative impact
Overview
Governance
Financial statements
Additional information
99
Convatec Group Plc Annual Report and Accounts 2022
Strategic report
to form revised long-term viability
scenarios. As a result of ongoing
investment in our operational
resilience over the course of 2022 we
have decided to shift focus in our EHS
incident scenario from our plant in the
Dominican Republic to the equivalent
manufacturing facility in Slovakia. The
Group has taken into account the
COVID-19 situation as part of the budget
and strategic plan cycle. We have
updated the long-term viability model
to include scenarios on financial market
distress and macroeconomic forces
and/or sanctions restricting access to
a key global market as higher priorities
in the current environment. This reflects
the importance of both these areas to
our business as we grow new and
emerging markets as well as the
changing and emerging external
environment that our current and
future operations work within.
The scenarios and sensitivity testing
have been based upon the current
Board-approved strategic plan and
forecast revenues, operating profit
and balance sheets and were reviewed
against the current and projected
liquidity and funding position. The main
severe but plausible scenarios are
included in the table below.
Consideration was also given to a
number of other scenarios as well as
the combination of the main severe
but plausible scenarios, reflecting
individual risks and events. In the Board’s
estimation these events would not
plausibly occur to a level of materiality
that, in themselves, would endanger
the Group’s viability.
The scenarios took no account of the
likely mitigating actions available to the
Directors through adjustments to the
Group’s strategy and other means
in the normal course of business,
for example lower capital investment
or reduced dividends.
This assessment was informed by
Management’s and the Board’s
combined judgement as to the potential
financial (particularly liquidity) impact
of these risks if they were to materialise,
together with their likelihood of
occurrence. The Directors reviewed
and discussed the process undertaken
by Management and also reviewed
the results of reverse stress testing
performed against the forecast base
case to determine the performance
levels that would result in a breach of
covenants. For a breach of covenants
to occur in the next 12 months, before
mitigation, the Group would need to
experience a sustained revenue
reduction of more than 10% across
all categories and markets. This was
considered to be implausible given the
Group’s strong global market position
and diversified portfolio of products and
mitigations available to the Board and
management, as described above.
In addition, the Board undertook
an independent review of market
information, including investors’ and
analysts’ views and the insights from
market commentators on the future
viability of the Group and the market
prospects. This review was undertaken
to ensure that where there was an
external view or information that
was contradictory to the views of
Management, the Board understood
the rationale for the difference of
opinion and agreed with Management’s
view. This independent review and the
scenario tests enabled the Board
to conclude on the Group’s viability
and resilience.
Viability statement
Having assessed the Group’s principal
risks and uncertainties, and the
consolidated financial impact of
sensitivity analysis (including a severe
but plausible set of scenarios, which
did not take into consideration any
mitigating actions available to the
Group), plus the Group’s level of cash
generation and existing financing
facilities, and the timing of the peak
cash outflows, the Board has
determined that it has a reasonable
expectation that the Group will be
able to continue to operate within
its existing bank covenants and meet
its liabilities over the viability period
to December 2025.
The Group’s Going Concern statement
is detailed on pages 172 and 173.
Karim Bitar
Chief Executive Officer
Jonny Mason
Chief Financial Officer
Scenarios
Linkage to risks on pages 93 to 97
Impacts from a significant EHS incident, linked to a fire, at the Michalovce plant in Slovakia
–
Impact on supplying customers before plant production is restored
–
Reduced production or extended period of shut down
–
Loss of sales could have a material adverse impact on the Group’s reputation
–
Impact of supply disruption
–
Operational Resilience and Quality
Impacts from a significant cyber incident producing a significant interruption
–
A significant data privacy breach, leading to a regulatory penalty and subsequent costs for
investigation and remediation
–
We have modelled a one-off significant fine (3% of revenue) resulting from a privacy issue
–
Information Systems, Security and
Privacy
–
Operational Resilience and Quality
Impacts from significant regulatory issues
–
Significant breach of regulatory compliance in a product line
–
Reduced production and loss of sales due to reputation
–
Impact of supply disruption
–
Legal and Compliance
–
Innovation and Regulatory
–
Operational Resilience and Quality
Financial market distress
–
Significant economic downturn resulting in additional interest rate and inflation increases
–
Increased costs as a result of inflationary pressure on materials prices and global logistics costs
–
Political and Economic Environment
Macroeconomic forces and/or sanctions restrict access to key global markets
–
Failure to deliver stated growth targets in a key global focus market
–
Supply chain issues to our manufacturing and distribution from the affected key global
focus market
–
Customer and Markets
–
Political and Economic Environment
–
Legal and Regulatory
–
Strategy and Change Management
What’s inside
Governance
Convatec Group Plc Annual Report and Accounts 2022
100
Convatec Group Plc Annual Report and Accounts 2022
100
Governance
102
Governance at a glance
103
Board statements
Board statements required by the UK Corporate
Governance Code 2018
104
Chair’s governance letter
The Chair’s overview of governance developments
during the year
107
How we have applied the Code’s core principles
110
Board of Directors
112
Convatec Executive Leadership Team (CELT)
114
How we are governed
116
Board activity and actions
122
Board evaluation
123
Nomination Committee report
126
Audit and Risk Committee report
139
Directors’ Remuneration report
140 Letter from the Chair of the
Remuneration Committee
142 Our remuneration at a glance
144 Our Annual Report on Remuneration
153 Our Remuneration Policy
162
Directors’ report
165
Directors’ responsibilities statement
Overview
Strategic report
Financial statements
Additional information
101
Governance
Convatec Group Plc Annual Report and Accounts 2022
101
GOVERNANCE HIGHLIGHTS
Board
•
Consideration of, and agreement for, the acquisition
of Triad Life Sciences.
•
Consideration of, and agreement for, the minority
investment in BlueWind Medical Ltd of $30.0 million,
a company developing an innovative solution for the
continence market.
•
Consideration of, and agreement for, Convatec’s
withdrawal from hospital care activities and related
industrial sales.
•
Ongoing review of other M&A opportunities.
•
Oversight of execution against the FISBE 1.0 strategy and
the development of FISBE 2.0.
•
Capital expenditure discussions and approvals for
manufacturing expansion.
•
Approval of the refinancing of the Group’s
banking facilities.
•
Review and approval of the Group’s Strategic Plans
and Budget.
•
Review of a revised Treasury Policy and establishment
of a new Treasury, Tax & Finance Committee.
Nomination Committee
•
Review of, and recommending changes to Board
Committee composition, taking into account
Directors’ skills, knowledge and experience.
•
Consideration of progress against diversity,
equity & inclusion and wellbeing strategic targets.
•
Review of succession and talent at Board, CELT
and wider global leadership team levels.
•
Consideration of CEO succession plan.
Audit and Risk Committee
•
Consideration of the Group’s internal controls
environment, including cyber security and data privacy.
•
Review of interim and full-year results statements prior
to recommending to the Board for approval.
•
Oversight of Convatec’s enterprise risk management
framework and risk reporting.
•
Review of the BEIS corporate governance and audit
reform proposals and the measures taken or to be
taken by the Company in response.
•
Review of TCFD and other non-financial reporting
and disclosures.
•
Review and approval of the external audit plan for the
2022 external audit.
•
Review of 2022 internal audit reports and 2023 internal
audit plan.
•
Evaluation of the effectiveness of the external auditor
and internal audit function.
Remuneration Committee
•
Review of remuneration advisers to the Committee,
selection and appointment of Willis Towers Watson.
•
Consideration of shareholder feedback following
the 2022 AGM and determination of next steps.
•
Development of the new Remuneration Policy taking
into account extensive shareholder consultation
through the year.
•
Review of remuneration arrangements under the LTIP
and annual bonus scheme.
Governance at a glance
Governance
Board and Committee meetings:
8
Board scheduled meetings
3
7
Audit and Risk Committee meetings
2
Nomination Committee meetings
5
Remuneration Committee meetings
Male: 60%
Female: 40%
1 year or less: 1
1–2 years: 2
2–3 years: 2
3–4 years: 3
4 years or more: 2
Gender
1
Length of tenure
2
BOARD STATISTICS
1.
As at 31 December 2022 and at 8 March 2023.
2.
As at 8 March 2023.
3.
In addition, there were several strategic or project-specific meetings
of the Board and sub-committees thereof held at short notice
throughout the year.
Convatec Group Plc Annual Report and Accounts 2022
102
Convatec is subject to the requirements of the UK Corporate Governance Code 2018. In accordance with the Code the Board
is required to make a number of statements. These are set out in the table below.
Requirement
Board statement
More information
UK Corporate Governance
Code compliance
Throughout the financial year ended 31 December 2022, except as explained
on page 106, the Company has complied with the Code.
Page 106
Going concern
The Directors are satisfied that the Group has sufficient financial resources
to continue operating for at least 12 months from the date of signing of the
2022 Annual Report and Accounts and, therefore, have adopted the going
concern basis in preparing the Group’s 2022 Financial Statements.
Page 172
Viability statement
The Directors have assessed the viability of the Group over a three-year
period ending 31 December 2025, taking into account the principal risks
identified by the Board as set out on pages 92 to 97. This assessment had led
the Board to the reasonable expectation that the Group will remain viable
and continue in operation and meet its liabilities as they become due over
the Viability Period through to December 2025.
Pages 98 and 99
Fair, balanced, and
understandable
The Directors consider that the 2022 Annual Report and Accounts, taken as
a whole, is fair, balanced and understandable, and provides the necessary
information for all stakeholders to assess the Group’s position and
performance and its business model and strategy.
Page 138
Assessment of the Group’s
principal and emerging risks
The Directors confirm that they have undertaken a robust assessment of the
principal and emerging risks facing the Group.
Pages 88 to 97
Annual review of risk
management and internal
control systems
The Board undertook a review of the effectiveness of the Group’s risk
management framework and internal controls, including those over the
financial reporting period, and concluded that these provided assurance
that there were no control failures in the year which could materially impact
the financial statements or the future financial performance of the Group.
Page 121
Stakeholder engagement
The Board has taken steps to understand stakeholders’ views and has
considered them in its discussions and decision-making process.
Pages 118 to 121
Board statements
Overview
Strategic report
Financial statements
Additional information
103
Convatec Group Plc Annual Report and Accounts 2022
Governance
Chair’s governance letter
Dear Shareholder
I am pleased to present this
Governance report which covers,
amongst other things, key governance
developments throughout the year,
progress against our diversity strategy
at Board and senior management
levels and the Board’s stakeholder
engagement activities.
Our key governance priorities
Sound corporate governance and
effective oversight provide the
foundations of successful and
sustainable businesses. During
2022, the Board not only maintained
a sharp focus on execution and
delivery against the Group’s FISBE
strategy, including reviewing progress
against our simplification and
productivity agenda, but also
considered the Group’s future
corporate strategy and delivery.
This included reviewing a number of
corporate development opportunities,
such as M&A transactions and
strategic investments.
Set out later in this report is further
detail on some of the key agenda
items and decisions made during the
year and how the Board considered
key stakeholders in making those
decisions. We also provide detail on
the activities of the Board committees.
Our culture
We have a clear vision statement
which encapsulates our purpose
and ambition and a set of values that
reflect our culture, all of which have
become embedded throughout the
Group and influence our everyday
behaviours and how we do business.
The launch of ’Convatec Cares’, our ESG
framework, supports what we do and
reflects our vision and values, and how
they are integral to our wider strategic
framework, set out on page 8.
The Board remains committed to
promoting a culture with our values
and forever caring promise at the
heart. We have continued to assess
and monitor culture through reports
provided regularly to the Board and
Nomination Committee, including
reviews of the results of Convatec’s
Organisational Health Survey, the
outcomes of which are described on
page 58. In addition, we received
reports on progress against our
people strategy as well as talent and
succession planning.
An evolving Board
As reported in last year’s Annual
Report, Jonny Mason joined Convatec
as Chief Financial Officer Designate
on 31 January 2022 and became Chief
Financial Officer and a Director of the
Company on 12 March 2022. Jonny
replaced Frank Schulkes, who stepped
down as CFO and from the Board on
11 March 2022.
Kim Lody and Sharon O’Keefe joined the
Board as Non-Executive Directors on
1 February 2022 and 1 March 2022,
respectively. Rick Anderson stepped
down from the Board on 3 March 2022,
as did Dr. Regina Benjamin on 12 May 2022.
Following these Director changes,
during the first half of 2022 the
Nomination Committee reviewed
the resulting Board composition
and determined that there continues
to be an appropriate mix of skills,
knowledge, experience and diversity
on the Board to fulfil the Board’s vision
and support the delivery of the
Company’s FISBE strategy. The Board
supported that assessment.
Membership of each of the Board’s
committees and changes in the
Committees’ memberships are set out
in the respective committee reports
on pages 123, 126 and 139.
Governance
“Sound corporate
governance
and eﬀective
oversight provide
the foundations
of successful
and sustainable
businesses.”
Dr John McAdam CBE
Chair
Safeguarding the
business now and
into the future
Convatec Group Plc Annual Report and Accounts 2022
104
Workforce engagement
2022 saw the appointment of Sharon
O’Keefe as Convatec’s dedicated
Non-Executive Director workforce
liaison champion. She has since
attended and debriefed the Board
on a number of employee engagement
activities, including a multi-day
Convatec Global Leaders Meeting,
an event which provided her with an
excellent opportunity to engage with
Convatec’s top 100 leaders. Further
details of Board-level workforce
engagement can be found on page
118. We are planning yet more direct
employee engagement activities for
the Board in 2023, including an off-
site Board meeting at one of our
manufacturing sites.
Convatec’s ’Our Work Life’ initiative
continued to gather momentum and
reinforces our approach to working in
more agile and flexible ways, as well as
supporting employees’ physical and
mental health and wellbeing. This
initiative includes our annual ’Convatec
Day’, a global mental health awareness
campaign, as well as workshops,
activities and focus groups.
Our other key stakeholders
Our key stakeholder groups are
identified and detailed on pages
44 to 45. Recognising that the
sustainable success of our business
is dependent on our stakeholders,
and mindful of our duty under section
172 of the Companies Act 2006, we have
ensured that all Directors have timely
access to information about stakeholder
issues and concerns. Information about
how the Board has taken account of
section 172 considerations in our Board
discussions and decision-making
processes is set out on pages 118 to 121.
Our section 172 statement is on page 45.
A key engagement during the year
was with our shareholders, as we
sought further insight and
understanding of concerns following
the significant minority vote against
Convatec’s Directors’ Remuneration
report resolution at our Annual
General Meeting (AGM) in 2022. We are
grateful to shareholders for sharing
their thoughts and views which have
been invaluable as we have developed
our new Remuneration Policy which
will be put forward for shareholder
consideration and vote at the
2023 AGM in May.
Environmental, social and
governance (ESG)
The Board oversees our responsible
business programme and details of
work in this area during the year are
included on page 117.
In recent years, we have laid strong
foundations to ensure we operate in a
responsible and sustainable way (see
pages 40 to 74) and in 2022, we made
progress against sustainability targets,
including against new targets which
were set in 2021.
Our CELT-led ESG Steering Committee,
chaired by the CEO, met three times
during the year.
The remit of the ESG Steering
Committee includes reviewing
progress on our sustainability targets,
setting new targets where required
and enhancing our TCFD disclosures.
The Committee provided regular
updates to the Board on progress
against ESG strategic aims, and to the
Audit and Risk Committee in relation
to TCFD disclosures and ESG assurance.
Governance practices
During the year the Board held four
in-person Board meetings, in March,
July, September and December, and
four Board meetings by video
conference, in April, May, August and
October, a pattern which we expect
to continue through 2023 and beyond.
Our 2022 AGM took place as a hybrid
meeting, with the added functionality
of enabling shareholders to attend,
fully participate in voting and ask
questions, both in person and
remotely. Our 2023 AGM will similarly
be held as a hybrid meeting.
Board evaluation
In accordance with the Code
requirements, a performance
evaluation of the Board and Board
Committees was carried out in the
autumn of 2022. This was conducted
by way of an externally facilitated
questionnaire to Board members and
select senior managers, with findings
then collated externally and reports
provided to the Board and Board
Committees. Details of the evaluation
process and key points arising from the
2022 review can be found on page 122.
Overview
Strategic report
Financial statements
Additional information
105
Convatec Group Plc Annual Report and Accounts 2022
Governance
Chair’s governance letter
continued
Governance
Diversity
The Board is committed to achieving
diversity and inclusion across the
Group and, in doing so, ensure
transparency against our targets. We
have chosen to report against the new
comply or explain diversity targets
under the Listing Rules within this
Annual Report. As at 31 December 2022
and the date of this report, we comply
with these targets. Further details can
be found within the Nomination
Committee Report on page 124.
We are compliant with the
recommendations of the Parker Review
on ethnic diversity and will continue to
monitor Board composition to ensure
that we maintain an appropriately
diverse Board in all respects. As at
31 December 2022 and the date of this
report, the proportion of women on
our Board was 40% (2021: 30%) and
one member of our Board is from a
minority ethnic background.
Our objective is to achieve 40% of
senior management roles (members
of CELT and their direct reports,
excluding administrative staff) held
by women by the end of 2025. As at
31 December 2022, women held 38%
of our senior management roles
(2021: 32%).
During the year, the Board and
Nomination Committee have
considered diversity, equity &
inclusion and wellbeing insights globally
across a range of metrics, with a focus
on gender, and insights from our
Employee Resource Groups. Initiatives
to increase diversity, equity & inclusion
and wellbeing are being consistently
implemented across the Group and
the Board and Nomination Committee
will continue to review the Group’s
efforts and the implementation of
our people strategy.
Our diversity policy for the Board,
senior management and the wider
workforce is a key pillar of our ESG
strategy and is fully aligned to our
FISBE strategy and our people strategy.
The objectives of our diversity policy
are set out on page 59.
The Code
During the year, we have complied with
the Code other than:
•
Provision 36: formal policy for
post-employment shareholding
requirements. The Remuneration
Committee was of the view that the
structure of the Deferred Bonus Plan
and LTIP sufficiently supported the
requirement for Executive Directors
to maintain a meaningful
shareholding in the Company for a
period of time after they leave the
Group. The Committee has
considered feedback from
shareholders and evolving investor
sentiment on post-employment
shareholding requirements and a
new post-employment shareholding
requirement forms part of our new
Remuneration Policy which
shareholders will be invited to vote
upon at our 2023 AGM (see page 157).
•
Provision 38: pension contribution
rate for Executive Directors to be
aligned to those available to the
workforce. Karim Bitar’s pension
benefit previously reflected the
shareholder Remuneration Policy in
force at the time of his appointment,
however his pension benefit was
aligned to the wider UK workforce
from 1 January 2023. (See page 143).
Jonny Mason’s pension benefit has
been in line with that of the wider UK
workforce from his appointment.
•
Provisions 40 and 41: employee
engagement on executive
remuneration. The Remuneration
Committee has not undertaken
consultation with the workfoce
when considering executive
remuneration, however the
Committee has considered wider
pay practices across the Group
and is mindful when applying
salary increases.
We explain how we have applied the
Code’s principles on pages 107 to 109.
These core principles also serve as a
framework for the following sections
of this Annual Report which explain
our governance structure and the
processes we operate to support
the Group’s long-term success.
2023 priorities
The Board remains committed
to the highest levels of corporate
governance. As a Board, we will
continue to oversee delivery of our
FISBE strategy, especially as it evolves
this year. We will also continue to
monitor our simplification and
productivity initiatives, including the
continuing transition of key central
functions to our Global Business
Services team in Lisbon.
In 2022, we saw the launch of several
key new products. The Board will
continue to monitor the successful
development and launch of a range
of new products, at the same time
overseeing the continuing build of our
wider supply chain resilience. After
much progress over the last few years,
we will also continue to monitor the
ESG and climate agenda, evolving
societal expectations and Convatec’s
response and actions.
Dr. John McAdam CBE
Chair
8 March 2023
Convatec Group Plc Annual Report and Accounts 2022
106
How we have applied the Code’s core principles
BOARD LEADERSHIP AND COMPANY PURPOSE
Principles
Application
Where further information is available
A
An effective and entrepreneurial
Board that promotes long-term
sustainable success of the Company
and which generates value for
shareholders and contributes to
wider society
The Board discharges its responsibilities
through a programme of activities that
include review and approval of the
Group’s strategy, regular progress reviews
of its execution and implementation,
discussion on arising key issues and
monitoring of performance, to enable
the Group to deliver sustainable and
profitable growth.
Board focus and principal matters
considered in 2022
Pages 116 to 121
B
Establishment of purpose, values
and strategy and promotion of
desired culture
The Board endorses the Group’s vision
statement (which encapsulates our
promise, purpose and ambition), its values
and our forever caring promise. During the
year, it has reviewed the Group’s strategy
and continued to assess and monitor
culture to ensure their alignment.
How we realise our vision
Page 6
Building a winning culture
Page 57
Chair’s statement
Pages 10 and 11
Chair’s governance letter
Pages 104 to 106
Culture
Page 115
C
Ensuring resources are in place
to meet objectives, measuring
performance and establishing
controls which assess and
manage risk
The Board regularly reviews the Group’s
financial and non-financial resources to
ensure that it has the resources available
to deliver its strategy. The Board has
approved and regularly reviews a series
of KPIs. The Board has established an
effective governance and risk
management framework.
The Group’s KPIs
Pages 20 and 21
The Group’s risk management
framework
Page 89
Audit and Risk Committee report
Pages 126 to 138
D
Effective stakeholder engagement
and participation
To fulfil its duty to promote the Group’s
long-term success and generate value for
shareholders, stakeholders and wider
society, the Board has designated a
Non-Executive Director for workforce
engagement and established a number
of mechanisms to facilitate stakeholder
engagement and ensure that the Directors
consider all relevant stakeholder issues
and concerns.
Engaging stakeholders and section
172 statement
Pages 44 and 45
Board stakeholder engagement
Pages 118 and 119
Board key decisions
Pages 120 and 121
E
Ensuring workforce policies and
practices are consistent with the
Company’s values and support
long-term sustainable success,
and that mechanisms are in
place to allow the workforce
to raise concerns
The Board has ensured that workforce
policies and practices are consistent with
the Group’s values and has established
mechanisms, including an independently
provided whistleblowing/speaking-up
facility to allow the workforce to raise
concerns anonymously.
Enabling our people to thrive
Pages 56 to 61
Compliance Helpline and website
Page 62
Audit and Risk Committee report
Pages 126 to 138
Overview
Strategic report
Financial statements
Additional information
107
Convatec Group Plc Annual Report and Accounts 2022
Governance
DIVISION OF RESPONSIBILITIES
Principles
Application
Where further information is available
F
The Chair’s role
The Chair was independent on
appointment and is responsible for the
leadership of the Board.
Key Board roles and responsibilities
Page 115
G
Clear division of responsibilities and
appropriate combination of executive
and non-executive roles
The Board includes eight Non-Executive
Directors and two Executive Directors.
Their responsibilities are clearly defined.
Key Board roles and responsibilities
Page 115
H
Time commitment, constructive
challenge and strategic guidance
All Directors have demonstrated that
they have sufficient time to fulfil their
duties and responsibilities. In their roles,
the Non-Executive Directors have
provided constructive challenge,
strategic guidance and held
management to account.
Nomination Committee report
Pages 123 to 125
Board evaluation
Page 122
I
Effective and efficient Board
All Directors have access to an encrypted
electronic portal system which enables
them to receive accurate and timely
information. They also have access to
the advice of the Company Secretary
and independent professional advice
at the expense of the Group. The Board
undertook an externally facilitated
Board evaluation by way of detailed
questionnaires, the conclusions of
which are contained within this report.
The Non-Executive Directors meet with
the Chair, without the Executive Directors
present, to discuss performance against
agreed objectives. The Non-Executive
Directors also meet without the Chair
to appraise his performance. The Chair
provides performance feedback to each
Non-Executive Director throughout the
year as and when the need arises.
Board and Committee meetings
Page 115
Board evaluation
Page 122
COMPOSITION, SUCCESSION AND EVALUATION
Principles
Application
Where further information is available
J
Board appointments and succession
A Nomination Committee is established
and Board appointments are made in
accordance with a formal, rigorous and
transparent procedure, with diversity
a key consideration as well as relevant
knowledge, skills and experience.
The Nomination Committee regularly
considers Board and senior
management succession.
Nomination Committee report and
Board appointment procedure
Pages 123 to 125
Board appointments
Page 124
Talent and succession planning
Page 125
K
Combination of skills, experience and
knowledge, with regard also to tenure
Our Board is balanced and diverse and
its members have proven leadership
capabilities and relevant healthcare,
operational and financial skills and
experience. Board member tenure is such
that there is a balance of deep knowledge
of the Company and fresh perspective
and challenge.
Directors’ biographical information
Pages 110 and 111
Skills and experience matrix
Page 110
Board member tenure
Page 102
L
Annual evaluation
In compliance with the Code, during 2022,
the Board undertook an evaluation of its
performance and that of its committees.
The evaluation was by way of an
externally facilitated questionnaire and
reporting process.
Board evaluation
Page 122
How we have applied the Code’s core principles
continued
Governance
Convatec Group Plc Annual Report and Accounts 2022
108
AUDIT RISK AND INTERNAL CONTROL
Principles
Application
Where further information is available
M
Independent and effective internal
and external audit functions
The Board has delegated a number of
responsibilities to the Audit and Risk
Committee including oversight of the Group’s
financial reporting processes and ensuring
the effectiveness and independence of the
external and internal auditors. The Audit and
Risk Committee Chair regularly briefs the
Board on how the Committee has discharged
its responsibilities.
Audit and Risk Committee report
Pages 126 to 138
N
Fair, balanced and understandable
assessment
The Board has established arrangements
to ensure that reports and other information
published by the Group are fair, balanced
and understandable.
Audit and Risk Committee report
Page 138
O
Risk management and internal
control systems
The Board sets the Group’s risk appetite and
assesses the nature and extent of its principal
risks. Annually, the Board reviews the
Company’s principal and emerging risks and
the effectiveness of the Group’s risk
management and internal control systems
and processes. The Audit and Risk Committee
regularly reviews the effectiveness of these
systems and processes throughout the year.
Risk management
Pages 88 to 97
Audit and Risk Committee report
Pages 126 to 138
REMUNERATION
Principles
Application
Where further information is available
P
Remuneration policy and practices
The Group’s Remuneration Policy, which
was approved by shareholders at the
2020 AGM, is designed to support our
strategy, be aligned to our vision and our
employee and shareholder interests and
promote long-term sustainable success.
Remuneration Policy
Pages 153 to 161
Directors’ Remuneration report
Pages 139 to 161
Q
Development of remuneration policy
and packages
Following a comprehensive consultation
with Convatec’s shareholders, a new
Remuneration Policy is being submitted
to shareholders for consideration at the
2023 AGM, which has been designed to
support Convatec’s strategy and
promote long-term sustainable growth.
Remuneration Policy
Pages 153 to 161
Directors’ Remuneration report
Pages 139 to 161
R
Independent judgement and
discretion
Following a formal and transparent
procedure, the Remuneration Committee
sets the remuneration for the Executive
Directors and oversees the remuneration
of senior management. In doing so it
applies judgement and, if required,
discretion to ensure a considered
outcome on remuneration issues.
Directors’ Remuneration report
Pages 139 to 161
Overview
Strategic report
Financial statements
Additional information
109
Convatec Group Plc Annual Report and Accounts 2022
Governance
Margaret Ewing
Senior
Independent
Director
N*
AR*
N
Board of Directors
Governance
Experienced
leadership
A diversely skilled
Board with proven
leadership capabilities
and relevant healthcare,
operational and financial
skills and experience.
Jonny Mason
Chief Financial
Officer
Karim Bitar
Chief Executive
Officer
Dr John McAdam CBE
Chair
Date of appointment
September 2019
Independent
Yes (on appointment)
Relevant skills and experience
•
Extensive chair and board leadership
experience, including as former Chair
of Rentokil Initial plc and United Utilities
Group PLC and as a Non-Executive
Director of a number of FTSE 100 and
US companies.
•
Extensive experience of leading
companies undergoing transformation
including as Chief Executive of ICI plc
between 2003 and 2008.
Current external appointments
Adviser to BlackRock’s Long Term
Investment Group
Date of appointment
March 2022
Independent
No
Relevant skills and experience
Seasoned CFO with an extensive track
record in listed and international
businesses.
Was formerly CFO of Dixons Carphone Plc,
now known as Currys Plc from 2018-2021,
CFO of Halfords Plc from 2015 to 2017,
CFO of Scandi Standard AB, CFO at
Odeon and UCI Cinemas and FD of
Sainsbury’s Supermarkets.
Current external appointments
None.
Date of appointment
September 2019
Independent
No
Relevant skills and experience
•
Significant board level and leadership
experience including as Non-Executive
Director of Spectris plc between 2017
and 2021 and Chief Executive Officer
of Genus plc between 2011 and 2019.
• Successful business transformation
track record.
•
Extensive and broad management
experience.
•
Relevant sector knowledge and
experience, including 15 years with Eli Lilly,
where from 2008, Karim was President of
Europe, Australia and Canada.
Current external appointments
Member of the University of Michigan,
Ross School of Business Advisory Board.
AR
N
R
Audit and Risk Committee
Nomination Committee
Remuneration Committee
* Committee Chair
KEY TO COMMITTEE
Date of appointment
August 2017
Independent
Yes
Relevant skills and experience
•
Chartered Accountant with significant
financial experience, including as former
Managing Partner of Deloitte LLP and
CFO of BAA plc.
•
Extensive audit and risk management
experience.
•
Strong board experience, having served
as a Non-Executive Director of Whitbread
plc and Standard Chartered plc and CFO
of BAA plc and Trinity Mirror plc.
Current external appointments
Non-Executive Director and Chair of the
Audit and Risk Committee of ITV plc.
Non-Executive Director, Chair of the Audit
and Compliance Committee and a member
of the Nominations Committee of
International Consolidated Airlines
Group, S.A.
Skills and experience
1
Strategy,
transformation
and organisational
design
95%
Global business
80%
Listed board
experience
90%
Leadership
98%
Operational
85%
Finance
73%
Healthcare
78%
Technology
and innovation
78%
Corporate
transactions
and M&A
78%
Environmental,
social & governance
and sustainability
55%
1
Percentages based on Directors’ individual
self-scoring of skills and experience.
Convatec Group Plc Annual Report and Accounts 2022
110
R*
N
N
R
AR
AR
N
N
R
N
R
Sharon O’Keefe
Non-Executive
Director
Sten Scheibye
Non-Executive
Director
Date of appointment
July 2018
Independent
No
Relevant skills and experience
• Substantial healthcare knowledge
and significant operational experience
as former President and CEO of
Coloplast A/S.
•
Board experience, including previous
roles as Chair of the Novo Nordisk
Foundation and of Novo Holdings A/S.
• Extensive governance experience
including as a member of the Danish
Corporate Governance Committee,
also serving as the Committee’s Chair.
Current external appointments
Chair of BioInnovation Institute Foundation,
BioInnovation Institute Holdings A/S and of
The Knud Højgaard Foundation, Non-
Executive Director of Perfusion Tech Aps.
Date of appointment
March 2022
Independent
Yes
Relevant skills and experience
•
Extensive healthcare and executive
experience, with focus on driving quality,
efficiency and innovation.
•
Previously President and Chief Operating
Officer of UChicago Medicine, Non-
Executive Director of Aviv REIT and of
Vocera Communications.
•
Holds an M.S. in Nursing Administration
from the Loyola University of Chicago,
and a B.S. in Nursing from Northern
Illinois University.
Current external appointments
•
Non-Executive Director of Adtalem Global
Education Inc., and of Apollo Endosurgery
Inc.
Brian May
Non-Executive
Director
Date of appointment
March 2020
Independent
Yes
Relevant skills and experience:
•
Significant financial and international
business experience, including as Chief
Financial Officer of Bunzl plc from 2006 to
2019. Prior to that, Brian held a number of
senior management finance roles with
Bunzl, including divisional Finance Director,
Group Treasurer and Head of Internal Audit.
•
Experience as a Non-Executive Director
including of United Utilities Group Plc
between 2012 and 2021, where he was
also Chair of the Audit Committee.
•
Extensive experience of significant
strategic initiatives that delivered growth
and sustained shareholder returns over
the long term.
• Chartered accountant.
Current external appointments
Non-Executive Director of Ferguson plc,
where Brian is also a member of its
Nominations and Governance Committee and
Audit Committee. Non-Executive Director of
OFI Group Limited.
Prof Constantin
Coussios OBE
Non-Executive
Director
Date of appointment
September 2020
Independent
Yes
Relevant skills and experience
• Internationally recognised key
opinion leader in the field of
biomedical engineering.
•
Proven track record of translating
research into commercial technologies
through academic entrepreneurship
including as Founder, Chief Technology
Officer and Chief Scientific Officer of
three successful spin-outs.
•
Significant experience of drug delivery
devices and technologies, including
directing and leading the Oxford
Centre for Drug Delivery Devices,
a cross-disciplinary centre working
across pharmaceutical and medical
device companies and the NHS,
between 2014 and 2020.
Current external appointments
Director, Institute of Biomedical
Engineering, University of Oxford.
Professorial Fellow, Magdalen College,
Oxford, Founder and Director of OrganOx
Limited, OxSonics Limited and OrthoSon
Limited. Trustee of the Oxford Transplant
Foundation and Governor of Magdalen
College School, Oxford.
Kim Lody
Non-Executive
Director
Date of appointment:
February 2022
Independent
Yes
Relevant skills and experience
• Extensive healthcare, reimbursement,
and MedTech experience with a
background in international and
multicultural environments.
•
Formerly President and CEO of NYSE
listed Sonida Senior Living Corporation
(retired).
•
Leadership and management experience,
serving as President of GN Hearing for
North America, President of Resound in
the US and President of Chronic Care for
the US subsidiary of Coloplast, Chief
Operating Officer of Senior Home Care,
and Executive Vice President and Chief
Marketing Officer of Gentiva Health
Services. Kim has also held various
other senior leadership roles.
Current external appointments
Board of Directors, Ball Ventures.
Heather Mason
Non-Executive
Director
Date of appointment
July 2020
Independent
Yes
Relevant skills and experience
• Significant international healthcare
experience leading fully integrated
global businesses, including 27 years with
Abbott Laboratories, where Heather held
a number of global senior operational
and strategic leadership roles, including
Senior Vice President of Abbott Diabetes
Care and most recently Executive Vice
President of Abbott Nutrition.
• Extensive relevant international,
commercial and operational experience.
•
Proven track record of overseeing the
development of commercially viable new
product pipelines and brand building.
Current external appointments
Chair of SCA Pharmaceuticals, LLC.
Non-Executive Director and member of the
Audit and Compensation Committees of
Immatics, Inc., Non-Executive Director of
Pendulum Therapeutics, Inc. and of Assertio
Therapeutics, Inc., where Heather is Chair of
the Governance Committee and member of
the Audit and Compensation Committees.
Overview
Strategic report
Financial statements
Additional information
111
Convatec Group Plc Annual Report and Accounts 2022
Governance
Convatec Executive Leadership Team (CELT)
Governance
Karim Bitar
1
Chief Executive Officer
Jonny Mason
1
Chief Financial Officer
David Shepherd
President & Chief Operating Officer,
Advanced Wound Care
Appointed to CELT: 2018
David joined Convatec and CELT
in 2018, having previously worked
for Johnson & Johnson for 26 years,
where he held a variety of sales,
marketing, strategic and
operations roles, most recently
being Vice President, Southern
EMEA with responsibility for
15 businesses across the region.
Prior to that, he was the US
President for Cardiovascular
and Speciality Services.
Natalia Kozmina
1
Executive Vice President, Chief
Human Resources Officer & ESG
Stewardship
Kjersti Grimsrud
President & Chief Operating Officer,
Infusion Care
Seth Segel
President & Chief Operating
Officer, Continence Care and
Home Services Group
Appointed to CELT: 2020
Prior to joining Convatec in 2020,
Natalia was Senior Vice President,
Human Resources at Iron Mountain.
Prior to this, she was Vice President of
Human Resources for Smiths Group,
following several years as Principal
of the Global Health Practice at Egon
Zehnder. Natalia transitioned to HR
after spending more than 15 years
in the pharmaceutical industry and
brings more than 20 years of life
sciences and technology sectors
knowledge to her role.
Appointed to CELT: 2018
Kjersti joined Convatec and the CELT
in 2018. She was a member of the
founding team at Axis-Shield and
appointed President Europe and the
Middle East and President
International, at Alere, Inc., following
its acquisition. Kjersti’s 25 years of
experience in the MedTech sector
includes roles within diabetes care,
including General Manager,
Operations, Sales, Marketing and
R&D positions.
Appointed to CELT: 2020
Seth served as CEO of Woodbury
Health Products for five years until
it was acquired by Convatec in 2017.
Prior to this, Seth was Executive
Vice President at Cantel Medical
Corp, a speciality healthcare
company dedicated to Infection
Prevention and Control. Seth has
lived and worked in North America,
Asia and Europe, holding positions
in investment banking, management
consulting, and as head of operations.
CELT is responsible for the management and
performance of the individual business units
with frequent reporting to, and oversight by,
the Board.
Karim Bitar, CEO and Jonny
Mason, CFO, are also members of
CELT. Their biographical details
are provided on page 110.
More detailed CELT member
biographical information is
available at
www.convatecgroup.com
BOARD MEMBERSHIP
Convatec Group Plc Annual Report and Accounts 2022
112
Dr Divakar Ramakrishnan
1
Executive Vice President, Chief
Technology Officer & Head of
Research & Development
Bruno Pinheiro
President & Chief Operating Officer,
Ostomy Care
Evelyn Douglas
Executive Vice President, Chief
Corporate Strategy and Business
Development, General Counsel
& Company Secretary
Appointed to CELT: 2020
Prior to joining Convatec three years
ago, Divakar served as Chief Digital
Officer and Vice President for Eli Lilly’s
Drug Delivery, Device and Digital Health
groups, where he led a global R&D team
focused on developing innovative and
digitally-enabled devices to improve
patient care. Divakar’s career in
healthcare spans more than 20 years.
He served as Eli Lilly’s Vice President of
Manufacturing Science and Technology,
a role in which he oversaw all the
company’s process development
across its entire product portfolio.
Appointed to CELT: 2021
Bruno worked for Bristol Myers Squibb
prior to its sale to Convatec in April
2005. Bruno’s diverse experience
spans across Sales, Business
Development & Global Emerging
Markets. Prior to his appointment as
interim President & COO, Global
Emerging Markets, Bruno led a diverse
team across eight countries in his role
as Head of Convatec’s Latin America
business. Bruno was appointed as
President & Chief Operating Officer,
Ostomy Care, in May 2022.
Appointed to CELT: 2020
Evy has in-depth expertise in the
MedTech sector, having spent 20
years at Becton, Dickinson and
Company (BD) prior to joining
Convatec in 2020. At BD, she was
Senior Vice President of Corporate
Development and Strategy, where
she supported the company to
build its capabilities, focusing on
opportunities for partnerships,
acquisitions and divestitures. Prior
to her role in corporate development
at BD, Evy held senior positions in
their legal team.
John Haller
1
Executive Vice President, Chief
Quality & Operations Officer
Anne Belcher
President & Chief Operating Officer,
Global Emerging Markets
Appointed to CELT: 2022
John joined Convatec in 2022 from
Next Press, where he was General
Manager. Previously, he spent 26 years
with Stryker Corporation, a leading
global MedTech business, where he
played a pivotal role in helping Stryker
grow from a $1 billion revenue
company to a $13 billion revenue
company. John has lived and worked in
countries around the world.
Appointed to CELT: 2022
Anne joined Convatec last year after
30 years at GlaxoSmithKline (GSK),
where she most recently served as
Senior Vice President & General
Manager, Nordics. She originally joined
GSK as a sales representative in New
Zealand in 1991 and went on to hold
senior roles globally within GSK. Anne
has experience in diverse market
environments, including both mature
and emerging markets across Asia
Pacific, EMEA and the Americas.
1.
Members of the ESG Steering
Committee
Overview
Strategic report
Financial statements
Additional information
113
Convatec Group Plc Annual Report and Accounts 2022
Governance
How we are governed
Governance
ESG Steering Committee
An executive committee chaired by
the CEO that drives the ESG agenda
within the Group, monitoring
performance of the ESG programme
and regularly reporting to the Board.
Market Disclosure Committee
A Board committee chaired by the Chair
that oversees the disclosure of
information by the Company to meet its
obligations under the Market Abuse
Regulation, Listing Rules and Disclosure
Guidance and Transparency Rules.
Responsibilities:
• Reviews Board composition and
proposes appointments to the
Board.
• Considers succession planning
for the Board and senior
management.
• Sets diversity and inclusion
targets and objectives for Board
and senior management.
Responsibilities:
•
Oversees the integrity of the
Group’s financial reporting,
internal controls and risk
management framework.
• Ensures the Group complies
with legal and regulatory
governance requirements,
including those related to
financial reporting,
environmental and climate
change-related matters.
• Assesses the independence
and effectiveness of the
external and internal auditors.
Responsibilities:
• Ensures the Remuneration
Policy and wider
remuneration practices are
designed to support the
Group’s strategy and
promote long-term
sustainable success.
• Oversees Remuneration
Policy implementation for
Executive Directors and
senior management.
• Reviews workforce
remuneration and
related policies.
Nomination Committee
Audit and Risk Committee
Remuneration Committee
GOVERNANCE FRAMEWORK
Our governance framework, which includes the Board and its three committees, is set out below.
Responsibilities:
•
Oversees and is responsible for the
long-term success of the Group
and for ensuring that there is a
framework of appropriate and
effective governance and controls
which enables risk to be assessed
and managed.
Board
• Sets the Group’s strategic aims,
determines resource allocation to
ensure that the necessary financial and
human resources are in place for the
Group to meet its objectives and
reviews management performance.
•
Determines the Group’s purpose and
values and monitors and assesses
the Group’s culture and ensures that
its obligations to shareholders and
other stakeholders are understood
and met.
Responsibilities:
• Implements Group strategy for the
long-term success of the Group,
monitoring performance and
significant business projects and
initiatives against budget and the
agreed strategy.
Convatec Executive Leadership Team
•
Assists the CEO in executing the
authority delegated by the Board,
making and implementing day-to-day
operational decisions and exercising
oversight of the Group’s commercial
issues.
• Monitors and assesses the Group’s
cultural activities, execution
against the ESG strategy and
day-to-day behaviours to ensure
that they are aligned with the
Group's purpose and values.
Treasury, Tax & Finance Committee
An executive committee chaired by
the CFO that oversees day-to-day
tax and treasury matters and
treasury related financial liabilities.
The Board is collectively accountable
to the Company’s shareholders for
the proper conduct of the Group’s
business and its long-term success.
The Board is responsible for effective
oversight, delegating some of its
responsibilities to Board Committees
through agreed terms of reference
which are subject to annual review.
Terms of reference for each Board
Committee can be found at www.
convatecgroup.com/investors/
governance.
INTRODUCTION TO OUR GOVERNANCE FRAMEWORK
The Board also delegates responsibility
for the day-to-day operational
management of the Company to the
Chief Executive Officer, who is supported by
the Convatec Executive Leadership Team,
which is chaired by the CEO.
The independent Non-Executive
Directors exercise independent,
objective judgement in respect of
decisions of the Board, and scrutinise
and challenge management. Through the
various committees of the Board, they
have responsibility for ensuring the
robustness and integrity of financial
information, internal controls and risk
management framework, that the
Board has an appropriate mix of skills,
knowledge, experience and diversity
to fulfil the Board’s vision and support
the delivery of the Company’s FISBE
strategy, and that remuneration
arrangements appropriately support the
Group’s culture and strategic ambition.
Other key committees
Convatec Group Plc Annual Report and Accounts 2022
114
Key Board roles and responsibilities
Matters reserved for the Board
Board and Committee meetings
Chair
• Independent on appointment
•
Leads the Board and facilitates
constructive Board discussions
•
Promotes high standards of governance
•
Sets the Board agenda
•
Supports and guides the CEO
•
Leads the review of the effectiveness
and performance of the other Directors
Senior Independent Director
•
Sounding board for the Chair
•
Serves as intermediary for other
Directors when necessary
•
Available to shareholders should they
have concerns where contact through
the normal channels has either failed
to resolve or would be inappropriate
•
Leads the review of the effectiveness
and performance of the Chair
Non-Executive Directors
•
Bring relevant skills, experience and
knowledge to provide constructive
challenge
• Independent Non-Executive Directors
provide independent judgement and
serve on the Board’s committees
•
Support the Chair by ensuring effective
governance across the Group
•
Monitor strategic execution in accordance
with risk and control framework
Chief Executive Officer
•
Accountable to, and reports to, the Board
•
Leads the executive management team in
delivery of the Group strategy and
objectives as determined by the Board
•
Day-to-day responsibility for executive
management matters
•
Responsible for maintaining dialogue
with the Chair and the Group’s
stakeholders
•
Sets the cultural tone throughout
the organisation
Company Secretary
•
Responsible for advising the Board on
all corporate governance matters and
best practice
•
Works with the Chair to ensure Directors
receive accurate and timely information
to enable them to discharge their duties
•
Works with the Chair to design the
induction programme for new Board
members, ongoing training and the
format of the Board evaluation
The Board has a schedule of matters
reserved for its approval and a formal
structure of delegated authority.
This schedule of matters clearly defines
the decisions which can only be made by
the Board and largely relates to matters
of strategic importance, particularly
high value or governance related,
where independence from executive
management is important. It is available
at www.convatecgroup.com/investors/
governance. The schedule was reviewed
and updated during the year.
The Board has delegated certain
responsibilities and authority to the
Board committees, which all operate in
accordance with Board-approved terms
of reference. The Board has also delegated
specified management control to the
Executive Directors and CELT. The written
terms of reference that each of the Board
committees operates under can also be
found within the web link referenced above.
The principal activities undertaken during
the year by the Nomination, Audit and Risk
and Remuneration Committees are set out
in their respective reports in this Annual
Report. The paragraphs under the heading
“Directors’ Remuneration report” on pages
139 to 161 are incorporated by reference into
this Corporate governance report.
Board attendance
Director
Member
since
Attended
John McAdam (Chair)
Sept 2019
8/8
Karim Bitar
Sept 2019
8/8
Jonny Mason
March 2022
7/7
Brian May
March 2020
8/8
Margaret Ewing
Aug 2017
8/8
Constantin Coussios
Sept 2020
8/8
Sten Scheibye
July 2018
7/8
Heather Mason
July 2020
8/8
Kim Lody
Feb 2022
8/8
Sharon O’Keefe
March 2022
8/8
Frank Schulkes
(Board member
until 11 March 2022)
Nov 2017
1/1
Rick Anderson
(Board member
until 3 March 2022)
Oct 2016
1/1
Regina Benjamin
(Board member
until 12 May 2022)
Aug 2017
3/3
Details of the number of Board and
Committee meetings which took place
during the year can be found on page 102.
Attendance at scheduled Board meetings
was 100% by all eligible Directors during
the year apart from Sten Scheibye who was
unable to attend one scheduled meeting
due to unavoidable circumstances (see
meeting attendance table). Four of the
scheduled Board meetings were held
in person in the UK, and four meetings
were conducted using video and audio
conference facilities; a format which the
Board intends to continue to follow during
2023. In addition to the scheduled meetings,
several meetings were held at short notice
to consider specific matters, projects or
transactions, for example the acquisition
of Triad Life Sciences.
The Non-Executive Directors met on one
occasion during the year without the Chair
and Executive Directors present.
The Company Secretary and Deputy
Company Secretary attend all Board
meetings. External advisers also attend
meetings where independent guidance and
expertise is required to facilitate the Board
in carrying out its duties. Members of CELT
(who are not Board members) and other
senior executives regularly attend relevant
parts of meetings to make presentations
and provide their input on a range of topics.
The Board and its Committees are provided
with appropriate and timely information.
For scheduled meetings, agendas are
drafted based on a previously agreed
annual forward agenda schedule and are
then reviewed with the CEO and the relevant
Board or Committee Chair. Agendas may
then be amended, if deemed appropriate,
to reflect current business priorities.
The Directors have access to an encrypted
electronic portal system, which enables
them to receive and review Board and
committee papers quickly and securely
electronically.
22
Scheduled Board and committee
meetings held
Strategy setting
The CEO, CFO and other members of
CELT take the lead in developing the
Group’s strategy. A dedicated
two-day strategy meeting is held
annually between the Board and
CELT, at which the strategy is
reviewed, constructively challenged
and approved by the Board.
Culture
The Board has the responsibility
of ensuring that Convatec’s culture
remains fully aligned with the
Company’s purpose, values and
strategy. Our values frame the
Group’s culture and our employees’
behaviours, in turn determining how
we do business. To this end, the Board
continues to assess and monitor
culture in different ways, including:
•
Regular briefings from the CEO, the
Chief Human Resources Officer and
other members of the senior.
management team on progress against
our FISBE and people strategies.
• Review of Convatec’s Organisational
Health Index survey results and output
from our Big Conversation initiatives.
• Post-engagement briefings from
Sharon O’Keefe, the Board’s workforce
liaison champion.
• Review of Compliance Hotline
investigation reports and internal
audit reports.
Overview
Strategic report
Financial statements
Additional information
115
Convatec Group Plc Annual Report and Accounts 2022
Governance
Board focus and principal matters considered in 2022
The principal matters considered by the Board during 2022 and their linkage to the Company’s strategic priorities are set
out in the table below.
As part of the business of each Board meeting, the CEO submits a report on business performance, including areas of
progress and areas which are not progressing to plan. The Board also receives a report from the CFO providing updates
on the Group’s financial performance. Members of the CELT and senior management regularly attend Board meetings to
ensure that the Board has good visibility of business developments, opportunities, principal and emerging risks and their
mitigation, and key operating decisions. The Board also receives key functional reports and presentations in relation to
Convatec’s responsible business agenda, enterprise risk management, stakeholder engagement, legal and compliance
as well as presentations from internal and external speakers on other topics relevant to the business and the environment
it operates in.
Areas of focus
Activities
Strategic priorities
Strategy and delivery
•
Considering and approving the Group’s
strategy and any changes and monitoring
execution and delivery.
•
Considering and approving major
transactions, capital projects, corporate
actions or investments by the Company.
•
Reviewing and approving the Group’s
branding strategy.
•
Decision in relation to the acquisition of Triad
Life Sciences (see Key decisions on page 120)
and subsequent review in relation to its
integration into the Group.
•
Decision to approve the strategic investment
in BlueWind Medical Ltd (see Key decisions
on page 120).
•
Decision to support substantial investment in
high speed automated manufacture of Gentle
Cath (GC) Air for Women v2.0 at our Slovakian
plant facility (see Key decisions on page 120).
•
Decision to withdraw from hospital care
activities and related industrial sales
(see Key decisions on page 121).
•
Regular review of progress and evolution of
the FISBE strategy, including participation in
a two-day strategy session and approval of
strategic plans and of FISBE 2.0.
•
Review of other corporate development
opportunities or capital investments to
ensure alignment with our FISBE strategy and
Business Unit plans.
•
Approval of the Group’s term and revolving
credit facilities up to $1.2 billion committed
for five years.
•
Ostomy Care and Advanced Wound Care
deep-dive business reviews and Global
Quality and Operations briefing.
•
Post-acquisition review of Cure Medical.
•
Regular review of innovation and technology,
including the new product pipeline.
Focus
Innovate
Simplify
Build
Execute
Leadership
•
Making appointments to Board or Board
Committees, following recommendations
from the Nomination Committee.
•
Reviewing the performance of the Board
and its committees, individual Directors
and the Group’s overall corporate
governance framework.
•
Board evaluation completed and results
reviewed in late 2022 (see page 122 for details).
•
Consideration and confirmation of changes
to the composition of the Board Committees
following changes to the Board in 2022.
Build
Execute
Business plan and performance
•
Approving annual budget and business
plan and regularly reviewing actual
performance and latest forecasts against
the budget and business plan.
•
Approved 2023 budget and business plan.
•
Regular CFO Reports and briefings.
•
Consideration of published Trading Update
in November 2022.
Focus
Innovate
Simplify
Build
Execute
Board activity and actions
Governance
Convatec Group Plc Annual Report and Accounts 2022
116
Areas of focus
Activities
Strategic priorities
Financial reporting
•
Approving final and interim results,
trading updates, the Annual Report and
the release of price-sensitive information.
•
Approving the dividend policy,
determination of any interim dividend
and the recommendation (subject to the
approval of shareholders) of any final
dividend to be paid by the Company.
•
Approval of the Viability and Going Concern
statements.
•
Approval of half-year and full-year results.
•
Confirmation and approval of the interim
dividend and recommendation of the
final dividend.
•
Approval of the 2021 Annual Report and
Notice of 2022 AGM, held as a hybrid meeting.
Focus
Execute
Risk and governance
•
Ensuring the Group has effective systems
of internal control and risk management
in place, including approving the Group’s
risk appetite.
•
Review of the effectiveness of the Group’s risk
management and internal control systems.
•
Review and approval of the Group’s Risk
appetite, ensuring that Group strategy and
current performance are aligned with risk
appetite.
•
Regular Governance, Legal and
Compliance briefings.
•
Briefings to the Board from the Board
Committee Chairs on the activities of
the Committees.
•
Review and update of the Securities
Dealing Policy.
•
Review of Board matters reserved and
Board Committee terms of reference.
Focus
Innovate
Simplify
Build
Execute
Stakeholder engagement
•
Considering the balance of interests
between the Group’s stakeholders.
•
Receiving and considering the views
of the Company’s shareholders.
•
Receiving and considering the views
of the Company’s employees.
•
Briefings provided by the Investor Relations
team and/or the Group’s corporate brokers
on investor feedback following results
announcements and investor roadshows.
•
Debrief on investor feedback following
Convatec’s Capital Markets event.
•
The Board met healthcare practitioners
and patients from the US and UK to obtain
valuable insights into their concerns
and needs.
•
The Chair had meetings with two of our top
20 institutional shareholders during the year.
•
Sharon O’Keefe took over the role of Non-
Executive Director workforce liaison
champion providing post engagement
briefings to the Board.
Innovate
Build
Execute
Responsible business
•
Overseeing the Group’s responsible
business programme.
•
Reviewing the Group’s responsible
business strategy and its implementation.
•
Considering the Group’s people and
their welfare.
•
Regular briefings from the ESG Steering
Committee chaired by the CEO.
•
Oversight of the development of our new
ESG framework.
•
Reviewed progress against sustainability
targets and agreed priorities for 2023.
•
Review of progress on DE&I initiatives
including gender data.
•
Review of employee gender pay gap data.
•
Review of the Modern Slavery Statement.
•
Review of the Group’s latest Organisational
Health Index results.
Innovate
Simplify
Build
Execute
Overview
Strategic report
Financial statements
Additional information
117
Convatec Group Plc Annual Report and Accounts 2022
Governance
Board activity and actions
continued
Governance
Stakeholders
Board-level engagement
Our people
Sharon O’Keefe was appointed in May 2022 as our dedicated Non-Executive Director for workforce
engagement. Sharon participated in the Global Leaders Meeting in May 2022 , bringing together our
top 100 leaders across the business, and has attended other employee-related events and activities,
including interaction with the Employee Resource Groups, employee communications via Convatec’s
intranet and site visits (including ’meet and greet’ with employees). Sharon provided post-event
briefings to the Board.
Members of the management team regularly attend relevant parts of Board and committee meetings
to present on specific topics, including briefings on our people strategy,
The Chair participated in a ’Q&A’ session at the Global Leaders Meeting in 2022.
The Board and the Audit and Risk Committee receive reports from the Group’s compliance function
detailing input from the Group’s Compliance Helpline and website. When relevant, this includes details
of investigations arising from information provided via the Compliance Helpline and website and
resulting outcomes (see page 132).
Investors
All members of the Board are available to meet with shareholders.
The Chair had meetings with two of our top 20 institutional shareholders during the year.
The Chair and Committee Chairs have regular dialogue with Convatec’s major shareholder, Novo,
through Novo’s representative on our Board, Sten Scheibye.
The Board receives analysts’ notes published about the Group and the sector and receives regular
updates on investor relations matters. The Board considers this feedback important to understand our
investors’ views on Convatec’s progress in pivoting to sustainable and profitable growth. Investors’
feedback and insights are taken into account by the Board in our communications to shareholders.
The Executive Directors participate in an active IR programme, including investor roadshows. Convatec
held an Innovation Day on 17 May 2022 for investors to learn more about our new product launches and
held our first Capital Markets Day for investors on 17 November 2022. Further information about our
engagement with shareholders and potential investors is provided on page 105.
All Directors participated in our 2022 AGM which took the form of a hybrid meeting, which enabled
shareholders to attend, vote and ask questions either in person or remotely.
The Chair of the Remuneration Committee led a comprehensive shareholder consultation exercise in
relation to our proposed new Remuneration Policy, engaging with over 30 shareholders as well as the
Investment Association and proxy-voting agencies. The views of our shareholders and other bodies were
taken into account in formulating and finalising the Remuneration Policy proposals which are being
submitted to shareholders for consideration at our 2023 AGM.
HOW THE BOARD ENGAGED
BOARD STAKEHOLDER
ENGAGEMENT
Connecting with our
stakeholders and discharging
section 172 duties
When making decisions, the
Board acts in a way that the Directors
consider most likely to promote
the success of the Company, for the
benefit of its shareholders as a whole,
while also considering the broad
range of stakeholders who interact
with the business.
Our section 172 statement is set out
on page 45.
How we engage as a Board
All of our stakeholders are important to
us. Identifying our key stakeholders was
an essential step in the implementation
of our FISBE strategy. Ultimately, our
vision – pioneering trusted medical
solutions to improve the lives we
touch – can only be fulfilled through
interaction with our stakeholders.
For that reason, we are committed to
maintaining strong relationships and
good communication lines with
stakeholders. We also consider this
fundamental to the successful delivery
of our strategy and long-term prospects
and alignment with our purpose. Further
information on how the Company
proactively engages with a broad
range of stakeholders to understand
their issues and to build positive
relationships can be found on
pages 44 and 45.
Our vision and values provide a
framework which helps our employees
make decisions in the best interests of
the Group and our stakeholders. This
approach ensures that stakeholder
issues are considered throughout the
organisation and not just at Board level.
How the Board understands
stakeholders’ interests
The table below summarises how
our Board gains an understanding of
stakeholder issues. The table on pages
120 and 121 describes how the Board
considered different stakeholders
in making four key decisions in 2022.
Convatec Group Plc Annual Report and Accounts 2022
118
Stakeholders
Board-level engagement
Consumers/
patients/healthcare
professionals
During the year, the Board held an in-depth group discussion session with a surgeon specialising in
advanced wound care, a vascular nurse and a patient. This provided valuable insight into patient and
HCP needs. These insights were applied to the constructive challenge and debate regarding the Group
and Business Unit strategies in July 2022.
Supply chain partners
and channel partners
During the year, the Board received reports from the Global Quality and Operations team with respect
to initiatives they are undertaking to continue to improve the resilience of our global supply chain .
The Board confirms its compliance with the UK Payment Practices Reporting Duty and the Prompt
Payment Code and similar legislation across the Group in relation to the year ended 31 December 2022.
The Board reviewed and discussed strategic plans for each of our business units during the year. The
Board supported close collaboration with one of our key partners, Medtronic, with whom we launched
the first and only infusion set that can be worn for up to seven days.
We work in close cooperation with all of our partners to develop products that improve the quality of
life of our patients.
The Board considered and approved multi-million dollar manufacturing infrastructure investment, thus
strengthening Convatec’s supply chain and resilience whilst also scaling up production and availability
of life-enhancing products for the customers and patients we serve.
Further details of the steps taken to ensure that Convatec’s vision and values guide our operations and
supply chain, taking a zero-tolerance approach to any form of modern slavery can be found in our
Modern Slavery Statement at www.convatecgroup.com/modern-slavery-statement/.
Regulators
The Board has received reports on the implementation of MDR from the Group’s regulatory function.
Governments
The Audit and Risk Committee received reports from the Global Tax function on taxation matters across
the Group and approved the Tax Statement including tax strategy, which was subsequently agreed by
the Board.
All other stakeholders
The Board receives information relating to our stakeholder groups through the executive reports at each
Board meeting and in the annual strategy sessions from Business Units.
HOW THE BOARD ENGAGED
continued
Overview
Strategic report
Financial statements
Additional information
119
Convatec Group Plc Annual Report and Accounts 2022
Governance
Governance
Board activity and actions
continued
BOARD KEY DECISIONS IN 2022
Investment in
BlueWind Medical Ltd
In May 2022, Convatec invested
$30.7 million, inclusive of
transaction costs, in BlueWind
Medical, a developer of a small
implantable tibial nerve
stimulation device for patients
with an overactive bladder.
S.172 – How the Board considered
different stakeholders in making
the decision
Investors:
The investment supports
Convatec’s FISBE strategy by
securing a relationship with a
company developing an innovative
solution related to the US
Continence space, an exciting
opportunity to gain exposure to
a new and innovative technology
in the Overactive Bladder segment.
The investment also provides the
potential for financial returns in
the future.
Patients and HCPs:
The new
technology has the potential to
provide better outcomes for patients
who have an overactive bladder
(currently there are around 34 million
patients affected by this condition in
the US alone).
Investment of
$26.9 million capital
to provide enhanced
manufacturing
of new product
In March 2022, the Board
approved an investment of
$26.9 million to provide high-
speed automated manufacture
of GentleCath Air™ for Women
v2.0 at our Slovakian plant facility.
S.172 – How the Board considered
different stakeholders in making
the decision
The investment was fully aligned with
our FISBE strategy.
Investors:
Investing in manufacturing
plant expansion is expected to lead to
additional revenue for Convatec, and
ultimately to higher returns for
investors. It also underpins confidence
in Convatec’s future growth and the
overall success of the business.
Patients and HCPs:
The expanded
plant is expected to provide greater
output of a new catheter for patients
and ensures that patient demand can
be met.
Suppliers and distributors:
Expanding our capacity to deliver
more catheter products not only
provides more resilience in the supply
chain for Convatec but helps to
ensure a consistent supply feed.
Communities:
The expansion plans
will lead to employment
opportunities for local communities
in Slovakia. Being able to enhance
production of these vital and
life-enhancing products will have a
positive impact on our customers
and patients in all communities
around the world.
Acquisition of Triad
Life Sciences
In March 2022 Convatec acquired
Triad Life Sciences.
Based in Tennessee, US, the
business has developed and
markets a specialist porcine
amniotic membrane for
treatment and healing of acute
and chronic wounds. The
acquisition provides an
opportunity for Convatec to enter
a high-growth, sizeable wound
biologics
1
segment,
a key growth strategy for our
Advanced Wound Care business,
and allowing Convatec to better
serve patients with advanced
wound needs all over the world.
S.172 – How the Board considered
different stakeholders in making
the decision
The acquisition was fully aligned
with our FISBE strategy.
Investors:
The acquisition provided
strategic opportunities for product
development and use of the
technology in other areas within
Convatec, as well as providing
additional revenue growth and
increasing the potential for higher
shareholder returns.
Patients and HCPs:
The new
technology has the potential
to provide better outcomes for
patients who have chronic wounds,
and the potential to provide better
outcomes for patients with other
chronic conditions as the
technology is developed and
new applications and products
are introduced.
Our people:
The transaction
benefited employees of both
organisations by better serving
customers and increasing the
strength of the combined business
and creating opportunities with
a larger scale Advanced Wound
Care business.
Communities:
The acquisition
strengthened Convatec’s presence,
product range and reach to the
customers and patients we serve
in communities across the world.
Suppliers and distributors:
The
transaction provides an opportunity
to build our partnerships with
trusted suppliers and distribution
network across the globe.
1.
As defined by SmartTRAK: see page 22.
Convatec Group Plc Annual Report and Accounts 2022
120
Risk management and internal
control effectiveness
The Board is ultimately responsible
for overseeing how we manage both
internal and external risks (current
and emerging) that could impact our
business model and strategic goals.
The Board also determines the Group’s
risk appetite and monitors adherence
to it through reports received by the
Audit and Risk Committee and from
the VP of Internal Audit & Enterprise
Risk. The Board regularly reviews the
Group’s principal risks and, on an
annual basis, reviews the effectiveness
of our risk management and internal
control systems and undertakes
horizon scanning to identify new
emerging risks. The Audit and Risk
Committee reviews the Group’s risk
management and internal control
systems periodically throughout
the year. The Group’s principal and
emerging risks are set out on pages
92 to 97
Statement of review
During 2022, the Board has directly,
or through delegated authority to the
Audit and Risk Committee, monitored
and reviewed the Group’s risk
management activities and processes,
including a review of the effectiveness
of all material risk mitigations and the
financial, operational and compliance
internal controls. The Audit and Risk
Committee’s activities in these areas
are set out in the Audit and Risk
Committee report on pages 131 and
132. Following this review, the Board
is satisfied that the Group’s risk
management and internal control
framework provided assurance that
there were no control failures in the
year that could have a material impact
on the Group’s financial statements or
its future financial situation.
Withdrawing from the
hospital care business
and related industrial
sales products
During 2022, Convatec withdrew
from the lower margin, lower
growth hospital care business
and ceased related industrial
sales. As a result, production of
a portfolio of products was
phased out at two of the Group’s
manufacturing sites. The decision
was made to close one of the
sites, the manufacturing plant in
Belarus, which manufactured
products almost entirely for the
hospital care business.
S.172 – How the Board considered
different stakeholders in making
the decision
The decision was in full alignment
with our FISBE strategy.
Investors:
Following the exit,
Convatec is focused on higher-
growth chronic care markets with
improved margins and higher levels
of recurring revenue, increasing
the potential for higher
shareholder returns.
Patients and HCPs:
Patient impact
was determined to be low in the
medium term due to the generic
nature of the products concerned.
It was determined in the short term
that the Company would support
customers and patients to find
alternative sources of the products.
Our people:
With the restructure
there were inevitable job losses. The
Company was determined to work
closely with employees, unions and
partners to fulfil obligations and
treat all those impacted in line with
Convatec’s core values.
Suppliers and distributors:
It was
noted that some suppliers and
providers of raw materials had
already started exiting Belarus.
Governments
: Given the geopolitical
situation there was the increased
threat of sanctions on the Company
should operations have continued
in Belarus.
Overview
Strategic report
Financial statements
Additional information
121
Convatec Group Plc Annual Report and Accounts 2022
Governance
Individual Director evaluation
As part of the annual evaluation
process, there is a review of the
effectiveness and commitment
of individual Directors. In respect
of the Non-Executive Directors this
includes a review of an individual’s
commitment of time to the Company
in light of their other commitments
(as noted in their biographies on
pages 110 and 111). Except in relation
to his own, the Chair leads the
individual Director evaluations.
Board Chair evaluation
The evaluation of the performance of
the Board Chair by the other Directors
was led by the Senior Independent
Director (SID) and without the
presence of the Board Chair. The
overall conclusion was that he was
performing very well in all aspects
of the role. The Chair values the
individual opinions of all Directors
and seeks and listens to their views.
He chairs effective meetings, allows
debate and encourages contribution
and challenge, with a focus on clarity
and pragmatism in decision-making.
He has a strong and constructive
relationship with the Executive
Directors, particularly the CEO, and
provides appropriate challenge,
support and advice.
The SID provided feedback to the
Board Chair after the review of
his performance.
2021 Board evaluation progress
report and 2022 Board evaluation
review
In 2021 the Board undertook an
evaluation of its effectiveness as
required by the Code (details of which
are set out in the 2021 Annual Report
and Accounts). Information about
the key priorities arising from this
evaluation and progress to date is
set out below.
In October 2022 the Board again
undertook a questionnaire-based
evaluation, externally facilitated
by Lintstock. The questionnaire
included both quantitative and
qualitative questions.
Lintstock analysed the results and
provided reports for the Board and
Board Committees, with unattributed
scoring and comments. The reports
and key findings were discussed at the
December 2022 Board and Committee
meetings, with each forum considering
the evaluation outcomes and any
appropriate actions.
The key findings from the 2022 Board
evaluation process, including the
actions agreed to address
recommendations resulting from the
review process, are set out below.
Lintstock has no other connection
with Convatec or any of the individual
Convatec Directors.
Actions
Progress
Board composition
The profile of the Board should evolve over the next
three to five years to match Convatec’s strategic goals.
The Board should continue to ensure that digital,
innovation and international experience is sought
and in addition, medical expertise would be considered
to further strengthen the Board, whilst ensuring a
sufficient level of diversity is maintained.
The Nomination Committee allocated dedicated time
in 2022 to discuss Board composition and succession
planning. Three appointments were made to the Board
during the year. Succession planning remains on the
Nomination Committee forward agenda for each of
its two scheduled meetings in 2023.
Strategic and operational oversight
The Board would benefit from deep dives into areas
such as technological developments in medical
solutions; and greater understanding of medical
regulations, patients’ needs and suppliers/distributors.
Deep dives in these areas were included on the Board
agenda during 2022, either at scheduled Board meetings
or at the July 2022 strategy meeting.
PROGRESS IN RELATION TO ACTIONS ARISING FROM THE 2021 BOARD EVALUATION
2022 BOARD AND COMMITTEE EVALUATION REVIEW
Overall the Board was considered to be working effectively, with a view that the Board was well aligned and with
good Board member dynamics. The two priority recommendations arising from the Board evaluation and proposed
actions are set out below.
Findings
Actions for 2023
Board engagement with the CELT and future
leadership talent
In support of succession planning and understanding
the business, provide a structured engagement
programme between NEDs and current and future
leadership talent across the Group.
Consider a structured engagement programme
between NEDs, Executive Directors, CELT and CELT-1,
encompassing both formal and informal events in
the UK and elsewhere. Ensure that the Board and/or
Committee members visit other Convatec sites other
than Head Office.
Board agenda
Reinforce focus on key areas for the business, such as
the competitive and macroeconomic environments;
provide improved stakeholder oversight in areas
identified by Board members.
Ensure that the Board’s 2023 and 2024 forward agendas
evolve to reflect the Board’s evolving priorities.
Board evaluation
Governance
Convatec Group Plc Annual Report and Accounts 2022
122
Dr John McAdam CBE
Chair of the Nomination
Committee
Nomination Committee report
A word from
the Chair
“A balanced and diverse Board, with a broad
range of skills, experience and knowledge,
is more likely to be an effective Board.”
COMMITTEE INTRODUCTION AND OVERVIEW
COMMITTEE MEMBERSHIP, MEETINGS AND
ATTENDANCE
The table below shows Committee members and the
number of scheduled meetings attended out of the number
of meetings members were eligible to attend during 2022.
Director
Member since
Attended
John McAdam (Chair)
September 2019
1
2/2
Margaret Ewing
May 2019
2/2
Heather Mason
September 2020
2/2
Brian May
September 2020
2/2
Constantin Coussios
January 2022
2/2
Kim Lody
February 2022
2/2
Sharon O’Keefe
March 2022
2/2
Rick Anderson
(member until 3 March 2022)
September 2020
0/0
Regina Benjamin
(member until 12 May 2022)
June 2019
1/1
1
Dr McAdam was appointed Chair of the Committee on 30 September 2019
There were three appointments to the Committee during
the year: Constantin Coussios on 27 January 2022, Kim Lody
on 1 February 2022, and Sharon O’Keefe on 1 March 2022.
Rick Anderson and Regina Benjamin stepped down as
Committee members on resigning from the Board.
The Deputy Company Secretary attends meetings as
Secretary to the Committee and the EVP, Chief Human
Resources Officer regularly attends the Committee’s
meetings to provide information and support to the
Committee to enable it to carry out its duties and
responsibilities effectively.
KEY NUMBERS
Meetings held
2
(2021: 3)
Attendance
100%
(2021: 94%)
ACTIVITY HIGHLIGHTS
•
Recommendations to the Board for Committee
appointments.
•
Reviewed skills, experience and characteristics of
Board members and determined that the Board was
balanced, diverse and with an appropriate level of
skills, knowledge and experience.
•
Reviewed talent and succession planning for the
CEO and the CELT.
•
Reviewed progress and development of the Group’s
diversity, equity & inclusion and wellness strategy
and assessed key metrics.
•
Reviewed progress of leadership development
programme for CELT and application of new high–
performing team principles, helping to build and develop
a sustainable, diverse and inclusive organisation.
2023 PRIORITIES
•
Maintain focus on succession planning and talent
management for Executive Directors and senior
management.
•
Continue to monitor progress against the diversity,
equity & inclusion and wellbeing agenda across
the Group.
KEY AREAS OF RESPONSIBILITY
•
Reviews regularly the Board’s composition.
•
Leads Board appointments process as necessary.
•
Oversees and recommends orderly Board succession
and oversees senior management succession planning.
•
Reviews whether each Non-Executive Director
is devoting enough time to his or her duties.
•
Oversees the balance of skills and experience
within the Group and on the Board.
•
Monitors diversity within the Board and across
the Group.
The role and responsibilities of the Committee are
set out in the terms of reference and available at
www.convatecgroup.com/investors/governance/.
These are subject to annual review.
Overview
Strategic report
Financial statements
Additional information
123
Convatec Group Plc Annual Report and Accounts 2022
Governance
Nomination Committee report
continued
Governance
Dear Shareholder
I am pleased to present the
Nomination Committee Report, which
summarises how the Committee
discharged its duties during the year.
Our role
As a Board we recognise that a
balanced and diverse Board, with a
broad range of skills, experience and
knowledge, is more likely to be an
effective Board. In support of our
vision of pioneering trusted medical
solutions that improve the lives we
touch, and with the ultimate aim of
creating sustainable value for all our
stakeholders, we continue to focus
on ensuring that we have that right
balance of skills, knowledge and
diversity, both at the Board and
within our leadership team.
An equally important role for the
Committee is ensuring that we have
an appropriate pipeline of future talent
within the business. The Committee
regularly reviews succession plans,
not only for the Board, but also for CELT.
In support of Convatec’s succession
planning, a new leadership
development programme was rolled
out for our Global Leadership Team
(circa 100 leaders across the business)
with emphasis on our high performance
team principles. This has been well
received and is accelerating the
development and retention of this
important group of leaders, a group
that has a crucial role to play in inspiring
and motivating our people to accelerate
and deliver on our strategic aims.
Board changes
As Convatec continues to pivot to
sustainable and profitable growth,
the Committee has continued to focus
on recruiting the best executive and
non-executive talent to the Board.
As reported last year, the Committee
recommended to the Board the
appointment of Jonny Mason as our
new CFO with effect from 12 March
2022, replacing Frank Schulkes who
stepped down from the Board and
as CFO on 11 March 2022.
At the end of 2021 the Committee
recommended the appointment of two
new independent Non-Executive
Directors, Kim Lody and Sharon O’Keefe,
who joined the Board on 1 February 2022
and 1 March 2022, respectively. Rick
Anderson resigned as Non-Executive
Director on 3 March 2022, and Dr Regina
Benjamin resigned as a Non-Executive
Director on 12 May 2022.
Board committees’ composition
During the year, the Committee
reviewed the composition of Board
committees and recommended
changes which were approved by
the Board. The composition of the
Nomination Committee and changes
during the year are set out on page 123.
Similarly, the composition and any
changes to membership during the
year of the other Board committees
are set out at the beginning of the
respective Reports that follow.
Diversity
The Board endorses the aims of the
Davies’ report entitled “Women on
Boards”, the Hampton-Alexander
report entitled “FTSE Women Leaders
– Improving Gender Balance in FTSE
Leadership”, and the Parker report
entitled “A Report into the Ethnic
Diversity of UK Boards”. The Board
also endorses the Government’s
new five-year review to monitor
women’s representation in FTSE 350
companies, entitled “The FTSE
Women Leaders Review”.
At Board level we have members of
various nationalities, gender and
ethnicity who have an excellent range
of appropriate skills and expertise.
As at 31 December 2022 and at the
date of this report, we comply with
the new Listing Rule recommendations.
Adjacent on this page, we have
provided data on Board and CELT
members’ gender and ethnicity, and
whereby directors and CELT
members were asked to self-declare
against the Office for National
Statistics classification.
The Committee will continue to monitor
Board diversity in other respects,
including experience, skills, personal
attributes, age and ethnicity. In all
instances individuals will continue
to be appointed on merit and the
Committee will remain focused on
always ensuring that the Board has
the relevant skills and expertise to
perform effectively.
As part of our ongoing diversity and
inclusion strategy, our target is to
achieve 40% of senior management
roles to be held by female executives by
2025 and this currently stands at 38%.
During the year the Board has
considered diversity insights across a
range of metrics with a focus on gender
and the initiatives to advance women in
leadership. In 2023 the Committee and
the Board will continue to monitor the
ongoing development of Diversity,
Equity & Inclusion and Wellbeing
initiatives across the Group.
Board and senior leadership gender representation
Number
of Board
members
Percentage
of
Board
Number
of senior
positions on
the Board
(CEO, CFO,
SID and
Chair)
Number in
executive
management
Percentage
of executive
management
Men
6
60%
3
5
56%
Women
4
40%
1
4
44%
Note: Executive Management includes CELT members, but excludes the CEO and CFO. The Company
Secretary, Evelyn Douglas, is included within the CELT disclosure.
Board and senior leadership ethnicity representation
Number
of Board
members
Percentage
of
Board
Number
of senior
positions on
the Board
(CEO, CFO,
SID and
Chair)
Number in
executive
management
Percentage
of executive
management
White British or other
white (including
minority-white groups)
9
90%
3
7
78%
Mixed/multiple ethnic
groups
–
–
–
–
-
Asian/Asian British
-
-
-
1
11%
Black/African/Caribbean/
black British
–
–
–
–
–
Other ethnic group,
including Arab
1
10%
1
1
11%
Note: Executive Management includes CELT members but excludes the CEO and CFO. The Company
Secretary, Evelyn Douglas, is included within the CELT disclosure.
Convatec Group Plc Annual Report and Accounts 2022
124
Relevant skills and expertise
The Board benefits from a wide variety
of relevant skills, experience and
knowledge, details of which are set
out in the biographies and skills matrix
on pages 110 and 111.
Board appointments
Appointments to our Board are made
solely on merit with the overarching
objective of ensuring that the Board
maintains the correct balance of
diversity, experience, skills, length of
service and knowledge of the Group to
successfully establish and oversee the
delivery of the Group’s strategy, whilst
also providing constructive challenge
as necessary. Appointments are made
based on the recommendation of the
Nomination Committee with due
consideration given to the benefits of
diversity in its widest sense, including
gender, social and ethnic backgrounds.
The Nomination Committee also
reviews the ongoing commitments
of candidates prior to making
recommendations for the appointment
of new Directors. Directors are required
to seek Board approval prior to taking
on additional commitments to ensure
that existing roles and responsibilities
continue to be met and conflicts are
avoided or managed.
When recruiting new Non-Executive
Directors, meetings are held between
potential candidates and the Chair,
CEO, CFO and Non-Executive Directors.
Members of the Nomination
Committee review feedback and
recommend candidates for
appointment to the Board. Decisions
relating to such appointments are
made by the entire Board based on
a number of criteria including the
candidate’s skills and experience,
the contribution they can make to our
business and their ability to devote
sufficient time to properly fulfil their
duties and responsibilities.
Reappointment of Directors
All Directors are subject to annual
re-election and will be proposed for
re-election by shareholders at the AGM
to be held on 18 May 2023. Following
evaluation, all Directors continue to be
effective and have the time available
to commit to their role, and the Board
has recommended that all directors
are put forward for re-election.
Non-Executive Directors are initially
appointed for a three-year term and
retiring Directors, if willing to act, will
be deemed to be re-appointed unless
the resolution for their re-
appointment is not approved.
Talent and succession planning
Succession planning work during 2022
focused on the Board and CELT. The
Committee has considered succession
planning for each of the Executive
Directors and CELT members, as well
as emerging talent within the business.
The review included scoping those
potential successors ready now,
those ready in one to two years,
and those anticipated to be ready
in three to five years.
Given its importance, succession
planning is scheduled for the
Committee’s consideration
twice a year.
External search firms
For all independent Non-Executive and
Executive Director appointments, we
engage international search and
selection firms to support the Board,
most recently using firms including
Heidrick & Struggles, Spencer Stuart
and Russell Reynolds. None of them
have any connection with the Group,
or any Director, other than they may
be engaged to assist with Board and
senior management appointments
and ordinary course succession
planning from time to time.
Board induction, training and
development
On joining the Board, all Non-Executive
Directors participate in a formal
induction programme. The
programme is monitored by the Chair
(other than in relation to his own
induction, which is guided by the
Senior Independent Director) and is
the responsibility of the Company
Secretary. Its purpose is to ensure that
each newly appointed Non-Executive
Director is able to contribute to Board
discussions as quickly as possible.
While each induction programme is
tailored to the individual Director’s
needs based on their skills and
experience, typically each programme
provides new Directors with insight
into the Group’s strategy, culture and
operations and informs them about
the governance and compliance
processes and procedures we operate.
In 2022, the induction programme for
our two new US-based Non-Executive
Directors, Kim Lody and Sharon
O’Keefe, included meetings with our
corporate law firm who provided
comprehensive training on UK
company law and the Code.
During the year Freshfields Bruckhaus
Deringer also provided the Board with
directors’ duties refresher training
and an update on governance and
regulatory matters. The Board also
received updates and training from
the Group’s senior management and
external advisers covering a range
of topics.
We continued to evolve our training
programme and, in particular, its
scope was expanded to include
training from external advisers to both
the Remuneration and Audit and Risk
Committees. Training focused on
matters specific to their respective
committee activities, including
corporate governance updates,
executive remuneration, corporate
reporting and audit updates.
All Directors have access to the
advice and services of the Company
Secretary and, through her, have
access to independent professional
advice in respect of their duties,
at the Group’s expense.
Committee evaluation
The Committee conducted an
evaluation of its performance in the
form of a detailed questionnaire
facilitated by an external provider,
Lintstock, the results of which were
highly rated overall. Matters identified
for attention in 2023 are set out under
2023 Priorities on page 123.
Copies of all appointment letters are
available for inspection at the
Company’s registered office.
On behalf of the Nomination
Committee.
Dr John McAdam CBE
Chair of the Nomination Committee
8 March 2023
Overview
Strategic report
Financial statements
Additional information
125
Convatec Group Plc Annual Report and Accounts 2022
Governance
A word from
the Chair
“I am pleased to see the progress that
has been made to simplify and deliver
on environmental matters, resilience,
risk management and control.”
COMMITTEE INTRODUCTION AND OVERVIEW
COMMITTEE MEMBERSHIP, MEETINGS AND
ATTENDANCE
The table below shows Committee members and the
number of meetings attended out of the number of
meetings members were eligible to attend during 2022.
Director
Member since
Attended
Margaret Ewing (Chair)
1
August 2017
7/7
Brian May
March 2020
7/7
Heather Mason
September 2020
7/7
1
Ms Ewing was appointed Chair of the Committee on 28 June 2019.
The biographies of the Committee members on pages 110 and
111 outline the members’ collective wide finance, audit, risk
management and relevant sector and business experience,
enabling the Committee to provide constructive challenge
and support to management and the auditors. In accordance
with the Code, the Board has determined that Margaret Ewing
and Brian May have recent and relevant financial experience
and is satisfied that the Committee has competence relevant
to the sector and its overall responsibilities.
The Deputy Company Secretary attends meetings as
Secretary to the Committee. Other regular attendees, at
the invitation of the Committee, include the Chair, CEO, CFO,
General Counsel & Company Secretary, VP Group Financial
Controller & Transformation, VP Internal Audit & Enterprise
Risk and external audit partners.
During the year, the Committee periodically met without
others present, and also held separate private sessions with
the CFO, VP Internal Audit & Enterprise Risk and the external
audit partners
KEY NUMBERS
Meetings held
7
(2021: 7)
Attendance
100%
(2021: 100%)
ACTIVITY HIGHLIGHTS
•
Review of key judgements and estimates, adjusted
measures and disclosures in respect of the 2022
financial statements
•
Consideration of the withdrawal from hospital care and
related industrial sales and associated restructuring
•
Monitoring of progress and improvements in ESG
reporting, including development of targets and
compliance with TCFD requirements
•
Review of risks and initiatives to improve operating
resilience
2023 PRIORITIES
•
Commissioning an independent assessment of
the maturity and effectiveness of cybersecurity and
data privacy activities to complement the
Committee’s expertise
•
Ensuring the focus of the Internal Auditor is aligned to
the Committee’s priorities and concerns regarding risk
across the Group
•
Externally benchmarking the governance approach
to ESG to enhance the Committee’s ESG-related
oversight and responsibilities
•
Reviewing the future finance model and its role in
delivering the simplification agenda
KEY AREAS OF RESPONSIBILITY
The Committee’s principal responsibilities are to oversee
and provide assurance to the Board on:
•
The integrity and quality of financial reporting
•
Effectiveness of audit arrangements
•
Robustness and effective operation of internal
controls, compliance and risk management processes
•
TCFD and ESG metrics and data reporting
The role and responsibilities of the Committee are set
out in the terms of reference (available on the Company’s
website) which were reviewed and updated by the
Committee in March and October 2022 to reflect changes
in the relevant legislation and regulations and
recommended good practice.
Margaret Ewing
Chair of the Audit and Risk
Committee
Governance
Audit and Risk Committee report
Convatec Group Plc Annual Report and Accounts 2022
126
Dear Shareholder
On behalf of the Board, I am pleased
to present the 2022 Audit and Risk
Committee Report. This report is
intended to provide shareholders and
other stakeholders with an insight
into key matters considered in 2022,
together with how the ARC has
discharged its responsibilities and
provided assurance on the integrity of
the 2022 Annual Report and Accounts.
It is our responsibility to ensure the
financial and non-financial information
published by the Group appropriately
presents its activities to all stakeholders
in a way that is transparent, useful and
understandable and is aligned with the
latest guidance and requirements of
regulators and other relevant bodies. In
addition, the Committee’s fundamental
priorities include ensuring the quality
and effectiveness of the external and
internal audit processes and monitoring
the management of the principal risks
and effectiveness of the internal
controls of the business.
During the year, management
undertook a strategic review of the
Group to ensure that we can continue
to serve, support and innovate to
benefit the people who rely on our
products and services in chronic care
sectors. This led to the announcement
of the withdrawal from the hospital
care activities and related industrial
sales business. In addition, risk
management became an area of
increasing focus as a result of recent
and ongoing global events, including
their inflationary implications. Building
on the timely business response to
recent issues, the Committee
welcomed the management initiative
to develop a rapid response team
to provide a balanced and consistent
approach to business continuity
in readiness for future events. In
planning the Committee’s agenda,
we took account of management’s
areas of focus and any consequential
significant issues and operational,
compliance and financial risks likely
to have an impact on the Group’s
financial statements.
Throughout 2022, we have ensured:
the key challenges and risks faced
by the Group were reflected in the
external and internal audit plans;
effective controls remained in place;
changes in the Group’s principal and
emerging risks were identified and
effectively managed; ongoing
compliance with all regulatory and
legal obligations; and sound financial
judgements and estimates continued
to be made.
During 2022, I have maintained regular
dialogue with my fellow members of
the Committee, the CFO, other
members of management (financial,
legal and commercial) and the Vice
President of Internal Audit & Enterprise
Risk Management, including meeting
with ’agenda topic owners’ prior to
Committee meetings, ensuring the
Committee would be provided with
the necessary information to enable
it to guide, challenge and advise and,
when required, make informed
decisions. I also met regularly with
the lead partners from Deloitte, the
external auditor, as part of my ongoing
review of their effectiveness.
To help the Committee meet its
oversight responsibilities, several
knowledge sessions were held
during 2022 on key areas including
cybersecurity, data privacy, financial
and IT general internal controls (and
related improvement programme)
and proposed regulatory reform.
In addition, the Committee was
delighted to visit the Global Business
Services (GBS) centre in Lisbon, to gain
insight into the operations which were
set up in 2020 as part of Convatec’s
transformation and simplification
programme. In 2023, we will continue
to review progress in the GBS as
additional geographies and activities
are transitioned to it, processes
mature, and as we prepare for the
changes in corporate governance
and regulatory requirements.
Despite offering to be available for
meetings, no direct meetings with
Convatec shareholders were held
during 2022, with the exception of
regular interactions with Sten Scheibye,
Novo’s representative, and a Non-
Executive Director. During 2023, I will
seek direct engagement with key
investors on financial reporting, risk
and assurance planning as we prepare
for the proposed corporate governance
changes in anticipation of their
implementation for the financial
year ending 31 December 2024.
In July 2022, the Chair received a letter
from the FRC in respect of its review
of the Company’s Annual Report
and Accounts for the year ended
31 December 2021. The review was
based solely on the financial
statements without any detailed
knowledge of the business or the
underlying transactions, and did
not result in any specific questions
or queries. They did, however, note
a number of matters where they
believed that users of the accounts
would benefit from improvements to
certain existing disclosures, including
changes to the wording of certain
accounting policies, disclosures of
tax losses by expiry date and more
disclosures on restricted cash, leases
and Alternative Performance Measures
(APMs). The Committee reviewed
management’s proposed responses
in respect of each matter raised and
agreed amended disclosure notes
where applicable in the 2022 ARA,
having also considered the views
of the external auditor.
We welcomed Jonny Mason as
CFO and supported him during his
induction period. During 2022 Jonny
has focused on simplifying processes,
managing risk and delivering in line
with the FISBE strategy. The
Committee has developed a very
effective, transparent and trusted
relationship with Jonny.
I would like to thank my fellow
Committee members and all teams
involved with the Committee’s activities
for their contribution during 2022 and
their relentless focus on quality, sound
judgements, controls and risk in a
challenging global environment,
politically and economically.
I hope that you find this report
informative and responsive to
shareholders’ and other stakeholders’
expectations and can take assurance
from the work undertaken by the
Committee during the year and
planned for 2023.
Overview
Strategic report
Financial statements
Additional information
127
Convatec Group Plc Annual Report and Accounts 2022
Governance
OUR ROLE
•
Interim and full-year results
statements, prior to
recommendation to the Board
for approval, together with
supporting reports from CFO and
VP, Group Finance Controller
highlighting all key judgements
and estimates
•
External auditor reports to the
Committee at each Committee
meeting, regarding audit plan and
progress in implementation,
interim review and full year audit
•
Final draft 2022 ARA, the external
auditor’s and management
reports on all key judgements
•
Appropriateness of going concern
and viability assessments,
including basis of preparation and
management reports on all key
judgements, risk scenarios and
underlying assumptions,
supporting analysis and evidence
•
Acquisition papers and related
accounting treatments and
judgements, including assessment
of earn-outs and impact on the
recognition of deferred tax,
particularly in respect of the
acquisition of Triad Life Sciences
•
Accounting treatment and
provisions for the costs and
contract breaches associated
with the closure of our facility in
Review and challenge
judgements, estimates
and policies
Review appropriateness
of the going concern and
viability statements
Advise Board on fair,
balanced and
understandable
Integrity of the
published financial
information
Belarus alongside the
discontinuation of associated
Russia activities
•
Policy for APMs and review of
proposed adjusting items for
rationale to be considered as
non-recurring items
•
Group’s treasury policy, regular
treasury activity and funding
status updates, funding strategy
and debt covenant compliance
at relevant reporting dates
•
Group’s key tax risks, effectiveness
of related controls and mitigations
and tax transparency agenda,
including the Company’s
published Tax Strategy Statement,
subsequently approved by
the Board
•
Estimated effective tax rates
applied in interim and full-year
financial statements, judgements
and disclosures in respect of
underlying key tax issues/risks
•
Progress of the Finance
Transformation programme,
the implementation of the
target operating model and
the standardisation of activities
transitioned to GBS
•
Monitoring of the continuing
effectiveness of internal controls
and the internal control framework
improvement programme
SCOPE OF REVIEW BY THE COMMITTEE
Significant audit risks and accounting judgements
Audit and Risk Committee report
continued
Governance
2022 KEY MATTERS
Matters considered at the meetings
are set out on pages 129 to 135.
The Committee meeting agendas
are tailored to ensure that emerging
topics are included and to allow
for ad hoc discussion and reviews.
A summary of the Committee’s
activities during 2022 and until
the date of this report is detailed
on the following pages.
Annual review
During the year, the Committee
members and regular attendees
(including the internal and external
auditors) undertook an evaluation
of the Committee’s effectiveness. An
external provider, Lintstock, prepared
(with input from the Committee chair
and Deputy Company Secretary) and
provided participants in the evaluation
with a questionnaire (different
questionnaire for Committee
members to that provided to other
evaluation participants). Lintstock
also collated and summarised the
responses, but without drawing
conclusions. The findings and
proposed responses were discussed
initially by the Committee and then
shared with the Board. Overall, it
was concluded that the Committee
continued to perform very effectively
and had addressed its key priorities
and action plan for 2022, with priority
areas of focus for 2023 also identified.
The significant operational and
financial issues and risks which may
impact the Company’s financial
statements, internal controls and/or
delivery and execution of the
Company’s strategy were considered
by the Committee when planning its
agenda and reviewing the audit plans
of internal and external auditors.
The Committee used its collective
expertise to challenge the approach
and judgements made by management
in the accounting treatment and
valuation of financial matters,
and the resulting disclosures. The
Committee also considered these
issues with the external auditor,
reviewing reports outlining work
performed, and any issues identified,
together with consideration of the risk
of management override of controls.
A summary of the significant areas
of audit focus, as described in the
Auditor’s Report on pages 232 to 240,
plus additional areas of key focus by
the Committee is outlined below.
Following considerable discussion and
review of each significant accounting
judgement with management and the
external auditor, the Committee was
satisfied that there were relevant
accounting policies in place in relation
to these significant issues and that
management had correctly applied
these policies and exercised
reasonable judgement.
Financial reporting
Convatec Group Plc Annual Report and Accounts 2022
128
KEY MATTERS IN 2022
Key matter
Issue
Action taken by the Committee and
outcome/future actions
Acquisitions and
Investments
As reported on pages 213 to 215, the Group acquired
Triad Life Sciences (now Advanced Tissue
Technologies or ATT) in March 2022 for an initial
consideration of $125.3 million, with potential further
contingent consideration of $325.0 million based on
two short-term milestones and the performance
during the first two years post-completion. The two
short-term milestones were both achieved in 2022
resulting in payments of $50.0 million. The valuation
of the contingent consideration has been identified
as a key estimate. Key inputs used in calculating the
fair value of the contingent consideration include a
weighted probability of different scenarios and
revenue projections based on latest available
internal forecasts, discounted using an appropriate
discount rate. Management engaged a third-party
valuation specialist to calculate the appropriate
discount rate to use in calculating the $130.8 million
discounted fair value of the remaining contingent
consideration at 31 December 2022. The potential
range of discounted outcomes with the next financial
year is between $85.2 million and $230.8 million.
In respect of the acquisition of Cure Medical in 2021,
there is total potential contingent consideration of
$10.0 million, which is based on post-acquisition
performance targets and due to be paid within three
years of the acquisition date. As at 31 December 2022,
the discounted fair value of the contingent
consideration was $9.2 million (2021: $3.1 million),
with the increase arising as a result of good
performance during 2022 together with the latest
financial forecasts, and the unwinding of the
discount during the year.
In May 2022, the Group invested $30.7 million in
preference shares of BlueWind Medical Limited,
inclusive of transaction costs. The equity investment
is held at fair value in the Consolidated Financial
Statements, with any changes in fair value taken to
Other Comprehensive Income. Management engaged
with a third-party valuation specialist to calculate
the fair value at 31 December 2022, which has not
changed since the date of investment.
The materiality of the acquisition of Triad Life Sciences
poses a significant financial risk related to the
accounting for this transaction. To address this risk, the
Committee compared the performance of Triad Life
Science’s latest forecasts with the assumptions in the
acquisition business case, considered the work
undertaken by the external valuation experts and
discussed with Deloitte the results of their audit of the
transaction accounting. The Committee reviewed and
challenged the key drivers of the valuation of intangible
assets identified, the fair value uplift of inventory
acquired and the resulting value of goodwill. The
Committee also ensured that the implications of the
potential maximum consideration were reflected in
management’s going concern and viability assessments.
The Committee reviewed the basis for determining the
increase in the contingent consideration liability related
to Cure Medical and concluded that it was appropriate.
In respect of BlueWind Medical, the Committee
considered the audit work performed by Deloitte and
the conclusions of the external valuation experts.
The Committee discussed these key judgements with
the auditors and considered the results of their audit
review, including the conclusions of Deloitte’s valuation
experts, and ultimately considered that the accounting
for acquisitions and investments was appropriate.
Withdrawal from
hospital care and
associated
industrial sales
business
The withdrawal from hospital care and the
associated industrial sales business has resulted
in management making assumptions related to
the costs of a plant closure, restructuring of other
impacted businesses and operations and the impact
of the contractual commitments to customers in
many markets across the globe.
The Committee reviewed the estimates and incurred
closure costs throughout the year, with particular
attention paid to those unspent at year end and carried
over as a provision. The judgements taken on items
estimated due to uncertainty were scrutinised and
challenged with management and discussed with
the external auditor.
Management ascertained that the withdrawal costs are
a non-recurring item and consequently should qualify
as an adjusted item. The Committee carefully reviewed
the non-recurring nature of the various related costs,
and their consideration as an adjusted item.
The Committee concluded that, given the status of the
withdrawal from these businesses at the reporting date,
the provisions were sensible and the costs treated as
adjusted items were categorised appropriately.
Overview
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Financial statements
Additional information
129
Convatec Group Plc Annual Report and Accounts 2022
Governance
Key matter
Issue
Action taken by the Committee and
outcome/future actions
APMs
APMs are disclosed to enable the reader of the
financial statements to form a balanced view of the
ongoing prospects of the Group. Non-recurring items
impacting the financial statements are adjusted in
order to reflect the results of the ongoing business.
The Committee reviewed all proposed adjusting items in
detail, ensuring that they are consistent with the policy
and challenged the treatment of proposed new adjusted
items. The Committee requested additional detail in
respect of a number of new costs proposed as adjusting
items, particularly in respect of the strategy and plans
that give rise to such costs.
The Committee concluded that the adjusted items were in
accordance with the policy, and that a reconciliation to cash
conversion had been included as per the recommendation
in the recent letter from the FRC. The Committee will review
the APM policy in early 2023 to ensure that it continues to
appropriately allow the performance of the underlying
ongoing business to be reflected as management
implements the FISBE 2.0 strategy.
Management
override of
controls
There is a risk of management bias and influence on
key judgements which may materially impact the
financial statements.
The Committee reviewed the internal control framework
and its operating effectiveness, in conjunction with the
progress by the Fraud Risk Committee on the
identification and mitigations of fraud risk.
The Committee has reviewed key judgements relation to
the exit from hospital care and the acquisition of Triad
Life Sciences and considered whether there were any
indicators of management bias.
The Committee also considered the work of the external
auditor who confirmed that they had not identified
areas of material management bias or concern over
key judgements and consolidation entries.
The Committee considered they had been provided
with assurance that no material override of controls
had occurred.
OTHER IMPORTANT ACCOUNTING AND DISCLOSURE JUDGEMENTS
The Committee considered the key risks, facts and judgements for the following areas:
Matter
Action taken by the Committee
Outcome/future actions
Going concern
and viability
statements
The Committee reviewed the appropriateness of the going
concern basis of accounting in preparing the interim and full-
year financial statements and assessed the longer-term
viability of the Group in accordance with the requirements of
the Code.
In reaching its view, the Committee considered the process and
methodology adopted by management and the principal and
emerging risks and their potential impact, and also challenged
the appropriateness of the three-year viability period. The
forecasts, stress test scenarios, including the underlying
scenario assumptions and the reverse stress test, were
reviewed and assessed against the Group’s financing facilities
and covenants. In addition, the Committee obtained a
summary of external views from analysts and other industry
commentators, to understand the wider market views on the
Group’s future financial performance and viability, and the
external auditor’s findings and conclusions on this matter.
The Committee also considered the adequacy and accuracy of
the disclosures in the 2022 ARA in respect of the Group’s ability
to continue as a going concern and its future viability.
Following this thorough assessment,
the Committee recommended additional
assumptions related to a significant cyber
incident scenario and sanctions being
applied to certain geographies in response
to the macroeconomic market distress
scenario. Having taken these
recommendations into account, the
Committee considered the scenarios
applied were severe but plausible and the
extent of the analysis made by management
to be appropriate and recommended the
viability statement and related disclosures
and the going concern statement to the
Board for approval and inclusion in the
2022 ARA.
Recognition of US
deferred tax assets
(DTAs)
The Committee reviewed the revised position, following the
acquisition of Triad Life Sciences, in relation to the recognition
of DTAs in respect of US tax losses. The Committee sought
explanations as to how the acquisition of Triad Life Sciences
gave rise to new deferred tax liabilities which provided a
justification for additional recognition of the Group’s DTAs
in the US. The Committee considered the assessment and
conclusion of the external auditor.
The Committee agreed with management’s
proposal for additional recognition of US
DTAs in light of the new deferred tax liability
profile arising from the acquisition of Triad
Life Sciences.
Governance
Audit and Risk Committee report
continued
Convatec Group Plc Annual Report and Accounts 2022
130
Matter
Action taken by the Committee
Outcome/future actions
Dividends and
distributable
reserves
The Committee reviewed the analysis of realised distributable
reserves and the availability of liquidity, including the effect of
sensitivities aligned to the viability statement.
The Committee considered the proposed dividend with
reference to the proposed enhanced dividend and
distributable reserves requirements of the Government’s
proposals (in response to the BEIS consultation on corporate
governance reform).
The Committee concluded that it was able to
advise the Board that there were sufficient
realised distributable reserves and cash
resources to enable the Board to approve
the 2022 interim and final dividends.
Operating segment
reporting
The Committee considered management’s assessment to
support the position that, for the purposes of financial
reporting, no triggers have been identified that contradicted
the view that the Group’s business should be treated as a single
segment entity. Management’s assessment concluded that the
CEO continues to be the Chief Operating Decision Maker, and
the business continues to operate in a matrix structure.
Financial information in respect of revenues is provided to the
CEO for decision-making purposes, both on a category and key
market basis, with the primary focus of financial reporting
based on the consolidated Group results.
With reference to IFRS 8, the Committee
noted the resource allocation continues
to be driven with the support of global
functions and Centres of Excellence, and
consequently agreed with management’s
view that the Group should continue to
report as a single segment for the purposes
of the disclosures in the 2022 ARA.
The Committee will continue to review
the appropriateness of the single-segment
approach as the Group completes its
pivot to the new operating model and
improvements are made to the internal
management reporting process, including
allocation of central costs.
DISCHARGE OF OTHER KEY AREAS OF RESPONSIBILITY
Throughout the year, the Committee addressed its other key areas of responsibility contributing to its ability to provide
assurance to the Board that it could conclude on the effectiveness of the Company’s internal controls, compliance, fraud
prevention and risk management processes throughout the year.
Our role
Items reviewed
Outcome/future actions
Enterprise risk management
and insurance
• Assist the Board to
establish and articulate
overall risk appetite,
oversee specific risk
exposures and mitigations
and ensure Group is
operating within the
Board’s risk appetite
• Ensure a robust
assessment of principal
and emerging risks has
been undertaken, with
effective mitigations and
controls established
• Monitor the policies and
process for identifying new,
emerging and existing risks,
and effectively managing
their impact on the Group
•
Review effectiveness of the
Company’s risk management
systems and processes
• Review of the annual
insurance renewal strategy
and programme to assess
coverage of insurable risks
across the Group
• Principal and emerging risks, including
the interim and full-year risk management
statements and disclosures
•
Update to the risk management policy
• Effectiveness of the Group’s risk
management processes
•
Progress in improving the risk management
framework and reporting
•
Updates on the management of cyber and
data privacy risks
• Proposed risk appetite for subsequent
consideration and approval by the Board
•
Support to evidence the Group had operated
within the Board-approved risk appetite and the
Group’s strategy and three-year strategic plan
were consistent with the Group’s risk appetite
•
Viability of the Group over the next three years
considering severe but plausible scenarios of
impact of the Group’s principal risks
• Annual insurance renewal programme,
subsequently approved (other than Board-
approved Directors’ and officers’ liability
insurance)
• Monitoring of the implementation of
additional resilience uplift programmes
across the Group in response to insurance
programme reviews and recommendations
The Committee noted the continued
improvements to the risk framework following
the refreshed approach initiated in 2019,
including the way in which risks are identified,
managed and reported to CELT, the Committee
and the Board.
The Committee supported the elevation of the
political and economic risk given the external
global events (including the implications of
significantly increased inflation and interest rates).
The Committee reviewed the progress in
implementing improvements to the management
of cyber and data privacy risks, on a quarterly
basis, and the results of the oversight survey
conducted in 2022. The Committee concluded
that, despite some slippage in management’s
cyber risk strategy implementation, good
progress had been achieved, including improved
cyber defence capabilities and improvements
in the IT controls and risk profile.
The Committee reviewed the proposed insurance
renewals programme, and scrutinised areas
where the extreme total loss scenario exceeded
the maximum insurable loss.
The Committee was encouraged by the plan
to strengthen the enterprise risk management
process and continued investment in capital
and operational programmes which enhance
our business resilience, and to develop a rapid
response team to respond to incidents in order
to manage certain risks leading to the potential
reduction in the cost of insurance cover.
The Committee requested a knowledge-
sharing session covering the Group insurance
programme prior to the renewal in 2023 and a
review of alignment between insurable risks
and insurance policy cover.
Overview
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Financial statements
Additional information
131
Convatec Group Plc Annual Report and Accounts 2022
Governance
Our role
Items reviewed
Outcome/future actions
Internal controls
• Promote and review sound
risk management and
internal control systems
over financial, operational
and compliance processes
• Review the effectiveness of
internal controls
• Quarterly updates of management’s
self-attestation of compliance with the
Group’s financial control framework,
including details of control failures (all
immaterial during 2022), their remediation
and the independent reviews by the Group
Financial Control function
•
Deep dive on the updated internal control
framework and the controls improvement
programme
•
Internal audit reviews of financial and
operational controls in a number of
countries and businesses with agreed
remediation plans (compliance controls
are discussed below)
•
Reports from the external auditor on control
weaknesses identified during their audit
The Committee reviewed the proposals to refresh
the financial control model to focus on risk and
requested a deep dive to understand and challenge
the new internal control framework (see case study).
The Committee is pleased to note the improvements
in the internal control framework in 2022 and in the
results of the self-attestations and independent
reviews of control evidence.
Based on the deep dive and the quarterly updates,
and the reports from the internal and external
auditors, the Committee noted that the Group’s
internal controls and risk management processes
were monitored throughout the year, with no
control failures that could have a material impact on
the Group’s financial statements. and mitigating
actions taken until control failures were remediated.
Compliance, including
whistleblowing and fraud
• Review the Group’s codes,
policies, systems and
controls in respect of fraud,
bribery, corporate conduct
and regulatory and legal
compliance
• Reports on the global compliance
programme, monitoring processes,
compliance control testing, issues, and
litigation matters from the Deputy
General Counsel and the Global Chief
Compliance Officer
•
Reports on the cases raised via the
confidential Compliance Helpline for
employees and certain third parties to report
misconduct or policy deviations with analysis
of the volume of cases triaged, investigated
and resolved by the Office of Ethics &
Compliance, and a summary of the subject
matters, locations and disposition of
whistleblower matters and any consequent
enhancements to our non-retaliation policy
•
Updates on the global business risk
assessment review focusing on commercial
relationships performed by the Office of
Ethics & Compliance, supported by
Internal Audit
•
Updates on the fraud risk assessment and
the development of the fraud risk
management framework and associated
control programme managed jointly by the
respective Vice Presidents for Internal Audit
& Enterprise Risk Management and the
Office of Ethics & Compliance and Group
Financial Control
The Committee considered the results of the global
business risk assessments across a number of key
global markets that determined the overall
existence of an ethical business culture; however,
targeted enhancements to certain third-party
business partner relationships were required.
Executive leadership is continuing to further develop
corporate culture throughout the Group and to
ensure adherence to global policies and procedures.
In addition, the Committee noted positive
compliance culture results from the high-level risk
assurance initiative in which ten compliance risk
areas are self-evaluated by key business leaders
and tested by the Office of Ethics & Compliance in
partnership with Enterprise Risk Management,
and in which most improvements related to
resource management.
The Committee was pleased to note the ongoing
development of the global fraud risk programme
to monitor fraud risk effectively across the Group,
and the implementation of the associated
controls programme.
The Committee continues to monitor our
compliance culture across the Group with strong
focus on markets which have an enhanced
perceived corruption index risk score.
Governance
The Group implemented a global
internal control programme in 2019
to support the Directors’ related
statements in the Annual Report
and Accounts. Aligned to COSO, the
framework is primarily focused
currently on financial reporting
risks and comprises the key
elements, including Entity Level
Controls, controls over the financial
processes and IT general controls
over the financial systems, and is
supported by a control monitoring
programme including self-
assessments, independent
assessments and quarterly updates
to the Committee. In 2022, the
framework was refreshed to
provide a focus on risk, including
the introduction of a lighter
framework for the smaller operating
entities, with controls more closely
aligned to the financial reporting
’close’ process.
In October, the Committee requested
a knowledge session to understand
the refreshed control framework,
including the monitoring and
assurance processes, to provide the
basis for the Directors’ statement in
relation to internal control, and to
assess the readiness of the Group for
the forthcoming proposed FRC-
related changes to the Code.
The Committee noted that the high
level of operating effectiveness,
recorded by the self-assessment
process, was supported by the
monitoring process by the Financial
Controls team, with a significant
improvement in the quality of
controls evidence.
The Committee was assured that
the recent development towards a
more risk-focused controls
framework had been appropriate
and that the proposed roadmap to
extend the internal control
framework to manage additional
risks (e.g. non-financial data) to
address the BEIS requirements was
achievable. The Committee will
review the assurance of the internal
control programme in the light of
BEIS guidance in 2023.
CASE STUDY: INTERNAL CONTROL
Audit and Risk Committee report
continued
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132
The Board:
Ultimate responsibility for internal control
Audit and Risk Committee:
Oversight of internal control framework
Tax, Treasury and Finance Committee:
Oversight of tax and treasury matters and
liabilities
Senior management:
Delegated responsibility for internal control
Our role
Items reviewed
Outcome/future actions
Regulatory compliance –
ESG and TCFD
• Review and approve the
TCFD disclosures and
oversee the Responsible
Business report (pages
40 to 87)
• Approve the appointment
of Deloitte as the ESG
assurance partner and
review their report
•
Progress on the enhancements to the
ESG governance and framework, to enable
compliance with the increasing stakeholder
and regulatory reporting disclosure
requirements
•
The disclosure benchmarking assessment
against other listed groups and sector peers
•
Results of the Scope 3 emissions materiality
study and the strategy to develop Scope 3
science-based targets
•
Monitoring of the progress to develop
scenario analyses of climate-related physical
and transition risks and opportunities
The Committee remained focused on ESG and
TCFD reporting during 2022, providing challenge
to management to meet the increasing reporting
requirements and stakeholder expectations and
develop quantitative targets.
The Committee is encouraged by the significant
progress made during 2022 as environmental
targets are developed, and the Group has started
to deliver against them. The Committee will
continue to monitor progress and ensure that
robust plans and roadmaps are in place to meet
the commitments and targets.
The Scope 3 materiality study findings were
reviewed and assessed by the Committee as a
key building block to developing and committing to
science-based targets in 2023. The Committee will
continue to monitor progress on how the Group
works with its suppliers to develop and deliver
Scope 3 reduction targets going forward.
The appointment of an independent expert adviser
on key ESG topics was approved by the Committee
to assist with the development of quantitative
targets and initiatives to meet these targets, as well
as the response to the ongoing development of
reporting requirements. The Committee approved
the appointment of Deloitte as ESG assurance
partner, after considering that it did not impact
on their independence as external auditor.
The three lines of defence model summarises the roles and responsibilities for our internal control framework around
the Group to ensure that the financial statements are free from material misstatement.
Business operations
•
Identify, assess and manage
financial risks on an ongoing
basis, including maintenance
and operation of the internal
control framework to mitigate
key risks
• Self-assess on operating
effectiveness of key controls
through the control monitoring
programme.
Group financial control
and IM governance, risk
and control
•
Support the business in their
financial risk, IT risk and control
management including setting
relevant policies, reviewing the
risk assessment, advising the
business on controls and
establishing the key controls
•
Report on the operating
effectiveness of the control
framework (self-attestation and
controls monitoring including
reviewing the quality of control
evidence on a sample basis).
Internal audit
• Provides independent
assurance over the design and
operating effectiveness of the
Group’s Internal control
framework.
External audit
•
Reviews controls relevant to
the external audit approach
and report to management
on control improvements.
Risk ownership
1st line of defence
Challenge
2nd line of defence
Assurance
3rd line of defence
THREE LINES OF DEFENCE
Overview
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Financial statements
Additional information
133
Convatec Group Plc Annual Report and Accounts 2022
Governance
Our role
Items reviewed
Outcome/future actions
Internal audit
• Monitor and review the role
and effectiveness of the
internal audit function,
ensuring the internal audit
plan is aligned to the key
risks of the business and
that the function is able to
provide support and
assurance to the Board,
Committee and
management in the
execution and delivery of
the Group’s strategy and
transformation and
effectiveness of its internal
controls and processes
• Annual internal audit plan, resourcing
and budget, subsequently approved
• Reports summarising conclusions and
recommendations made following internal
audit and progress of implementation of
agreed management actions
•
Effectiveness of the Group’s internal audit
function and processes
The Committee considered the results of the
audits conducted during the year (particularly
any emerging themes of concern) and approved
changes to the audit plan to reflect changing
circumstances or risks.
The Committee approved the proposed 2023
internal audit plan, which had been prepared
adopting a risk focused approach, using the
Group’s principal and emerging risks as a base.
In December, the Committee undertook an
assessment of the effectiveness of the internal
audit function, including obtaining feedback
from CELT members and other relevant
Management to understand if they feel that
they are receiving the assurance they need on
the key risks communicated by the VP Internal
Audit & Enterprise Risk Management directly with
the CELT. Both management and the Committee
concluded that the quality and effectiveness of
the internal audit function continued to improve
in 2022.
Looking forward to 2023, the Committee will
ensure that the internal auditor function remains
independent, whilst responding to the ’pull’ from
management for increased support and audits,
providing independent assurance across an
appropriately balanced portfolio of audits
covering financial controls and processes and
key areas of risk, with some advisory support,
particularly to assist the Group in improving
its second line of defence capabilities.
The Committee will also review the scope of
assurance to be obtained from internal audit as
the Audit and Assurance policy is developed in
line with the expected changes to the corporate
governance regulations.
Governance
Audit and Risk Committee report
continued
Convatec Group Plc Annual Report and Accounts 2022
134
Our role
Items reviewed
Outcome/future actions
Regulatory developments
• Monitor the development
of regulations relating to
ESG, TCFD, climate change,
audit and corporate
governance, FRC and FCA
reporting requirements
• Consider management’s
preparedness to adopt the
changing requirements
• Briefings and discussion on the
Government’s and FRC’s responses to the
BEIS Audit and Corporate Governance
reform proposals
•
Review of the internal plan to develop
and adopt the new requirements within
the Group
•
Review of developments in ESG and TCFD
requirements
• Review of management’s assessment of
thematic reviews issued by the FRC during
2022 (including ESEF requirements)
The Committee requested a briefing from the
external auditor regarding the status of the BEIS
proposals following the Government response
to the “Restoring trust in audit and corporate
governance” consultation and the auditor’s views
on the group’s key challenges in implementing
the likely reforms and the appropriateness of
management’s implementation plans.
Although the many requirements still lack clarity,
the Committee was satisfied that the current
plans (to focus on no-regret actions, which
improved the control environment of the Group)
were appropriate to enable the relevant teams
to progress, whilst monitoring further guidance
as it is released.
Treasury
• Provide oversight of the
treasury function
• Review activities of the
treasury function including
the status of the treasury
instruments, the
indebtedness of the
Group and compliance
with covenants within its
debt instruments
•
Review of the proposed (and subsequently
completed) refinancing of the Group’s bank
facilities
•
Monitoring of the implementation of the
treasury management system
• Group’s treasury policy (approved) and
review policy compliance at relevant
reporting dates
The Committee reviewed the proposed
refinancing and recommended it to the Board
for approval.
The Committee reviewed compliance with
covenants and other conditions of financing
arrangements.
The introduction of the Treasury, Tax and Finance
Committee was considered by the Committee to
be a key development to align these key finance
disciplines, and will lead to improvements to
governance, control and risk mitigation.
Tax
• Provide oversight of the tax
function
• Review the key aspects of
taxation, including
compliance, accounting
judgements, reporting, tax
strategy and the external
reporting requirements of
regulators and tax bodies
• Global tax strategy
• Company’s published tax statement, which
was subsequently approved by the Board
•
Tax rates applied in the interim and full-year
financial statements
• Judgements and disclosures in respect
of underlying key tax issues
•
The Group’s key tax risks, effectiveness
or related controls and mitigations and
tax transparency agenda
The Committee considered the Group’s tax risk
profile in light of tax authorities around the world
undertaking an increasing number of tax audits
in respect of all companies, requirement for
greater transparency and new tax legislation in
jurisdictions where the Group has presence and
was satisfied that the Group manages its tax
affairs carefully, ensuring that we operate
within our tax risk appetite.
The provision for uncertain tax positions was
reviewed by the Committee and considered to be
in line with the requirements of IFRIC 23.
The Committee was concerned with the
significant changes in the actual and effective
tax rates to be applied during the year compared
to the guidance previously shared, and requested
a detailed explanation. The Committee was
satisfied with the analysis of the tax position by
management demonstrating the impact of the
Triad Life Sciences acquisition on the US deferred
tax liability.
Overview
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Financial statements
Additional information
135
Convatec Group Plc Annual Report and Accounts 2022
Governance
EXTERNAL AUDIT
Audit process
The Committee is responsible for overseeing the relationship with the external auditor, the audit process and, most
importantly, the effectiveness and quality of the audit. The following table summarises the steps taken by the Committee
in overseeing the effectiveness of the 2022 audit and its quality.
Significant matters for review
Decisions and actions taken by the Committee
The annual audit plan and strategy
including the scope of the audit,
changes in approach and
methodology, emerging industry
and Group-specific risks and change
in the audit leadership team
Reviewed and challenged the proposed audit plan, and agreed the addition of the
accounting for the acquisition of Triad Life Sciences as a significant risk due to the
judgements associated with the contingent consideration, and the removal of revenues
as a significant audit risk.
Challenged the structure of the audit to centralise certain audit activities in Lisbon to
leverage the Group’s GBS operating model and simplify the management of the audit.
Materiality level for audit including
Group materiality and component
materiality
Reviewed methodology and agreed a higher level of materiality for 2022. In reaching this
conclusion the Committee agreed with the auditor that the methodology applied in 2021
(based on improved forecast profitability) remained appropriate and should be adopted.
Audit fee and terms of engagement
Approved the audit fee and terms of engagement, ensuring no impact on scope of audit
or quality of resource engaged due to the agreed fee level.
The Committee noted that the regulatory change ISA 315 (Identifying and Assessing the
Risks of Material Misstatement through Understanding the Entity and its Environment)
and resource inflation had an impact on audit cost.
Deloitte has also been engaged to provide limited assurance on ESG data in 2022.
Audit scope and risk assessment
Further to the challenge by the Committee in 2021 to align to the Group strategy, all 12 of
the Group’s focus markets were in audit scope – five were subject to full scope audit
procedures, four had the material components subject to specified audit procedures, and
three were subject to local statutory audits by Deloitte, with desktop reviews undertaken
by the central audit team.
Deloitte undertook a thorough risk assessment process to identify the three areas of
significant audit risk and other areas of audit focus. The Committee sought an explanation
for the change in emphasis and particularly the downgrading of risks considered
significant in 2021 and agreed with Deloitte’s proposals. The Committee did not identify
additional risks that could materially impact the consolidated financial statements.
Having considered the proposed audit scope, risk assessment and materiality level, the
Committee approved the 2022 audit plan and subsequent changes to certain aspects of
the plan to reflect the Group’s performance.
Audit findings, significant issues and
other accounting judgements
Discussed with Deloitte and management throughout the year, and particularly during the
year-end audit.
Deloitte’s independence, objectivity
and quality control procedures
Independence and objectivity confirmed and quality control procedures reviewed
(see below).
Audit quality and effectiveness
The Committee is very focused
on audit quality and effectiveness,
ensuring the rigour and challenge
of the external audit process are
maintained. The Committee sought
to ensure the objectivity and quality
of the external audit throughout the
year by meeting regularly with the
audit partners (with and without
management present) and considering
the quality and clarity of the auditor’s
communication with management, the
Committee and the Board, both orally
and written. The Committee formally
reviewed the quality and effectiveness
of the external audit in December,
taking into consideration
management’s conclusions. The
formal review process and key areas
of focus are outlined in the diagram
on page 137.
In particular, the Committee assessed
the depth of review and the level of
challenge provided by the external
auditor over the significant accounting
policies applied and the judgements
and estimates made by management.
An example of where the Committee
observed the external auditor to
demonstrate both professional
scepticism and a challenge to
management was in relation to the
valuation of the provisions associated
with the withdrawal from hospital
care. The external auditor discussed
the basis of the estimates for the
provisions with key stakeholders
and was eventually satisfied with the
provisions recognised. The Committee
also considered the summary of the
issues raised by the FRC from their
Audit Quality Inspection of the
external auditor, how the issues
identified impact the audit of the
Convatec Group, and the actions
being taken by the external auditor
to address the issues raised. The
Committee was pleased with the
introduction of a new key audit
partner, with specific experience of
auditing groups with global business
services facilities and noted his
responsibility for leading the GBS-
based audit activities.
The Committee’s review concluded
that the Company benefited from a
capable and knowledgeable senior
audit team, that provided the
Committee with strong opinions, views
and insights, with clear evidence of
robust challenge of management and
exercise of appropriate scepticism in
relation to key audit judgements and
estimates, reliable interpretation of
evidence provided by management
and use of external sources to support
their conclusions when appropriate.
Overall, the results of the external
Governance
Audit and Risk Committee report
continued
Convatec Group Plc Annual Report and Accounts 2022
136
PROCESS TO REVIEW EFFECTIVENESS OF THE EXTERNAL AUDITOR
Review and discussion:
audit quality and effectiveness review
and the evidence gathered by the
Committee during the year confirm
that Deloitte’s audit process and
procedures were appropriate and
effective, focused on the areas of
greatest risk and that the audit
team provided an effective, robust
and objective challenge to Group
management. Based on the
Committee’s conclusions, we
recommended to the Board
that Deloitte be proposed for
reappointment by shareholders at
the AGM to be held on 18 May 2023.
Audit independence
The Committee ensures objectivity
and independence of the external
auditor through the policy on the
provision of non-audit services, which
is compliant with the Revised Ethical
Standard (2019 ES). The policy requires
non-audit engagements performed by
the external auditor to be approved by
the Committee. Permissible services
are subject to a fee cap of 10% of
average audit fees billed to the
Company by the auditor in the past
three financial years. The Group was
compliant with the policy in 2022,
when non-audit fees principally
related to the interim review of the
Group’s half-year unaudited financial
statements. A summary of fees paid to
the external auditor is set out in Note 3
to the Financial Statements.
In addition, the Committee’s review
of the independence of the external
auditor included:
•
Confirmation to the Directors
from Deloitte that they remained
independent and objective within
the context of applicable
professional standards
•
Monitoring the tenure and rotation
of the lead and engagement
partners. Claire Faulkner rotated
into the role of lead partner in 2021
and the Committee is very happy for
her to continue in this position for
the next three years. After
completing the permissible seven
years’ service on the Group’s audit
this year, Dawn Harris will hand the
role of engagement partner to
David Holtam for 2023, who will
also continue leading the GBS audit
•
Monitoring the tenure and rotation
of other key personnel
•
Observing the relationship and
tone of communication between
management and the auditor
• Deloitte reconsidering and
reconfirming their audit
independence under 2019 ES given
Margaret Ewing’s situation as both
a former partner of Deloitte LLP
and chair of this Committee, with
Deloitte and the Committee
(excluding Margaret Ewing)
concluding that this relationship
does not affect the external
auditor’s independence
The Committee concluded that
Deloitte remained appropriately
independent in the role of external
auditor.
External auditor appointment
and engagement tender
At the AGM on 12 May 2022,
shareholders approved the
reappointment of Deloitte as the
Group’s external auditor. Deloitte
has been the Group’s external auditor
since the Company’s listing in October
2016 and prior to this were the
Company’s external auditor for the
period 2008 to 2016. The Committee
recommended to the Board the
proposal to reappoint Deloitte as
external auditor at the 2023 AGM.
In compliance with the 2014 Order,
the Company will undertake an audit
tender (not mandatory rotation) during
2024, effective for the 2026 audit.
However, the Committee will review
this matter annually, taking into
consideration the ongoing provision
of a high-quality and effective audit,
changing regulations and market
practice. The audit tender process will
be designed to adopt market and best
practice and it is anticipated that
challenger or second-tier audit firms
will be invited to participate along with
major audit firms.
Objectivity
Quality and clarity of communication
Level of challenge over policies,
judgements and estimates
Capability and understanding of the business
Survey
completed
by finance
leaders
Report of
survey
responses
Review and
discussion by
management
Review and
discussion by
Audit and Risk
Committee
Directors’
Statement in
the ARA
Discussion
with external
auditor and
agree actions
Overview
Strategic report
Financial statements
Additional information
137
Convatec Group Plc Annual Report and Accounts 2022
Governance
FAIR, BALANCED, AND
UNDERSTANDABLE
The Board is required to provide its
opinion on whether it considers that
the Company’s 2022 ARA taken as a
whole are fair, balanced and
understandable, and provide the
information necessary for
shareholders and other stakeholders
to assess the Company’s position and
performance, business model and
strategy and key risks that challenge
the Group.
To support the Board in providing its
opinion, the Committee considered
the overall cohesion and clarity of the
ARA and assessment of the quality of
reporting through discussion with
management and the external auditor
and the assurance framework, process
and controls that were applied in its
preparation. This included:
•
a verification process dealing with
the factual content
• comprehensive reviews undertaken
independently by senior
management to consider
messaging, adequacy of disclosures,
compliance with regulatory and
legal reporting requirements,
and balance
•
specific reviews by the Board and
CELT in relation to key sections of the
ARA and relevant sections of the ARA
as audited by Deloitte
• confirmation from management
that the assurance framework had
been adhered to for the preparation
of the 2022 ARA
Committee conclusions and
confirmations
Taking into consideration all areas of
focus of the Committee during the
year and in reviewing the 2022 ARA,
including reviewing the supporting
detailed topic papers, presentations
and reports from management, the
Committee is satisfied that:
•
The Financial Statements for the year
ended 31 December 2022 have been
prepared applying appropriate
accounting policies and address the
critical accounting judgements and
key sources of estimation uncertainty,
both in respect of the amounts
reported and the disclosures made
•
The significant assumptions used for
determining the value of assets and
liabilities have been appropriately
scrutinised and challenged and are
sufficiently robust
•
The Group’s internal controls and
risk management processes were
monitored throughout the year,
with management continuing to
implement further improvements
in 2023
•
The conclusions in relation to critical
accounting judgements, significant
assumptions and estimates and key
valuation assumptions are in line
with those drawn by the auditor,
having discussed them with the
auditor during the audit planning
process and at the finalisation of
the year-end audit and following
robust challenge of both the
auditor and management
Consequently, the Committee has
confirmed to the Board, in its advisory
capacity, that:
•
The key accounting estimates,
judgements and disclosures
within the Financial Statements
are appropriate and serve to
provide a true and fair view
•
The 2022 ARA, overall, are fair,
balanced and understandable.
The Board’s statement in relation
to this confirmation is included on
page 165
•
It is reasonable for the Directors to
make the viability statement and the
going concern statement on pages
98 and 99 and pages 172 and 173
•
The Group’s whistleblowing and
fraud risk processes have operated
effectively during the year, with
further improvements to be
implemented during 2023
The Board is able to provide the
statement regarding the effective
operation throughout the year of the
Group’s internal controls and risk
management processes in the
2022 ARA.
Margaret Ewing
Chair of the Audit and Risk Committee
8 March 2023
Governance
Audit and Risk Committee report
continued
Convatec Group Plc Annual Report and Accounts 2022
138
Directors’ Remuneration report
A word from
the Chair
“The Committee completed an extensive
consultation exercise in 2022 and would like
to thank everyone who participated for their
valuable feedback and contribution to shaping
our Remuneration Policy proposals.”
COMMITTEE INTRODUCTION AND OVERVIEW
COMMITTEE MEMBERSHIP, MEETINGS AND
ATTENDANCE
The table below shows the number of scheduled meetings
attended out of the number of meetings members were
eligible to attend during 2022.
Director
Member since
Attended
Brian May¹
March 2020
5/5
Constantin Coussios
January 2022
5/5
Kimberly Lody
February 2022
3/4
Sharon O’Keefe
March 2022
4/4
Rick Anderson
(member until 3 March 2022)
September 2020
2/2
Regina Benjamin
(member until 12 May 2022)
June 2019
2/2
1
Mr May was appointed Chair of the Committee on 1 September 2020
There were three appointments during the year: Constantin
Coussios was appointed on 27 January 2022, Kimberly Lody
was appointed on 1 February 2022 and Sharon O’Keefe was
appointed on 1 March 2022. Rick Anderson and Regina
Benjamin stepped down from the Committee due to their
resignation from the Board.
The Deputy Company Secretary attends meetings as the
Secretary to the Committee. The Chair, CEO, CFO, EVP Chief
Human Resources Officer & ESG Stewardship and VP Global
Head of Total Rewards & Recognition attend meetings of
the Committee by invitation, as does the Committee’s
appointed adviser. Executives are absent when their own
remuneration is under consideration.
KEY NUMBERS
Meetings held
5
(2021: 5)
Attendance
95%
(2021: 100%)
Brian May
Chair of the Remuneration
Committee
ACTIVITY HIGHLIGHTS
–
Ensured the remuneration arrangements for the
Executive Directors and CELT members in 2022
continue to support Convatec’s sustainable and
profitable growth strategy.
–
Kept under review remuneration arrangements and
outcomes to ensure continued alignment of executive
interests with those of other stakeholder groups.
–
Completed an annual review of the Committee’s terms
of reference versus best practice guidelines and
completed an annual performance review to support
continuous improvement.
–
Conducted an in-depth review of our Policy (ahead
of being required to put this to a binding shareholder
resolution at the 2023 AGM) to ensure that it remains fit
for purpose, aligned with our strategy, reinforces our
remuneration principles and reflects good practice.
2023 PRIORITIES
–
Continue to actively engage with key stakeholders
on remuneration matters, as appropriate.
–
Implement 2023 Remuneration Policy to deliver
competitive and motivational remuneration that
reinforces the successful delivery of our stated
strategic ambition and alignment with long-term
shareholder interests.
KEY AREAS OF RESPONSIBILITY
–
Designs, recommends and implements the Company’s
Remuneration Policy, packages for the Executive
Directors and CELT, and sets the fee for the Non-
Executive Chair.
–
Ensures appropriate alignment of executive
remuneration with the remuneration approach
across the wider organisation.
In this section you will find
Letter from the Chair of the Remuneration Committee
Pages 140 and 141
Our remuneration at a glance
Pages 142 and 143
Our Annual Report on Remuneration
How we implemented our Remuneration Policy during 2022
and how we intend to apply it in 2023. Pages 144 to 152
Our Remuneration Policy
Pages 153 to 161 set out the updated Remuneration Policy
for approval.
Overview
Strategic report
Financial statements
Additional information
139
Convatec Group Plc Annual Report and Accounts 2022
Governance
LETTER FROM THE CHAIR OF
THE REMUNERATION
COMMITTEE
Dear Shareholder
On behalf of the Board, I am pleased to
present the report of the Remuneration
Committee for the year ended
31 December 2022. I would like to thank
our outgoing Non-Executive Directors
Rick Anderson and Regina Benjamin
for their service on the Remuneration
Committee and welcome our new
Committee members Constantin
Coussios, Kim Lody and Sharon
O’Keefe who joined the Committee on
27 January, 1 February and 1 March
2022, respectively.
Context and approach to
remuneration
I would like to start this letter by
thanking all our employees for their
strong commitment and contribution
in the past year. It is only through our
employees’ impressive performance that
we have been able to increase our market
capitalisation and enter the FTSE 100
during 2022. Our FISBE strategy continues
to be embedded into the organisation
and we are set to build on this growth
trajectory in 2023. We intend that our new
policy proposals will allow remuneration
decisions that continue to support the
future success of the Company.
Shareholder consultation in
relation to 2022 AGM voting
The Remuneration Committee
recognises that a minority of
shareholders were not able to support
the Remuneration Report resolution
at the 2022 AGM. In conducting an
exercise of engagement with our
shareholders we understand that the
main point of contention was the
Committee’s decision to exclude the
impact of strategic investments on
financial outcomes under the 2019
long-term incentive plan (LTIP) award.
These investments were made in
support of the FISBE strategy and were
not yet known at the time targets for
the 2019 LTIP award were set.
The Committee continues to believe
that neutralising the impact of these
elements on performance was an
appropriate reflection of Executive
Director impact and shareholder
experience. That said, the Committee
recognises that shareholders would
have preferred a greater level of
discussion of this point in the years
leading up to vesting.
Going forward, the Remuneration
Committee is committed to positive
and proactive engagement with
shareholders, and shareholders will
note that no discretion or judgement
has been used to modify the 2020 LTIP
vesting this year (see below).
Performance in the year ended
31 December 2022 and
implications for remuneration
The Board is pleased with the
continued strategic progress of the
Group and its strong performance
in 2022. The Group delivered 6.9% and
12.2% constant currency revenue and
adjusted operating profit growth,
respectively. Further details are set
out in the Financial review on pages
30 to 38.
Based on performance, the Committee
approved payouts under the 2022
annual bonus of 73% of maximum for
the CEO and 72% of maximum for the
CFO. The Committee reviewed the
formulaic bonus outcome in the
context of the wider performance of
the Group, as well as the experience of
our stakeholders, and concluded that
there was no need to make any
discretionary adjustment.
Over the three-year performance
period, our adjusted profit before
income taxes (PBT) and total
shareholder return (TSR) performance
resulted in 77% and 92% of maximum
vesting under each metric. This means
the 2020 LTIP awards will vest at 81%
of maximum. The Committee was
satisfied that the vesting outcome
under both metrics was appropriate
given the Company’s superior
performance and so no discretionary
adjustments have been made.
Appointment of new CFO
Jonny Mason was appointed as CFO
on 12 March 2022, after Frank Schulkes
stepped down from the Board on
11 March 2022. Frank assisted the
Company through the transition
period in the early part of the year
and we thank him for his service. As
disclosed last year, the Committee
determined Frank a ‘good leaver’ and
his remuneration arrangements on
departure were in accordance with the
Remuneration Policy and plan rules.
Jonny is a seasoned CFO with an
extensive track record of
transformation and performance.
His remuneration package is
commensurate with his experience
and directly aligned with our focus
on sustainable and profitable growth.
Jonny’s salary was set at £500,000 on
appointment with a maximum bonus
opportunity of 200% of salary and an
annual LTIP award opportunity of 250%
of salary. In keeping with its stated
commitment, the Committee set the
pension allowance for Jonny to align
with the wider workforce (currently at
8.5% of salary) from appointment.
Directors’ Remuneration report
continued
Committee focus and activities in 2022
Focus areas
Activities
Policy
–
Undertook a detailed strategic review of Remuneration
Policy
–
Consulted with investors, representing the majority of
the register
–
Considered investor feedback and amended final Policy
proposals to reflect investor guidance
Remuneration packages
–
Approved Executive Director and CELT salaries for 2022
–
Approved the 2021 bonus outcomes for Executive Directors
and CELT
–
Approved 2022 LTIP award levels for Executive Directors
and CELT
–
Considered the AGM voting outcomes and completed follow
up shareholder consultation
Setting performance
targets
–
Reviewed and set financial targets for 2022 annual bonus
and 2022 LTIP, in the context of multiple internal and external
reference points for performance over the relevant period
Equity incentives
–
Confirmed outcome of the 2020 award cycle
–
Reviewed developments in the executive
remuneration landscape
Workforce remuneration
–
Received updates on workforce remuneration policies
and practices
–
Reviewed increases to salary budget in light of the
inflationary environment and global living wage levels
in all our locations
Effectiveness
–
Completed a review of our remuneration advisers and
selected Willis Towers Watson
–
Worked with Willis Towers Watson to complete the review
of our Remuneration Policy
Governance
Convatec Group Plc Annual Report and Accounts 2022
140
Proposed amendments to our
Remuneration policy
Since the announcement of Karim Bitar
as CEO in March 2019, Convatec has
grown its market capitalisation
considerably from 129 to 75 in the FTSE
at the end of 2022. Convatec has also
outperformed the FTSE 350 (excluding
investment trust) with TSR growth of
91% compared to 18% from the index
over the same period (see page 148).
Beyond share price performance, the
Group has continued its pivot towards
sustainable and profitable growth
despite considerable cost inflation
and economic headwinds.
In light of the above, and the need to
support the next chapter of the FISBE
growth strategy, the Committee
conducted a thorough review of its
Remuneration Policy during 2022.
Specifically, the review was based
on four key objectives to ensure the
new policy:
1.
Promotes the Group’s strategy
of pivoting to sustainable and
profitable growth
2.
Supports the delivery of long-term
value creation for shareholders
3.
Ensures we retain high calibre
individuals and the ability to
recruit top talent in a globally
competitive sector
4.
Acknowledges shareholder views
and evolving best practice
governance considerations as
well as the Group’s wider impact
on society
To arrive at its final proposals the
Group conducted an extensive
consultation exercise with its largest
shareholders, covering the majority of
the share register as well as a number
of proxy voting agencies. Taking into
account the feedback received, the
following amendments are proposed:
–
The alignment of the CEO’s pension
with that of the wider UK workforce
(CFO alignment already in place)
–
The introduction of a policy on
post-cessation shareholding for
Executive Directors
–
The increase of the maximum LTIP
award from 250% to 300% of salary
for the CEO (no change to CFO)
–
A selection of changes to the choice
and weighting of metrics in
incentives, namely:
–
The introduction of an organic
revenue measure in both the bonus
and the LTIP
–
The inclusion of quantifiable ESG
metrics in the annual bonus
–
The revision of the relative TSR
measure in the LTIP to include equally
weighted measurement against two
indices: the FTSE 50-150 excluding
investment trusts and the S&P
Global Healthcare Equipment
& Services Index.
In total, these changes align with the
key strategic focus areas of our revised
FISBE growth strategy, the growth of our
business since the CEO’s appointment
and the need to compete for top talent
in the global healthcare sector.
The proposed reduction in pension
contributions and the introduction
of a post-cessation shareholding
requirement are in line with
commitments made previously to align
with best practice governance. The
amendments to performance
conditions under both the bonus and
the LTIP are proposed to reflect
Convatec’s focus on sustainable and
profitable growth. In particular, the
distinction between organic revenue
growth in driving long-term shareholder
value creation and short-term results
was discussed with our major investors
during the consultation exercise. Given
the importance of encouraging both
growth in the year and consistently
over several years, the organic revenue
growth metric was included as a
measure in both schemes.
In addition, the Committee has
embedded ESG metrics in the annual
bonus to ensure focus on delivery of
our ESG agenda, with the flexibility to
evolve the definition, weighting and
targets of this measure as our ESG
strategy matures. Specifically, the
measures selected are based on
quantifiable targets aligned with our
longer-term ESG goals. We have also
reflected on the choice of TSR peer
groups in the LTIP and have updated
our approach to reflect our size and
provide an additional global sector-
related benchmark of performance.
The proposed increase in the LTIP award
for the CEO is reflective of the significant
growth and outperformance of the
business since the Policy was last
renewed. It is also reflective of the
globally competitive sector within which
the Company operates and remains
below the shareholding requirement of
the CEO which (at 400% of salary) is well
above market norms for a company of
Convatec’s size. Further details of the
measures and targets set out for 2023
awards are included below.
Remuneration in 2023 and beyond
In keeping with its stated commitment,
the Committee reduced the pension
allowance for the CEO from 15% to 8.5%
of salary to ensure all existing and future
Executive Directors are aligned with the
wider UK workforce. As a result of the
changes to our policy for 2023, the
annual bonus will be weighted at 45%
on adjusted operating profit, 25% on
organic revenue growth, 10% on
adjusted free cash flow and 20% on
strategic objectives including 5%
linked to ESG priorities.
2023 LTIP awards will be measured 50%
on adjusted PBT, 25% on organic
revenue growth and 25% on relative
TSR equally weighted against the FTSE
50-150 excluding investment trusts
and the S&P Global Healthcare
Equipment & Services Index. Further
details are set out in the Annual Report
on Remuneration, on pages 144 to 152
of this report.
Despite considerable inflationary and
wider macroeconomic challenges to
our long-term growth plans, the
Company’s financial objectives remain
ambitious. The Committee reviewed
the targets under the LTIP and
determined that in line with these
ambitions, it remains appropriate to
set a PBT growth range which requires
growth well in excess of consensus
and at the upper end of UK market
norms. The Company has therefore set
a range at 7% to 14% for the 2023 LTIP
award versus 8% to 15% last year.
Similarly, the Committee decided to
set the new organic revenue growth
range at 3.5% to 6.5% per annum which
is aligned around consensus and the
medium-term goals shared at the
Capital Markets Day (17 November
2022). The Committee will continue to
review the performance ranges very
closely on an annual basis for each LTIP
grant cycle and ensure that maximum
pay outs are only delivered if
exceptional performance and long-
term shareholder value are delivered.
Despite relatively higher rates of
inflation, the Committee decided
to moderate the salary increases for
the Executive Directors and focus on
the wider employee population due to
the cost of living pressures. As a result,
the increases to the CEO and CFO were
held at 2.5% and the average increases
to Convatec’s wider UK employee
population were at 6.2%.
Concluding remarks
On behalf of the Committee, I would
like to thank you for your support
and I trust you will find the Directors’
Remuneration report useful and
informative. I would particularly like to
thank our shareholders for their time
and feedback in consultations on our
policy renewal – the dialogue was
invaluable in shaping our proposals
set forth in this report. I hope that we
can count on your support for both the
Annual Report on Remuneration and
Remuneration Policy being put to
shareholders at the 2023 AGM.
Brian May
Chair of the Remuneration Committee
8 March 2023
Overview
Strategic report
Financial statements
Additional information
141
Convatec Group Plc Annual Report and Accounts 2022
Governance
Directors’ Remuneration report
continued
2022 annual bonus outcomes
The charts below show how actual performance contributed to the bonus payouts for the Executive Directors for 2022:
Outcome warranted by
performance: 76.7% of
maximum for this element.
Outcome warranted by
performance: 91.8% of
maximum for this element.
Annual bonus: 145.4% of salary
(£1,338,843); 72.7% of maximum
bonus opportunity. LTIP: 80.5%
maximum LTIP opportunity
(£1,894,500).
Annual bonus: 143.4% of salary
(£579,115); 71.7% of maximum bonus
opportunity. Bonus pro-rated from
appointment to the Board on
12 March 2022.
Annual bonus: 104.6% of salary
(£93,331); 69.7% of maximum bonus
opportunity. Bonus pro-rated for
the period on the Board to 11 March
2022. LTIP: 80.5% of maximum LTIP
opportunity (£823,350). LTIP
pro-rated to 8 December 2022.
OUR REMUNERATION AT A GLANCE
This section provides a summary of outcomes relating to 2022.
2020-2022 LTIP outcomes
The charts to the right show how
actual performance contributed to the
LTIP awards vesting for the Executive
Directors for the three-year period
ended 31 December 2022. Overall
the LTIP vesting outcome was at
80.5% of maximum.
2022 remuneration: outcomes
vs performance scenarios –
Karim Bitar (CEO)
2022 remuneration: outcomes
vs performance scenarios –
Jonny Mason (CFO)
2022 remuneration: outcomes
vs performance scenarios –
Frank Schulkes (previous CFO)
Adjusted free cash flow
(20% weighting)
Relative TSR
(25% weighting)
Personal strategic objectives
(20% weighting)
Personal strategic objectives were
set for each Executive Director in
relation to the following areas of
strategic focus for 2022:
–
Customer
–
People
–
Product/service improvement
–
Business performance
Adjusted operating profit¹
(60% weighting)
Adjusted PBT
(75% weighting)
Single Figure 2022
Maximum
Minimum
Fixed Remuneration
On-target
£5,294,216
£4,341,158
£1,107,815
£2,611,865
Annual bonus
LTIP
Maximum
Minimum
On-target
£1,248,077
£1,026,467
£447,352
£847,714
Single Figure 2022
Fixed Remuneration
Annual bonus
LTIP
Maximum
Minimum
On-target
£1,484,035
£1,026,339
£109,658
£499,504
Single Figure 2022
Fixed Remuneration
Annual bonus
LTIP
Target
Threshold
Actual
Maximum
$355m
$373m
$394m
$390m
Maximum
Threshold
Actual
4.5%
10%
8.3%
Target
Threshold
Actual
Maximum
$260m
$274m
$296m
$203m
Jonny Mason
Karim Bitar
Frank Schulkes
95%
90%
80%
Stretch
(upper quartile)
Threshold
(median)
Vesting
(78th percentile)
Maximum
(upper decile)
50%
90%
100%
92%
Outcome warranted by
performance: 89.5% of maximum
for this element.
1.
Adjusted operating profit is calculated
on a constant currency basis.
Outcome warranted by
performance: 0% of maximum
for this element.
Details of the objectives set
for the Executive Directors,
and performance against these,
are on page 145.
Governance
Convatec Group Plc Annual Report and Accounts 2022
142
Our approach to implementing our Remuneration Policy in 2023
Rationale
Link to strategy
Base salary
Reviewed
annually
Policy: Benchmarked periodically against comparable roles at
international Medtech peers, as well as UK-listed companies of
similar size and complexity. In deciding base salary levels, the
Committee considers personal performance including the
individual’s contribution to the achievement of the Group’s strategic
objectives. The Committee will also consider employment conditions
and salary levels across the Group, and prevailing market conditions
in the geographies in which the Group competes for talent. Base
salaries are reviewed annually with any increases normally aligned
with those of the wider workforce, and effective from 1 April.
Implementation in 2023: Karim Bitar: £943,820; Jonny Mason:
£512,500 (2.5% increase).
Due to the cost of
living pressures, the
increases for the
Executive Directors
were held at 2.5%
compared with the
wider UK workforce
average at 6.2%.
Innovate
Build
Pension and
benefits
Policy: Executives may receive a contribution to a personal pension
plan, a cash allowance in lieu or a combination thereof. Other
benefits normally include car allowance, medical insurance and life
insurance, and are set at a level considered appropriate taking into
account market practice and consistent with the wider workforce.
Implementation in 2023: Reduction in pension contribution for
Karim Bitar down from 15% to 8.5% in line the wider UK workforce
from 1 January 2023. Jonny Mason already receives a pension benefit
of 8.5%, aligned to that of the wider UK workforce.
Pension levels for
all Executive
Directors are now
aligned to the wider
workforce rate,
in line with
prior
commitment to
investors.
Annual bonus
Policy: Maximum opportunity: 200% of salary (target: 50% of
maximum). Performance measures, targets and weightings are set at
the start of each year. Financial performance will normally be weighted
80% of the overall opportunity, with the remainder (up to 20%) linked
to the achievement of personal strategic objectives. A minimum of 5%
of the bonus opportunity will be based on quantifiable ESG metrics.
One-third of any bonus earned is deferred into shares normally for
three years. Malus and clawback provisions apply.
Implementation in 2023: Maximum opportunity of 200% of salary
for Karim Bitar and Jonny Mason. The annual bonus
1
will be based
on: adjusted operating profit (weighted 45%), organic revenue
growth (25%), adjusted free cash flow (10%) and personal strategic
objectives (20%), of which 5% relate to quantifiable EGS metrics.
The introduction of
an organic revenue
growth measure in
the bonus supports
our strategy of
sustainable growth.
Introducing
quantifiable ESG
targets also
ensures our
continued focus in
this area aligned
with our ESG
strategy.
Focus
Innovate
Simplify
Build
Execute
Long-Term
Incentive Plan
Policy: Maximum opportunity: 300% of salary. The performance
conditions and targets are agreed and set to ensure they remain
appropriately stretching and aligned to the Group’s strategy. 25%
of an award will vest at threshold, with 100% vesting at maximum.
The minimum performance and vesting period is three years.
A two-year post-vesting holding period will apply. Malus and
clawback provisions apply under certain circumstances.
Implementation in 2023: Award opportunity of 300% of salary
for Karim Bitar and 250% for Jonny Mason. Awards will vest subject
to adjusted PBT growth (weighted 50%), organic revenue growth
(weighted at 25%), and TSR versus the constituents of the FTSE
50 to 150 excluding investment trusts (12.5%) and the S&P Global
Healthcare Services Index (12.5%) over the three financial years to
31 December 2025.
Recognises the
significant growth
in the size and
complexity of
Convatec since the
last time the Policy
was renewed and
ensures the
attraction and
retention of high
calibre talent from
the international
Medtech sector.
The introduction
of organic revenue
growth also drives
long-term value
creation and
furthers our focus
on sustainable
growth.
Focus
Simplify
Execute
Innovate
Shareholding
requirement
Policy: Executives are required to build up shareholdings of 400%
of salary for the CEO and 300% of salary for the CFO. These must be
retained whilst the Executive Directors remain on the Board. 50% of
any net vested share awards (after sales to meet tax liabilities) must
be retained until the minimum shareholding requirements are met.
At the end of 2022, Karim Bitar held shares worth 547% of his 2022
salary and Jonny Mason held shares worth 22% of his 2022 salary.
For 2023, Executive Directors will be required to hold 100% of their
in-situ shareholding requirements for 12 months after cessation
and 50% for the next 12 months. This means 400% and 300% of
salary in the first year and 200% and 150% of salary in the second
year post-cessation for the CEO and CFO, respectively.
Current
shareholding
guidelines are well
ahead of market
norms for a
similarly sized
business.
Introduction of
post-cessation
policy aligns with
UK corporate
governance
expectations and
prior commitment
to investors.
Focus
1.
Adjusted operating profit and organic revenue is calculated on a constant currency basis, using a budget rate.
Overview
Strategic report
Financial statements
Additional information
143
Convatec Group Plc Annual Report and Accounts 2022
Governance
Directors’ Remuneration report
continued
OUR ANNUAL REPORT ON REMUNERATION
This section of the Remuneration
report provides details of how our
Remuneration Policy was implemented
during the financial year ended
31 December 2022, and how it will be
implemented during the year ending
31 December 2023. It has been
prepared in accordance with the
provisions of the Companies Act
2006 and Schedule 8 of the Large and
Medium-sized Companies and Groups
(Accounts and Reports) Regulations
2008 (as amended). It also meets
the requirements of the FCA’s
Listing Rules.
In accordance with the Regulations,
the following sections of the
Remuneration report are subject
to audit: the single total figure of
remuneration for Executive Directors
and Non-Executive Directors, and
accompanying notes (pages 144 and
147), scheme interests awarded during
the financial year (page 146), exit
payments made in the year (page 148),
payments to past Directors (page 148)
and the statement of Directors’
shareholdings (page 152). The
remaining sections of the report are
not subject to audit.
Committee membership in 2022
Details of the membership of the
Committee, the number of times it met
during 2022 and attendance at its
meetings are set out on page 139.
Committee responsibilities
The Committee’s key areas of
responsibility are also set out
on page
139.
Committee performance
evaluation
A performance evaluation of the
Remuneration Committee was carried
out in 2022, facilitated by an external
consultant, Lintstock, by way of a
detailed questionnaire. The key
priority identified for 2023 was to
ensure that over the course of the year,
Committee members are provided
with continuing education on
governance and remuneration
regulations, including insights into
investor expectations.
Advisers
The Committee conducted a
detailed review of its advisers and
appointed Willis Towers Watson
from May 2022. During the year,
Willis Towers Watson reported to the
Chair of the Committee and provided
Summary of shareholder voting
The following table shows the results at the 2022 AGM of the advisory vote on the
2021 Annual Report on Remuneration and the binding vote at the 2020 AGM on
the 2020 Remuneration Policy.
Resolution
Votes
‘for’
Votes
‘against’
Votes
withheld
1
Approve the Directors’ Remuneration Policy
(2020 AGM)
87.54%
12.46%
906,684
To approve the Directors’ Remuneration report
(2022 AGM)
2
72.51%
27.49%
24,156,478
1.
Votes ‘withheld’ are not votes in law and, therefore, have not been included in the calculation
of the proportion of votes ‘for’ or ‘against’ each resolution.
2.
The Committee completed an engagement exercise with shareholders following the 2022 AGM,
as set out in the Chair’s letter on page 140.
Single total figure of remuneration for Executive Directors (audited)
The following table sets out a single figure for the total remuneration received by each Executive Director for the 2022
financial year, and compares this with the equivalent figure for the 2021 financial year.
Director
Base
salary
’000
Taxable
benefits
1
’000
Annual
bonus
2
’000
LTIP
3
’000
Pension
benefit
4
’000
Other
5
’000
Total
Fixed
6
’000
Total
Variable
7
’000
Total
’000
Karim Bitar
2022
£915
£56
£1,339
£1,895
£137
n/a
£1,108
£3,233
£4,341
2021
£892
£56
£1,433
£298
£134
£888
£1,081
£2,618
£3,699
Jonny Mason
2022
£400
£13
£579
n/a
£34
n/a
£447
£579
£1,026
Frank Schulkes
2022
£93
£3
£93
£823
£14
n/a
£110
£916
£1,026
2021
£461
£16
£535
£680
£69
n/a
£547
£1,215
£1,762
1.
For Karim Bitar, Jonny Mason and Frank Schulkes, benefits consist primarily of car allowance, private medical insurance, life assurance and permanent
health insurance. For Karim Bitar, taxable benefits include a healthcare allowance of £30,000 payable per annum.
2.
Reflects the total bonus awarded for performance in the relevant financial year. One-third of the bonus earned by Karim Bitar, Jonny Mason and Frank
Schulkes is deferred into shares for three years (the vesting of which is not subject to any further performance conditions). See page 145 for further
details.
3.
2022 figures represent the estimated value of LTIP awards made to Karim Bitar and Frank Schulkes in May 2020. These awards shall vest on the third
anniversary of grant as to 80.5% of maximum based on performance over the three-year performance period ending 31 December 2022 (further details
of which are set out on page 146). The estimated values shown in the table above use the three-month average share price for the period ended
31 December 2022 (221.7p), and will be trued up in next year’s report to reflect their value (including any accrued distribution which were reinvested into
shares) on the vesting date. The value of vested shares has increased by £133,564 for Karim Bitar and £58,047 for Frank Schulkes since the respective
award dates as a result of share price appreciation. The 2021 figure represents the actual vesting value of the 2019 LTIP award.
4.
Karim Bitar’s and Frank Schulkes’ pension benefits in the year, equivalent to 15% of base salary. Jonny Mason’s pension benefit is equivalent to 8.5% of
base salary.
5.
The 2021 figure in the ‘Other’ column represents the actual vesting value of the Conditional Shares awarded to Karim Bitar as part of the buy-out award
made on his appointment. As disclosed in the 2019 Annual Report, the vesting of this award was linked to the same performance conditions as the 2019
LTIP which vested at 44.2% of maximum.
6. Total of base salary, taxable benefits and pension benefit.
7.
Total of annual bonus, LTIP and other payments.
reward survey benchmark data to
the Company. Willis Towers Watson
has no other connection with the
Group (remuneration-related or
otherwise) and is considered to be
independent by the Committee.
Fees paid to Willis Towers Watson
are determined on a time and
materials basis, and totalled
£130,010 (excluding expenses and
VAT) for the 2022 financial year in its
capacity as adviser to the Committee.
Willis Towers Watson is a member of
the Remuneration Consultants
Group and, as such, voluntarily
operates under the Code of
Conduct in relation to executive
remuneration consulting in the UK
(www.remunerationconsultantsgroup.
com). In the period prior, the
Committee’s adviser was Ellason LLP,
with fees for the period appointed at
£44,930 (excluding expenses and VAT).
Governance
Convatec Group Plc Annual Report and Accounts 2022
144
Incentive outcomes for the year ended 31 December 2022 (audited)
Annual bonus in respect of performance in the 2022 financial year
For 2022, Karim Bitar and Jonny Mason had a maximum bonus opportunity of 200% of their 2022 base salary. Any payments
under the annual bonus are normally payable two-thirds in cash and one-third in shares, deferred for three years. The
on-target opportunity was 50% of maximum. The annual bonus for 2022 was based on a combination of adjusted operating
profit
1
(weighted 60%), adjusted free cash flow (20%) and personal strategic objectives (20%).
The tables below summarise the structure of the 2022 annual bonus, the targets set, our performance over the financial
year and the resulting annual bonus payout.
Performance targets
Financial measure
Link to corporate strategy
Threshold
0% payout
Target
50% payout
Maximum
100% payout
Actual
performance
Adjusted operating profit
1
for bonus purposes
Focus
Innovate
$355m
$373m
$394m
$390m
Adjusted free cash flow
Simplify
Execute
$260m
$274m
$296m
$203m
Objectives and actual performance
Karim Bitar
–
Successfully executed FISBE strategy, achieving sustainable and profitable growth while strengthening
Convatec’s competitive position.
–
Continued inorganic strategy with successful acquisition and integration of Triad Life Sciences.
–
Continued delivering improvements in overall quality of products (13% CPM reduction), greenhouse gas
emissions (32% reduction in S1/S2 over 2021) and increased resilience of operations.
–
Successfully launched three new products: Extended Wear Infusion Sets, GentleCath™ Air for Men, and
InnovaMatrix
®
.
–
Strengthened senior leadership team with key appointments in areas such as Quality & Operations and
Global Emerging Markets, along with sustaining high levels of employee engagement.
Jonny Mason
–
Successfully exited the hospital care business, including the disposal of the associated factory in Belarus,
to increase Convatec’s focus on our four chronic care categories.
–
Secured refinancing of bank facilities for a further five years at attractive rates so that, in conjunction with
the bond issue in 2021, the delivery of the strategic plan is fully funded.
–
Drove simplification of processes in finance and IT, to reduce low-value-added activities and improve
productivity. This supported a 2.8 percentage points reduction in G&A cost to sales ratio.
–
Strengthened the finance team, in corporate and across the business units, to improve the focus on
excellent execution of the strategy which supported the evolution from FISBE 1.0 to 2.0, as announced at
the Capital Markets Event in November.
–
Improved performance reporting across the organisation to support the delivery of the financial targets
for the year, including the corporate response to the unexpected, substantial inflationary pressures. This
supported a 180 basis-points improvement in adjusted operating margin year on year.
Frank Schulkes
–
Progressed preparation of the exit from the hospital care business to increase Convatec’s focus on our
four chronic care categories.
–
Successfully led 2021 year-end financial reporting in support of the Group’s annual reporting.
–
Continued driving simplification of processes in finance and IT, to reduce low-value-added activities and
improve productivity.
–
Supported onboarding of Jonny Mason, incoming CFO, to ensure smooth integration and transition of
leadership in the Finance function.
Annual bonus in respect of performance breakdown
Maximum
Earned bonus
Director
Measure
Weighting
opportunity
(% of salary)
(% of salary)
(‘000)
Karim Bitar
Adjusted operating profit for bonus purposes
1
60%
120%
107%
£989
Adjusted free cash flow
20%
40%
0%
£0
Personal strategic objectives
20%
40%
38%
£350
Total
100%
200%
145%
£1,339
Jonny Mason
Adjusted operating profit for bonus purposes
1
60%
120%
107%
£434
Adjusted free cash flow
20%
40%
0%
£0
Personal strategic objectives
20%
40%
36%
£145
Total
100%
200%
143%
£579
Frank Schulkes
Adjusted operating profit for bonus purposes
1
60%
90%
81%
£72
Adjusted free cash flow
20%
30%
0%
£0
Personal strategic objectives
20%
30%
24%
£21
Total
100%
150%
105%
£93
1.
Adjusted operating profit for bonus purposes is calculated on a constant currency basis using a budget rate.
2.
The bonus for Frank Schulkes is pro-rated to 11 March 2022 for the period served on the Board. The bonus for Jonny Mason is pro-rated from appointment
to the Board on 12 March 2022.
One-third of the bonus earned by the Executive Directors (including Frank Schulkes) will be deferred into shares to be held
for three years. Details of this element of the bonus award will be disclosed in next year’s Annual Report.
Overview
Strategic report
Financial statements
Additional information
145
Convatec Group Plc Annual Report and Accounts 2022
Governance
Scheme interests vesting in respect of the year ended December 2022
In 2020, Karim Bitar and Frank Schulkes were granted conditional share awards under the LTIP. These LTIP awards were
subject to performance over the three-year period ended 31 December 2022, and performance conditions based on a
combination of: Relative TSR and adjusted PBT growth, both over a three-year period, weighted 25% and 75% respectively.
The table below sets out details of the targets, and performance against these:
Measure
Weighting
Performance range
Actual performance
Weighted vesting
outcome
Three-year Relative TSR against the constituents
of the FTSE 350 excluding investment trusts
25%
Median to
90th percentile
78th percentile
23.0%
Three-year compound annualised growth
in adjusted PBT
75%
4.5% to
10.0% p.a.
8.3%
57.5%
Total % vesting
80.5%
Accordingly, Executive Directors’ 2020 LTIP awards will vest on the third anniversary of grant as set out below:
Director
Date of grant
Number awarded
% vesting
Number vesting
Karim Bitar
1 May 2020
1,061,532
80.5%
854,533
Frank Schulkes
1
1 May 2020
461,342
80.5%
371,380
1.
Number of awards pro-rated to departure date of 8 December 2022.
Scheme interests awarded in 2022 (audited)
2022 LTIP awards
During the year ended 31 December 2022, the Executive Directors were awarded conditional share awards under the LTIP,
details of which are summarised in the table below.
Face value
Director
Date of grant
Number awarded
Award price
1
Value
% of annualised
salary
Vesting date
Karim Bitar
14 March 2022
1,238,337
181.13p
£2,243,000
250%
14 March 2025
Jonny Mason
14 March 2022
690,112
181.13p
£1,250,000
250%
14 March 2025
1.
The LTIP face values are determined as a percentage of each Executive Director’s annualised salary on the date of grant, and converted into numbers of
conditional shares using the average of the three-day closing price preceding the date of grant.
The performance conditions attached to these 2022 LTIP awards are set out in the table below.
Vesting schedule
Measure
Weighting
Performance
period
Performance
requirement
% of
maximum
Three-year Relative TSR against the constituents of the
FTSE350 excluding investment trusts
25%
1 January
2022 to
31 December
2024
< Median
0%
Median
25%
75th
percentile
to ≥ 90th
percentile
90%
≥ 90th
percentile
100%
Straight-line sliding scale
vesting between these points
Three-year compound annualised growth in adjusted PBT
75%
1 January
2022 to
31 December
2024
< 8.0% p.a.
0%
8.0% p.a.
25%
≥ 15.0% p.a.
100%
Straight-line sliding scale
vesting between these points
To the extent the 2022 LTIP awards vest, vested shares will be required to be held for a further two-year post-vesting
holding period.
2021 Deferred bonus
One-third of the 2021 bonus earned by Karim Bitar and Frank Schulkes was deferred into shares to be held for three years
under the DBP, details of which are summarised in the table below.
Value
Director
Date of grant
Number
awarded
Award price
1
£
% of 2021 bonus
Vesting date
Karim Bitar
14 March 2022
263,650
181.13p
£477,549
One-third
14 March 2025
Frank Schulkes
14 March 2022
98,462
181.13p
£178,344
One-third
14 March 2025
1.
The award values are determined as one-third of each Executive Director’s 2021 bonus and converted into numbers of conditional shares using the
average of the three-day share price preceding the date of grant.
Directors’ Remuneration report
continued
Governance
Convatec Group Plc Annual Report and Accounts 2022
146
Fees retained for external non-executive directorships
Executive Directors may hold one external appointment and retain the fees paid for such a role. Neither of the Executive
Directors held an external non-executive director appointment during the year.
Single total figure of remuneration for Non-Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by each Non-Executive Director for the 2022
and 2021 financial years.
Fee
Benefits
1
Total
Non-Executive Director
2022
’000
2021
’000
2022
’000
2021
’000
2022
’000
2021
’000
John McAdam
£326
£320
£0
£0
£326
£320
Margaret Ewing
£117
£117
£1
£0
£118
£117
Sten Scheibye
£75
£75
£1
£1
£76
£76
Brian May
£95
£95
£1
£1
£96
£95
Heather Mason
£75
£75
£2
£1
£77
£76
Constantin Coussios
£75
£75
£1
£0
£76
£75
Kimberly Lody
2
£69
–
£2
–
£71
–
Sharon O’Keefe
3
£69
–
£2
–
£71
–
Rick Anderson
4
£13
£75
£1
£1
£15
£76
Regina Benjamin
5
£31
£85
£0
£0
£31
£85
1.
In addition to the fees payable to each of the Directors, the Group reimburses reasonable expenses.
2. Joined the Board on 1 February 2022.
3. Joined the Board on 1 March 2022. Includes fee for acting as a Board Level Employee Representative.
4. Stepped down from the Board on 3 March 2022.
5. Stepped down from the Board on 12 May 2022.
Percentage change in Director remuneration
The table below shows the percentage change in Director remuneration (from 2019 to 2022) compared to the average
percentage change in remuneration for other employees over the same period. As required under The Companies
(Directors’ Remuneration Policy and Directors’ Remuneration report) Regulations 2019, this analysis will continue to
be expanded to build up a five-year history.
Convatec Group Plc does not have any other employees other than Executive Directors. For the comparator group, we have
used the population of UK-based employees whose remuneration is based on overall Group business performance rather
than that of a particular Business Unit. In determining the annual change in average employee remuneration, we have
looked at average annual pay increase (excluding promotions) and actual bonus payments. We have only included
employees who were in the Group in both years of the comparison to ensure consistency.
Annualised percentage change from
2021 to 2022
Annualised percentage change from
2020 to 2021
Annualised percentage change from
2019 to 2020
Salary
or fees¹
Benefits²
Bonus
Salary
or fees
1
Benefits
2
Bonus
Salary
or fees
1
Benefits
2
Bonus
Executive Directors
Karim Bitar
2.6%
0%
(6.5)%
1.9%
0%
(16.9)%
0%
0%
40%
Jonny Mason
3
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Frank Schulkes
0%
0.4%
(9.3)%
1.9%
(5.9)%
(17.9)%
2.5%
0.5%
42%
Non-Executive
Directors
John McAdam
2.5%
213.0%
n/a
0%
n/a
n/a
0%
(100)%
n/a
Margaret Ewing
0%
310.1%
n/a
(5.4)%
n/a
n/a
0.9%
(100)%
n/a
Sten Scheibye
0%
72.9%
n/a
15.4%
n/a
n/a
8.3%
(100)%
n/a
Brian May
0%
443.5%
n/a
8.4%
n/a
n/a
n/a
n/a
n/a
Heather Mason
0%
134.2%
n/a
15.4%
n/a
n/a
n/a
n/a
n/a
Constantin Coussios
0%
247.4%
n/a
15.4%
n/a
n/a
n/a
n/a
n/a
Kimberly Lody
4
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Sharon O’Keefe
5
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Rick Anderson
n/a
2.2%
n/a
11.9%
(4.6)%
n/a
(6.9)%
100%
n/a
Regina Benjamin
0%
0%
n/a
(8.6)%
(100)%
n/a
(1.2)%
(92.1)%
n/a
Average per employee
5.3%
10.0%
13.5%
2.7%
(16.5)%
(39.2)%
2.7%
2.7%
16%
Former Directors (who did not serve on the Board during the financial year under review) have been removed from the table. Relevant prior data and
commentary can be found in last year’s annual report.
1.
Salary/fee figures have been annualised for this analysis to permit a meaningful comparison over time. Effective 1 September 2020, the Non-Executive
Director fee structure was changed: the base fee was increased and committee membership fees were discontinued.
2.
The year-on-year increase in benefits reflects the Group’s best estimate for the change in the average value of benefits for other employees. Non-
Executive Directors’ benefits relate to taxable expenses (largely travel to attend meetings, and due to COVID-19 restrictions very limited travel took place
in 2021 compared to 2022).
3. Joined the Board on 12 March 2022 as CFO.
4. Joined the Board on 1 February 2022.
5. Joined the Board on 1 March 2022 and receives a fee for acting as a Board Level Employee Representative.
Overview
Strategic report
Financial statements
Additional information
147
Convatec Group Plc Annual Report and Accounts 2022
Governance
Relative importance of spend on pay
The table below shows shareholder distributions (i.e. dividends) and total employee pay expenditure for the financial years
ended 31 December 2022 and 31 December 2021, and the percentage change year-on-year.
2022
$m
2021
$m
Year-on-year
change
Total employee pay expenditure¹
649
650
(0.2)%
Shareholder distributions²
113
114
(0.9)%
1. Decrease in total employee pay expenditure predominantly relates to foreign exchange differences.
2.
The decrease in dividend is due to the difference in the exchange rate year-on-year. Overall dividend per share paid in 2022 (in cents) remained consistent
with 2021.
Exit payments made in the year (audited)
Frank Schulkes stepped down as CFO and as a Director of the Company on 11 March 2022. He remained an employee of the
Group until 8 December 2022. In accordance with the terms of his service agreement, Frank continued to receive his salary,
pension benefit and other benefits over the period until he left the Group in December 2022. He received a total of £407,551
during the remainder of his notice period as per his contractual agreement. In line with our Policy, the Committee agreed to
pay outplacement fees of up to £20,000 (excluding VAT) and make a contribution of up to £10,000 (excluding VAT) towards
legal fees incurred in connection with the arrangements relating to his departure during the year. Frank received £10,000
(excluding VAT) with respect to his legal fees.
Frank will be paid a pro-rata bonus of £93,331 for the 2022 financial year. One-third of the payment will be deferred into
shares for three years. The Committee exercised the discretion afforded under the plan rules to treat the award in line with
the approved policy on cessation.
Payments to past Directors (audited)
There were no payments to past Directors during the year.
Review of past performance
The first graph shows the Group’s TSR compared to the FTSE 350 index, an index of which the Group is a constituent.
Performance, as required by legislation, is measured by TSR over the period from commencement of conditional dealing
(26 October 2016) to 31 December 2022.
The second graph shows TSR performance of the Group compared with the FTSE 350 index excluding investment trusts
since the announcement of Karim Bitar as CEO (25 March 2019) to 31 December 2022.
Directors’ Remuneration report
continued
Governance
TSR chart – Convatec vs the FTSE 350 Index
Value of £100 invested on 25 October 2016 in Convatec and
the FTSE 350 Index (£)
Convatec Group Plc
FTSE 350
40
50
60
70
80
90
100
110
120
130
140
25/10/16
31/12/16
31/12/17
31/12/18
31/12/19
31/12/20
31/12/21
31/12/22
Value of £100 invested on 25 March 2019 in Convatec and the
FTSE 350 Index excluding investment trusts (£)
Convatec Group Plc
FTSE 350 excluding investment trusts
70
80
90
100
110
120
130
140
150
160
170
180
190
200
March 19
Dec 19
Dec 20
Dec 21
Dec 22
Convatec Group Plc Annual Report and Accounts 2022
148
The table below details the CEO’s single total figure of remuneration and incentive outcomes over the same period:
2017
2018
2019
2020
2021
2022
Karim Bitar
(from 30 September 2019)
CEO single figure (‘000)
£6,878¹
£2,786
£3,699²
£4,341
Annual bonus (% max.)
70.2%
98.5%
79.8%
72.7%
LTIP vesting (% max.)
n/a
n/a
44.2%
80.5
%³
Rick Anderson
(15 October 2018 to
29 September 2019)
CEO single figure (‘000)
£264
£1,118
Annual bonus (% max.)
n/a
n/a
LTIP vesting (% max.)
n/a
n/a
Paul Moraviec
(to 14 October 2018)
CEO single figure (‘000)
£917
£631
Annual bonus (% max.)
9%
n/a
LTIP vesting (% max.)
n/a
n/a
1.
2019 remuneration includes the face value of the restricted share awards made to Karim Bitar as part of his buyout.
2. Includes the actual vesting value of Karim Bitar’s Conditional Share award that formed part of his buyout arrangement on appointment of £888k.
3. Represents the performance outcome of the 2020 LTIP (as a % of maximum) with a final vesting date in May 2023.
CEO pay ratio
The table below discloses the ratio of CEO pay for 2022, comparing the single total figure of remuneration for Karim Bitar to
the full-time equivalent total reward of those colleagues whose pay is ranked at the 25th, 50th and 75th percentiles in our
total UK workforce.
Methodology Option A has been chosen to calculate the ratio, as it provides a fair comparison of colleague pay with that of
our CEO by using a consistent methodology to value remuneration and identify our colleagues ranked at the 25th, 50th and
75th percentiles. Colleague pay was calculated based on actual pay and benefits for the 12 monthly payrolls in respect of
the full financial year to 31 December 2022. We are confident that the three colleagues identified are a true reflection of our
UK workforce; none of these individuals received any additional or exceptional pay during 2022. We can also confirm that
no adjustments were made to the calculation of the total remuneration for these employees from the methodology set
out for the CEO’s single total figure remuneration. Our pay ratios are set out below:
Year
Method
25th percentile
50th percentile
75th percentile
2022
Option A
125:1
98:1
59:1
2021
Option A
115:1
89:1
52:1
2020
Option A
83:1
65:1
40:1
The table below provides information on the salary and total pay and benefits paid to our colleagues ranked at the 25th,
50th and 75th percentiles.
Year
Method
25th percentile
50th percentile
75th percentile
2022
Salary
£29,892
£38,000
£55,017
Total pay and beneﬁts
£34,757
£44,418
£73,336
2021
Salary
£27,638
£34,521
£58,739
Total pay and beneﬁts
£32,663
£41,964
£71,619
2020
Salary
£26,660
£34,487
£52,415
Total pay and beneﬁts
£33,425
£42,641
£69,668
Overview
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Financial statements
Additional information
149
Convatec Group Plc Annual Report and Accounts 2022
Governance
Implementation of Executive Director Remuneration Policy for 2023
Base salary
Following a review of the Executive Directors’ salaries and the cost of living challenges, the Committee decided to award
a base salary increase of 2.5% (materially lower than the average increase for the general employee population in the UK
at 6.2%). The increase will be effective 1 April 2023.
Director
Role
From 1 April 2023
From 1 April 2022
Karim Bitar
CEO
£943,820
£920,800
Jonny Mason
CFO
£512,500
£500,000
Pension
Karim Bitar and Jonny Mason receive a pension benefit of 8.5% of base salary in line with that available to the wider UK
workforce. Karim Bitar receives his pension benefit as a combination of a contribution to pension and the balance as a cash
allowance. Jonny receives his pension benefit as a cash allowance.
Annual bonus
For 2023, Karim Bitar and Jonny Mason will continue to have a maximum bonus opportunity of 200% of salary. The on-target
bonus opportunity remains 50% of maximum. Two-thirds of any bonus earned will be paid in cash, with the remainder
deferred into Convatec Group Plc shares for a further three-year period.
The annual bonus for 2023 will be based on the following measures and weightings:
Measure
Link to corporate strategy
Weighting
Adjusted operating profit
1
for bonus purposes
Focus
Innovate
Simplify
45%
Organic revenue growth
1
Focus
Innovate
Simplify
25%
Adjusted free cash flow
Simplify
Execute
10%
Personal strategic objectives (including ESG)
Focus
Build
20%
(of which 5%
relates to ESG)
1.
Adjusted operating profit and organic revenue growth are both calculated on a constant currency basis using a budget rate.
The Committee believes the balance of financial measures for 2023 (as set out above) is appropriate in the context of the
emphasis in our strategy on sustainable and profitable growth. In particular, the introduction of organic revenue alongside
operating profit and maintaining a focus on free cash flow were considered by the Committee to provide the right mix to
support our strategy in 2023. Lastly, the incorporation of specific and quantifiable ESG metrics in the personal strategic
objectives of the bonus ensures continued leadership focus on the ESG agenda and allows flexibility to evolve the ESG
metric definition and targets over the life of the Policy as company reporting and strategic focus progresses.
The Board currently considers these targets to be commercially sensitive and intends to disclose retrospectively in next
year’s Annual Report on Remuneration. In the event the Board considers these targets to remain commercially sensitive,
they will be disclosed as soon as possible once they are no longer considered to be sensitive.
In line with our Policy, bonuses for the 2023 financial year will be subject to the Group’s policy on deferral, and its malus
and clawback provisions (see page 155 for further details).
Directors’ Remuneration report
continued
Governance
Convatec Group Plc Annual Report and Accounts 2022
150
Long-Term Incentive Plan (LTIP)
The inclusion of an organic revenue metric in the LTIP recognises the importance of sustained revenue growth as a key
driver of long-term value creation for shareholders under the next phase of the FISBE strategy. The measurement of our
relative TSR against both the FTSE 50-150 excluding investment trusts and a global sector index recognises the growth of
the business over time, the diversity of our shareholder base and the varying benchmarks used to measure performance
and value creation over the long term.
The 2023 LTIP will vest after three years, subject to the following performance targets assessed over the three years ending
31 December 2025:
Measure
Weighting
Threshold
(25% vesting)
Stretch
(90% vesting)
Maximum
(100% vesting)
Organic revenue growth
25%
3.5%
6.5%
Three-year compound annualised growth in adjusted PBT
50%
7% p.a.
14% p.a.
Three-year Relative TSR rank vs constituents of FTSE 50 to 150
excluding investment trusts and using three-month average
opening and closing values)
12.5%
Median
75th
percentile
≥ 90th
percentile
Three-year Relative TSR rank vs constituents of S&P Global
Healthcare Equipment & Services index (calculated in GBP)
12.5%
Median
75th
percentile
≥ 90th
percentile
To the extent an award vests, it will be subject to a further two-year holding period.
Implementation of Non-Executive Director Remuneration Policy for 2023
The Remuneration Committee sets the fee for the Chair and approved an increase aligned with that of the Executive
Directors at 2.5%.
The fees for the Non-Executive Directors, other than the Chair, are reviewed and set by the Non-Executive Director Fee
Committee comprised of the Chairman, CEO and CFO.
Non-Executive Director fees were reviewed in late 2022 by the Non-Executive Director Fee Committee who approved an
increase of 2.7% to the Non-Executive Director basic fees. In addition, this Committee approved a 4.5% increase to the Audit
and Risk Committee Chair fee and a 5% increase to the Senior Independent Director fee, the Remuneration Committee
Chair fee and the Board Level Employee Representative fee. The fee increases will take effect on 1 April 2023.
To recognise the international makeup of the Board, the Non-Executive Director Fee Committee approved a change in
approach to the Non-Executive Director fee structure introducing US dollar and Euro fee levels, alongside the Sterling fee
rates. The Non-Executive Directors will be given the one-time election to have their fee denominated in their preferred
currency, and, where relevant, will take effect from 1 April 2023.
The fees payable to the Non-Executive Directors are set out below.
Role
Fee structure
in 2023¹
Fee structure
in 2022
Chair
£336,200
£328,000
Non-Executive Director basic fee
£77,000, $101,000 or €89,000
£75,000
Additional fees:
Senior Independent Director
£21,000, $28,000 or €24,000
£20,000
Chair of the Audit and Risk Committee
£23,000, $30,000 or €26,000
£22,000
Chair of the Remuneration Committee
£21,000, $28,000 or €24,000
£20,000
Fee for acting as a Board Level Employee Representative
£10,500, $14,000 or €12,000
£10,000
1.
Effective 1 April 2023.
Overview
Strategic report
Financial statements
Additional information
151
Convatec Group Plc Annual Report and Accounts 2022
Governance
Directors’ Remuneration report
continued
Governance
Directors’ shareholdings (audited)
The table below sets out details of the current shareholdings of each Director (and any relevant connected persons) as at
31 December 2022. For Executive Directors, the current shareholding is compared to their shareholding guideline.
Shares
Options
Owned outright or vested
Director
31 December
2021
31 December
2022
Unvested and
not subject to
performance
conditions
Unvested and
subject to
performance
conditions
Vested but not
exercised
Unvested and
not subject to
performance
conditions
Current
shareholding¹
(% salary)
Shareholding
guideline
(% salary)
Current directors
Karim Bitar
1,606,064
1,943,562
620,458
3,447,560
–
–
547%
400%
Jonny Mason
n/a
50,000
–
690,112
–
–
22%
300%
John McAdam
23,181
23,181
–
Margaret Ewing
10,000
10,000
–
Sten Scheibye
25,000
45,000
–
Brian May
25,000
25,000
Heather Mason
10,000
10,000
–
Constantin
Coussios
8,440
18,301
–
Kimberly Lody
n/a
10,000
–
Sharon O’Keefe
n/a
3,200
Former directors
²
Frank Schulkes
169,180
169,180
223,444
1,735,785
10,230
137%
300%
Rick Anderson
210,706
210,706
Regina Benjamin
10,000
10,000
–
1.
Executive Director shareholdings calculated based on the number of shares that are owned outright or vested plus an estimated number of unvested
shares that are not subject to performance conditions, on a net of tax basis. These shares are valued using a share price of 221.7p, being the average share
price during the last three months of the 2022 financial year.
2. Reflects shareholding at the date of stepping down from the Board.
No further shares were acquired by the Directors between 31 December 2022 and 8 March 2023, being the latest practicable
date prior to publication of this Annual Report.
Share scheme dilution limits
The Company complies with the guidelines laid down by the Investment Association. These restrict the issue of new shares
under all the Company’s share schemes in any ten-year period to 10% of the issued ordinary share capital and under the
Company’s discretionary schemes to 5% in any ten-year period.
The Directors’ Remuneration report has been approved by the Board and signed on its behalf by:
Brian May
Chair of the Remuneration Committee
8 March 2023
Convatec Group Plc Annual Report and Accounts 2022
152
This section of the Directors’ Remuneration report has been prepared in accordance with the Remuneration Reporting
Regulations, and sets out details of the 2023 Policy to be approved by shareholders at the 2023 AGM in May and is effective
for a period of up to three years from that date.
We also describe below how our Policy reflects the principles of Provision 40 of the 2018 UK Corporate Governance Code:
–
Clarity:
we are committed to transparent disclosure of our remuneration structures and decisions, including clear
rationale and context for these.
–
Simplicity:
our Policy and approach to its implementation is simple and well-understood internally and externally.
–
Risk:
remuneration arrangements are designed not to encourage or reward excessive risk taking, with targets set to be
stretching and achievable, and retaining Committee discretion to adjust formulaic bonus and LTIP outcomes to align with
underlying performance.
–
Predictability:
there are defined threshold and maximum pay scenarios, which we have disclosed on page 158.
–
Proportionality:
there is a clear and direct link between performance and reward. No variable remuneration is payable
for performance below defined thresholds.
–
Alignment to culture:
the Committee has designed the Policy to align with the Group’s culture, driving behaviours that
promote the long-term and sustainable success of the Group for the benefit of all stakeholders.
Details of how the Company plans to implement the 2023 Policy for the year ending 31 December 2023, are provided in the
Annual Report on Remuneration starting on page 144.
Remuneration principles
When setting remuneration for the Executive Directors, the Committee considers the following principles:
–
Incentivise sustained strong financial performance.
–
Align rewards with the delivery of the Group’s strategy and long-term interests of shareholders..
–
Help attract, motivate and retain the best talent to deliver the Group’s strategy and create long-term shareholder value.
–
Reflect market best practice and consistently adhere to principles of good corporate governance and encourage good
risk management.
OUR REMUNERATION POLICY
Overview
Strategic report
Financial statements
Additional information
153
Convatec Group Plc Annual Report and Accounts 2022
Governance
2023 Remuneration Policy for the Executive Directors
Purpose and link to strategy
Operation
Opportunity
Performance measures
Base salary
To attract and retain talented
Executive Directors to deliver
the Group’s strategy, by
ensuring base salaries and the
implied total package are
competitive in relevant talent
markets, while not overpaying.
Base salaries will be reviewed
by the Committee annually,
and benchmarked periodically
against comparable roles at
international MedTech peers,
as well as UK-listed companies
of similar size and complexity.
Any resulting changes are
normally effective from 1 April,
in line with the effective date
for salary increases for the
broader workforce.
In deciding base salary levels,
the Committee considers
personal performance including
the individual’s contribution to
the achievement of the Group’s
strategic objectives. The
Committee will also consider
employment conditions and
salary levels across the Group,
and prevailing market conditions
in the geographies in which the
Group competes for talent.
Base salary increases for the
Executive Directors will normally
be no higher than those of the
wider workforce, but may be
made above or below this level
in exceptional circumstances
such as a material change
in responsibilities, size or
complexity of the role, or if
a Director was intentionally
appointed on a below-
market salary.
The maximum salary payable
to Executive Directors will be
capped at the upper quartile
of the benchmarking
comparator group for the role
under review. Salaries will be
set on a case-by-case basis
to reflect the role and the
experience and qualifications
of the individual.
Base salaries for the year under
review and the following year,
as well as the rationale for any
increases, will be disclosed in
the relevant year’s Annual
Report on Remuneration.
n/a
Pension
To provide an appropriate level
of post-retirement benefit for
Executive Directors in a
cost-efficient manner, taking
account of the provisions for
the wider workforce.
Executive Directors may
receive a contribution to a
personal pension plan, a cash
allowance in lieu, or a
combination thereof.
Salary is the only element
of remuneration that is
pensionable.
Karim Bitar and Jonny Mason
receive a pension benefit
from the Group of 8.5% of
salary, in line with the wider
UK workforce.
Details of the pension
contributions made to
Executive Directors during
the year are disclosed in
the Annual Report on
Remuneration.
n/a
Directors’ Remuneration report
continued
Governance
Convatec Group Plc Annual Report and Accounts 2022
154
Purpose and link to strategy
Operation
Opportunity
Performance measures
Other benefits
To provide non-cash benefits
which are competitive in the
market in which the Executive
Director is employed.
The Group may provide
benefits in kind including, but
not limited to, a company car
or car allowance, private
medical insurance (or
allowance in lieu), permanent
health insurance, and life
insurance. Executive Directors
may also be provided certain
other benefits to take account
of individual circumstances
such as, but not limited to,
payment of financial, and/or
legal adviser fees, expatriate
allowance, relocation
expenses, housing allowance
and tax equalisation (including
associated interest, penalties
or fees plus, in certain
circumstances or where the
Committee consider it
appropriate, any tax incurred
on such benefits). Executive
Directors may also be offered
any other future benefits made
available either to all senior
employees globally or in the
region in which the Executive
Director is employed.
Benefits for Executive
Directors are set at a level
which the Committee
considers appropriate
compared to wider employee
benefits, as well as competitive
practices in relevant markets.
The value of annual benefits
will normally not exceed 10% of
salary. The Committee retains
discretion to approve non-
material increases in cost.
In addition, the Committee
retains discretion to approve
a higher cost in exceptional
circumstances (e.g. to facilitate
recruitment, relocation,
expatriation, etc.) or in
circumstances where factors
outside the Group’s control
have changed (e.g. market
increases in insurance costs).
Benefits in respect of the year
under review are disclosed in
the Annual Report on
Remuneration.
n/a
Annual bonus
To incentivise Executive
Directors to deliver strong
financial performance on an
annual basis and reward the
delivery of the Group’s
strategic aims that will
underpin the longer-term
health and growth of the
business.
Deferral into shares enhances
alignment with shareholders.
Performance measures,
targets and weightings are set
by the Committee at the start
of the year. After the end of the
financial year, the Committee
determines the level of bonus
to be paid, taking into account
the extent to which these
targets have been achieved.
To the extent that the
performance criteria have
been met, one-third of the
annual bonus earned will
normally be compulsorily
deferred into shares for a
period of three years under
the Deferred Bonus Plan.
The remainder of the bonus
will be paid in cash.
Dividends may accrue on
deferred bonus shares over
the deferral period and, if so,
will be paid on deferred
shares at the time deferred
shares are released to the
Executive Director.
Malus and clawback provisions
apply to the annual bonus
in certain circumstances (as
set out in the Notes to the
Policy Table).
The maximum annual bonus
opportunity is 200% of base
salary for both Executive
Directors.
The payout for on-target
performance is 50% of
maximum; threshold
performance results in
a payout of no more than
25% of maximum.
Bonuses are based on a
combination of stretching
annual financial and non-
financial/strategic
performance measures,
selected to reflect the Group’s
short-term KPIs, financial goals
and strategic drivers.
The financial element of the
annual bonus will normally
be weighted 80% of the overall
bonus opportunity, with the
balance based on personal
strategic objectives, including
a minimum of 5% linked to
qualifiable ESG metrics.
The Committee may adjust
the formulaic annual bonus
outcomes (including to zero)
to avoid unintended outcomes,
align pay outcomes with
underlying Group performance
and ensure fairness to
shareholders and participants.
Further details will be disclosed
in the relevant Annual Report
on Remuneration. Performance
targets set for each year will
be disclosed retrospectively,
usually in the Annual Report
on Remuneration in respect
of the year to which such
performance targets relate.
Overview
Strategic report
Financial statements
Additional information
155
Convatec Group Plc Annual Report and Accounts 2022
Governance
Purpose and link to strategy
Operation
Opportunity
Performance measures
Long-Term Incentive Plan (LTIP)
To align the interests of
Executive Directors and
shareholders in growing the
value of the Group over the
long term.
Executive Directors are eligible
to receive annual awards of
Convatec Group Plc shares
under the LTIP either in the
form of conditional share
awards or nil cost options.
Prior to awards being granted
each year, the performance
conditions and targets are
agreed and set to ensure they
remain appropriately
stretching and aligned to the
Group’s strategy.
Awards granted under the LTIP
to Executive Directors will
have a performance period of
three years and a minimum
vesting period of three years.
If no entitlement has been
earned at the end of the
relevant performance period,
awards will not vest. Shares
received as a result of an
award vesting will normally
be subject to an additional
two-year holding period.
Dividends may accrue on LTIP
awards over the vesting period
and, if so, will be delivered in
shares that vest at the end of
the vesting period.
LTIP awards granted to
Executive Directors will be
subject to malus and clawback
provisions, as set out in the
Notes to the Policy Table.
The maximum annual LTIP
opportunity is 300% of base
salary for the CEO and 250%
of base salary for the CFO.
25% of an award will vest if
performance against each
performance condition is at
threshold and 100% if it is at
maximum, normally with
straight-line vesting in
between.
Further details of the LTIP
awards granted to each of the
Executive Directors will be
disclosed in the relevant
Annual Report on
Remuneration.
Vesting of the LTIP is subject to
continued employment during
the performance period and the
achievement of performance
conditions aligned with the
Group’s strategic plan and
shareholder value creation.
Measures and their weightings
will be determined by the
Committee prior to making
an award.
The Committee may adjust the
formulaic LTIP outcome to
ensure it takes account of any
major changes to the Group
(e.g as a result of M&A activity)
and is a fair reflection of
the underlying financial
performance of the Group
over the performance period.
Further details, including the
performance targets attached
to the LTIP in respect of each
year, will be disclosed in the
relevant Annual Report on
Remuneration.
Save-As-You-Earn (SAYE) or equivalent scheme
To align the interests of
employees and shareholders
by encouraging employees to
buy and own Convatec Group
Plc shares.
Executive Directors are
entitled to participate in the
Group’s all-employee share
plan if available in the
jurisdiction in which they are
based on identical terms as
other eligible employees. A
UK or Europe-based Executive
Director may make monthly
savings over a period of three
or five years or other period
set by any relevant tax
authority linked to the grant
of an option over Group
shares. The option price will be
set at a discount of up to 15% of
the market value of the shares
at grant (to align with similar
all-employee arrangements
in the US).
Employees are limited to
saving a maximum in line with
the monthly savings limit
imposed by the Committee
(which will not exceed any
limits imposed by legislation)
at the time they are invited to
participate.
n/a
Directors’ Remuneration report
continued
Governance
Convatec Group Plc Annual Report and Accounts 2022
156
Notes to the Policy Table
Malus and clawback policy
Malus and clawback may be applied
to the annual bonus and LTIP awards
in certain circumstances including:
–
cases of fraud, negligence or gross
misconduct by the Executive
Director;
–
material financial misstatement in
the audited financial results of the
Group;
–
error in calculation; or
–
other exceptional circumstances at
the Committee’s discretion.
Cash bonuses will be subject to
clawback, with deferred shares being
subject to malus, over the deferral
period. LTIP awards will be subject
to malus over the vesting period and
clawback from the vesting date to the
second anniversary of the relevant
vesting date.
Share ownership guidelines
The Committee recognises the
importance of aligning Executive
Directors’ and shareholders’ interests
through significant shareholdings in
the Group. The Group’s policy is to
require Executive Directors to build
up shareholdings worth 400% of base
salary for the CEO, and 300% of base
salary for other Executive Directors,
and to retain these shares whilst an
Executive remains on the Board of
Directors. 50% of any net vested share
awards (after sales to meet tax
liabilities) must be retained until the
minimum shareholding requirements
are met. Shareholdings will be valued
at the higher of the acquisition price of
the shares and the average share price
over the last three months of the
financial year.
Post-exit shareholding
requirement
The Committee further recognises
the expectation of shareholders that
a requirement is placed on Executive
Directors to maintain a meaningful
shareholding for a period of time after
they leave the Company. In keeping
with prior commitments, the 2023
Policy has introduced a requirement
for Executive Directors to hold 100%
of their in-situ guideline in the first
year post-exit and 50% in year two (e.g.
400% and 200% of salary for the CEO
in year one and year two, respectively.)
Details of the Executive Directors’
current personal shareholdings, and
progress towards meeting the share
ownership guidelines, are provided
in the Annual Report on Remuneration.
Use of discretion
The Committee may apply its
discretion (as set out below) when
agreeing remuneration outcomes, to
help ensure that the implementation
of our Remuneration Policy is
consistent with the guiding principles
set out in this report.
Payments from outstanding awards
The Committee reserves the right, in
certain circumstances, to make any
remuneration payments and
payments for loss of office (including
exercising any discretions available to
it in connection with such payments)
where the terms of the payment were
agreed: before the Policy in force at
that time came into effect; or at a time
when the relevant individual was not a
Director of the Group provided that,
in the opinion of the Committee,
the payment was not agreed in
consideration of the individual
becoming a Director of the Group. For
these purposes, payments include the
satisfaction of variable remuneration
awards previously granted, but not
vested, to an individual.
Minor changes to Policy
The Committee retains discretion to
make minor, non-significant changes
to the Policy set out above (for reasons
including, but not limited to,
regulatory, exchange control, tax or
administrative purposes or to take
account of a change in legislation)
without reverting to shareholders for
approval for that amendment, where
seeking such shareholder approval
would be disproportionate to the
discretion being exercised.
LTIP awards
The Committee may exercise its
discretion as provided for in the
LTIP rules approved by shareholders.
The Committee may also adjust the
number of shares comprising an LTIP
award (or the exercise price if the
award comprises options) in the
event of a variation of share capital,
demerger, special dividend,
distribution or any other corporate
event which may affect the current
or future value of an award. It is
intended that any adjustment will
be made on a neutral basis, i.e. to
not be to the benefit or detriment of
participants. Any use of discretion by
the Committee during a financial year
will be detailed in the relevant Annual
Report on Remuneration and may
be the subject of consultation with
the Group’s major shareholders,
as appropriate.
Remuneration Policy for the
wider workforce
The Remuneration Policy for other
employees is based on principles that
are broadly consistent with those
applied to Executive Director
remuneration, with a common
objective of driving financial
performance and the achievement of
strategic objectives, and contributing
to the long-term success of the Group.
Remuneration supports our ability to
attract, motivate and retain skilled and
dedicated individuals, whose
contribution will be a critical factor
in the Group’s success. Annual salary
reviews take into account Group
performance, local pay and market
conditions, and salary levels for similar
roles in comparable companies.
Pension entitlements and other
benefits vary according to jurisdiction,
to ensure these remain appropriately
competitive for the local market.
Some employees below executive
level are eligible to participate in
annual bonus schemes. Opportunities
and performance measures vary by
organisational level, geographical
location and an individual’s role.
Employee ownership of Convatec
Group Plc shares is promoted across
the Group. Senior executives are
eligible for LTIP awards on similar
terms as the Executive Directors,
although award opportunities are
lower and vary by organisational
level. Other executives are eligible
for restricted share awards on a
discretionary basis. Convatec also
offers an opportunity for broader-
based participation in a share
purchase plan, as approved by
shareholders at the 2017 AGM.
Approach to target setting and
performance measure selection
The Committee considers carefully the
selection of performance measures at
the start of each performance cycle,
taking into consideration the Group’s
strategic objectives and the
macroeconomic environment.
Annual bonus measures are selected
to align with the Group’s KPIs (see
pages 20 and 21). Measures may
change from year-to-year (subject
to the Remuneration Policy), and the
rationale for any changes to the bonus
measures selected will therefore be
disclosed in the relevant Annual
Report on Remuneration.
Overview
Strategic report
Financial statements
Additional information
157
Convatec Group Plc Annual Report and Accounts 2022
Governance
LTIP performance measures are
selected to ensure they align with
the Group’s strategy and long-term
shareholder value creation. LTIP
awards to be granted in 2023 will be
based on a blend of adjusted PBT
performance, organic revenue growth,
and relative TSR over a three-year
period. The Committee considers
these measures to align executive and
shareholder interests through a good
balance between external and internal
measures of performance, and
between growth and returns in the
context of the Group’s strategy.
For 2023 LTIP awards, TSR performance
will be measured relative to the FTSE
50-150 excluding investment trusts
and the S&P Global Healthcare
Equipment & Services (50%/50%).
Targets are set to be stretching but
achievable over the three-year
performance period, taking account of
multiple relevant reference points, for
example, internal forecasts, external
expectations for future performance
at both the Group and its closest
sector peers, and typical performance
ranges at other FTSE companies of
comparable size and complexity.
The Committee also retains discretion,
in exceptional circumstances, to vary,
substitute or waive the performance
conditions attaching to incentive
awards (within the relevant limits set
out in the Policy table) if there is a
significant and material event which
causes the Committee to believe
the original conditions are no longer
appropriate, and the new performance
conditions are deemed reasonable
and not materially less difficult to
satisfy than the original conditions.
Pay-for-performance:
scenario analysis
The charts below provide an estimate
of the potential future reward
opportunities for Karim Bitar and
Jonny Mason, and the potential split
between the different elements of
remuneration under four different
performance scenarios: “Maximum +
50% share price growth”, “Maximum”,
“On target” and “Minimum”.
Potential reward opportunities are
based on the forward-looking policy,
applied to 2023 base salaries and
incentive opportunities. LTIP awards
granted in a year will not normally vest
until the third anniversary of the date
of grant, and the projected value of
the “Maximum”, “On target” and
“Minimum” scenarios excludes the
impact of share price movement.
Pay scenarios
CEO – Karim Bitar
Fixed Remuneration
£7,234,403
£5,818,703
£1,099,703
£2,751,353
Annual bonus
LTIP
CFO – Jonny Mason
Fixed Remuneration
£3,519,323
£2,878,698
£572,448
£1,405,260
Annual bonus
LTIP
Directors’ Remuneration report
continued
The above charts are based on the following assumptions:
“Maximum + 50% SPA”:
fixed remuneration (salary, pension, other benefits), plus maximum bonus (200% of salary) and full vesting of the 2023 LTIP awards
(300% of salary for the CEO/250% of salary for the CFO, and reflecting 50% share price growth over the vesting period).
“Maximum”:
fixed remuneration (as above), plus maximum bonus (200% of salary) and full vesting of the 2023 LTIP awards (300% of salary for the CEO/250%
of salary for the CFO) assuming no share price growth.
“On-target”:
fixed remuneration (as above), plus target bonus (50% of maximum or 100% of salary) and threshold LTIP vesting (25% of maximum or 75% of
salary for the CEO/62.5% of salary for the CFO) assuming no share price growth.
“Minimum”
: fixed remuneration only, being the only element of Executive Directors’ remuneration not linked to performance.
Executive Director service contracts
In accordance with general market practice, each of the Executive Directors has a rolling service contract. Karim Bitar and
Jonny Mason have service contracts with the Company (copies of which are available to view at the Company’s registered
office) that are terminable on 12 months’ notice from the Group and six months’ notice from the Executive Director. This
practice will also apply for any new Executive Directors. The following table shows the date of the service contract for each
Executive Director that served during the year:
Executive Director
Position
Date of appointment
Date of service agreement
Karim Bitar
CEO
30 September 2019
24 March 2019
Jonny Mason
CFO
31 January 2022
8 December 2021
Exit payments policy
The Group’s policy on termination payments is to consider the circumstances on a case-by-case basis, taking into account
the relevant contractual terms in the executive’s service contract and the circumstances of termination. Executive
Directors’ contracts provide for the payment of a pre-determined sum in the event of termination of employment in certain
circumstances (but excluding circumstances where the Group is entitled to dismiss without compensation), comprising
base salary, pension benefit and benefits in respect of the unexpired portion of the notice period. Termination payments
may take the form of payments in lieu of notice. Payments would normally be made on a phased basis and subject to
mitigation. If the employment is terminated by the Group, the Committee retains the discretion to settle any other amount
the Committee considers reasonable to the Executive Director including in settlement of claims, in respect of legal fees
incurred in connection with the termination and fees for outplacement services and relocation costs.
Governance
Convatec Group Plc Annual Report and Accounts 2022
158
In addition to contractual provisions, the following table summarises how awards under each discretionary incentive plan
are typically treated in specific circumstances, with the final treatment remaining subject to the Committee’s discretion
as provided under the rules of the plan. In the event of termination, any outstanding options granted under the SAYE, or
equivalent, scheme will be treated in accordance with the rules of the scheme, which do not include discretion. Disclosure
in relation to any departing Executive Director, including details of any remuneration payment made to them after they cease
to be a Director, will be made on the Company’s website in accordance with Section 430(2B) of the Companies Act 2006.
Treatment of awards on cessation of employment
Reason for cessation
Calculation of vesting/payment
Timing of vesting/payment
Annual bonus
Injury, disability, death, redundancy,
retirement, or other such event as
the Committee determines
The Committee may determine that a bonus is
payable on cessation of employment (normally
pro-rated for the proportion of the performance year
worked) and the Committee retains discretion to
determine that the bonus should be paid wholly in
cash. The bonus payable will be determined based on
the performance of the Group and of the individual
over the relevant period, and the circumstances of
the Director’s loss of office.
At the normal payment date,
taking into account actual
Company performance for the
performance period.
All other reasons (including
voluntary resignation)
No bonus will be paid for the financial year.
Not applicable.
Deferred bonus shares
Resignation or dismissal for cause
Awards normally lapse.
Not applicable.
All other reasons (e.g. injury,
disability, death, redundancy,
retirement, or other such event as
the Committee determines)
Awards will normally vest in full (i.e. not pro-rated for
time) unless the Committee determines that time
pro-rating should apply.
At the normal vesting date, unless
the Committee decides that awards
should vest earlier (e.g. in the event
of death).
Change of control
Awards will normally vest in full (i.e. not pro-rated for
time). Awards may alternatively be exchanged for
equivalent replacement awards, where appropriate.
On change of control.
LTIP awards
Resignation or dismissal for cause
Awards normally lapse.
Not applicable.
All other reasons (e.g. injury,
disability, death, redundancy,
retirement, or other such event as
the Committee determines)
Awards will normally be pro-rated for time (unless
the Committee exercises discretion to disapply time
pro-rating) and will vest based on performance over
the original performance period (unless the
Committee decides to measure performance to the
date of cessation).
At the normal vesting date, unless
the Committee decides that awards
should vest earlier (e.g. in the event
of death).
Change of control
LTIP awards will normally be pro-rated for time
(unless the Committee exercises discretion to
disapply time pro-rating) and will vest subject to
performance over the performance period to the
change of control.
LTIP awards may alternatively be exchanged for
equivalent replacement awards, where appropriate.
On change of control.
Overview
Strategic report
Financial statements
Additional information
159
Convatec Group Plc Annual Report and Accounts 2022
Governance
Approach to remuneration on recruitment
External appointments
In cases of hiring or appointing a new Executive Director from outside the Group, the Committee may make use of all existing
components of remuneration set out in the Policy table, up to the disclosed maximum opportunities (where applicable).
When determining the remuneration package for a new Executive Director, the Committee will take into account all
relevant factors based on the circumstances at that time to ensure that arrangements are in the best interests of the Group
and its shareholders. This may include factors such as the experience and skills of the individual, internal comparisons and
relevant market data.
The Committee may also make an award in respect of a new appointment to “buy-out” incentive arrangements forfeited on
leaving a previous employer, i.e. over and above the maximum limits on incentive opportunities set out in the Policy table.
In doing so, the Committee will consider relevant factors, including any performance conditions attached to these awards,
the likelihood of those conditions being met, and the time over which they would have vested. The intention is that the
expected value of any “buy-out” award would be no higher than the expected value of the forfeited arrangements, and that
the structure will replicate (as far as reasonably possible) that of the awards being forfeited. The Committee may consider
it appropriate to structure “buy-out” awards differently from the structure described in the Policy table, exercising its
discretion under the LTIP rules to structure awards in other forms (including market value options, restricted shares,
forfeitable shares or phantom awards) and may use the exemption permitted within the Listing Rules where necessary
to make a one-off award to an Executive Director in this context.
Internal promotion
Where a new Executive Director is appointed by way of internal promotion, the Policy will be consistent with that for
external appointees, as detailed above (other than in relation to “buy-out” awards). Any commitments made prior to
an individual’s promotion will continue to be honoured even if they would not otherwise be consistent with the Policy
prevailing when the commitment is fulfilled, although the Group may, where appropriate, seek to revise an individual’s
existing service contract on promotion to ensure it aligns with other Executive Directors and good practice.
Disclosure on the remuneration structure of any new Executive Director, including details of any “buy-out” awards, will be
disclosed in the RNS notification made at the time of appointment and in the Annual Report on Remuneration for the year
in which recruitment occurred.
External appointments held by Executive Directors
Executive Directors may accept one external appointment subject to approval by the Board, there being no conflicts of
interest and the appointment not leading to deterioration in the individual’s performance. Executive Directors may retain
the fees paid for such roles. Details of external appointments and the associated fees received will be included in the
Annual Report on Remuneration.
Consideration of conditions elsewhere in the Group
The Committee seeks to promote and maintain good relations with employees as part of its broader employee
engagement strategy, considers pay practices across the Group and is mindful of the salary increases applying across
the rest of the business in relevant markets when considering any increases to salaries for Executive Directors.
Consideration of shareholder views
The Committee will take into consideration all shareholder views received during the year and at the Annual General
Meeting each year, as well as guidance from shareholder representative bodies more broadly, in shaping the Group’s
implementation of its Remuneration Policy. It is the Committee’s intention to consult with major shareholders in advance
of making any material changes to remuneration arrangements for Executive Directors.
Directors’ Remuneration report
continued
Governance
Convatec Group Plc Annual Report and Accounts 2022
160
Remuneration Policy for the Non-Executive Directors
Details of the Policy on fees paid to our Non-Executive Directors are set out in the table below:
Purpose and link to strategy
Operation
Opportunity
Performance
measures
Non-Executive Director fees
To attract and retain
Non-Executive Directors of
the highest calibre with
broad commercial and other
experience relevant to the
Group
The fees of the Chair are determined by the
Committee. The fees paid to Non-Executive Directors
are determined by the Chair and Executive Directors.
Additional fees are payable for acting as Senior
Independent Director and for chairing the Audit
and Risk Committee or the Remuneration Committee.
An additional fee is also payable for acting as a Board
Level Representative for the workforce. Flexibility to
introduce Committee membership fees is also
retained if deemed to be necessary.
The maximum aggregate
annual fee for all
Non-Executive Directors
(including the Chair) as
provided in the Group’s
Articles of Association is
£1,500,000.
n/a
Fee levels are reviewed annually (with any increases
normally effective 1 April), taking into account
external advice on best practice and competitive
levels, in particular at other FTSE companies of
comparable size and complexity. Time commitment
and responsibility are also taken into account when
reviewing fees.
Chair and Non-Executive Director fees are paid
in cash.
The Committee reimburses the Chair and Non-
Executive Directors for reasonable expenses
in performing their duties and may settle any tax
incurred in relation to these expenses. For any
Non-Executive Director that is based overseas,
the Group will meet travel and accommodation
expenditure as required to fulfil their Non-
Executive duties.
The fees paid to the Chair and Non-Executive
Directors are disclosed in the Annual Report
on Remuneration.
Fee increases will be
applied taking into
account the outcome of
the annual review.
Non-Executive Directors are not eligible to join the Group’s pension, incentives or share schemes or to participate in any
of the Group’s other benefit arrangements.
In recruiting a new Non-Executive Director, the Committee will use the Policy set out above.
Non-Executive Director letters of appointment
None of the Non-Executive Directors has a service contract with the Group. They do have letters of appointment, and will
be submitted for re-election annually. The dates relating to the appointments of the Chair and Non-Executive Directors
who served during the reporting period are as follows:
Director
Role
Date of
appointment
Date of letter of
appointment
Date of election/
re-election
John McAdam
Non-Executive Chair
30 September 2019
18 August 2019
12 May 2022
Margaret Ewing
Senior Independent Director
11 August 2017
17 August 2017
12 May 2022
Sten Scheibye
Non-Executive Director
3 July 2018
3 July 2018
12 May 2022
Brian May
Independent Non-Executive Director
2 March 2020
26 February 2020
12 May 2022
Heather Mason
Independent Non-Executive Director
1 July 2020
8 May 2020
12 May 2022
Constantin Coussios
Independent Non-Executive Director
1 September 2020
29 June 2020
12 May 2022
Kimberly Lody
Independent Non-Executive Director
1 February 2022
13 December 2021
12 May 2022
Sharon O’Keefe
Independent Non-Executive Director
1 March 2022
24 February 2022
12 May 2022
Rick Anderson
Independent Non-Executive Director
31 October 2016
12 October 2016
n/a
Regina Benjamin
Independent Non-Executive Director
11 August 2017
15 August 2017
n/a
Rick Anderson and Regina Benjamin stepped down from the Board on 3 March 2022 and 12 May 2022, respectively.
Overview
Strategic report
Financial statements
Additional information
161
Convatec Group Plc Annual Report and Accounts 2022
Governance
Directors’ report
The Directors present their Annual Report on the
aﬀairs of the Group, together with the Financial
Statements and auditor’s report, for the year
ended 31 December 2022.
Taken together, the Strategic report on pages 4 to 99 and this Directors’ report fulfil the requirements of the Disclosure
Guidance and Transparency Rules to provide a management report.
Information incorporated by reference
The following information is provided in other sections of this Annual Report and is incorporated by reference.
Information
Section where provided
Page
Corporate governance
Corporate governance statements
103
Nomination, Audit and Risk Committee reports
123 to 138
Post-balance sheet events
Financial Statements – Note 30
217
Likely future developments and research and
development activities
Strategic report
10 to 87
Preparation and disclosure of Financial Statements
and Annual Report
Directors’ responsibilities statement
165
Use of financial instruments
Financial Statements – Note 23
209 and 210
Shares held by the Company’s Employee Benefit Trust
Financial Statements – Note 17
199 and 200
Board membership and biographical details
Corporate governance report
110 and 111
Related party transactions
Financial Statements – Note 29
216
Employee engagement
Strategic report
Governance section
44
118
Greenhouse gas emissions
Strategic report
68 and 69
Engagement with suppliers, customers and others
in a business relationship with the Company
Strategic report
Governance section
44 and 45
118 and 119
Disclosure of information
to the auditor
Each of the Directors, as at the date
of this Annual Report, confirms that:
–
the Director has taken all steps that
he/she ought to have taken as a
Director in order to make him/herself
aware of any relevant audit
information and to establish that
the Company’s auditor is aware of
that information; and
–
so far as the Director is aware, there is
no relevant audit information of which
the Company’s auditor is unaware.
This confirmation is given and should
be interpreted in accordance with
the provision of Section 418 of the
Companies Act 2006. Deloitte LLP have
expressed their willingness to continue
in office as auditor and a resolution to
reappoint them will be proposed at
the 2023 AGM.
Branches of the Company
The Group, through various subsidiary
and related undertakings, has
branches in a number of different
jurisdictions in which the business
operates. Further details are included
in subsidiary undertakings on pages
229 to 231.
Dividends
Our stated policy is to target a payout
ratio of between 35% and 45% of
adjusted net profit. This is interpreted
flexibly over time to reflect the
development of the business. The
Board is recommending a 3.0%
increase in the full year dividend to
reflect the underlying improvement
in business performance.
We annually assess the application of
the policy when proposing the dividend,
taking into account, among other things,
our growth prospects, capital efficiency,
investment plans and the profitability of
the Group, whilst also maintaining
appropriate levels of dividend cover.
Any decision to declare and pay
dividends will be made at the discretion
of the Directors and will depend on,
among other things, applicable law,
regulation, restrictions, strategic
objectives, capital management, the
Group’s various stakeholders (for
further information see the section 172
statement on page 45), review of our
comparator peer group, available and
forecast distributable reserves of the
Company and the forecast cashflows
and liquidity of the Group, and other
factors the Directors deem significant.
During the year, the Directors resolved
to pay an interim dividend of 1.717 cents
per share on 6 October 2022. A scrip
dividend alternative was oﬀered in
respect of the interim dividend allowing
shareholders to elect by 16 September
2022 to receive their dividend in the
form of new ordinary shares. On
6 October 2022, 2,107,103 ordinary
shares of 10p each were allotted to
shareholders who had elected to take
the scrip dividend alternative.
The Directors recommend a final
dividend for the year of 4.330 cents per
share (2021: 4.154 cents) which, together
with the interim dividend, makes a total
for the year of 6.047 cents per share
(2021: 5.871 cents), a 3% increase over
the prior year. The final dividend, if
approved by the shareholders, will be
paid on 25 May 2023 to shareholders on
the register at the close of business on
11 April 2023; a scrip dividend alternative
will also be available to shareholders.
Capital structure
Share capital
As at 31 December 2022, the Company’s
issued share capital consisted of
2,043,872,048 ordinary shares of 10p
each. Further details of the authorised
and issued share capital, together with
details of the movements in the
Company’s issued share capital during
the year, are shown in Note 17 to the
Consolidated Financial Statements.
As at 31 December 2022, the Company
had only one class of share consisting
of ordinary shares of 10p each.
Governance
Directors’
report
Convatec Group Plc Annual Report and Accounts 2022
162
Acquisition of Company’s
own shares
At the Company’s AGM on 12 May 2022
the Directors’ authority was renewed
under shareholders’ resolution to
purchase through the market up to 10%
of the Company’s ordinary shares at a
maximum price per share at the higher
of: (i) an amount equal to 105% of middle
market quotations of the price of shares
for the five business days prior to the
date of purchase; and (ii) an amount
equal to the higher of the last
independent trade and the highest
current independent bid at the time of
purchase. This authority will expire at
the end of Company’s 2023 AGM and the
Company will seek its renewal at the
AGM. It is confirmed that no acquisition
of the Company’s own shares has been
made under such authority.
Shareholders’ rights
The rights attaching to the ordinary
shares are governed by the Company’s
Articles of Association (the Articles) and
prevailing legislation. There are
no specific restrictions on the size of a
holding. Subject to applicable law and
the Articles, holders of ordinary shares
are entitled to receive all shareholder
documents, including notice of any
general meeting, attend, speak and
exercise voting rights at general
meetings, either in person or by proxy,
and participate in any distribution of
income or capital.
Restrictions on voting
There are no specific restrictions on
voting rights, save in situations where
the Company is legally entitled to
impose such restrictions (usually where
amounts remain unpaid on shares after
request, or the shareholder is otherwise
in default of an obligation to the
Company). Currently all issued ordinary
shares are fully paid. There are no
agreements between holders of
securities in the Company that are
known to the Company and may result
in restrictions on transfer or on
voting rights.
Restrictions on the transfer
of ordinary shares
The transfer of ordinary shares is
governed by the general provisions of
the Company’s Articles and applicable
legislation. There are no restrictions on
the transfer of ordinary shares other
than: (i) as set out in the Articles; and (ii)
certain restrictions which may from time
to time be imposed by laws and
regulations and pursuant to the Listing
Rules whereby Directors and certain
officers and employees of the Company
require approval to deal in the ordinary
shares in accordance with the
Company’s share dealing policies and
the Market Abuse Regulation.
Directors’ appointment,
replacement and powers
The appointment and replacement of
Directors of the Company is governed
by its Articles, the Code, the Companies
Act and related legislation. The Articles
themselves may be amended by special
resolution. Details of the powers of the
Board and its Committees are described
in the Corporate governance report on
page 115. The powers of the Board are set
out in the Articles and the Terms of
Reference of each of the Board’s
committees set out their respective
duties and responsibilities. The
aforementioned documents can be
found at www.convatecgroup.com/
investors/governance.
Significant agreements
There are a number of agreements that
take eﬀect, alter or terminate upon a
change of control of the Company such
as commercial contracts, bank loan
agreements, property lease
arrangements and employees’ share
plans. Other than the Group’s main
funding agreements referenced in the
following paragraph, none of these are
considered to be signiﬁcant in terms of
their likely impact on the business of
the Group as a whole. Furthermore,
the Directors are not aware of any
agreements between the Group and
its Directors or employees that provide
for compensation for loss of oﬃce or
employment that occurs because
of a change of control resulting from
a takeover bid.
In the event of a change of control of the
Company, the Group’s main funding
agreements allow the lenders to give
notice of repayment for all outstanding
amounts under the relevant facilities.
Directors’ indemnities
The Group has made qualifying
third-party indemnity provisions for
the beneﬁt of its Directors, which were
made during the year and remain in
force at the date of this report.
Company Secretary
The Company Secretary provides
ongoing support to the Board in
relation to corporate governance issues
and compliance with the Listing Rules.
She is responsible for establishing,
implementing and monitoring the
corporate governance framework,
attending (directly or through a
designate) all Board and committee
meetings, advising on effective Board
processes, advising on Directors’
statutory duties, disclosure obligations
and requirements under the Listing
Rules, and working in conjunction with
the investor relations team regarding
dialogue with investors.
Political donations
No political donations, including to
non-UK political parties, were made
during the period. Information about
the Group’s lobbying activities is
included on page 45.
Substantial shareholdings
At 31 December 2022 the Company had been notified in accordance with Chapter 5 of the Disclosure Guidance and
Transparency Rules, of the following voting rights as a shareholder of the Company. At 8 March 2023, being the latest
practicable date prior to the publication of this Annual Report, the Company had not received any further notifications
pursuant to Chapter 5 of the Disclosure Guidance and Transparency Rules.
Shareholder
No. of ordinary shares
Percentage of
voting rights
Nature of holding
Novo Holdings A/S
395,318,793
20.25%
Direct holding
The Capital Group Companies, Inc.
97,418,767
4.9911%
Indirect holding
Artisan Partners Limited Partnership
97,980,658
4.98%
Indirect holding
Pelham Capital LTD.
93,526,729
4.71%
Direct holding/
Financial instruments
Black Creek Investment Management, Inc.
80,048,681
4%
Direct holding/
Indirect holding
Standard Life Aberdeen Plc
Below 5%
Indirect holding
BlackRock, Inc.
Below 5%
Indirect holding/
Financial instruments
It should be noted that the percentages are shown as notified and that these holdings are likely to have changed since the Company was notified, however
notification of any change is not required until the next notifiable threshold is crossed.
Overview
Strategic report
Financial statements
Additional information
163
Convatec Group Plc Annual Report and Accounts 2022
Governance
Directors’ report
continued
Relationship agreement with
controlling shareholders
Novo Holdings A/S (Novo) became a
significant shareholder on 31 March
2017 and the Company entered a
relationship agreement with Novo
on such date as required by Listing
Rule 9.2.2A R(2)(a). Given its significant
investment in the Company, Novo is
entitled to appoint one Non-Executive
Director to the Board for so long as
they and their associates are entitled
to exercise, or control the exercise of,
10% or more of the votes able to be
cast on all or substantially all matters
at general meetings of the Company.
In the financial period to 31 December
2022 (and also from 31 December
2022 to 8 March 2023, being the
latest practicable date prior to
publication of this Annual Report),
the Company has complied with
the independence provisions of the
relationship agreement, and so far as
the Company is aware, Novo and their
associates also complied with the
independence provisions.
Diversity and inclusion
We are committed to creating a
values-led, performance-driven
culture which starts with our
employees, and we aim to bring
together a rich diversity of
backgrounds, experiences,
preferences and capabilities which
unite together to improve people’s
lives through their work at Convatec.
The Board considers a diverse
workforce as critical to its success.
Information about the Group’s
initiatives to achieve diversity
across the business, including
specific objectives, are contained
on pages 59 and 60.
Employment of disabled people
Applications for employment by
disabled people are always fully
considered, bearing in mind the
aptitudes of the applicant concerned.
In the event of members of staﬀ
becoming disabled every eﬀort is
made to ensure that their employment
with the Group continues and that
appropriate training is arranged.
It is the policy of the Group that the
training, career development and
promotion of anyone with a disability
should, as far as possible, be identical
to that of other employees.
Employee share schemes
In addition to the discretionary share
schemes operated as part of the
Group’s long-term incentives, detailed
in the Remuneration Policy on page
156, the Group operates an all-
employee share scheme in selected
jurisdictions. The Directors believe
that this scheme aligns the interests
of employees and shareholders by
encouraging employees to buy and
own shares in the Company, thus
enabling them to benefit directly from
the anticipated growth and success of
the Group in the future.
Executive Directors may also
participate in the UK all-employee
share scheme, which is an HMRC
approved savings-related share option
plan, on the same basis as other
eligible employees. All participants
may invest up to the limits set in line
with HMRC guidance and as operated
by the Group.
Shares acquired through the Group’s
share plans rank pari passu with
existing ordinary shares in issue and
have no special rights with regards to
voting, rights to dividend, control of
the Company or otherwise.
All of the Group’s employee share
plans contain provisions relating to
a change of control. On a change of
control, options and awards granted
to employees under the Group’s
share plans may vest and become
exercisable, subject to the satisfaction
of any applicable performance
conditions at that time.
Listing Rules – compliance with LR 9.8.4R
The information required to be disclosed by LR 9.8.4R can be found in the following locations. There are no other
disclosures required under this LR.
Section
Applicable sub-paragraph within LR 9.8.4R
Location
1
Interest capitalised
Group Financial Statements, Note 25, page 212
4
Details of long-term incentive schemes
Directors’ Remuneration report, page 156
14
Confirmation of relationship agreement
Directors’ report, page 164
Annual General Meeting
The Annual General Meeting will be held on 18 May 2023 at 2pm and will take place at 3 Forbury Place, 23 Forbury Road,
Reading, RG1 3JH, in the form of a hybrid meeting. Notice of the meeting, containing details of the resolutions to be put to
the meeting, will be available at www.convatecgroup.com/investors/shareholder-centre/agm-information/.
By order of the Board:
Evelyn Douglas
Company Secretary
8 March 2023
Convatec Group Plc is registered in England No. 10361298
Governance
Convatec Group Plc Annual Report and Accounts 2022
164
Directors’ responsibilities statement
The Directors are responsible for
preparing the Annual Report and the
Financial Statements in accordance
with applicable law and regulations.
Company law requires the Directors
to prepare financial statements for
each financial year. Under that law
the Directors are required to prepare
the Group Financial Statements in
accordance with United Kingdom
adopted International Accounting
Standards and have elected to
prepare the parent company financial
statements in accordance with United
Kingdom Generally Accepted
Accounting Practice (United Kingdom
Accounting Standards and applicable
law), including FRS 101 “Reduced
Disclosure Framework”. Under
company law the Directors must
not approve the accounts unless they
are satisfied that they give a true and
fair view of the state of affairs of the
Group and Company and of the profit
or loss of the Group and Company for
that period.
In preparing the parent company’s
financial statements, the Directors are
required to:
–
select suitable accounting policies
and then apply them consistently;
–
make judgements and accounting
estimates that are reasonable
and prudent;
–
state whether applicable UK
Accounting Standards have been
followed, subject to any material
departures disclosed and explained
in the Financial Statements; and
–
prepare the Financial Statements on
the going concern basis unless it is
inappropriate to presume that the
Company will continue in business.
In preparing the Group Financial
Statements, International Accounting
Standard 1 requires that Directors:
–
properly select and apply
accounting policies; present
information, including accounting
policies, in a manner that provides
relevant, reliable, comparable and
understandable information;
–
provide additional disclosures
when compliance with the
specific requirements in IFRSs are
insufficient to enable users to
understand the impact of particular
transactions, other events and
conditions on the Group’s financial
position and financial performance;
and
–
make an assessment of the Group’s
ability to continue as a going
concern.
The Directors are responsible for
keeping adequate accounting records
that are sufficient to show and explain
the Group and Company’s
transactions and disclose with
reasonable accuracy at any time the
financial position of the Group and
Company and enable them to ensure
that the Financial Statements comply
with the Companies Act 2006. They are
also responsible for safeguarding the
assets of the Group and Company and
hence for taking reasonable steps for
the prevention and detection of fraud
and other irregularities.
The Directors are responsible for
the maintenance and integrity of the
corporate and financial information
included on the Group’s website.
Legislation in the United Kingdom
governing the preparation and
dissemination of financial statements
may differ from legislation in other
jurisdictions.
Responsibility statement
We confirm that to the best of our
knowledge:
–
the Financial Statements, prepared
in accordance with the relevant
financial reporting framework, give
a true and fair view of the assets,
liabilities, financial position and
profit or loss of the Company and
the undertakings included in the
consolidation taken as a whole;
–
the Strategic report includes a fair
review of the development and
performance of the business and
the position of the Company and
the undertakings included in the
consolidation taken as a whole,
together with a description of the
principal risks and uncertainties
that they face; and
–
the Annual Report and Financial
Statements, taken as a whole, are
fair, balanced and understandable
and provide the information
necessary for shareholders to
assess the Group and Company’s
performance and position,
business model and strategy.
This responsibility statement was
approved by the Board of Directors
on 8 March 2023 and is signed on
its behalf by:
Karim Bitar
Chief Executive Officer
Jonny Mason
Chief Financial Officer
Overview
Strategic report
Financial statements
Additional information
165
Convatec Group Plc Annual Report and Accounts 2022
Governance
What’s inside
Convatec Group Plc Annual Report and Accounts 2022
166
Financial statements
168
Consolidated financial statements
218
Company financial statements
224 Non-IFRS financial information
232
Independent auditor’s report
Financial
statements
167
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Convatec Group Plc Annual Report and Accounts 2022
167
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2022
Notes
2022
$m
2021
$m
Revenue
2
2,072.5
2,038.3
Cost of sales
(968.6)
(915.2)
Gross profit
1,103.9
1,123.1
Selling and distribution expenses
(575.9)
(539.7)
General and administrative expenses
(214.9)
(285.3)
Research and development expenses
(92.0)
(94.5)
Other operating expenses
4
(13.8)
–
Operating profit
3
207.3
203.6
Finance income
25
5.5
0.8
Finance expense
25
(73.2)
(44.3)
Non-operating expense, net
5
(57.7)
(8.8)
Profit before income taxes
81.9
151.3
Income tax expense
6
(19.0)
(33.7)
Net profit
62.9
117.6
Earnings per share
Basic earnings per share (cents per share)
7
3.1¢
5.9¢
Diluted earnings per share (cents per share)
7
3.1¢
5.8¢
The accounting policies and notes on pages 172 to 217 form an integral part of the Consolidated Financial Statements.
All amounts are attributable to shareholders of the Group and wholly derived from continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
Notes
2022
$m
2021
$m
Net profit
62.9
117.6
Other comprehensive (expense)/income
Items that will not be reclassified subsequently to the Consolidated Income Statement
Remeasurement of defined benefit pension plans, net of tax
15
8.4
3.3
Change in pension asset restriction
15
–
1.3
Items that may be reclassified subsequently to the Consolidated Income Statement
Foreign currency translation, net of tax
(113.6)
(29.6)
Realisation of cumulative translation adjustments
27
12.2
–
Effective portion of changes in fair value of cash flow hedges
23
(7.7)
(5.1)
Changes in fair value of cash flow hedges reclassified to the Consolidated Income Statement
23
16.5
5.7
Costs of hedging
23
(1.1)
(0.4)
Income tax in respect of items that may be reclassified
2.4
(0.9)
Other comprehensive expense
(82.9)
(25.7)
Total comprehensive (expense)/income
(20.0)
91.9
All amounts are attributable to shareholders of the Group and wholly derived from continuing operations.
Consolidated Financial Statements
Convatec Group Plc Annual Report and Accounts 2022
168
Financial statements
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2022
Notes
2022
$m
2021
$m
Assets
Non-current assets
Property, plant and equipment
8
400.4
366.7
Right-of-use assets
24
79.4
83.6
Intangible assets and goodwill
9
2,149.5
2,058.5
Investment in financial assets
10
30.7
–
Deferred tax assets
6
26.6
28.9
Derivative financial assets
23
0.2
–
Restricted cash
22
7.3
13.6
Other non-current receivables
12
8.6
11.9
2,702.7
2,563.2
Current assets
Inventories
11
336.9
308.8
Trade and other receivables
12
364.0
323.5
Derivative financial assets
23
26.4
15.1
Restricted cash
22
18.2
–
Cash and cash equivalents
22
143.8
463.4
889.3
1,110.8
Total assets
3,592.0
3,674.0
Equity and liabilities
Current liabilities
Trade and other payables
13
346.6
342.5
Borrowings
21
–
144.8
Lease liabilities
24
20.3
19.7
Current tax payable
33.5
45.5
Derivative financial liabilities
23
32.5
11.7
Provisions
14
100.2
5.0
533.1
569.2
Non-current liabilities
Borrowings
21
1,211.9
1,199.8
Lease liabilities
24
68.0
70.8
Deferred tax liabilities
6
83.2
87.2
Provisions
14
53.1
1.7
Derivative financial liabilities
23
0.3
2.9
Other non-current liabilities
13
32.7
47.6
1,449.2
1,410.0
Total liabilities
1,982.3
1,979.2
Net assets
1,609.7
1,694.8
Equity
Share capital
17
250.7
247.0
Share premium
17
165.7
142.3
Own shares
17
(1.5)
(2.2)
Retained deficit
(892.2)
(842.0)
Merger reserve
2,098.9
2,098.9
Cumulative translation reserve
(177.1)
(75.7)
Other reserves
17
165.2
126.5
Total equity
1,609.7
1,694.8
Total equity and liabilities
3,592.0
3,674.0
The Consolidated Financial Statements of Convatec Group Plc, company number 10361298, were approved by the Board of
Directors and authorised for issue on 8 March 2023 and signed on its behalf by:
Jonny Mason
Karim Bitar
Chief Financial Officer
Chief Executive Officer
169
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Notes
Share
capital
$m
Share
premium
$m
Own
shares
$m
Retained
deficit
$m
Merger
reserve
$m
Cumulative
translation
reserve
$m
Other
reserves
$m
Total
$m
At 1 January 2021
245.5
115.3
(6.7)
(845.3)
2,098.9
(46.1)
109.1
1,670.7
Net profit
–
–
–
117.6
–
–
–
117.6
Other comprehensive income:
Foreign currency translation
adjustment, net of tax
–
–
–
–
–
(29.6)
–
(29.6)
Remeasurement of defined benefit
pension plans, net of tax
15
–
–
–
–
–
–
3.3
3.3
Change in pension asset restriction
15
–
–
–
–
–
–
1.3
1.3
Changes in fair value of cash flow
hedges, net of tax
–
–
–
–
–
–
(0.7)
(0.7)
Other comprehensive
(expense)/income
–
–
–
–
–
(29.6)
3.9
(25.7)
Total comprehensive income
–
–
–
117.6
–
(29.6)
3.9
91.9
Dividends paid
18
–
–
–
(85.8)
–
–
–
(85.8)
Scrip dividend
17, 18
1.5
27.0
–
(28.5)
–
–
–
–
Share-based payments
19
–
–
–
–
–
–
16.4
16.4
Share awards vested
–
–
4.5
–
–
–
(3.5)
1.0
Excess deferred tax benefit from
share-based payments
–
–
–
–
–
–
0.6
0.6
At 31 December 2021
247.0
142.3
(2.2)
(842.0)
2,098.9
(75.7)
126.5
1,694.8
Net profit
–
–
–
62.9
–
–
–
62.9
Other comprehensive
(expense)/income:
Foreign currency translation
adjustment, net of tax
–
–
–
–
–
(113.6)
–
(113.6)
Realisation of cumulative translation
adjustments
5, 27
–
–
–
–
–
12.2
–
12.2
Remeasurement of defined benefit
pension plans, net of tax
15
–
–
–
–
–
–
8.4
8.4
Changes in fair value of cash flow
hedges, net of tax
–
–
–
–
–
–
10.1
10.1
Other comprehensive
(expense)/income
–
–
–
–
–
(101.4)
18.5
(82.9)
Total comprehensive
income/(expense)
–
–
–
62.9
–
(101.4)
18.5
(20.0)
Dividends paid
18
–
–
–
(88.1)
–
–
–
(88.1)
Scrip dividend
17, 18
1.1
23.4
–
(24.5)
–
–
–
–
Allotment of shares to Employee
Benefit Trust
17
2.6
–
(2.6)
–
–
–
–
–
Share-based payments
19
–
–
–
–
–
–
16.6
16.6
Share awards vested
–
–
3.3
–
–
–
2.9
6.2
Excess deferred tax benefit from
share-based payments
–
–
–
–
–
–
0.2
0.2
Transfer between reserves
–
–
–
(0.5)
–
–
0.5
–
At 31 December 2022
250.7
165.7
(1.5)
(892.2)
2,098.9
(177.1)
165.2
1,609.7
Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
170
Financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2022
Notes
2022
$m
2021
$m
Cash flows from operating activities
Net profit
62.9
117.6
Adjustments for
Depreciation of property, plant and equipment
8
39.7
40.6
Depreciation of right-of-use assets
24
22.1
22.8
Amortisation of intangible assets
9
147.4
147.2
Income tax
6
19.0
33.7
Non-operating expense, net
5
56.0
4.5
Finance costs, net
25
67.7
43.5
Share-based payments
19
16.7
16.4
Impairment/write-off of intangible assets
3
6.3
2.9
Impairment/write-off of property, plant and equipment
3
9.2
3.0
Change in assets and liabilities:
Inventories
(36.3)
(19.6)
Trade and other receivables
(63.6)
(29.4)
Other non-current receivables
3.0
1.1
Restricted cash
(11.8)
(8.4)
Trade and other payables
40.7
10.7
Other non-current payables
5.5
14.0
Net cash generated from operations
384.5
400.6
Interest received
5.5
0.8
Interest paid
(55.4)
(36.3)
Income taxes paid
(52.9)
(59.2)
Net cash generated from operating activities
281.7
305.9
Cash flows from investing activities
Acquisition of property, plant and equipment and intangible assets
8, 9
(144.2)
(94.1)
Acquisitions, net of cash acquired
26
(123.3)
(113.8)
Payment of contingent consideration arising from acquisitions
26
(50.0)
–
Net cash (outflow)/inflow arising from divestitures
(0.1)
1.4
Investment in financial assets
10
(30.7)
–
Net cash used in investing activities
(348.3)
(206.5)
Cash flows from financing activities
Repayment of borrowings
21
(842.5)
(583.9)
Proceeds from borrowings
21
714.2
491.8
Payment of lease liabilities
24
(20.7)
(22.0)
Dividends paid
18
(88.1)
(85.8)
Net cash used in financing activities
(237.1)
(199.9)
Net change in cash and cash equivalents
(303.7)
(100.5)
Cash and cash equivalents at beginning of the year
22
463.4
565.4
Effect of exchange rate changes on cash and cash equivalents
(15.9)
(1.5)
Cash and cash equivalents at end of the year
22
143.8
463.4
171
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
1. BASIS OF PREPARATION
This section describes the Group’s significant accounting policies that relate to the Consolidated Financial Statements
and explains critical accounting judgements and estimates that management has identified as having a potentially
material impact to the Group. Specific accounting policies relating to the Notes to the Consolidated Financial Statements
are described within that note.
1.1 General information
Convatec Group Plc (the Company) is a public limited company incorporated in the United Kingdom under the Companies
Act of 2006. The Company's registered office is 3 Forbury Place, 23 Forbury Road, Reading RG1 3JH, United Kingdom.
The Consolidated Financial Statements have been prepared in accordance with United Kingdom adopted international
accounting standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB).
The Consolidated Financial Statements are presented in US dollars (USD), reflecting the profile of the Company and its
subsidiaries (collectively, the Group) revenue and operating profit, which are primarily generated in US dollars and US dollar-
linked currencies. All values are rounded to $0.1 million except where otherwise indicated.
Pages 2 and 3 in the Strategic report provide further detail of the Group's principal activities and nature of its operations.
1.2 Significant accounting policies
The following significant accounting policies apply to the Consolidated Financial Statements as a whole:
Basis of accounting and presentation
The consolidated financial information has been prepared on a historical cost basis, except for certain financial instruments
where fair value has been applied. Historical cost is generally based on the fair value of the consideration given in exchange
for goods and services.
Basis of consolidation
The Consolidated Financial Statements include the results of the Company and all its subsidiary undertakings. Subsidiaries
are entities controlled by the Group. Control exists when the Group: (i) has power over the investee; (ii) is exposed, or has
rights, to variable returns from its involvement in the investee; and (iii) has the ability to use its power to affect its returns.
The Group reassesses whether or not it controls an entity if facts and circumstances indicate that there are changes to one
or more of the three elements of control listed above.
The consolidated financial information of the Company's subsidiaries is included within the Group's Consolidated Financial
Statements from the date that control commences until the date that control ceases and is prepared for the same year-end
date using consistent accounting policies.
Going concern
As discussed in the Financial review on pages 30 to 38, the overall financial performance of the business remains strong with a
robust liquidity position.
As at 31 December 2022, the Group held cash and cash equivalents of $143.8 million (31 December 2021: $463.4 million), and
borrowings of $1,211.9 million (31 December 2021: $1,344.6 million). During the year, the Group refinanced its bank facilities with
$1.2 billion committed for five years at the appropriate reference rate plus margins of 1.75% and 2.00% for the multicurrency
revolving credit facility and the term loan facility respectively. The new credit facility of $1.2 billion comprises a $250.0 million
term loan and a $950.0 million multicurrency revolving facility. The borrowings as at 31 December 2022 comprised senior
notes of $500.0 million, term loan of $250.0 million, and multicurrency revolving credit facilities of $477.2 million, net of
unamortised financing fees of $15.3 million. The senior notes are repayable in 2029 and the term loan and multicurrency
revolving credit facilities are repayable in 2027. $472.8 million of the multicurrency revolving credit facilities remained
undrawn as at 31 December 2022, which together with cash and cash equivalents of $143.8 million, provided the Group with
total liquidity of $616.6 million as at that date (2021: $663.4 million). The principal financial covenants remained unchanged
and as at 31 December 2022, the Group was in compliance with its financial covenants.
In preparing their assessment of going concern, the Directors have considered available cash resources, financial performance
and forecast performance, including strategy delivery, together with the Group’s financial covenant compliance requirements
and principal risks and uncertainties. The Directors have used cash flow forecasts derived from actual performance in 2022,
the Board approved 2023 budget and longer-term strategic plan as foundations. The forecasts reflected the full potential
funding requirements in relation to the remaining estimated contingent consideration payable in relation to the Triad Life
Sciences and Cure Medical acquisitions, and the impact of exiting hospital care and industrial sales activities. The Directors
have considered a going concern period to 31 December 2024, which is at least 21 months from the date of approval of the
Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
Convatec Group Plc Annual Report and Accounts 2022
172
Financial statements
In accordance with FRC guidance, management applied severe but plausible downside scenarios linked to the Group’s
principal and emerging risks, including supply chain disruption, cyber security disruption, significant regulatory breaches,
financial market distress and geopolitical events and sanctions to a key global market. Further details of the specific
scenarios are provided in the Viability statement on page 99. The Board has reviewed these scenarios as part of the going
concern assessment and has concluded that these scenarios are in line with the Group’s principal and emerging risks and
continue to reflect the financial risk of severe but plausible downside events and circumstances during the going concern
period. Under each scenario, the Group is forecast to retain significant liquidity and covenant headroom throughout the
going concern period.
The Group has carried out reverse stress test against the forecast base case to determine the performance levels that would
result in a breach of covenants. For a breach of covenants to occur in the next 12 months, before mitigation, the Group would
need to experience a sustained revenue reduction of more than 10% across all categories and markets. This was considered to
be implausible given the Group’s strong global market position and diversified portfolio of products and the mitigations
available to the Board and management, which include minimising capital expenditure to critical requirements and reducing
levels of discretionary spend.
Accordingly, at the time of approving these Consolidated Financial Statements, the Directors have a reasonable expectation
that the Group and the Company will have adequate liquid resources to meet their respective liabilities as they become due
and will be able to sustain its business model, strategy and operations and remain solvent for a period of at least 12 months
from 8 March 2023.
Foreign currency translation and transactions
Assets and liabilities of subsidiaries whose functional currency is not US dollars are translated into US dollars at the rate of
exchange at the period end. Income and expenses are translated into US dollars at the average rates of exchange prevailing
during the year. Foreign currency gains and losses resulting from the translation of subsidiaries into US dollars are recognised
in the Consolidated Statement of Comprehensive Income. Exchange differences arising from the translation of the net
investment in foreign operations are taken to the cumulative translation reserve within equity. They are recycled and
recognised in the Consolidated Income Statement upon disposal of the operation.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional
currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each
reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates
prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated
at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of
historical cost in a foreign currency are not retranslated. Any gain or loss arising from subsequent exchange rate movements
is included as an exchange gain or loss in the Consolidated Income Statement.
1.3 Climate change
The Directors recognise the risk of climate change on the business and acknowledge that the Group must take appropriate
action to mitigate and, where feasible, prevent further climate change impact. Accordingly, climate related risks are considered
within the “Environment and Communities” principal risks and are discussed in greater detail in the “Principal risks” section
within the Annual Report and Accounts.
Whilst the valuation of our assets and liabilities has not been materially impacted as at 31 December 2022, the Group will
continue to monitor possible implications of climate related risks that could arise in future years on both future cash flows
and the valuation of the Group’s assets and liabilities, as Government policies and the Group’s own strategy and transition
plans evolve. Further detail is provided within the “Responsible business review – communities” and “TCFD disclosure”
sections of the Annual Report and Accounts on pages 66 to 87.
1.4 Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements, in conformity with adopted IFRS, requires management to make judgements,
estimates and assumptions that affect the application of accounting policies and the reported value of assets and liabilities,
income and expense. Actual results may differ from these estimates or judgements of likely outcome. Management regularly
reviews, and revises as necessary, the accounting judgements that significantly impact the amounts recognised in the
Consolidated Financial Statements and the sources of estimation uncertainty that are considered to be “key estimates”
due to their potential to give rise to material adjustments in the Group’s Consolidated Financial Statements within the next
financial year.
Considerations for the identification of critical accounting judgements and key estimates
A detailed assessment was performed by management of the potential impact on each balance sheet caption and associated
accounting estimates and judgements at each reporting date during the year. In preparing the Consolidated Financial
Statements, no critical accounting judgements have been identified. A key estimate has been identified in relation to the
valuation of the contingent consideration related to the acquisition of Triad Life Sciences Inc (Triad Life Sciences).
As detailed further in the Group’s Audit and Risk Committee report on pages 126 to 138, the Committee has reviewed,
discussed, and challenged management on identification and, where appropriate, the determination of its critical accounting
judgements and key estimates.
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Financial statements
1. BASIS OF PREPARATION (CONTINUED)
Valuation of the contingent consideration in relation to the acquisition of Triad Life Sciences
The contingent consideration is based on both specified post-acquisition financial and non-financial performance targets
as defined by the Merger Agreement. The contingent consideration is fair valued at the date of acquisition with key inputs
including a weighted probability of different scenarios and revenue projections based on internal forecasts, discounted using
an appropriate discount rate that reflects the relative risk of the investment as well as the time value of money.
Actual revenue results may differ from estimates, leading to a change in the fair value of the contingent consideration.
Management has identified that reasonably possible changes in certain key assumptions and forecasts may cause the
calculated fair value of the contingent consideration to vary materially within the next financial year. The maximum
undiscounted contingent consideration payable under the Merger Agreement was $325.0 million, of which $50.0 million
was paid during the year following successful attainment of the two short-term milestones. The estimated discounted fair
value of the remaining contingent consideration payable as at 31 December 2022 was $130.8 million.
Management has determined that the reasonable potential range of discounted outcomes within the next financial year is
between $85.2 million and $230.8 million, compared to a maximum remaining undiscounted contingent consideration of
$275.0 million.
The timing and amount of future contingent elements of consideration is therefore considered a key source of estimation
uncertainty. Refer to Note 26 – Acquisitions for more information.
1.5 Accounting standards
New standards, interpretations and amendments applied for the first time
On 1 January 2022, the Group adopted the following amendments which are mandatorily effective for the period beginning
1 January 2022:
•
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37);
•
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);
•
Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41);
and
•
References to Conceptional Framework (Amendments to IFRS 3).
The adoption during the year of the amendments and interpretations has not had a material impact on the Consolidated
Financial Statements.
Apart from these changes, the accounting policies set out in the Notes have been applied consistently to both years
presented in these Consolidated Financial Statements.
New standards, interpretations and amendments not yet effective
There are a number of standards, amendments to standards and interpretations which have been issued by the IASB that are
effective in future accounting periods that the Group has decided not to adopt early.
The following amendments are effective for the period beginning 1 January 2023:
•
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2);
•
Definition of Accounting Estimates (Amendments to IAS 8);
and
•
Deferred Tax Related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12).
The following amendments are effective for the period beginning 1 January 2024:
•
IFRS 16 Leases (Amendment – Liability in a Sale and Leaseback);
•
IAS 1 Presentation of Financial Statements (Amendment – Classification of Liabilities as Current or Non-current);
and
•
IAS 1 Presentation of Financial Statements (Amendment – Non-current liabilities with Covenants)
The Group is currently assessing the impact of these new accounting standards and amendments and does not believe these
will have a material impact on the Group.
Other interpretations and amendments
In addition to these issued standards, there are a number of other interpretations, amendments and annual improvement
project recommendations that have been issued but not yet effective that have not yet been adopted by the Group because
application is not yet mandatory, or they are not relevant for the Group.
•
IFRS 17 – Insurance contracts (effective from 1 January 2023)
is ultimately intended to replace IFRS 4. It sets out the
requirements that a company should apply in reporting information about insurance contracts it issues and reinsurance
contracts it holds. The Group believes that the adoption of IFRS 17 will not have a significant impact on the Consolidated
Financial Statements.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
174
Financial statements
RESULTS OF OPERATIONS
This section includes disclosures explaining the Group’s performance for the year, including segmental information,
operating costs, other expenses, taxation and earnings per share.
2. REVENUE AND SEGMENTAL INFORMATION
2.1 Revenue recognition
The Group sells a broad range of products to a wide range of customers, including healthcare providers, patients and
manufacturers. This note provides further information about how the Group generates revenue and when it is recognised
in the Consolidated Income Statement.
Accounting policy
Revenue recognition
The Group measures revenue for goods sold based on the consideration specified in a contract with a customer, net of
discounts, chargeback allowances and sales-related taxes. Revenue is recognised when control over a product or service is
transferred to a customer, distributor or wholesaler, which is generally when goods have been delivered, as most products
are insured by the Group until delivery. Due to the short-term nature of the receivables from sale of goods, the Group
measures them at the original transaction price without discounting. The transaction price is the amount the Group
expects to receive at that date.
Nature of goods and services
Advanced Wound Care, Ostomy Care, Continence and Critical Care products are sold to pharmacies, hospitals and other
acute and post-acute healthcare service providers directly or through distributors and wholesalers. Products are also sold
directly to end customers (patients) through the Group's home services entities and a small number of clinical and retail
outlets. Infusion Care primarily serves business-to-business customers, consisting principally of the leading insulin pump
manufacturers. A small proportion of its revenue is derived from business-to-business urology product sales.
In 2022 and 2021, no single customer generated more than 10% of the Group's revenue.
Nature, timing of satisfaction of performance obligations
Principally, the Group's contracts with customers contain a single performance obligation, that is the delivery of products
to customers. Revenue is typically recognised when the customer receives the product but is subject to the shipping terms
in each individual contract. Where non-standard shipping arrangements exist, revenue is recognised when control of the
goods has transferred. Allowances for returns, where the contract specifies these terms, are made at the point of sale.
For sales to distributors, revenue is recognised when title is transferred to the distributor and the distributor has assumed
control, the timing of which depends on the contractual terms with each distributor. Chargeback allowances or
contractual deductions relating to end-customer agreements, which may differ from distributor contracts, are made at
the point of title transfer to the distributor. In certain European countries, rebates are provided to governments and are
often mandated by laws or government regulations. These rebates are estimated based on government regulations and
unbudgeted spending, laws and terms of individual rebate agreements, and are recorded as a deduction from revenue
at the time the related revenue is recorded. The estimates are adjusted periodically to reflect actual experience.
When distributors buy products from the Group at a contract price and sell these products to end-customers at a price
agreed with the Group that is lower than the distributors’ list price, a chargeback may arise and a claim may be submitted
to the Group by the distributor. The provision for chargebacks is based on expected sell-through levels by the Group’s
distributors to contracted customers, as well as estimated distributor inventory levels. Retrospective claims are reviewed
against estimations to ensure provisions are regularly updated.
Volume discounts
The Group offers certain prospective volume discounts to customers who achieve a specified volume amount or value
of purchases in any given year. Volume discounts that meet the definition of a material right are recognised as a separate
performance obligation. Material rights are the option to purchase additional products at a discount which would not have
been given had the contract not been entered into and are incremental to the range of discounts typically given for those
goods to that class of customer.
The stand-alone selling price of these volume discounts is based on the discount that the customer would obtain when
exercising the option, adjusted for any discount the customer could receive without exercising the option and the
likelihood that the option will be exercised. The revenue allocated to volume discounts is short term in nature and
recognised proportionally to the pattern of options exercised by the customer or when the option expires.
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2. REVENUE AND SEGMENTAL INFORMATION (CONTINUED)
Contract costs
Incremental costs in respect of obtaining a contract with a customer principally relate to commissions paid by the Group
to its sales representatives. Such costs are capitalised as an asset to the extent that they directly relate to a specific contract,
are used to generate or enhance resources used in satisfying performance obligations and are expected to be recovered.
The amortisation period for commissions can differ according to the contract term. Renewals of milestones in the contract
are taken into account when determining the amortisation period. For each contract that has sales commissions paid, the
Group has determined an appropriate amortisation period that is consistent with the transfer of control to the customer.
These capitalised costs amounted to $5.4 million (2021: $5.6 million) at 31 December 2022 and the amount of related
amortisation expense for the year ended 31 December 2022 was $4.3 million (2021: $3.6 million). There was no impairment
loss in respect of the costs capitalised.
Contract balances
The Group recognises contract liabilities that are primarily in respect of advance consideration received from customers
prior to transfer of the related products and material rights offered to customers for options to purchase additional
goods. The contract liability balance at 31 December 2022 was $1.3 million (2021: $4.9 million).
2.2 Segment information
The Board considers the Group’s business to be a single segment entity engaged in the development, manufacture and
sale of medical products, services and technologies. R&D, manufacturing and central support functions are managed
globally for the Group, supporting all categories of sales. Revenues are managed both on a category and regional basis.
This note presents the performance and activities of the Group as a single segment.
Pages 22 to 29 of the Strategic report provide further detail of category revenue.
The Group's CEO, who is the Group's Chief Operating Decision Maker, evaluates the Group's global product portfolios on a
revenue basis and evaluates profitability and associated investment on an enterprise-wide basis due to shared infrastructures
and support functions between the categories and geographies. Financial information in respect of revenues provided to the
CEO for decision-making purposes is made on both a category and geographic basis. Resources are allocated on a Group-wide
basis, with a focus on key categories and the key markets. The allocations are based on the relative merits of the individual
proposals across the Group.
Revenue by category
The Group generates revenue across four major product
categories. The following chart sets out the Group's
revenue for the year ended 31 December by category:
Revenue by category ($m)
Geographic markets
The following chart sets out the Group's revenue by
geographic market in which third-party customers
are located:
Revenue by geography ($m)
2021
522.1
620.7
Advanced
Wound Care
Advanced
Wound Care
Ostomy Care
Ostomy Care
Continence &
Critical Care
Continence &
Critical Care
Infusion Care
Infusion Care
546.3
383.4
2022
2,072.5
546.5
592.3
542.9
356.6
2,038.3
688.6
Europe
North America
RoW
(1)
Europe
North America
RoW
(1)
1,090.3
293.6
2022
2,072.5
741.6
1,022.1
274.6
2,038.3
2021
1.
Rest of World (RoW) comprises all countries in Asia-Pacific,
Latin America (including Mexico and the Caribbean), South America,
the Middle East (including Turkey) and Africa.
From 2023 onwards, Flexi-Seal
TM
(2022 revenue: $65.8 million), our faecal management system, will move from Continence &
Critical Care to Ostomy Care. The remaining industrial sales, predominantly continence-related supplies for B2B customers
(2022 revenue: $16.7 million) will move from Infusion Care into Continence Care. Going forward the Continence & Critical Care
category will be renamed Continence Care.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
176
Financial statements
Geographic regions
The following table sets out the Group's revenue on the basis of where the legal entity generating the revenue resides,
including countries representing over 10% of Group revenue and the UK, where the Group is domiciled:
2022
$m
2021
$m
Geographic regions
US
749.8
704.1
UK
131.5
147.2
Denmark
371.7
346.8
Other
1
819.5
840.2
2,072.5
2,038.3
1.
Other consists primarily of other countries in Europe, Asia-Pacific, Latin America and Canada.
The following table sets out the Group's long-lived assets by country in which the legal entity resides:
2022
$m
2021
$m
Long-lived assets
1
US
1,349.6
1,141.9
UK
695.7
777.8
Denmark
266.0
272.6
Other
318.0
316.5
Total long-lived assets
2,629.3
2,508.8
1.
Long-lived assets consist of property, plant and equipment, right-of-use assets, intangible assets and goodwill.
3. OPERATING COSTS
The Group incurs operating costs associated with the day-to-day operation of the business. These operating costs are
deducted from revenue to calculate operating profit.
3.1 Operating profit
Operating profit is stated after deducting from revenue:
Notes
2022
$m
2021
$m
Depreciation:
Property, plant and equipment
8
39.7
40.6
Right-of-use assets
24
22.1
22.8
Amortisation of intangible assets
9
147.4
147.2
Impairment/write-off of intangible assets
9
6.3
2.9
Impairment/write-off of property, plant and equipment
8
9.2
3.0
Loss on terminated leases
24
0.1
–
Amounts in respect of inventories included in cost of sales
818.3
766.7
Write-down of inventories
1
22.6
6.4
Lease expenses
2
24
3.9
2.8
Staff costs:
Wages and salaries
532.7
533.4
Share-based payment expense
19
16.7
16.4
Social security costs
67.5
64.2
Defined contribution plans post-employment costs
21.2
21.0
Defined benefit plans pension costs
15
1.7
3.6
Recruitment and other employment-related fees
8.7
11.5
Total staff costs
648.5
650.1
1.
The write-down of inventories to their realisable value is included in cost of sales.
2.
Lease expenses comprises the costs in respect of low-value leases and short-term leases. Refer to accounting policy in Note 24 – Leases.
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3. OPERATING COSTS (CONTINUED)
The remuneration of the Executive Directors, which is set out on pages 139 to 151, has been audited and is included within staff
costs and forms part of these Consolidated Financial Statements.
3.2 Employee numbers
The average number of the Group's employees
by function:
Employees by function
The average number of the Group's employees
by location:
Employees by location
2021
3,258
5,749
Operations
Sales and
marketing
General and
administrative
R&D
Operations
Sales and
marketing
General and
administrative
R&D
861
529
2022
10,397
3,104
5,587
863
471
10,025
6,214
Europe
North
America
RoW
Europe
North
America
RoW
1,405
2,778
2022
10,397
5,985
1,310
2,730
10,025
2021
The total number of employees as at 31 December 2022 was 10,028 (2021: 10,134).
3.3 Auditor's remuneration
The total remuneration of the Group's auditor, Deloitte LLP, for services provided to the Group during the year ended
31 December, is analysed below:
2022
$m
2021
$m
Fees for audit services
Group
1.5
1.2
Subsidiaries
3.0
3.2
Total fees for audit services
4.5
4.4
Fees for non-audit services
Audit-related assurance services
0.2
0.2
Other assurance services
0.1
0.2
Total auditor remuneration
4.8
4.8
A description of the work performed by the Audit and Risk Committee to safeguard auditor independence when non-audit
services are provided is set out in the Audit and Risk Committee report on pages 126 to 138.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
178
Financial statements
4. OTHER OPERATING EXPENSES
Other operating expenses were as follows:
2022
$m
2021
$m
Exit and divestiture-related activities
12.4
–
Impairment of other intangible assets
1.4
–
13.8
–
As a result of the exit from hospital care and industrial sales-related activities and disposal of a foreign subsidiary,
impairments of $8.1 million to property, plant and equipment and $4.3 million to intangible assets have been recognised
during the period. See Note 27 – Divestitures for further details. The impairment of other intangible assets relates to a legacy
acquisition-related customer relationship asset which was impaired as part of the rationalisation of activities in the portfolio.
5. NON-OPERATING (EXPENSE)/INCOME, NET
Non-operating (expense)/income, net was as follows:
Notes
2022
$m
2021
$m
Net foreign exchange (loss)/gain
1
(13.5)
4.3
Realisation of cumulative translation adjustments
27
(12.2)
–
Gain/(loss) on foreign exchange forward contracts
23
15.8
(9.7)
Loss on foreign exchange cash flow hedges
23
(16.5)
(3.9)
Change in contingent consideration
2
26
(29.5)
–
(Loss)/gain on divestiture
27
(2.0)
0.5
Other non-operating income
0.2
–
Non-operating expense, net
3
(57.7)
(8.8)
1.
The foreign exchange losses in 2022 primarily relate to the foreign exchange impact on intercompany transactions, including loans transacted in non-functional
currencies. The Group uses foreign exchange forward contracts to manage these exposures in accordance with the Group's foreign exchange risk management policy.
2.
The $29.5 million expense relates to the change in fair value of the contingent consideration for the Cure Medical ($5.8 million) and Triad Life Sciences ($23.7 million)
acquisitions as described in Note 26 – Acquisitions.
3.
Of the total net non-operating expense, $1.7 million (2021: $4.3 million) relates to mark-to-market derivatives, the cash flow impact of which have been shown within
the changes in working capital section of the Consolidated Statement of Cash Flows.
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6. INCOME TAXES
The note below sets out the current and deferred tax charges, which together comprise the total tax expense in the
Consolidated Income Statement. The deferred tax section of the note also provides information on expected future tax
charges or benefits and sets out the deferred tax assets and liabilities held across the Group.
Accounting policy
The tax expense represents the sum of current and deferred tax.
Current tax
Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of prior years. Taxable profit
differs from profit before income taxes because taxable profit excludes items that are either never taxable or tax
deductible or items that are taxable or tax deductible in a different period.
Deferred tax
Deferred tax is recognised using the balance sheet liability method for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred
tax is not recognised for temporary differences:
•
on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects
neither accounting nor taxable profit or loss;
•
arising on the initial recognition of goodwill;
•
on investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse
in the foreseeable future.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to temporary differences when
the asset is realised or the liability is settled, based on the laws that have been enacted or substantively enacted by the
reporting date.
Deferred tax assets are recognised for unused tax losses, tax credits and deductible temporary differences, to the extent
that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit
will be realised.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and
they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they
intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
Current tax and deferred tax for the year
Current tax and deferred tax are recognised in the Consolidated Income Statement, except when they relate to items that
are recognised in other comprehensive income or directly in equity, in which case, the current tax and deferred tax are also
recognised in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from
the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
Tax provisions
The Group is subject to income taxes in numerous tax jurisdictions. Judgement is sometimes required in determining the
worldwide provision for income taxes. There may be transactions for which the ultimate tax determination is uncertain and
may be challenged by the tax authorities. The Group recognises liabilities for anticipated or actual tax audit issues based
on estimates of whether additional taxes will be due. Where an outflow of funds to a tax authority is considered probable
and the Group can make a reliable estimate of the outcome of the issue, management calculates the provision for the best
estimate of the liability. In assessing its uncertain tax provisions, management takes into account the specific facts of each
issue, the likelihood of settlement and the input of professional advice where required. The Group assumes that where a
tax authority has a right to examine amounts reported to it, they will do so and will have full knowledge of all relevant
information. Where the ultimate liability as a result of an issue varies from the amounts provided, such differences could
impact the current and deferred tax assets and liabilities in the period in which the dispute is concluded.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
180
Financial statements
6.1 Taxation
The Group's income tax expense is the sum of the total current and deferred tax expense.
2022
$m
2021
$m
Current tax
UK corporation tax
–
0.8
Overseas taxation
46.8
46.8
Adjustment to prior years
(2.0)
(4.3)
Total current tax expense
44.8
43.3
Deferred tax
Origination and reversal of temporary differences
(3.7)
(6.5)
Change in tax rates
(3.2)
4.4
Adjustment to prior years
1.2
(0.7)
Benefit from previously unrecognised tax losses
(20.1)
(6.8)
Total deferred tax benefit
(25.8)
(9.6)
Income tax expense
19.0
33.7
In 2022, the deferred tax movement included a benefit of $20.1 million in respect of the recognition of previously
unrecognised tax losses in the US following the acquisition of Triad Life Sciences.
In 2021, the change in tax rates mainly relates to the revaluation of the net deferred tax liability in the UK following the
enactment of Finance Act 2021, which increases the UK corporation tax rate from 19.0% to 25.0% from 1 April 2023.
The Group’s deferred tax benefit in the year ended 31 December 2021 was mainly influenced by the deferred tax benefit of
$6.8 million for the recognition of deferred tax assets following the acquisition of Cure Medical LLC (Cure Medical) in respect
of previously unrecognised tax losses in the US.
6.2 Reconciliation of effective tax rate
The effective tax rate for the year ended 31 December 2022 was 23.2%, as compared with 22.3% for the year ended
31 December 2021.
Tax reconciliation to UK statutory rate
The table below reconciles the Group’s profit before income taxes at the UK statutory rate to the Group's total income
tax expense:
2022
$m
2021
$m
Profit before income taxes
81.9
151.3
Profit before income taxes multiplied by rate of corporation tax in the UK
of 19.0% (2021: 19.0%)
15.6
28.7
Difference between UK and overseas tax rates
1
3.0
4.0
Deferred tax impact for increase in UK tax rate
–
4.8
Non-deductible/non-taxable items
14.4
1.3
Movement in unrecognised tax losses and other assets
1.0
(0.1)
Recognition of previously unrecognised US deferred tax assets
(20.1)
(6.8)
Movement in provision for uncertain tax positions
2.5
(0.3)
Other
2
2.6
2.1
Income tax expense and effective tax rate
19.0
23.2%
33.7
22.3%
1.
This includes changes in tax rates based on substantively enacted legislation across various tax jurisdictions as of 31 December.
2.
Includes tax on amortisation of finite-lived intangibles and taxes on unremitted earnings.
The Group’s income tax expense includes a $20.1 million tax benefit due to the recognition of deferred tax assets following
the acquisition of Triad Life Sciences in respect of previously unrecognised tax losses in the US and the $9.5 million effect of
non-deductible contingent consideration on the acquisition of both Triad Life Sciences and Cure Medical. Refer to Note 26 –
Acquisitions for the acquisition accounting of Triad Life Sciences.
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6. INCOME TAXES (CONTINUED)
The Group has worldwide operations and therefore is subject to several factors that may affect future tax charges, principally
the levels and mix of profitability in different tax jurisdictions, transfer pricing regulations, tax rates imposed and tax regime
reforms. The calculation of the Group’s tax expense involves a degree of estimation and judgements in respect of certain
items for which the tax treatment cannot be finally determined until resolution has been reached with the relevant tax
authority, specifically in relation to open tax and transfer pricing matters. Due to the high volume of intercompany
transactions, the Group’s evolving business model and the increasing complexity in interaction between multiple tax
laws and regulations, transfer pricing requires judgement in determining the appropriate allocation of profits between
jurisdictions. The Group assessed the impact of ongoing changes to the Group’s operating model, the supporting
documentation for the tax and transfer pricing positions, existing tax authority challenges, and the likelihood of new
challenges by tax authorities. In line with the requirements of IFRIC 23,
Uncertainty over Income Tax Treatments
, the Group
has provided for uncertain tax positions in respect of transfer pricing positions and withholding tax liabilities. The net
increase in provisions during 2022 was driven by the reassessment of estimates, and settlement and expiry of open tax issues
in various jurisdictions. Where open issues exist, the ultimate liability for such matters may vary from the amounts provided
and is dependent upon the outcome of discussions with the relevant tax authorities or, where applicable, appeal
proceedings. Accordingly, settlement and expiry of open tax issues could have a significant impact on future tax expenses.
The Group is monitoring tax reforms driven by the OECD’s project to address the tax challenges arising from the digitalisation
of the economy, including Global Anti-Base Erosion Model Rules (Pillar Two). The Group has analysed the tax impact of the
project to the Group based on OECD model rules issued on 20 December 2021 and draft legislations available in jurisdictions
in which the Group operates in, and expect the tax impact to be not material in the foreseeable future. The Group will
reassess the tax impact once new legislation becomes available. This has no impact on the Group’s result for 2022.
6.3 Deferred tax
The components of deferred tax assets and liabilities at 31 December are as follows:
2022
$m
2021
$m
Deferred tax assets
26.6
28.9
Deferred tax liabilities
(83.2)
(87.2)
(56.6)
(58.3)
6.4 Movement in deferred tax assets and liabilities
Deferred tax is measured on the basis of the tax rates enacted or substantively enacted at the reporting date. The movements
in the deferred tax assets and liabilities were as follows:
Inventory
$m
Tax losses
$m
PP&E
$m
Intangibles
$m
Interest
$m
Other
$m
Total
$m
At 1 January 2021
14.2
55.3
1.2
(175.3)
21.4
23.2
(60.0)
Recognised in Income
Statement
(5.8)
34.4
(12.5)
1.1
(4.0)
(3.6)
9.6
Recognised in other
comprehensive income
–
–
–
–
(0.9)
0.1
(0.8)
Acquisitions
(0.2)
–
(0.1)
(9.1)
–
–
(9.4)
Other
–
–
–
–
–
0.5
0.5
Foreign exchange
0.2
(0.2)
0.4
0.9
–
0.5
1.8
At 31 December 2021
8.4
89.5
(11.0)
(
182.4
)
16.5
20.7
(
58.3
)
Recognised in Income
Statement
(1.4)
(5.5)
5.9
(
1.7
)
8.5
20.0
25.8
Recognised in other
comprehensive income
–
–
–
–
2.4
–
2.4
Acquisitions
1
(2.4)
6.3
–
(36.2
)
–
–
(32.3
)
Other
–
–
–
–
-
1.1
1.1
Foreign exchange
(1.3)
(0.2)
1.6
2.7
1.0
0.9
4.7
At 31 December 2022
3.3
90.1
(3.5)
(217.6
)
28.4
42.7
(56.6
)
1.
Refer to Note 26 – Acquisitions for the acquisition accounting of Triad Life Sciences.
Net deferred tax liabilities provided in relation to intangible assets are predominantly in respect of temporary differences
arising on assets and liabilities acquired as part of business combinations. The net movement in deferred tax liability in
respect of intangible assets in 2022 mainly relates to the acquisition of Triad Life Sciences. An amount relating to deductible
tax amortisation of intangible assets of $15.4 million that are not expected to reverse against taxable income in the future
(2021: $15.9 million) is not recognised.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
182
Financial statements
The Group has a history of US tax losses and has recognised a deferred tax asset on US tax losses at 31 December 2022
only to the extent that there are suitable offsetting taxable temporary differences. In 2022, there was an increase in suitable
offsetting taxable temporary differences in the US resulting in an additional amount of tax losses in the US being recognised
as a deferred tax asset. In particular, upon acquisition of Triad Life Sciences, a net deferred tax liability of $32.3 million was
recognised on acquisition (principally in relation to intangible assets – refer to Note 26 – Acquisitions for further details). Some
of this can be offset by the Group’s US tax losses and, therefore, the deferred tax recognition criteria were met, resulting in a
tax benefit of $20.1 million being recognised. Following the Triad Life Sciences acquisition, all Federal tax losses in the US were
recognised as deferred tax assets. Deferred tax assets on temporary differences of $0.3 million, state tax losses of $2.3 million
and foreign tax credits of $3.9 million remain unrecognised in the US based on forecasts of future taxable profit where the
underlying assumptions are consistent with the impairment and going concern forecasts.
Deferred tax on inventory predominantly relates to a deferred tax asset recognised on intra-Group profits arising on
intercompany inventory that are eliminated in the Consolidated Financial Statements. As intra-Group profits are not eliminated
from the individual entities’ tax returns, a temporary difference arises that will reverse when the inventory is sold externally.
Other net temporary differences include accrued expenses, employee costs, and pensions, for which a tax deduction is only
available on a paid basis, research and development expenses, unremitted earnings and share-based payments.
To the extent that dividends remitted from overseas subsidiaries and branches are expected to result in additional taxes,
appropriate amounts have been provided for. Deferred tax is not provided on temporary differences of $351.8 million in the
year to 31 December 2022 (2021: $369.1 million) arising on unremitted earnings as management has the ability to control any
future reversal and does not consider such a reversal in the foreseeable future to be probable.
6.5 Unrecognised tax losses carried forward
Deferred tax assets are only recognised where it is probable that future taxable profits will be available to utilise the tax
losses. The following table shows the unrecognised tax losses carried forward, including anticipated period of expiration:
Trading and capital losses expiring:
2022
Losses
$m
2021
Losses
$m
Within 5 years
10.0
15.3
Between 5 to 10 years
12.7
88.3
More than 10 years
30.7
75.0
Unlimited
958.0
661.6
Total
1,011.4
840.2
The Group also has unrecognised tax credits, in respect of non-US tax payments of $3.9 million (2021: $4.0 million) in the US,
which are due to expire within five years.
The unrecognised tax losses of $1,011.4 million reflects judgements and estimates considered in the provision for uncertain tax
positions, in line with the requirements of IFRIC 23,
Uncertainty over Income Tax Treatments
. The Group has Luxembourg tax
losses of $941.9 million (2021: $638.4 million) which are not recognised and will not expire. The movement in Luxembourg tax
losses not recognised is mainly attributable to foreign exchange differences and the reassessment during the year of
utilisation of losses in a prior year following an internal corporate reorganisation.
7. EARNINGS PER SHARE
Basic earnings per share is calculated based on the Group’s net profit for the year attributable to shareholders divided by
the weighted average number of ordinary shares in issue during the year. The weighted average number of shares is net of
shares purchased by the Group and held as own shares.
Diluted earnings per share take into account the dilutive effect of all outstanding share options priced below the market
price in arriving at the number of shares used in its calculation.
2022
2021
Net profit attributable to the shareholders of the Group ($m)
62.9
117.6
Basic weighted average ordinary shares in issue (number)
2,023,839,657
2,008,923,797
Dilutive impact of share awards (number)
16,407,811
17,416,548
Diluted weighted average ordinary shares in issue (number)
2,040,247,468
2,026,340,345
Basic earnings per share (cents per share)
3.1¢ per share
5.9¢ per share
Diluted earnings per share (cents per share)
3.1¢ per share
5.8¢ per share
The calculation of diluted earnings per share excludes 404,241 (2021: 1,878,714) share options that were non-dilutive for the
year because the exercise price exceeded the average market price of the Group's ordinary shares during the year.
183
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OPERATING ASSETS AND LIABILITIES
This section set outs the assets and liabilities that the Group holds in order to operate the business on a day-to-day basis,
including long-term assets which generate future revenues and profits for the Group.
Liabilities relating to the Group’s financing activities are addressed in “Capital structure and financial costs”.
8. PROPERTY, PLANT AND EQUIPMENT
The Group invests in buildings, equipment and manufacturing machinery to operate the business and to generate revenue
and profits. Assets are depreciated over their estimated useful economic life reflecting the reduction in value of the asset due,
in particular, to wear and tear.
Accounting policy
Property, plant and equipment (PP&E) are stated at cost less accumulated depreciation and impairment losses. Cost
includes expenditures that are directly attributable to the acquisition of an asset including subsequent additions and
improvements when it is probable that future economic benefit associated with the item will flow to the Group and the
cost can be reliably measured.
Depreciation is provided on a straight-line basis from the point an asset becomes available for use. Depreciation is
calculated to reduce the asset’s cost to its residual value over the asset’s estimated useful economic life. Assets are
depreciated as follows:
Asset category
Useful life
Land
not depreciated
Land improvements
15 to 40 years
Leasehold improvements
shorter of useful life or lease tenure
Buildings
15 to 50 years
Machinery, equipment and fixtures
3 to 20 years
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale
proceeds, less any selling expenses, and the carrying amount of the asset. This difference is recognised in the Consolidated
Income Statement.
Assets under construction reflects the cost of construction or improvement of items of PP&E that are not yet available for
use. Finance costs incurred in the construction of assets that take more than one year to complete are capitalised using
the Group’s weighted average borrowing cost during the period in which the asset is under construction. Capitalisation of
finance costs ceases when the asset becomes available for use.
Consideration of useful economic lives
The assets’ residual values, depreciation methods and useful economic lives are reviewed annually and adjusted if appropriate.
Impairment of assets
The carrying values of PP&E are reviewed for indicators of impairment annually or when events or changes in
circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the
asset is estimated, being the higher of an asset’s fair value less costs to sell and the net present value of its expected pre-
tax future cash flows (value in use).
When an asset’s recoverable amount falls below its carrying value, an impairment is charged to the Consolidated
Income Statement.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
184
Financial statements
The movement in the carrying value of each major category of PP&E is as follows:
Land & land
improvements
$m
Building, building
equipment and
leasehold
improvements
$m
Machinery,
equipment and
fixtures
$m
Assets under
construction
$m
Total
$m
Cost
1 January 2021
15.8
129.4
483.4
77.2
705.8
Additions
–
1.5
3.6
65.7
70.8
Disposals
1
–
(4.0)
(12.0)
(0.3)
(16.3)
Transfers
–
6.0
34.3
(40.3)
–
Foreign exchange
(0.5)
(3.0)
(18.6)
(3.8)
(25.9)
31 December 2021
15.3
129.9
490.7
98.5
734.4
Additions
–
1.8
8.2
90.0
100.0
Arising from acquisitions (Note 26)
–
0.5
0.3
–
0.8
Disposals
1
–
(4.0)
(17.5)
(1.8)
(23.3)
Transfers
–
13.7
24.7
(38.4)
–
Foreign exchange
(1.1)
(6.7)
(25.2)
(4.6)
(37.6)
31 December 2022
14.2
135.2
481.2
143.7
774.3
Accumulated depreciation
1 January 2021
0.9
50.5
302.2
–
353.6
Depreciation
0.1
6.1
34.4
–
40.6
Disposals
–
(3.3)
(11.0)
–
(14.3)
Impairment
–
1.0
–
–
1.0
Foreign exchange
–
(1.2)
(12.0)
–
(13.2)
31 December 2021
1.0
53.1
313.6
–
367.7
Depreciation
–
6.8
32.9
–
39.7
Arising from acquisitions (Note 26)
–
0.2
0.1
–
0.3
Disposals
–
(4.0)
(17.5)
–
(21.5)
Impairment
–
1.9
5.5
–
7.4
Foreign exchange
–
(2.7)
(17.0)
–
(19.7)
31 December 2022
1.0
55.3
317.6
–
373.9
Net carrying amount
31 December 2021
14.3
76.8
177.1
98.5
366.7
31 December 2022
13.2
79.9
163.6
143.7
400.4
1.
Included within disposals costs were asset write-offs of $1.8 million (2021: $2.0 million).
185
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9. INTANGIBLE ASSETS AND GOODWILL
The split of intangible assets and goodwill is as follows:
Notes
2022
$m
2021
$m
Intangible assets
9.1
924.9
902.2
Goodwill
9.2
1,224.6
1,156.3
Intangible assets and goodwill
2,149.5
2,058.5
9.1 Intangible assets
The Group’s intangible assets are those that have been recognised at fair value as part of business combinations, investment
in product development and software purchased to support business operations. These are assets that are not physical in
nature but can be sold separately or arise from legal rights.
Accounting policy
Recognition
Measurement on initial recognition of intangible assets is determined at cost for assets acquired by the Group and at fair
value at the date of acquisition if acquired in business combinations. Following initial recognition of the intangible asset,
the asset is carried at cost less any subsequent accumulated amortisation and accumulated impairment losses.
Purchased computer software and certain costs of information technology are capitalised as intangible assets. Software
that is integral to purchased computer hardware is capitalised as PP&E.
R&D
R&D expenses are comprised of all activities involving investigative, technical and regulatory processes related to
obtaining appropriate approvals to market our products. It also includes new product development aimed at developing
more sustainable product portfolios for the longer term, as mentioned within the Responsible Business review section
(refer to page 51). Costs include payroll, clinical manufacturing and pre-launch clinical trial costs, manufacturing
development and scale-up costs, product development, regulatory costs including costs incurred to comply with
legislative changes, contract services and other external contractors’ costs, research licence fees, depreciation and
amortisation of laboratory facilities, and laboratory supplies.
Research costs are expensed as incurred. Development costs are capitalised only if the expenditure can be measured
reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the
Group intends to and has sufficient resources to complete development and use or sell the asset. Subsequent to initial
recognition, development costs are measured at cost less accumulated amortisation and any accumulated impairment
losses. Upgrades and enhancements are capitalised to the extent they will result in added functionality and probable
future economic benefits.
Amortisation
Intangible assets with an indefinite life are not amortised. Amortisation of intangible assets with a finite life is calculated
using the straight-line method based on the following estimated useful lives:
Asset category
Useful life
Product-related
3 to 20 years
Capitalised software
3 to 10 years
Customer relationships and non-compete agreements
2 to 20 years
Trade names – finite
2 to 10 years
Trade names – indefinite
indefinite
Development costs
5 years
Assets under construction reflects the cost of development or improvement of intangible assets that are not yet available
for use.
Impairment of assets
Intangible assets with finite life are reviewed for indicators of impairment at each reporting period or when events or
changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable
amount of the asset is estimated, being the higher of an asset’s fair value less costs to sell and the net present value of its
expected pre-tax future cash flows (value in use).
When an asset’s recoverable amount falls below its carrying value, an impairment is charged to the Consolidated
Income Statement.
Refer to Note 9.3 – CGU impairment review for consideration of impairment of indefinite-lived intangible assets.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
186
Financial statements
The movement in the carrying value of each major category of intangible assets is as follows:
Product-
related
$m
Capitalised
software
1
$m
Customer
relationships
and non-
compete
agreements
$m
Trade names
$m
Development
cost
$m
Assets under
construction
$m
Total
$m
Cost
1 January 2021
2,101.2
128.6
305.5
260.2
12.5
8.2
2,816.2
Additions
–
2.2
–
–
–
20.6
22.8
Arising from acquisitions
2
4.9
–
33.2
4.6
–
–
42.7
Write-offs
(7.1)
(21.6)
(0.7)
–
–
(0.4)
(29.8)
Transfers
–
13.3
–
–
–
(13.3)
–
Foreign exchange
(12.9)
(0.3)
(7.0)
(1.1)
(0.9)
(0.3)
(22.5)
31 December 2021
2,086.1
122.2
331.0
263.7
11.6
14.8
2,829.4
Additions
10.0
0.6
–
–
–
34.0
44.6
Arising from acquisitions
2
154.8
–
–
–
–
–
154.8
Write-offs
(50.7)
(1.8)
(0.3)
–
–
(0.6)
(53.4)
Transfers
–
11.8
–
–
–
(11.8)
–
Foreign exchange
(79.7)
(2.4)
(6.3)
(0.9)
(0.6)
(0.9)
(90.8)
31 December 2022
2,120.5
130.4
324.4
262.8
11.0
35.5
2,884.6
Accumulated amortisation
1 January 2021
1,530.9
90.4
185.8
7.7
9.0
–
1,823.8
Amortisation
107.1
12.3
24.5
1.9
1.4
–
147.2
Write-offs
(7.1)
(21.6)
(0.7)
–
–
–
(29.4)
Impairment
–
2.5
–
–
–
–
2.5
Foreign exchange
(10.1)
(0.1)
(6.1)
0.1
(0.7)
–
(16.9)
31 December 2021
1,620.8
83.5
203.5
9.7
9.7
–
1,927.2
Amortisation
108.6
12.0
24.3
1.4
1.1
–
147.4
Write-offs
(50.7)
(1.8)
(0.3)
–
–
–
(52.8)
Impairment
4.3
–
1.4
–
–
–
5.7
Foreign exchange
(61.0)
(0.9)
(5.4)
–
(0.5)
–
(67.8)
31 December 2022
1,622.0
92.8
223.5
11.1
10.3
–
1,959.7
Net carrying amount
31 December 2021
465.3
38.7
127.5
254.0
1.9
14.8
902.2
31 December 2022
498.5
37.6
100.9
251.7
0.7
35.5
924.9
1.
Capitalised software is in respect of purchased and internally generated software.
2.
Acquisitions comprise assets in relation to the Triad Life Sciences acquisition. See Note 26 – Acquisitions. In the year ended 31 December 2021, acquisitions comprise
of Cure Medical and Patient Care Medical.
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Financial statements
9. INTANGIBLE ASSETS AND GOODWILL (CONTINUED)
Amortisation expenses in respect of finite-lived intangible assets for the year ended 31 December were as follows:
2022
$m
2021
$m
Cost of sales
113.1
110.7
Selling and distribution expenses
3.2
2.0
General and administrative expenses
29.1
32.5
Research and development expenses
2.0
2.0
Total amortisation expense
147.4
147.2
The carrying amount of trade names with indefinite life at 31 December 2022 was $248.9 million (2021: $249.8 million). Each of
these trade names are considered to have an indefinite life, given the strength and durability of the current trade name and
the level of marketing support. The trade names are in relatively similar stable and profitable market sectors, with similar risk
profiles, and their size, diversification and market shares mean that the risk of market-related factors causing a reduction in
the lives of the trade names is considered to be relatively low. The Group is not aware of any material legal, regulatory,
contractual, competitive, economic or other factor which could limit their useful lives.
Individual intangible assets with a carrying amount in excess of 10% of the total intangible asset carrying amount were as follows:
2022
$m
2021
$m Remaining life
Trade names
Convatec trade name
234.6
234.6
Indefinite
Product-related
InnovaMatrix
®
145.6
–
13.3 years
Aquacel
®
including Hydrofibre
®
120.2
172.2
3.6 years
Stoma care
113.6
145.2
3.6 years
9.2 Goodwill
The Group recognises goodwill resulting from business combinations where there are future economic benefits from
assets which cannot be individually separated and recognised. Goodwill represents the amount paid in excess of the fair
value of the net assets of the acquired business.
Accounting policy
Refer to Note 1 – Basis of preparation for the Group accounting policy in relation to the initial valuation and recognition of
goodwill arising from acquisitions.
Goodwill is not subject to amortisation but is tested for impairment annually or when events or changes in circumstances
indicate the carrying value may be impaired. Refer to Note 9.3 – CGU impairment review for consideration of impairment
of goodwill.
Goodwill is denominated in the functional currency of the acquired entity and revalued to the closing exchange rate at
each reporting period date.
The changes in the carrying value of goodwill as at 31 December were as follows:
Total
$m
1 January 2021
1,097.2
Divestitures
(0.9)
Arising from acquisitions
79.0
Foreign exchange
(19.0)
31 December 2021
1,156.3
Arising from acquisitions (Note 26)
129.9
Foreign exchange
(61.6)
31 December 2022
1,224.6
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
188
Financial statements
9.3 Cash generating unit (CGU) impairment review
An impairment assessment is required to be performed annually for goodwill and indefinite-lived intangibles or when
events or changes in circumstances indicate the carrying value may be impaired. An impairment is a reduction in the
recoverable amount of an asset compared to the carrying value of the asset. Recoverable amount is the higher of value
in use and fair value less costs to sell.
This note provides details of the annual impairment assessment that has been performed.
Accounting policy
For impairment testing, assets are grouped together into the smallest group of assets that generate cash inflows from
continuing use that are largely independent of the cash inflows of other assets or CGUs. Additionally, goodwill arising from
a business combination is allocated to a CGU or groups of CGUs that are expected to benefit from the synergies of the
combination. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.
The recoverable amounts of the CGUs are determined based on value in use calculations, which reflect the estimated
future cash flows of each CGU discounted by an estimated weighted average cost of capital that represents the rate of
return an outside investor would expect to earn. This discount rate is based on the weighted average cost of capital for
comparable public companies and is adjusted for risks specific to the CGU including differences in risk due to its size,
geographic concentration and trading history.
Future cash flows are determined using the latest available Board-approved forecasts and strategic plans. These forecasts
and strategic plans are based on specific assumptions for each CGU during the five-year planning period with respect to
revenue, results of operations, working capital, capital investments and other general assumptions for the projected
period. The forecast assumptions that derive the future cash flows are based on the historical results of each CGU
combined with external market information and defined strategic initiatives.
If identified, impairment losses are recognised in the Consolidated Income Statement. They are allocated first to reduce
the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the remaining
assets in the CGU, on a pro-rated basis.
An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the
extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depreciation or amortisation, if no impairment loss had been recognised. The Group has not recognised any reversal of
previous impairments in either 2022 or 2021.
The Group continues to operate under the same operating model as prior year and determined that there has not been
any triggers for a change in CGU groups. There has been no change in the reporting to the CODM during the year ended
31 December 2022, with profitability continuing to be assessed on a consolidated basis, and management’s focus is
predominantly category and key market focus. Goodwill is deemed to be monitored on a category basis, and the Group’s
CGU groups continue to be; (i) Advanced Wound Care; (ii) Ostomy Care; (iii) Continence & Critical Care, and (iv) Infusion Care.
Goodwill and intangible assets with indefinite life (trade names) are allocated to the Group's CGU groups as at 31 December
as follows:
Goodwill
Indefinite-lived intangible assets
2022
$m
2021
$m
2022
$m
2021
$m
CGU groups
Advanced Wound Care
490.0
386.9
104.8
104.8
Ostomy Care
116.5
121.7
91.2
91.2
Continence & Critical Care
535.6
558.0
41.2
41.4
Infusion Care
82.5
89.7
11.7
12.4
Total
1,224.6
1,156.3
248.9
249.8
Determining the estimated recoverable amount of a CGU group is judgemental in nature. The key input used in the estimation
of value in use as at 31 December 2022 is the Group’s five-year Board approved strategic plan, with key assumptions including
forecast sales growth rates, terminal value growth rate and discount rates. Forecast sales growth rates are based on past
experience adjusted for macroeconomic activity, sector market growth forecasts, competitor activity and strategic decisions
made in respect of each CGU group.
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9. INTANGIBLE ASSETS AND GOODWILL (CONTINUED)
The terminal value growth rate and discount rates used were as follows:
Discount rate (pre-tax)
1
2022
%
2021
%
CGU groups
Advanced Wound Care
13.5
10.5
Ostomy Care
12.5
10.0
Continence & Critical Care
11.5
9.5
Infusion Care
12.5
9.5
Terminal value growth rate
2
2.0
2.0
1.
The discount rate is based on the weighted average cost of capital for comparable public companies and is adjusted for risks specific to the CGU group including
differences in risk due to its size, geographic concentration and trading history.
2.
The estimated terminal value growth rate for the CGU groups is a prudent estimate based on expectations concerning the growth trends of the CGU groups, taking
into account global gross domestic product growth, general long-term inflation and population expectations.
Global equity markets have become more volatile in 2022, driven by rising inflation levels, the war between Russia and
Ukraine and the energy crisis. Consequently, discount rates have seen an increase in the year, driven by rises in the markets’
risk-free rates.
No impairments have been recognised in respect of the Group’s current CGU groups for the years ended 31 December 2022
and 2021.
Taking into consideration the Board approved 2023 budget and longer-term strategic plan as foundations, sensitivity analysis
was performed considering changes in key assumptions including discount rates and terminal value growth rate, and
consideration of risk-based severe but plausible downside scenarios consistent with those identified as part of the Viability
assessment (refer to page 99 for full details of scenarios). As part of the assessment, an external benchmarking assessment
was also carried out on the forecast sales growth rates.
Under all severe but plausible scenarios, headroom remained on all CGU groups, demonstrating that the impairment of
goodwill and indefinite-lived intangible assets is not a key source of estimation uncertainty and any possible impairment
would not result in a material adjustment in the next financial year.
10. INVESTMENT IN FINANCIAL ASSETS
Accounting policy
The Group has made an irrevocable election to designate its equity investment in BlueWind Medical at fair value through
other comprehensive income (FVOCI). It has been initially recorded at fair value plus transaction costs and will be
remeasured at subsequent reporting dates to fair value.
Unrealised gains and losses are recognised in other comprehensive income.
On disposal of the equity investment, any gains and losses that have been deferred in other comprehensive income are
transferred directly to retained earnings.
Dividends on equity investments are recognised in the income statement when the Group’s right to receive payment is
established, it is probable the economic benefits will flow to the entity and the amount can be measured reliably.
On 9 May 2022, the Group invested $30.0 million in preference shares of BlueWind Medical Limited (BlueWind Medical).
BlueWind Medical is developing an implantable tibial neuromodulation device, for the treatment of urge incontinence and
urinary urgency. This represents an investment into an innovative technology in the large and growing overactive bladder
market, related to the Continence space.
In line with IFRS 9
Financial Instruments
, the investment met the definition of an equity instrument and the Group has made
an irrevocable election on initial recognition to measure the investment at FVOCI. The Group considers this investment to be
strategic in nature and it is not held for trading.
In line with IFRS 13
Fair value measurement
, this investment has been classified as Level 3 in the fair value hierarchy as its
measurement is derived from significant unobservable inputs. As at the date of the transaction, the equity investment was
recorded at its cost of investment which approximates to fair value plus transaction costs of $0.7 million.
As at 31 December 2022, the fair value of the investment has been remeasured and remained at $30.7 million. No dividends
were recognised during the year.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
190
Financial statements
11. INVENTORIES
Inventories are the materials used in manufacturing, products manufactured or purchased to be sold by the Group in the
ordinary course of business. Inventories include finished goods, goods which are in the process of being manufactured
(work in progress) and raw and packaging materials awaiting use in production.
Accounting policy
Inventories are valued at the lower of cost or net realisable value with the cost determined using an average cost method.
The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and indirect
production overheads. Production overheads comprises indirect material and labour costs, maintenance and depreciation
of the machinery and production buildings used in the manufacturing process, as well as costs of production
administration and management.
Net realisable value is defined as anticipated selling price or anticipated revenue less cost to completion. Estimates of net
realisable value are based on the average selling prices at the end of the reporting period, net of applicable direct selling
expenses. Subsequent events related to the fluctuation of prices and costs are also considered, if relevant. If net realisable
values are below inventory costs, a provision corresponding to this difference is recognised.
Provisions are also made for obsolescence of inventories that; (i) do not meet the Group's specifications; (ii) have exceeded
their expiration date; or (iii) are considered slow-moving. The Group evaluates the carrying value of inventories on a regular
basis, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the
price the Group expects to obtain for products in their respective markets compared with historical cost and the
remaining shelf life of goods on hand.
The components of inventories at 31 December were as follows:
2022
$m
2021
$m
Raw and packaging materials
79.6
71.9
Work in progress
41.6
37.9
Finished goods
215.7
199.0
Inventories
336.9
308.8
Inventories are stated net of provision for obsolescence of $25.5 million (2021: $21.3 million). Adjustments to write-down
inventory to its net realisable value are provided in Note 3.1 – Operating profit.
12. TRADE AND OTHER RECEIVABLES
Trade receivables consist of amounts billed and currently due from customers. Gross trade receivables are presented
before allowances for expected credit losses, sales discounts and chargeback allowances. Credit risk with respect to trade
receivables is generally diversified due to the large dispersion and type of customers across many different geographies.
Other receivables include amounts due from third parties not related to revenue and prepaid expenses.
Accounting policy
Credit is extended to customers based on the evaluation of the customer’s financial condition. Creditworthiness of
customers is evaluated on a regular basis. Exposure to credit risk is managed through credit approvals, credit limits and
monitoring procedures. The Group considers a default event to be one where the customer does not have sufficient funds
to make their required payments and/or is in the process of being liquidated.
An allowance is maintained for expected lifetime credit losses that result from the failure or inability of customers to make
required payments. It is not necessary for a credit event to have occurred before credit losses are recognised. Instead, the
Group accounts for expected lifetime credit losses and changes in those expected lifetime credit losses. In determining
the allowance, consideration includes the probability of recoverability based on past experience and general economic
factors, incorporating forward-looking information and adjustments for customers who represent a lower risk of default,
which includes public or private medical insurance customers and customers guaranteed by local government. The
amount of expected credit losses, if any, is required to be updated at each reporting date.
Certain trade and other receivables may be fully reserved when specific collection issues are known to exist, such as pending
bankruptcy. The Group writes off uncollectable receivables at the time it is determined the receivable is no longer collectable.
Trade and other receivables are not collateralised or factored and the Group does not charge interest on past due
amounts. Refer to Note 2.1 – Revenue recognition for details on the accounting policy in respect of chargeback allowances.
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12. TRADE AND OTHER RECEIVABLES (CONTINUED)
Trade and other receivables at 31 December were as follows:
2022
$m
2021
$m
Included within current assets:
Trade receivables
344.7
296.9
Less: allowances for expected credit losses
(22.0)
(14.6)
Less: sales discounts and chargebacks
(37.6)
(31.7)
Other receivables
1
54.2
50.9
Prepayments
24.7
22.0
Trade and other receivables
364.0
323.5
1.
The balance of restricted cash with a maturity of less than one year as at 31 December 2022 is $18.2 million and is presented separately on the face of the Consolidated
Statement of Financial Position. The prior year balance of $0.4 million is presented within other receivables and has not been reclassified due to its immateriality.
The aged analysis of trade receivables at 31 December was as follows:
2022
$m
2021
$m
Current
255.0
235.2
Past due 1 to 30 days
33.6
15.5
Past due 31 to 90 days
22.5
17.3
Past due 91 to 180 days
7.9
0.7
Past due by more than 180 days
25.7
28.2
344.7
296.9
The unimpaired amounts at 31 December that are past due were aged as follows:
2022
$m
2021
$m
Past due 1 to 30 days
32.1
14.2
Past due 31 to 90 days
20.6
16.5
Past due 91 to 180 days
4.7
–
Past due by more than 180 days
10.3
16.4
67.7
47.1
The Group believes that the unimpaired amounts that are past due are still collectible in full, based on historic payment
behaviour and extensive analysis of customer credit risk.
Movements in the allowance for expected credit losses for the years ended 31 December were as follows:
2022
$m
2021
$m
At 1 January
(14.6)
(12.6)
Charges
(6.6)
(8.2)
Utilisation of provision
1.1
5.6
Foreign exchange
(1.9)
0.6
At 31 December
(22.0)
(14.6)
Other non-current receivables
Other non-current receivables of $8.6 million (2021: $11.9 million) are principally in respect of deposits held with lessors,
prepaid expenses and other receivables.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
192
Financial statements
13. TRADE AND OTHER PAYABLES
Trade payables consist of amounts owed to third-party suppliers and represent a contractual obligation to deliver cash in
the future.
Other payables include taxes and social security, accruals and liabilities for other employee-related benefits.
Accounting policy
Trade payables are recognised at the value of the invoice received from the supplier and are not interest bearing. The
carrying amount of trade and other payables is considered to approximate fair value, due to their short-term maturities.
The components of trade and other payables at 31 December were as follows:
2022
$m
2021
$m
Included within current liabilities:
Trade payables
112.2
116.7
Taxes and social security
26.0
29.0
Other employee-related liabilities
92.3
92.3
Accruals and other payables
116.1
104.5
Trade and other payables
346.6
342.5
2022
$m
2021
$m
Included within non-current liabilities:
Defined benefit obligations (Note 15)
11.0
19.7
Other employee-related liabilities
7.7
7.4
Accruals and other payables
14.0
20.5
Other non-current liabilities
32.7
47.6
14. PROVISIONS
A provision is an obligation recognised when there is uncertainty over the timing or amount that will be paid. Provisions
held by the Group are primarily in respect of restructuring, decommissioning, dilapidations, legal liabilities and contingent
consideration relating to acquisitions.
Accounting policy
A provision is recognised when there is a present legal or constructive obligation as a result of a past event, it is probable
that the Group will be required to settle the obligation and that obligation can be measured reliably. Restructuring
provisions are only recognised when a constructive obligation exists, which requires both a detailed formal plan and
a valid expectation being raised in those affected by starting to implement that plan or announcing the main features.
Provisions are measured at the best estimate of the expenditure required to settle the obligation and are discounted to
present value if the effect is material. Provisions are reviewed on a regular basis and adjusted to reflect management’s best
current estimates. Due to the judgemental nature of these items, future settlements may differ from amounts recognised.
When the timing of a settlement is uncertain or expected to be more than 12 months from the reporting date, amounts are
classified as non-current.
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14. PROVISIONS (CONTINUED)
The movements in provisions are as follows:
Decommissioning
and dilapidations
$m
Restructuring
$m
Legal
$m
Contingent
consideration
$m
Total
$m
1 January 2022
1.2
5.0
0.5
–
6.7
Contingent consideration
from acquisitions
–
–
–
141.8
141.8
Charged to income statement
1.7
15.7
(0.3)
29.5
46.6
Utilised
–
(10.4)
–
(50.0)
(60.4)
Discount unwinding
–
–
–
15.6
15.6
Reclassification from trade and
other payables
1
–
–
–
3.1
3.1
Foreign exchange
(0.1)
–
–
–
(0.1)
31 December 2022
2.8
10.3
0.2
140.0
153.3
Current
–
10.3
–
89.9
100.2
Non-current
2
2.8
–
0.2
50.1
53.1
1.
During the year ended 31 December 2022, $3.1 million was reclassified from trade and other payables in relation to the Cure Medical acquisition to better reflect
the estimation uncertainty of the contingent consideration.
2.
The expected timings of the payment of the contingent consideration are disclosed in Note 26 – Acquisitions. The timing for other non-current provisions is undefined.
Decommissioning and dilapidation provisions
Decommissioning provisions represent the estimated costs of dismantling and removing PP&E and restoring the site on which
it was located. Dilapidation provisions are in respect of contractual obligations, on the expiry of a lease, to return leased
properties in the condition which is specified in the individual leases.
Restructuring provisions
Restructuring provisions are mainly related to the exit from the low-margin hospital care and industrial sales portfolio.
Further details are in Note 27 – Divestitures. All restructuring provisions are supported by detailed plans and a valid
expectation has been raised in those affected as required by the Group’s accounting policy.
Legal provision
Legal provision of $0.2 million is in respect of an ongoing case. Legal issues are often subject to uncertainties over the timing
and the final amounts of any settlement.
Contingent consideration
Contingent consideration arising from business combinations is fair valued on acquisition and at each reporting period.
As at 31 December 2022, the discounted fair value of the contingent consideration payable in respect of the Cure Medical
acquisition was $9.2 million (2021: $3.1 million), with an increase of $5.8 million arising as a result of good performance to date,
together with the latest financial forecasts, and the unwind of discount of $0.3 million during the year. This has been charged
to the Consolidated Income Statement.
As at 31 December 2022, the discounted fair value of the contingent consideration payable in respect of the Triad Life Sciences
acquisition was $130.8 million, with the movements since the acquisition date fair value of $141.8 million being a combination of
an increase of $23.7 million arising from management’s view that the latest available financials are expected to exceed original
expectations and the unwind of discount of $15.3 million during the year, partly offset by the payments of $50.0 million to the
sellers following successful attainment of the two short-term milestones per the Merger Agreement.
Further detail is provided in Note 26 – Acquisitions.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
194
Financial statements
15. POST-EMPLOYMENT BENEFITS
The Group has over 10,000 employees globally and operates a number of defined benefit and defined contribution
pension plans for its employees. Each individual plan is subject to the applicable laws and regulations of the country
inwhich the plan operates.
Defined contribution arrangements are where the Group pays fixed payments as they fall due into a separate fund on
behalf of employees participating in the plan and has no further legal or constructive obligations. The cost of Group
contributions to defined contribution arrangements during the year is provided in Note 3 – Operating costs.
A defined benefit plan is a pension or other post-employment benefit plan under which the Group has an obligation to
provide agreed benefits to current and former employees. The Group bears the risk that its obligation may increase or that
the value of the assets in the pension fund may decline. The benefit payable in the future by the Group is discounted to the
present value and the fair value of plan assets is deducted to measure the defined benefit pension position.
The Group has defined benefit plans in a number of European countries. The most significant plans are: Switzerland,
which has a state-mandated plan that remains open to all Swiss employees; and Germany, which has one unfunded plan,
that remains open to German employees but is now closed to new entrants, and a funded plan that was put in place from
April 2019. The value of the funded plan in Germany is negligible to the Group. The Group's other defined benefit plans are
located in Austria, France and Italy (referred to as “Other” in the tables below). The Group’s UK defined benefit plan was
bought out by Aviva in December 2021 and the Group has no further liability for the benefits accrued under that plan.
For plans in Switzerland, Germany and Austria, asset funds for each country are being accumulated to meet the accruing
liabilities. The assets of each of these funds are either held under trusts or managed by insurance companies and are
entirely separate from the Group’s assets.
Accounting policy
Defined contribution pension plans
Payments to defined contribution pension plans are recognised as an expense when employees have rendered service
entitling them to the contributions. Payments made to state-managed retirement benefit plans are treated as payments
to defined contribution pension plans where the Group’s obligations under the plans are equivalent to those arising in a
defined contribution pension plan.
Defined benefit pension plans
The Group records an asset or liability related to its defined benefit pension plans as the difference between the fair
value of the plan assets and the present value of the plan liabilities. The obligations of the plans are calculated using the
Projected Unit Credit Method, with actuarial valuations being performed by an independent actuary at the end of each
reporting period. The valuation requires estimates and judgements to be made to calculate the Group’s liabilities, and
results in actuarial gains and losses being recorded.
Actuarial gains and losses, movements in the return on plan assets (excluding interest) and the impact of the asset ceiling
(if applicable) are recognised immediately in the Consolidated Statement of Financial Position with a charge or credit to
the Consolidated Statement of Comprehensive Income. Remeasurements recorded in the Consolidated Statement of
Comprehensive Income are not subsequently reclassified to the Consolidated Income Statement.
Past service cost is recognised in the Consolidated Income Statement in the period of plan amendment, where relevant.
Net interest is calculated by applying a discount rate to the net defined benefit liability or asset.
The assets of the plans are held at fair value, which is equal to market value, and are held in separate trustee-administered
funds or similar structures in the countries concerned. Surplus assets within the plan are only recognised to the extent
that they are recoverable in accordance with IFRIC Interpretation 14,
IAS 19 – The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction
(IFRIC 14).
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15. POST-EMPLOYMENT BENEFITS (CONTINUED)
Risks
The defined benefit plans typically expose the Group to risks. The most significant risks impacting the Group as a result of
these plans are as follows:
Investment risk
The present value of the defined benefit plan liability is calculated using a discount rate determined
by reference to high-quality corporate bond yields; if the return on plan assets is below this rate, it will
create a plan deficit. Currently the Group's plans invest primarily in debt instruments.
Interest risk
A decrease in the interest rate will increase the plan liability, but this will be partially offset by an
increase in the return on the plan’s fixed rate debt instruments.
Longevity risk
The present value of the defined benefit plan liability is calculated by reference to the best estimate
of the mortality of plan participants both during and after their employment. An increase in the life
expectancy of the plan participants will increase the plan’s liability.
Salary risk
The present value of the defined benefit plan liability is calculated by reference to the future salaries of
plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.
Amounts recorded in the Consolidated Financial Statements
Consolidated Income Statement
The aggregate expense for all post-employment defined benefit plans recognised in the Consolidated Income Statement for
the year ended 31 December was as follows:
2022
$m
2021
$m
Defined benefit plans:
Current service cost
1.7
2.2
Past service cost
(0.2)
–
Interest income on plan assets
(0.2)
–
Interest expense on defined benefit obligations
0.4
0.2
UK pension settlement cost
1
–
1.2
Total expense (Note 3)
1.7
3.6
1.
The UK defined benefit pension scheme was bought out during the year ended 31 December 2021, with a loss on settlement of $1.2 million recognised in the
Consolidated Income Statement.
Consolidated Statement of Comprehensive Income
Aggregate actuarial gains and losses for all defined benefit plans recognised in the Consolidated Statement of
Comprehensive Income for the year ended 31 December were as follows:
2022
$m
2021
$m
Remeasurement effect recognised in other comprehensive income:
Actuarial gain on liabilities due to experience
1.3
1.6
Actuarial gain/(loss) arising from changes in financial assumptions
8.9
(0.8)
Actuarial gain arising from changes in demographic assumptions
–
0.8
Actuarial (loss)/gain on plan assets
(1.7)
1.6
Remeasurement gain recognised in other comprehensive income
8.5
3.2
Deferred tax on remeasurement gain recognised in other comprehensive income
(0.1)
0.1
Change in pension asset restriction
–
1.3
Total amount recognised in other comprehensive income
8.4
4.6
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
196
Financial statements
Consolidated Statement of Financial Position
The amount recognised for each defined benefit arrangement in the Consolidated Statement of Financial Position at
31 December was as follows:
Germany
Switzerland
Other
Total
2022
$m
2021
$m
2022
$m
2021
$m
2022
$m
2021
$m
2022
$m
2021
$m
Fair value of schemes’ assets
–
–
10.4
13.3
0.7
0.8
11.1
14.1
Present value of funded
schemes’ liabilities
–
–
(
12.3
)
(17.2)
(0.7)
(1.4)
(13.0)
(18.6)
Deficit in the funded schemes
–
–
(
1.9
)
(3.9)
–
(0.6)
(1.9)
(4.5)
Present value of unfunded
schemes’ liabilities
(7.4)
(12.6)
–
–
(1.7)
(2.6)
(9.1)
(15.2)
Net pension liability
(7.4)
(12.6)
(
1.9
)
(3.9)
(1.7)
(3.2)
(11.0)
(19.7)
Recognised within Consolidated Statement of Financial Position:
Defined benefit obligations (Note 13)
(11.0)
(19.7)
The weighted average duration of the Group's defined benefit obligations at the end of the year is 17 years (2021: 21 years).
Fair value of assets and present value of the liabilities of the plan
The amount included in the Consolidated Statement of Financial Position arising from its obligations in respect of its defined
benefit plans was as follows:
Assets
$m
Liabilities
$m
Total
$m
At 1 January 2021
30.3
(49.8)
(19.5)
Current service cost
–
(2.1)
(2.1)
Interest income/(expense)
0.1
(0.3)
(0.2)
Remeasurement gain
0.1
1.2
1.3
Contributions by employer
0.7
–
0.7
Contributions by members
0.6
(0.6)
–
Benefits paid
(2.7)
3.0
0.3
Experience gain
–
1.9
1.9
Pension settlement
(14.4)
11.0
(3.4)
Foreign exchange
(0.6)
1.9
1.3
At 31 December 2021
14.1
(33.8)
(19.7)
Current service cost
–
(1.7)
(1.7)
Past service cost
–
0.2
0.2
Interest income/(expense)
0.2
(0.4)
(0.2)
Remeasurement gain/(loss)
(1.7)
6.5
4.8
Contributions by employer
0.6
–
0.6
Contributions by members
0.5
(0.5)
–
Benefits paid
(2.4)
2.7
0.3
Experience gain
–
3.9
3.9
Foreign exchange
(0.2)
1.0
0.8
At 31 December 2022
11.1
(22.1)
(11.0)
Plan assets
The fair value of defined benefit plan assets at 31 December, which has been determined in accordance with IFRS 13
, Fair
Value Measurements
, is analysed below. All assets have a quoted market price and are categorised as a Level 1 measurement
in the fair value hierarchy.
Germany
Switzerland
Other
Total
2022
$m
2021
$m
2022
$m
2021
$m
2022
$m
2021
$m
2022
$m
2021
$m
Equity instruments
–
–
3.4
4.0
–
3.4
4.0
Debt instruments
–
–
4.1
4.8
–
4.1
4.8
Property
–
–
1.6
2.0
–
1.6
2.0
Qualifying insurance policies
–
–
–
0.7
0.8
0.7
0.8
Other
–
–
1.3
2.5
–
1.3
2.5
Plan assets
–
–
10.4
13.3
0.7
0.8
11.1
14.1
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15. POST-EMPLOYMENT BENEFITS (CONTINUED)
Actuarial assumptions
The Group makes certain key assumptions in order to value the plan obligations, and the approach to how these are set was
as follows:
Approach taken
Discount rate
Calculated by reference to the yields on high-quality corporate bonds which match expected
cash flows in each territory in which a defined benefit plan is present.
Inflation
Calculated using the difference on yields between fixed and index-linked government bonds.
Future salary increases
Based on historical expectations and known future increases, including expected inflation rates.
Mortality
Based on mortality tables derived from assessments performed by national governments and
based upon recommendations by plan actuaries.
The principal actuarial assumptions for each defined benefit arrangement used at 31 December were as follows:
Germany
Switzerland
Other
2022
2021
2022
2021
2022
2021
Discount rate
3.56%
1.03%
1.90%
0.30%
3.47% to 4.05%
0.29% to 1.22%
Rate of price inflation
N/A
N/A
1.00%
0.50%
2.20% to 3.00%
1.20% to 2.00%
Future salary increases
3.00%
2.00%
1.75%
1.75%
0.00% to 3.00%
0.00% to 3.00%
Discount rates have increased in the year, driven by macroeconomic factors such as rising inflation levels, the war between
Russia and Ukraine and the energy crisis.
The current mortality assumptions underlying the values of the obligations in the defined benefit plans were as follows:
Germany
Switzerland
Other
2022
2021
2022
2021
2022
2021
Life expectancy at age 65
Male
18.6 years
17.5 years
22.8 years
22.7 years
23.9 years
20.5 years
Female
22.0 years
20.9 years
24.6 years
24.5 years
27.9 years
24.0 years
Life expectancy at age 65
in 20 years' time
Male
21.4 years
20.2 years
25.1 years
25.0 years
24.9 years
21.7 years
Female
24.3 years
23.1 years
26.6 years
26.5 years
28.9 years
25.1 years
Sensitivity analysis
The effect of movements in the key actuarial assumptions in respect of the Germany and Switzerland plans at 31 December 2022
would be an (increase)/decrease to the defined benefit asset/liabilities as follows:
Germany
Switzerland
Increase 0.5%
Decrease 0.5%
Increase 0.5%
Decrease 0.5%
Discount rate
0.7
(0.7)
1.1
(0.8)
Inflation
N/A
N/A
(0.2)
0.6
Future salary increases
N/A
N/A
(0.1)
0.4
1 year increase
1 year decrease
1 year increase
1 year decrease
Life expectancy
(0.1)
0.2
(0.1)
0.3
Future funding
Payments expected to be made by the Group to its defined benefit pension plans in the year ended 31 December 2023 are
as follows:
Germany
$m
Switzerland
$m
Other
$m
Total
$m
Expected payments
0.1
0.7
–
0.8
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
198
Financial statements
CAPITAL STRUCTURE AND FINANCIAL COSTS
The Group ensures that all entities within the Group have sufficient funding to deliver the Group’s strategy while
maximising the return to shareholders through the debt and equity balance. The capital structure of the Group consists
of net debt (which includes borrowings less cash and cash equivalents and excluding lease liabilities) and equity of the
Group, comprising issued capital, reserves and earnings as disclosed in the Consolidated Statement of Changes in Equity.
16. CAPITAL STRUCTURE AND NET DEBT
The capital structure of the Group at 31 December was as follows:
2022
$m
2021
$m
Borrowings (Note 21)
1,211.9
1,344.6
Less: Cash and cash equivalents (Note 22)
(143.8)
(463.4)
Net debt (excluding lease liabilities)
1,068.1
881.2
Equity
1,609.7
1,694.8
Total capital
2,677.8
2,576.0
The Group's capital structure is managed to provide ongoing returns to shareholders and service debt obligations, whilst
maintaining maximum operational flexibility. Refer to pages 30 to 38 in the Financial review for discussion of the Group's
sources and uses of cash.
17. SHARE CAPITAL AND RESERVES
Share capital
Called up share capital is the total number of shares in issue at their par value. The rights attaching to the ordinary shares
are uniform in all respects. They form a single class for all purposes, including with respect to voting and for all dividends
and other distributions thereafter declared, made or paid on the ordinary share capital of the Group. Incremental costs
directly attributable to the issue of new ordinary shares are shown in equity as a deduction from the proceeds, net of tax.
Repurchased shares are classified as own shares and are disclosed in the own shares reserve.
Share premium
The share premium represents amounts received in excess of the nominal value of the ordinary shares.
Own shares
Own shares are ordinary shares in the Group purchased and held by an Employee Benefit Trust to satisfy obligations under
the Group's employee share ownership programmes.
When any Group company purchases the Company’s equity share capital (own shares), the consideration paid, including
any directly attributable incremental costs (net of tax), is deducted from equity until the shares are cancelled, reissued
or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly
attributable costs and the related tax effects, is recognised in equity and the resulting surplus or deficit on the transaction
is presented within share premium.
Merger reserve
In 2016, the Consolidated Financial Statements were prepared under merger accounting principles. Under these principles,
no acquirer was required to be identified and all entities were included at their pre-combination carrying amounts. This
accounting treatment led to differences on consolidation between issued share capital and the book value of the
underlying net assets. This difference is included within equity as a merger reserve.
Cumulative translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial
statements of foreign subsidiaries.
Other reserves
Other reserves comprises the cumulative changes in the effective portion of cash flow hedges, cost of hedging,
remeasurement of defined benefit plans and the share-based payment reserve.
199
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
17. SHARE CAPITAL AND RESERVES (CONTINUED)
Share capital
Shares were allotted during the year in respect of the Group's scrip dividend offering. The movements in ordinary shares of
10 pence each were as follows:
Issued and fully paid or credited as fully paid
Ordinary shares
number
Share capital
$m
Share premium
$m
1 January 2021
2,004,347,138
245.5
115.3
Issue of new shares for Scrip Scheme – 2020 final dividend
9,475,532
1.3
24.8
Issue of new shares for Scrip Scheme – 2021 interim dividend
750,265
0.2
2.2
10,225,797
1.5
27.0
31 December 2021
2,014,572,935
247.0
142.3
Issue of new shares for Employee Benefit Trust
20,000,000
2.6
–
Issue of new shares for Scrip Scheme – 2021 final dividend
7,192,010
0.9
18.0
Issue of new shares for Scrip Scheme – 2022 interim dividend
2,107,103
0.2
5.4
29,299,113
3.7
23.4
31 December 2022
2,043,872,048
250.7
165.7
At 31 December 2022, 10,975,451 shares (2021: 742,756 shares) were held in the Employee Benefit Trust. The market value of
own shares at 31 December 2022 was $30.8 million (2021: $1.9 million).
Other reserves
Other reserves include the share-based payment reserve of $155.0 million (2021: $135.3 million) and remeasurement of defined
benefit obligations of $4.8 million (2021: $3.6 million loss), a transfer between reserves of $0.5 million (2021: nil) and the
effective portion of cash flow hedges of $4.9 million (2021: $5.2 million loss). A reconciliation of movements in all reserves
is provided in the Consolidated Statement of Changes in Equity.
Distributable reserves
Retained and realised distributable reserves equates to the retained surplus of Convatec Group Plc as set out in the
Company Financial Statements on page 218. At 31 December 2022, the retained surplus of the Company was $1,562.9 million
(2021: $1,590.3 million). The capacity of the Company to make dividend payments is primarily determined by the availability
of these retained and realised distributable reserves and the Group's cash resources including available borrowing facilities.
Cumulative translation reserve
During the year to 31 December 2022, the Group disposed of a subsidiary as part of the exit from all hospital care and related
industrial sales activities. The cumulative amount of exchange differences relating to this foreign operation of $12.2 million,
recognised in other comprehensive income, has been reclassified from equity to the Consolidated Income Statement, within
non-operating expense (Note 5).
18. DIVIDENDS
The Group ensures that adequate realised distributable reserves are available in the Company in order to meet proposed
shareholder dividends, and the purchase of shares for employee share scheme incentives. The Company principally
derives distributable reserves from dividends received from subsidiary companies.
In determining the level of dividend for the year, the Board considers the following factors and risks that may influence
the proposed dividend:
•
The underlying performance of the business;
•
The Board’s confidence in the Group’s future growth prospects;
•
Availability of realised distributable reserves;
•
Available cash resources and commitments;
•
Strategic opportunities and investments, in line with the Group’s strategic plan; and
•
Principal risks of the Group (as disclosed on pages 92 to 97).
The Board paid the 2021 final dividend in May 2022 and the 2022 interim dividend in October 2022. The Board has taken
into consideration balancing the return to shareholders with investment in the business. The decision to increase the
dividend for 2022 by 3.0% reflects the Board’s confidence in the future performance of the Group and the underlying
financial strength, distributable reserves position and cash generation of the Group. Detail of the Group’s considerations
and rationale for its policy in respect of the dividend distribution is given in the Directors’ report on page 162.
Accounting policy
Dividends paid are included in the Group Consolidated Financial Statements at the earlier of payment of the dividends or,
in respect of the Company’s final dividend for the year, on approval by shareholders.
The Company operates a scrip dividend scheme, allowing shareholders to elect to receive their dividend in the form of new fully
paid ordinary shares. For any particular dividend, the Directors may decide whether or not to make the scrip offer available.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
200
Financial statements
Dividends paid and proposed were as follows:
Pence
per share
Cents
per share
Total
$m
Settled in cash
$m
Settled via scrip
$m
No of scrip shares
issued
Final dividend 2020
2.845
3.983
79.7
53.6
26.1
9,475,532
Interim dividend 2021
1.229
1.717
34.6
32.2
2.4
750,265
Paid in 2021
4.074
5.700
114.3
85.8
28.5
10,225,797
Final dividend 2021
3.161
4.154
77.8
58.9
18.9
7,192,010
Interim dividend 2022
1.410
1.717
34.8
29.2
5.6
2,107,103
Paid in 2022
4.571
5.871
112.6
88.1
24.5
9,299,113
Final dividend 2022 proposed
3.657
4.330
88.5
The final dividend proposed for 2022, to be distributed on 25 May 2023 to shareholders on the register at the close of
business on 11 April 2023, is based upon the issued and fully paid share capital as at 31 December 2022 and is subject to
shareholder approval at the Annual General Meeting on 18 May 2023. The dividend will be declared in US dollars and will
be paid in Sterling at the chosen exchange rate of $1.184/£1.00 determined on 8 March 2023.
The Company operates a scrip dividend scheme allowing shareholders to elect to receive their dividends in the form of
new fully paid ordinary shares. For any particular dividend, the Directors may decide whether or not to make the scrip offer
available. A scrip dividend alternative will be offered allowing shareholders to elect by 3 May 2023 to receive their dividend
in the form of new ordinary shares.
The interim and final dividends for 2022 give a total dividend for the year of 6.047 cents per share, an increase of 3.0% over the
prior year (2021: 5.871 cents per share).
19. SHARE-BASED PAYMENTS
The Group operates a number of plans used to award shares to Executive Directors and other senior employees as part
of their remuneration package. A charge is recognised over the vesting period in the Consolidated Income Statement to
record the cost of these, based on the fair value of the award at the grant date.
The Group’s share-based payment schemes in place are as follows:
Long Term Incentive Plan (LTIP)
Provides Performance Share Plan (PSP) awards subject to Group performance and market conditions and Restricted Stock
Units (RSU) subject only to remaining employed up to the vesting date. Details on share-based payments in relation to
Executive Directors is set out on page 146.
Deferred Bonus Plan (DBP)
Provides for the grant of share awards to defer a portion of the participant’s bonus as determined by the Remuneration
Committee. The awards vest subject only to remaining employed up to the vesting date.
Share Plan (SP)
Provides for the grant of discretionary share awards. Awards granted in 2022 will vest to employees still employed on the
vesting date.
Employee Plans
The Group also operates Employee Plans which provide eligible employees the opportunity to save up to £500 per month
(or local currency equivalent) with an option to acquire shares using these savings at a 15% discount to the market price at
date of grant. The Employee Plans are available to employees under the following schemes:
•
Save-As-You-Earn (SAYE)
– Available to all employees in the UK employed by participating Group companies.
•
Employee Stock Purchase Plan (ESPP)
– Available to all employees in the US.
•
International Share Save Plan
– Available to all employees in certain countries in the rest of the world.
Accounting policy
Equity-settled share-based payment awards are measured at the fair value of the award on the grant date, excluding the
effect of non-market-based vesting conditions. The fair value of the awards at the date of the grant is expensed to the
Consolidated Income Statement over the vesting period on a straight-line basis.
Appropriate adjustments are made to reflect expected and actual forfeitures during the vesting period due to
uncertainties in satisfying service conditions or non-market performance conditions. The corresponding credit is to other
reserves in the Consolidated Statement of Financial Position.
201
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
19. SHARE-BASED PAYMENTS (CONTINUED)
Share-based payment expenses recognised in the Consolidated Income Statement as follows:
2022
$m
2021
$m
LTIP
10.8
11.6
SP
3.0
2.1
DBP
1.6
1.4
Employee Plans
1.3
1.3
16.7
16.4
During the year to 31 December 2022, $16.6 million (2021: $16.4 million) of share-based payment was equity-settled and $0.1 million
(2021: nil) was cash-settled. All amounts that were equity-settled were recognised in Other reserves, with the amounts that were
cash-settled recognised through other liabilities.
Awards outstanding
The movements in the number of share and share option awards and the weighted average exercise price of share options are
detailed below:
2022
2021
Number of
shares/
options
000's
Weighted
average exercise
price of options
£ per share
Number of
shares/
options
000's
Weighted
average exercise
price
£ per share
Outstanding at 1 January
33,707
0.43
30,472
0.51
Granted
14,225
0.32
13,190
0.33
Forfeited
(7,728)
0.48
(8,265)
0.53
Exercised
(9,404)
0.54
(1,690)
0.46
Outstanding at 31 December
30,800
0.33
33,707
0.43
Exercisable at 31 December
993
1.33
826
1.80
Weighted average fair value of awards granted (£ per share)
–
1.18
–
1.18
The average share price during 2022 was £2.11 (2021: £2.15). The share price of the Company at 31 December 2022 was £2.33.
The range of exercise prices and the weighted average remaining contractual life of options outstanding at 31 December were
as follows:
Range of prices
2022
Number of
shares/
options
000's
2021
Number of
shares/
options
000's
Nil
24,990
24,198
1.21
788
5,338
1.74
2,511
–
1.76
1,108
1,344
1.84
18
755
2.08
1,385
2,072
30,800
33,707
Weighted average remaining contractual life of options outstanding
2.2 years
1.9 years
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
202
Financial statements
Valuation assumptions
All share awards granted are valued directly by reference to the share price at date of grant except:
•
PSP shares awarded under the LTIP plans are subject to both market-based measures and non-market-based measures.
Values under the market-based element are based on relative Total Shareholder Return (TSR) performance conditions and
are valued using a Monte Carlo simulation.
•
Options granted under the Employee Plans are valued using the Black-Scholes model.
The principal assumptions used in these valuations were:
2022
2021
LTIP
SAYE &
International
Share Save Plan
ESPP
LTIP
SAYE &
International
Share Save Plan
ESPP
Share price at date of grant
£1.79
£2.13
£1.99
£1.92
£2.44
£2.44
Exercise price
nil
£1.74
£1.74
nil
£2.08
£2.08
Expected life
3.0 years
3.6 years
2.0 years
3.0 years
3.6 years
2.0 years
Expected volatility
1
28.7%
28.7%
28.7%
40.6%
40.6%
40.6%
Risk-free rate
1.3%
1.3%
1.3%
0.1%
0.1%
0.1%
Dividend yield
2.5%
2.5%
2.5%
2.1%
2.1%
2.1%
Fair value
£1.03
£0.36
£0.33
£1.00
£0.54
£0.48
1.
The expected volatility was determined by calculating the observed historical volatility of share prices of peer group companies (including the Company) over the
expected life of the share award.
20. FINANCIAL RISK MANAGEMENT
The Group’s treasury policy seeks to minimise the Group's principal financial risks. No trading or speculative transactions in
financial instruments are undertaken. This note presents information about the Group’s exposure to financial risks and the
Group’s objectives, policies and processes for measuring and managing risks.
Financial risk management objectives
Based on the global operations of the Group, management consider the key financial risks to be liquidity, foreign exchange,
interest rate and counterparty credit. The management of counterparty credit risk is discussed in Note 12 – Trade and
other receivables.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group
manages and minimises liquidity risk by using global cash management solutions and actively monitoring both actual and
projected cash outflows to ensure that it will have sufficient liquidity to meet its liabilities when due and have headroom to
provide against unforeseen obligations. As at 31 December 2022, the Group held cash and cash equivalents of $143.8 million
(2021: $463.4 million), of which 74.5% was held centrally.
On 15 November 2022, the Group refinanced its existing bank facilities with $1.2 billion of committed bank lending, comprising a
multicurrency revolving credit facility of $950.0 million and a term loan of $250.0 million, both with a maturity in November 2027.
The Group’s $500.0 million senior unsecured notes remain in place, with maturity in October 2029. As at 31 December 2022,
$472.8 million of the multicurrency revolving credit facility remained undrawn.
Medium and long-term borrowing requirements are met through committed bank facilities and capital market funding as
detailed in Note 21 – Borrowings. Short-term borrowing requirements, if necessary, may be met from drawings under the
multicurrency facility.
Longer term, the Group has assessed its liquidity forecast as part of the viability assessment and its ability to continue
trading as a going concern. For further detail on the Group's assessment of liquidity risk, refer to the Viability statement
on pages 98 and 99.
Foreign exchange risk
As a result of the global nature of operations, the Group is exposed to market risk arising from changes in foreign currency
exchange rates.
Where possible, the Group manages foreign exchange risk by matching same currency revenues and expenses. It will also
denominate debt in certain currencies and use foreign exchange forward contracts and swap contracts to further minimise
transactional foreign exchange risk, with certain currency contracts designated as cash flow hedges; refer to Note 23 –
Financial instruments for details. As a result, the impacts of the fluctuations in the market values of assets and liabilities
and the settlement of foreign currency transactions are reduced.
203
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
20. FINANCIAL RISK MANAGEMENT (CONTINUED)
The following table summarises the exchange rates used for the translation of currencies into US dollars that have the most
significant impact on the Group results:
Currency
Average rate/
Closing rate
2022
2021
USD/EUR
Average
1.05
1.18
Closing
1.07
1.14
USD/GBP
Average
1.24
1.38
Closing
1.20
1.35
USD/DKK
Average
0.14
0.16
Closing
0.14
0.15
During 2022, revenue was mostly USD denominated (52%). Other significant currencies were EUR (20%), GBP (6%) and DKK
(2%). The balance comprises a basket of other currencies which, on an individual basis, were each less than 2% of revenue.
Sensitivity analysis on foreign exchange risk
The sensitivity analysis below assumes a 10% strengthening of the US dollar against the principal currencies to highlight the
sensitivity of profit before income taxes and total equity to translation foreign exchange risk as at 31 December, with all other
variables held constant.
Currency
Sensitivity
2022
$m
2021
$m
Increase/(decrease) in profit before income taxes
USD/GBP
+10%
4.0
0.1
USD/EUR
+10%
(12.8)
(40.6)
USD/DKK
+10%
(10.4)
(20.5)
Decrease/(increase) in total equity
USD/GBP
+10%
(81.6)
(93.0)
USD/EUR
+10%
(8.1)
6.5
USD/DKK
+10%
(24.3)
(31.4)
Interest rate risk
The Group’s principal exposure to interest rate risk is in relation to interest expense on borrowings made under the Group's
credit facilities which attract interest at floating rates plus a fixed margin as well as any cash or investments that result in
interest income at floating rates. Floating rate instruments expose the Group to interest rate cash flow and expense risk.
The Group manages this exposure on a net basis within Board-approved policy parameters, including the use of interest
rate swaps designated as cash flow hedges to maintain an appropriate mix between fixed and floating rate borrowings.
As at 31 December 2022, the Group’s borrowings were denominated in USD and Euros. Prior to refinancing in November 2022,
credit facilities exposed the Group to USD LIBOR and EURIBOR reference rates. In line with IBOR reform, the facilities executed
in November 2022 referenced USD SOFR and EURIBOR. The Group’s interest rate swaps of $275.0 million as at 31 December 2022,
which matured in January 2023 were referenced to USD LIBOR. As at the year end, the Group had also entered into forward
starting interest rate swaps of $180.0 million, which are effective from January 2023, and these are referred to the SOFR
benchmark (see Note 23 – Financial Instruments).
IBOR Reform
Non-derivative financial liabilities
In November 2022, the Group refinanced its bank borrowings and as a result extinguished its existing non-derivative financial
liabilities linked to US LIBOR. The Group’s new facilities are at floating rate and reflect IBOR reform. Whilst one of the Group’s
facilities is multicurrency, most borrowings are expected to be denominated in USD and EUR with the reference rates of SOFR
and EURIBOR, respectively.
In July 2019, the Belgian Financial Services and Markets authority granted authorisation with respect to EURIBOR under
European Union Benchmarks Regulation. This allows market participants to continue to use EURIBOR. The Group expects
EURIBOR will continue as the EUR benchmark for the foreseeable future.
Derivatives
As of 31 December 2022, the Group held interest rate swaps for the purpose of risk management that are designated in cash
flow hedge relationships. The floating legs of these swaps are linked to both US LIBOR and SOFR. The Group’s derivatives are
governed by contracts based on the master agreement of the International Swaps and Derivatives Association (ISDA).
All interest rate swaps linked to US LIBOR had a maturity of January 2023. Interest rate swaps traded after November 2022
have a floating rate linked to SOFR, aligned with the Group’s facilities. See Note 23 – Financial Instruments.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
204
Financial statements
Hedge accounting
At the date of refinancing, the Group’s existing bank borrowings were extinguished and replaced with drawings under the
new facilities. Existing cash flow hedges were maintained as the underlying interest rate risk still existed and the hedging
relationships continued to fulfil the requirements of IFRS 9.
Swaps with floating legs linked to SOFR have also been designated as cash flow hedges and will provide interest rate risk
management beyond January 2023.
Sensitivity analysis on interest rate risk
Based on the composition and the terms of the Group's borrowings as at 31 December 2022, and including the 0% interest
rate floor and after the effect of the interest rate swaps and cash, if interest rates were to increase or decrease by 100 basis
points, the interest expense on borrowings would increase by $4.0 million (2021: $0.1 million) or decrease by $4.0 million
(2021: $2.3 million increase) assuming that all other variables remain constant and excluding any effect of tax. In 2021, the
impact of the interest rate decrease is limited due to the 0% interest floor on the borrowings.
21. BORROWINGS
The Group’s sources of borrowing for funding and liquidity purposes derive from senior notes and credit facilities,
including a committed revolving credit facility.
In November 2022, the Group refinanced its bank facilities with $1.2 billion committed for a five-year term. The Group’s
2029 unsecured senior notes of $500.0 million remain in place.
Accounting policy
Borrowings are recognised at fair value less directly attributable costs on the date that they are entered into and
subsequently measured at amortised cost using the effective interest rate method. Borrowing costs directly attributable
to the facility are capitalised and amortised over the period of the loan.
The effective interest rate method is a method of calculating the amortised cost of a financial liability and allocating the
interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future
cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net
carrying amount on initial recognition.
Borrowings are classified as non-current when the repayment date is more than 12 months from the period-end date or
where they are drawn on a facility with more than 12 months to expiry.
The Group derecognises borrowings when its contractual obligations are discharged, terminated or expired.
Fair value measurement
Borrowings are classified as Level 1 or Level 2 in the fair value hierarchy in accordance with IFRS 13, Fair Value Measurements,
based upon the degree to which the fair value movements are observable.
The Group's borrowings as at 31 December were as follows:
Currency
Year of
maturity
2022
Face value
$m
2021
Face value
$m
Revolving Credit Facility
1
USD/Euro
2027
477.2
–
Term Loan
USD
2027
250.0
–
Senior Notes
USD
2029
500.0
500.0
Revolving Credit Facility
Multicurrency
2024
–
–
Term Loan Facility A
2
USD/Euro
2024
–
461.2
Term Loan Facility B
3
USD/Euro
2024
–
396.7
Interest-bearing borrowings
1,227.2
1,357.9
Financing fees
4
(15.3)
(13.3)
Total carrying value of borrowings
1,211.9
1,344.6
Current portion of borrowings
–
144.8
Non-current portion of borrowings
1,211.9
1,199.8
1.
Included within the Revolving Credit Facility was €145.0 million ($155.2 million) at 31 December 2022 (2021: nil), representing 32.5% of RCF debt denominated in Euros
and 67.5% denominated in US dollars.
2.
Included within Term Loan Facility A as at 31 December 2021 was €78.4 million ($89.2 million) representing 19% of the loan denominated in Euros and 81%
denominated in US dollars.
3.
Included within Term Loan Facility B as at 31 December 2021 was €67.5 million ($76.7 million), representing 19% of the loan denominated in Euros and 81%
denominated in US dollars.
4.
Financing fees of $15.3 million (2021: $13.3 million) related to the remaining unamortised fees incurred on the credit facilities of $8.4 million (2021: $5.4 million) and on
the senior notes of $6.9 million (2021: $7.9 million).
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Financial statements
21. BORROWINGS (CONTINUED)
Credit facilities
The credit facilities held by the Group are committed and available for the refinancing of certain existing financial
indebtedness and general corporate purposes. On 15 November 2022, the Group refinanced its credit facilities. The original
facilities, maturing in October 2024 and, consisting of two five-year multicurrency term loans totalling $1.5 billion and an
undrawn $200.0 million multicurrency revolving credit facility, were settled and extinguished respectively on refinancing.
During the year and until the refinancing activity, $27.5 million (2021: $88.4 million) was repaid in accordance with the
repayment schedule for the original facilities.
The new credit facility for $1.2 billion comprises of a $250.0 million term loan and a $950.0 million multicurrency revolving
credit facility, both committed for a five-year term. As at 31 December 2022, the term loan was fully drawn and $477.2 million
of the revolving credit facility was drawn, with $472.8 million undrawn.
Transaction costs directly attributable to the refinancing have been capitalised and are amortised over the term of the facility
using the effective interest rate method. Unamortised deferred financing fees of $2.7 million associated with the previous credit
agreement have been written off to the Consolidated Income Statement in 2022 (refer to Note 25 – Finance income and expense).
The principal financial covenants are based on a permitted net debt to covenant-adjusted EBITDA
1
ratio and interest cover
test as defined in the credit facilities agreement. Testing is required on a semi-annual basis, at June and December, based on
the last 12 months’ financial performance. At 31 December 2022, the permitted net debt to covenant-adjusted EBITDA
1
ratio
was a maximum of 3.50 times and the interest cover a minimum of 3.50 times, terms as defined by the credit facilities
agreement. In accordance with the credit facilities agreement, the net debt to covenant-adjusted EBITDA
1
ratio can increase
toa maximum 4.00 times for permitted acquisitions or investments.
Senior notes
Unsecured senior notes of $500.0 million were issued on 7 October 2021 with a maturity date of 15 October 2029 at a coupon
rate of 3.875% per annum, payable semi-annually and, except for certain options redemption conditions, is not redeemable
at the issuer’s option prior to 7 October 2024. The Group’s refinancing activity did not affect the senior notes.
The senior notes are subject to a financial covenant which is an interest cover test (minimum of 2 times) as defined in the
indenture. Testing is required annually based on the last 12 calendar months’ financial performance.
Financial covenants
The Group was in compliance with all financial and non-financial covenants at 31 December 2022, with significant available
headroom on the financial covenants (in excess of $588.0 million debt headroom on net debt to covenant-adjusted EBITDA
1
).
Excluding the impact of interest rate swaps, the weighted average interest rate on borrowings for the year ended
31 December 2022 was 3.4% (2021: 2.0%). The increase in the weighted average interest rate was due to rising underlying
reference base rates on debt with floating rates and a full year of interest on the senior notes issued in 2021.
Borrowings not measured at fair value
The senior notes are listed and their fair value at 31 December 2022 of $430.8 million (2021: $507.7 million) has been obtained
from quoted market data and therefore categorised as a Level 1 measurement in the fair value hierarchy under IFRS 13,
Fair
Value Measurements
. For the Group’s other borrowings, the fair value is based on discounted cash flows using a current
borrowing rate and is categorised as a Level 2 measurement. At 31 December 2022, the estimated fair value of the Group's
other borrowings was $762.4 million (2021: $847.3 million).
1.
Covenant-adjusted EBITDA is calculated based on terms as defined in the credit facilities agreement. This is different to adjusted EBITDA, which is an alternative
performance measure (APM) as disclosed on pages 224 to 228.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
206
Financial statements
Maturity of financial liabilitiesS
The contractual undiscounted future cash flows, including contractual interest payments, related to the Group's financial
liabilities were as follows:
Contractual cash flows
Within 1
year
or on
demand
$m
1 to 2
years
$m
2 to 3
years
$m
3 to 4
years
$m
4 to 5
years
$m
More than
5 years
$m
Total
$m
Carrying
amount
$m
At 31 December 2022
Borrowings
57.5
55.2
50.8
50.2
777.8
538.8
1,530.3
1,211.9
Lease liabilities (Note 24)
22.7
17.8
13.1
9.8
7.9
94.2
165.5
88.3
Trade and other payables (Note 13)
346.6
–
–
–
–
–
346.6
346.6
Derivative financial instruments (Note 23)
Derivative financial instruments payable
1,919.8
6.3
1.2
–
–
–
1,927.3
32.5
Derivative financial instruments receivable
1,912.5
6.9
1.0
–
–
–
1,920.4
26.6
At 31 December 2021
Borrowings
184.7
182.0
591.2
19.4
19.4
558.1
1,554.8
1,344.6
Lease liabilities (Note 24)
22.6
19.4
14.7
10.9
8.3
28.4
104.3
90.5
Trade and other payables (Note 13)
342.5
–
–
–
–
–
342.5
342.5
Derivative financial instruments (Note 23)
Derivative financial instruments payable
1,723.4
2.9
–
–
–
–
1,726.3
14.6
Derivative financial instruments receivable
1,726.3
–
–
–
–
–
1,726.3
15.1
Reconciliation of movement in borrowings
2022
$m
2021
$m
Borrowings at 1 January
1,344.6
1,456.4
Repayment of borrowings
1
(842.5)
(583.9)
Proceeds of new borrowings, net of financing fees
2
714.2
491.8
Foreign exchange
(11.0)
(26.5)
Non-cash movements
3
6.6
6.8
Borrowings at 31 December
1,211.9
1,344.6
1.
In the year ended 31 December 2022, repayment of borrowings included the scheduled repayment instalment on Term Loan Facility A of $27.5 million (2021: $88.4 million)
and the full repayment of all term loans facilities of $815.0 million as part of the refinancing activity.
2.
On 15 November 2022, the Group entered into new revolving credit facilities and term loan facility. The transaction costs in respect of the refinancing activities were
$8.6 million. For the year ended 31 December 2021, 180 Medical, Inc. a wholly owned subsidiary of the Group, issued 8-year, non-call for 3 years unsecured senior notes
of $500.0 million in accordance with Rule 144A and Regulation S [under the Securities Act]. Transaction costs in respect of the issuance were $8.2 million.
3.
Non-cash movements were in respect of the amortisation of deferred financing fees associated with the borrowings and the $2.7 million write-off of the remaining
unamortised deferred financing fees following early termination of the Group’s previous credit facilities.
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Financial statements
22. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash held at bank is used for the Group's day-to-day operations. The Group utilises bank deposits or money market funds
which have a maturity of three months or less as liquid investments that enable short-term liquidity requirements to be met.
Accounting policy
Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions. All liquid
investments, including term deposits and money market funds, have original maturities of three months or less, are
subject to insignificant risk of changes in value and are repayable within one business day with no significant loss of
interest, resulting in classification as cash equivalents.
Cash at bank earns interest at rates based on daily bank deposit rates. Term deposits and money market funds earn
interest at the respective short-term deposit rate.
Cash and cash equivalents at 31 December 2022 included $19.2 million (2021: $37.5 million) of cash held in territories where
there are restrictions related to timely repatriation. The amounts meet the definition of cash and cash equivalents but are
not deemed to be readily available for general use by the wider Group.
Consolidated Statement of Cash Flows
Under certain circumstances, the Group utilises bank overdrafts to manage temporary fluctuations in cash positions.
The bank overdrafts are repayable on demand, used as part of the Group’s overall cash management strategy and form
part of cash and cash equivalents for the purpose of the Consolidated Statement of Cash Flows. The Group had no bank
overdrafts as at 31 December 2022 or 31 December 2021.
The Group reports cash flows from operating activities using the indirect method in accordance with IAS 7,
Statement of
Cash Flows
. The Group has elected to classify net interest paid (including interest on lease liabilities) as cash flows from
operating activities. Short-term lease payments and payments for leases of low-value assets are included in cash flows
from operating activities.
Changes in working capital assets and liabilities as reported in cash flows from operating activities reflect the changes in the
Consolidated Statement of Financial Position between the current and previous financial year end, including adjustments for
amounts relating to acquisitions and disposals (when necessary), as well as currency translation adjustments.
Cash payments for the principal portion of lease liabilities is included within cash flows from financing activities.
Acquisition of property, plant and equipment, and intangible assets reflects additions to the related assets, including
adjustments for changes in capital accruals. Acquisition of intangible assets relates to capitalised software, development
and product-related licences. Refer to Note 9 – Intangible assets and goodwill for further details.
The adjustment for non-operating expense, net in the Consolidated Statement of Cash Flows, excludes the gains and
losses realised on cash-settled derivative financial instruments. Refer to Note 5 – Non-operating (expense)/income, net.
Restricted cash
In certain instances, there are requirements to set aside cash to support payment guarantees and obligations, including
the payment of value-added taxes, custom duties on imports, tender programmes and lease arrangements. Such amounts
are classified by the Group as restricted cash, which do not form part of cash and cash equivalents. Cash paid into escrow,
arising from a business combination, is also classified as restricted cash.
2022
$m
2021
$m
Cash at bank and in hand
42.6
69.5
Money market funds and bank deposits
101.2
393.9
Cash and cash equivalents
143.8
463.4
2022
$m
2021
$m
Restricted cash – current
1
18.2
0.4
Restricted cash – non-current
7.3
13.6
Total restricted cash
25.5
14.0
1.
In the prior year, restricted cash with a maturity of less than one year of $0.4 million is included in Trade and other receivables.
Current restricted cash of $18.2 million (2021: $0.4 million) relates to cash held in escrow in respect of the Cure Medical,
Patient Care Medical and Triad Life Sciences acquisitions.
Included in non-current restricted cash of $7.3 million (2021: $13.6 million) is $4.0 million (2021: $9.7 million) relating to cash
held in escrow in respect of the above acquisitions. The remaining balance of $3.3 million (2021: $3.9 million) relates to
amounts held in respect of guarantees and the Group’s Share Save scheme for employees. None of these amounts are
accessible on demand.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
208
Financial statements
23. FINANCIAL INSTRUMENTS
A derivative financial instrument is a contract that derives its value from the performance of an underlying variable, such as
foreign exchange rates or interest rates. The Group uses derivative financial instruments to manage foreign exchange and
interest rate risk arising from its operations and financing. Derivative financial instruments used by the Group are foreign
exchange forwards and interest rate swaps.
The Group utilises interest rate swap agreements, designated as cash flow hedges, to manage its exposure to variability in
expected future cash outflows attributable to the changes in interest rates on the Group’s committed borrowing facilities.
Accounting policy
Derivative financial instruments are initially recognised at fair value on the derivative contract date and are remeasured
at their fair value at subsequent reporting dates. Derivative financial instruments are classified at fair value through profit
or loss (FVTPL) unless they are designated and qualify as an effective cash flow hedge. The fair value of forward foreign
exchange contracts is determined by using the difference between the contract exchange rate and the quoted forward
exchange rate from third parties at the reporting date.
Hedge accounting
The Group has elected to apply the IFRS 9,
Financial Instruments
hedge accounting requirements. Changes in the fair
values of derivatives designated as cash flow hedges are recognised in other comprehensive income to the extent the
hedges are effective. The fair value is the estimated amount that the Group would receive or pay to terminate the forward
or swap at the reporting date, taking into account current market rates, the Group’s current creditworthiness, as well as
that of the financial instrument counterparties.
The cumulative gain or loss is then reclassified to the Consolidated Income Statement in the same period when the
relevant hedged transaction is realised. Any ineffectiveness on hedging instruments is recognised in the Consolidated
Income Statement as they arise. Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated or exercised, or no longer qualifies for hedge accounting. The discontinuation is accounted for prospectively.
Any gain or loss recognised in other comprehensive income and accumulated in the cash flow hedge reserve at that time
remains in equity and is reclassified to profit or loss when the forecast transaction occurs. When a forecast transaction is
no longer expected to occur, the gain or loss accumulated in the cash flow hedge reserve is immediately reclassified to
profit or loss. Gains and losses arising from forward points and foreign currency basis spreads are excluded from
designation and are treated as a cost of hedging, deferred initially in other equity reserves and released into profit or loss
over the life of the hedging relationship.
The Group held USD interest rate swaps of $275.0 million, with exposure to USD LIBOR as a reference rate and maturing
in January 2023. New USD interest rate swaps of $180.0 million were entered during 2022 with an effective date of
23 January 2023, with exposure to USD SOFR as a reference rate and maturing at various points in the next two years.
These have been designated as cash flow hedges through other comprehensive income. In assessing hedge effectiveness
on a prospective basis for this relationship, the Group has assumed that the USD LIBOR-related interest cash flows on the
swap are not altered by IBOR reform and the hedge continues to be highly effective. Furthermore, hedge accounting did
not need to be discontinued during the period of IBOR-related uncertainty as the Group had taken the relief available in
Phase 1 to separately identify the risk component at the initial hedge designation and not on an ongoing basis.
At the date of refinancing, the Group’s existing bank borrowings were extinguished and replaced with drawings under the
new facilities. Existing cash flow hedges were maintained as the underlying interest rate risk still existed and the hedging
relationships continued to fulfil the requirements of IFRS 9. Swaps with floating legs linked to SOFR have also been
designated as cash flow hedges and will provide interest rate risk management beyond January 2023.
Right to offset
Financial assets and liabilities are offset and the net amount presented in the Consolidated Statement of Financial Position
when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or
to realise the asset and settle the liability simultaneously.
Fair value measurement
Financial instruments are classified as Level 1, Level 2 or Level 3 in the fair value hierarchy in accordance with IFRS 13,
Fair Value Measurements
, based upon the degree to which the fair value movements are observable. Level 1 fair value
measures are defined as those with quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2 fair value measurements are defined as those derived from inputs other than quoted prices that are observable
for the asset or liability, either directly (prices from third parties) or indirectly (derived from third-party prices). Level 3 fair
value measurements are defined as those derived from significant unobservable inputs.
The only instrument classified as Level 1 are the senior notes, given the availability of quoted market price (Note 21 – Borrowings).
The Group’s derivative financial instruments, discussed below, are classified as Level 2, and the Group’s equity investment in
preference shares is classified as Level 3 (Note 10 – Investment in financial assets).
209
Convatec Group Plc Annual Report and Accounts 2022
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Governance
Strategic report
Overview
Financial statements
23. FINANCIAL INSTRUMENTS (CONTINUED)
The Group holds interest rate swap agreements to fix a proportion of variable interest on US dollar-denominated debt,
in accordance with the Group's risk management policy. The interest rate swaps are designated as hedging instruments
in a cash flow hedging relationship.
In accordance with Group policy, the Group uses forward foreign exchange contracts, designated as cash flow hedges, to hedge
certain forecast third-party foreign currency transactions. When a commitment is entered into, a layered approach is taken when
hedging the currency exposure, ensuring that no more than 100% of the transaction exposure is covered. The currencies hedged
by forward foreign exchange contracts are US dollars, Swiss francs, Pound sterling, Danish krone and Japanese yen.
The Group further utilises foreign exchange contracts and swaps classified as FVTPL to manage short-term foreign
exchange exposure.
Cash flow hedges
The fair values are based on market values of equivalent instruments at 31 December. The following table presents the
Group's outstanding interest rate swaps, which were designated as cash flow hedges at 31 December:
2022
2021
Effective date
Maturity date
Notional
amount
$m
Fair value
1
assets/
(liabilities)
$m
Notional
amount
$m
Fair value
1
assets/
(liabilities)
$m
3 Month LIBOR Float to
Fixed Interest Rate Swap
24 Jan 2020
24 Jan 2023
275.0
2.0
275.0
(2.9)
6 Month term SOFR Float to
Fixed Interest Rate Swap
23 Jan 2023
23 Jan 2024
90.0
0.2
–
–
6 Month term SOFR Float to
Fixed Interest Rate Swap
23 Jan 2023
23 July 2024
40.0
–
–
–
6 Month term SOFR Float to
Fixed Interest Rate Swap
23 Jan 2023
23 Jan 2025
50.0
(0.3)
–
–
1.
The fair values of the interest rate swaps were disclosed in non-current derivative financial liabilities in the Consolidated Statement of Financial Position. There was
no ineffectiveness recognised in the Consolidated Income Statement.
Foreign exchange forward contracts
The following table presents the Group's outstanding foreign exchange forward contracts valued at FVTPL and foreign
currency forward contracts designated as cash flow hedges, disclosed in current derivative financial assets and liabilities,
at 31 December:
2022
2021
Term
Notional
amount
$m
Fair value
asset/
(liabilities)
$m
Notional
amount
$m
Fair value
assets/
(liabilities)
$m
Foreign exchange contracts
≤ 3 months
996.6
21.3
864.6
14.5
Foreign currency forward exchange contracts designated as
cash flow hedges
≤ 12 months
72.7
3.1
40.8
0.6
Derivative financial assets
1,069.3
24.4
905.4
15.1
Foreign exchange contracts
≤ 3 months
703.7
(30.2)
695.9
(6.5)
Foreign currency forward exchange contracts designated as
cash flow hedges
≤ 12 months
132.8
(2.3)
130.2
(5.2)
Derivative financial liabilities
836.5
(32.5)
826.1
(11.7)
During the year ended 31 December 2022, the Group realised a net gain of $15.8 million (2021: $9.7 million loss) on foreign exchange
forward contracts designated as FVTPL in non-operating expenses, net, (Note 5) in the Consolidated Income Statement.
Impact of hedging on other comprehensive income
The following table presents the impact of hedging on other comprehensive income:
2022
$m
2021
$m
Recognised in other comprehensive income:
Effective portion of changes in fair value of cash flow hedges:
Interest rate swaps
3.3
(1.0)
Foreign currency forward exchange contracts designated as cash flow hedges
(11.0)
(4.1)
Changes in fair value of cash flow hedges reclassified to the Consolidated Income Statement
16.5
5.7
Cost of hedging
(1.1)
(0.4)
Total
7.7
0.2
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
210
Financial statements
24. LEASES
The Group principally leases real estate and vehicles. Leases are recognised as a right-of-use asset with a corresponding
liability recorded at the date at which the leased asset is available for use by the Group.
Accounting policy
The lease liability is measured at the present value of future lease payments discounted using the rate implicit in the lease.
If this rate is not readily determinable, the Group uses its incremental borrowing rate. Generally, the Group uses its
incremental borrowing rate as the discount rate.
Options such as lease extensions or terminations on lease contracts are considered on a case-by-case basis by regular
management assessment.
Each lease payment is allocated between amounts paid for principal and interest. The interest cost is charged to the
Consolidated Income Statement over the lease term to produce a constant periodic rate of interest on the remaining
balance of the liability for each period. The right-of-use asset is depreciated on a straight-line basis over the lease term.
Payments associated with short-term leases and low-value leases are recognised on a straight-line basis as an expense
in the Consolidated Income Statement. Short-term leases are leases with a lease term of 12 months or less and low-value
leases comprise of leases with an underlying asset value of less than $5,000. Expenses recognised for these short-term
and low-value leases for the year ended 31 December 2022 were $3.9 million (2021: $2.8 million).
The movements in right-of-use assets were as follows:
Real estate
and other
$m
Vehicles
$m
Total
$m
As at 1 January 2021
70.3
15.5
85.8
Lease additions
17.1
7.8
24.9
Acquisitions
0.7
–
0.7
Leases terminated
(0.4)
(1.1)
(1.5)
Depreciation of right-of-use assets
(14.5)
(8.3)
(22.8)
Foreign exchange
(2.9)
(0.6)
(3.5)
As at 31 December 2021
70.3
13.3
83.6
Lease additions
12.3
8.4
20.7
Acquisitions (Note 26)
2.2
–
2.2
Leases terminated
(1.4)
0.1
(1.3)
Depreciation of right-of-use assets
(14.7)
(7.4)
(22.1)
Foreign exchange
(3.1)
(0.6)
(3.7)
As at 31 December 2022
65.6
13.8
79.4
Movements in lease liabilities were as follows:
2022
$m
2021
$m
Lease liabilities as at 1 January
90.5
92.1
Lease additions
21.0
24.9
Acquisitions
2.9
0.7
Payment of lease liabilities
(20.7)
(22.0)
Leases terminated
(1.2)
(1.5)
Interest expense on lease liabilities (Note 25)
3.3
3.8
Interest paid on lease liabilities
(3.3)
(3.8)
Foreign exchange
(4.2)
(3.7)
Lease liabilities as at 31 December
88.3
90.5
Total cash outflow of lease liabilities including interest for the year ended 31 December 2022 was $24.0 million (2021: $25.8 million).
Interest paid during the year was $3.3 million (2021: $3.8 million).
Lease liabilities by category at 31 December were as follows:
2022
2021
Real estate
and other
$m
Vehicles
$m
Total
$m
Real estate
and other
$m
Vehicles
$m
Total
$m
Current
13.8
6.5
20.3
13.2
6.5
19.7
Non-current
60.6
7.4
68.0
64.0
6.8
70.8
Total
74.4
13.9
88.3
77.2
13.3
90.5
211
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
24. LEASES (CONTINUED)
The maturity of lease liabilities at 31 December was as follows:
2022
2021
Real estate
and other
$m
Vehicles
$m
Total
$m
Real estate
and other
$m
Vehicles
$m
Total
$m
Within 1 year
13.8
6.5
20.3
13.2
6.5
19.7
1 to 2 years
12.3
4.2
16.5
12.7
4.1
16.8
2 to 3 years
9.5
2.3
11.8
10.7
2.0
12.7
3 to 4 years
8.1
0.7
8.8
8.5
0.6
9.1
4 to 5 years
7.2
0.1
7.3
6.8
0.1
6.9
5 to 10 years
23.5
0.1
23.6
24.2
–
24.2
More than 10 years
–
–
–
1.1
–
1.1
Total
74.4
13.9
88.3
77.2
13.3
90.5
The undiscounted contractual cash flows in relation to the maturity of leases liabilities have been disclosed in Note 21 – Borrowings.
25. FINANCE INCOME AND EXPENSE
Finance expenses arise from interest on the Group’s borrowings and lease liabilities. Finance income arises from interest
earned on investment of surplus cash.
Accounting policy
Finance expenses, including the transaction costs for borrowings and any discount or premium on issue, are recognised
in the Consolidated Income Statement using the effective interest rate method.
When existing debt is derecognised in the financial statements any transaction costs not amortised are recognised
immediately in the Consolidated Income Statement.
Upon derecognition of financial liabilities, any unamortised financing fees are recognised immediately in the Consolidated
Income Statement.
Interest related to qualifying assets under construction included within PP&E is capitalised (refer to Note 8 – Property,
plant and equipment).
Refer to Note 24 – Leases for accounting policy on interest expense on lease liabilities.
Interest arising from interest rate swaps is recorded as either interest income or expense over the term of the agreement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer
qualifies for hedge accounting. The discontinuation is accounted for prospectively. Any gain or loss recognised in other
comprehensive income and accumulated in the cash flow hedge reserve at that time remains in equity and is reclassified
to profit or loss when the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain
or loss accumulated in the cash flow hedge reserve is reclassified immediately to profit or loss.
Finance costs, net for the year ended 31 December were as follows:
2022
$m
2021
$m
Finance income
Interest income on cash and cash equivalents
5.5
0.8
Total finance income
5.5
0.8
Finance expense
Interest expense on borrowings
(46.4)
(29.2)
Other financing-related fees
1
(8.2)
(8.1)
Interest expense on interest rate derivatives
(1.4)
(3.8)
Interest expense on lease liabilities
(3.3)
(3.8)
Capitalised interest
2
2.0
0.6
Unwinding of discount
3
(15.6)
–
Other finance costs
(0.3)
–
Total finance expense
(73.2)
(44.3)
Finance costs, net
(67.7)
(43.5)
1.
Other financing-related fees include the amortisation of deferred financing fees associated with the multicurrency revolving credit facilities, term loan facilities
and senior notes. This also includes $2.7 million of deferred financing fees related to the early termination of the Group’s previous credit agreement.
2.
Capitalised interest was calculated using the Group’s weighted average interest rate over the year of 3.4% (2021: 2.0%).
3.
The unwinding of discount is in respect of the contingent consideration payable in relation to the Triad Life Sciences and Cure Medical acquisitions.
Refer to Note 26 – Acquisitions.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
212
Financial statements
26. ACQUISITIONS
During the year to 31 December 2022, the Group completed the acquisition of Triad Life Sciences Inc, a US-based medical
device company.
This note provides details of the transaction and the acquisition accounting that has been recorded to reflect the fair value
of assets acquired and liabilities assumed as well as the intangible assets and goodwill recognised upon acquisition. This
note also provides details of any fair value changes identified post-acquisition in respect of previous acquisitions that the
Group has completed.
Accounting policy
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method of accounting. Consideration
transferred in respect of an acquisition is measured at the fair value of the assets acquired, equity instruments issued and
liabilities incurred or assumed on the date of the acquisition. Identified assets acquired and liabilities assumed are
measured at their respective acquisition-date fair values.
The excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired is recorded
as goodwill. If the fair value of the identifiable net assets acquired is greater than the fair value of the consideration given,
the excess is recognised immediately in the Consolidated Income Statement as a bargain purchase gain. Acquisition-
related costs are expensed as incurred.
The operating results of the acquired business are reflected in the Group’s Consolidated Financial Statements from the
date of acquisition.
Triad Life Sciences Inc (Triad Life Sciences)
Description of the transaction
On 14 March 2022, the Group completed its acquisition of 100% of the share capital of Triad Life Sciences Inc. The acquisition
of Triad Life Sciences strengthens the Group’s Advanced Wound Care position in the US, securing access to a complementary
and innovative technology platform that enhances advanced wound management and patient outcomes.
In addition to the initial consideration of $125.3 million, the sellers may earn contingent consideration up to a maximum of
$325.0 million, in the form of (i) two additional payments of $25.0 million each relating to short-term milestones; and (ii) two
earnout payments conditional on performance during year 1 and year 2 post completion, with the maximum earnout for these
two payments totalling $275.0 million based on stretching financial performance over the period.
The discounted fair value of the contingent consideration at the date of acquisition was $141.8 million, of which $25.0 million
was paid in April 2022 and a further $25.0 million paid in October 2022 following attainment of the first and second short-
term milestones. The earnout payments are due to be paid within three years of the acquisition date, subject to achieving
the specified targets.
Following completion of the initial acquisition accounting, any changes in the fair value of the contingent consideration
at each reporting date will be recorded in the Consolidated Income Statement in accordance with the Group’s accounting
policies. This is explained further on in this note.
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26. ACQUISITIONS (CONTINUED)
Assets acquired and liabilities assumed
The transaction meets the definition of a business combination and has been accounted for under the acquisition method of
accounting. The following table summarises the provisional fair values of the assets acquired and liabilities assumed as of the
acquisition date:
Triad Life
Sciences
Provisional
$m
Non-current assets
Property, plant & equipment
0.5
Right-of-use assets
2.2
Intangible assets – Product-related
154.8
Current assets
Trade and other receivables
4.7
Inventories
10.8
Cash and cash equivalents
15.9
Total assets acquired
188.9
Non-current liabilities
Lease liabilities
(
2.7
)
Deferred tax liabilities
(
32.3
)
Current liabilities
Trade and other payables
(
2.6
)
Lease liabilities
(
0.2
)
Total liabilities assumed
(
37.8
)
Net assets acquired
151.1
Goodwill
129.9
Total
281.0
Initial cash consideration
125.3
Deferred purchase consideration paid into escrow
1
13.8
Working capital adjustment
2
0.1
Contingent consideration
141.8
Total consideration
281.0
Analysis of cash outflow in the Consolidated Statement of Cash Flows
Provisional
$m
Initial cash consideration
125.3
Deferred purchase consideration paid into escrow
1
13.8
Cash and cash equivalents acquired
(
15.9
)
Working capital adjustment
2
0.1
Net cash outflow from acquisitions, net of cash acquired
123.3
1.
$13.8 million was paid on closing into escrow as security and indemnity by the seller for its obligations under the Merger Agreement. $1.3 million was released in
December 2022 to the sellers following agreement of the closing statement. It is expected that the remaining balance will be released within the next 12 months
subject to the terms of the Merger Agreement.
2.
This is the Group’s calculation of the working capital adjustment and forms part of the initial consideration. The final amount was determined in accordance with the
terms of the Merger Agreement and this was finalised and paid by the reporting date.
The fair values of the assets acquired and liabilities assumed are provisional at 31 December 2022. The Group will finalise these
amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts
and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts
recognised at the acquisition date. The Group will finalise these amounts no later than one year from the acquisition date.
As part of the acquisition accounting, a $10.2 million fair value adjustment was applied to the carrying value of inventory held
at the acquisition date. The fair value adjustment relates to work-in-progress and finished goods and was calculated as the
estimated selling price less costs to complete and sell the inventory, associated margins on these activities, and holding
costs. As at 31 December 2022, $8.7 million has been expensed to cost of goods sold in the Consolidated Income Statement
as these have been sold. The remaining fair value uplift of $1.5 million is expected to be released over the next 6 to 12 months,
in line with forecast revenues.
The fair value of trade and other receivables amounts to $4.7 million, with a gross contractual amount of $7.0 million. At the
acquisition date, the Group’s best estimate of the contractual cash flows expected not to be collected amounts to $2.3 million.
The goodwill recorded, which is not deductible for tax purposes, represents the cost savings, operating synergies and future
growth opportunities expected to result from combining the operations of Triad Life Sciences with those of the Group.
The Triad Life Sciences acquisition is included in the Advanced Wound Care CGU group.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
214
Financial statements
Fair value of contingent consideration at reporting date
The two short-term milestones were achieved and paid during the year ended 31 December 2022. As at 31 December 2022,
management reviewed the fair value of the remaining contingent consideration since the acquisition date, based on the most
recent Board-approved strategic plan and forecast information. Consequently, the discounted fair value of the remaining
contingent consideration was increased by $23.7 million since the amount recognised at 30 June 2022, and was recognised
in non-operating expenses in the Consolidated Income Statement (see Note 5 – Non-operating (expense)/income, net).
The amount of discount unwind recognised in the Consolidated Income Statement during 2022 was $15.3 million and shown
within finance expenses (see Note 25 – Finance income and expense). The discounted fair value of the remaining contingent
consideration as at 31 December 2022 was $130.8 million. Refer to Note 14 – Provisions for the movement in the contingent
consideration during the year.
Management have determined that the potential range of discounted outcomes within the next financial year is between
$85.2 million and $230.8 million, from a maximum undiscounted contingent consideration of $275.0 million.
Acquisition-related costs
The Group incurred $2.4 million of acquisition-related costs directly related to the Triad Life Sciences acquisition in the year
ended 31 December 2022, primarily in respect of legal and advisers’ fees. The acquisition-related costs have been recognised
in general and administrative expenses in the Consolidated Income Statement.
Revenue and profit
The revenue of Triad Life Sciences for the period from the acquisition date to 31 December 2022 was $34.8 million and net profit
for the period was $5.8 million, before recognising acquisition-related intangible asset amortisation charge of $9.2 million and
the inventory fair value uplift release of $8.7 million. If the acquisition had been completed on 1 January 2022, reported Group
revenue would have been $4.4 million higher and Group profit for the year would have been $0.9 million lower, before
recognising acquisition-related intangible asset amortisation charges of $2.0 million.
Cure Medical LLC (Cure Medical)
On 15 March 2021, the Group acquired 100% of the share capital of Cure Medical.
During 2022, management reviewed the expectation of the contingent consideration based on the most recent Board-approved
strategic plan and forecast information. The Cure Medical business has outperformed its performance targets to date and
forecast financial performance was expected to exceed the original expectations. Consequently, the discounted fair value
of the contingent consideration has been revised from $3.1 million to $8.9 million during the year and the remeasurement
charge of $5.8 million has been recognised in non-operating expenses in the Consolidated Income Statement (see Note 5 –
Non-operating (expense)/income, net). The amount of discount unwind recognised in the Consolidated Income Statement
during 2022 was $0.3 million and shown within finance expenses (see Note 25 – Finance income and expense). The discounted
fair value of the contingent consideration as at 31 December 2022 was $9.2 million. Refer to Note 14 – Provisions for the movement
in the contingent consideration during the year.
This is due to be paid within three years of the acquisition date, subject to the terms of the Share Purchase Agreement.
27. DIVESTITURES
During the year ended 31 December 2022, the Group withdrew from its hospital care activities and related industrial sales.
Accounting policy
A divestiture or disposal occurs when the Group ceases to control a subsidiary, business or trade and assets associated
with a specific product line or class of business. Consideration received in respect of a divestiture is measured at fair value,
and all associated assets and liabilities are derecognised at the date control is transferred. The difference between the
carrying value of the net assets divested and the fair value of consideration received is recorded as a gain or loss on
divestiture in the Consolidated Income Statement.
Foreign exchange translation gains or losses relating to subsidiaries that the Group has divested, and that have previously
been recorded in other comprehensive income or expense, are also recognised as part of the gain or loss on divestiture.
The operating results of the divested subsidiary, business or product line cease to be included in the Group's Consolidated
Financial Statements from the date of divestiture.
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27. DIVESTITURES (CONTINUED)
Exit from hospital care and industrial sales activities
On 12 May 2022, following a strategic review, it was announced that the Group would be withdrawing from its hospital care
activities and related industrial sales during 2022. This does not represent a separate major line of business or component
of the Group.
As a result of the exit from the hospital care and industrial sales activities, the Group recognised impairment losses in the year
ended 31 December 2022 in relation to the following:
•
$8.1 million was recognised, within other operating expenses, as an impairment to property, plant and equipment, primarily
in relation to manufacturing equipment in Belarus and Slovakia.
•
$4.3 million was recognised, within other operating expenses, as an impairment to product-related intangible assets.
•
$13.4 million was recognised, within cost of sales, in relation to the write-off of inventories and provision for those which are
not expected to be sold.
In addition, the Group recognised $7.3 million of severance costs, of which $1.2 million remains as a provision as at
31 December 2022, and also recognised a $6.9 million provision in relation to contract exit costs. Management will review
this at each reporting period. The Group incurred $6.7 million of divestiture-related costs in relation to legal fees and closing
down of manufacturing site costs. The majority of the exit and closure activities have been completed at the end of the year,
with minimal costs expected in 2023.
As part of the exit from all hospital care and related industrial sales activities, a subsidiary was sold during the year.
The cumulative amount of exchange losses of $12.2 million recognised in Other Comprehensive Income relating to those
operations, and a loss on disposal of $2.0 million, have been recognised in the Consolidated Income Statement as non-
operating expenses. All costs associated with the exit have been classified as an adjusting item in accordance with our
Alternative Performance Measures policy.
28. COMMITMENTS AND CONTINGENCIES
Commitments represent the Group’s future capital expenditure which is not recognised as a liability in the Consolidated
Financial Statements but represents a non-cancellable commitment.
A contingent liability is a possible liability that is not sufficiently certain to qualify for recognition as a provision because
the amount cannot be measured reliably or because settlement is not considered probable.
Capital commitments
At 31 December 2022, the Group had non-cancellable commitments for the purchase of property, plant and equipment,
capitalised software and development of $39.3 million (2021: $32.1 million).
Contingent liabilities
There were no contingent liabilities recognised as at 31 December 2022 and 31 December 2021.
29. RELATED PARTY TRANSACTIONS
The Directors have not identified any related parties to the Group, other than the key management personnel. The Group
considers key management personnel as defined in IAS 24,
Related Party Disclosures
to be the members of CELT as set out
on pages 112 to 113 and the Non-Executive Directors as set out on page 111.
Key management personnel compensation
Key management personnel compensation for the year ended 31 December was as follows:
2022
$m
2021
$m
Short-term employee benefits
16.4
14.4
Share-based payment expense
9.2
9.0
Post-employment benefits
0.8
0.7
Termination benefits
0.4
–
Total
26.8
24.1
Further details of short-term employee benefits, share-based payment expense and post-employment benefits for the
Executive Directors are shown on page 144. Details of the Non-Executive Directors' fees, included in the table above, are
provided on page 147.
The Group has not been a party to any other material transaction, or proposed transactions, in which any member of the key
management personnel had or was to have a direct or indirect material interest.
Notes to the Consolidated Financial Statements
continued
Convatec Group Plc Annual Report and Accounts 2022
216
Financial statements
30. SUBSEQUENT EVENTS
The Group has evaluated subsequent events through to 8 March 2023, the date the Consolidated Financial Statements were
approved by the Board of Directors.
On 1 March 2023, the Board proposed the final dividend in respect of 2022 subject to shareholder approval at the Annual
General Meeting on 18 May 2023, to be distributed on 25 May 2023. See Note 18 – Dividends to the Consolidated Financial
Statements for further details.
217
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COMPANY STATEMENT OF FINANCIAL POSITION
As at 31 December 2022
Notes
2022
$m
2021
$m
Assets
Non-current assets
Investment in subsidiaries
3
3,818.9
4,271.5
Deferred tax assets
4
2.6
2.1
3,821.5
4,273.6
Current assets
Other receivables
5
22.4
10.2
Total assets
3,843.9
4,283.8
Equity and liabilities
Current liabilities
Trade and other payables
6
5.5
8.3
Total liabilities
5.5
8.3
Net assets
3,838.4
4,275.5
Equity
Share capital
7
250.7
247.0
Share premium
7
165.7
142.3
Own shares
7
(1.5)
(2.2)
Retained surplus
1,562.9
1,590.3
Merger reserve
1,765.6
1,765.6
Cumulative translation reserve
3.7
460.8
Other reserves
91.3
71.7
Total equity
3,838.4
4,275.5
Total equity and liabilities
3,843.9
4,283.8
The Company reported a net profit for the year ended 31 December 2022 of $85.2 million (2021: $51.5 million).
The Financial Statements of Convatec Group Plc (registered number 10361298) were approved by the Board of Directors
and authorised for issue on 8 March 2023. They were signed on its behalf by:
Jonny Mason
Karim Bitar
Chief Financial Officer
Chief Executive Officer
Company financial statements
Convatec Group Plc Annual Report and Accounts 2022
218
Financial statements
COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Share
capital
$m
Share
premium
$m
Own
shares
$m
Retained
surplus
$m
Merger
reserve
$m
Cumulative
translation
reserve
$m
Other
reserves
$m
Total
equity
$m
At 1 January 2021
245.5
115.3
(6.7)
1,653.1
1,765.6
499.8
58.6
4,331.2
Net profit
–
–
–
51.5
–
–
–
51.5
Foreign currency
translation adjustment
–
–
–
–
–
(39.0)
–
(39.0)
Total comprehensive
income
–
–
–
51.5
–
(39.0)
–
12.5
Dividends paid
–
–
–
(85.8)
–
–
–
(85.8)
Scrip dividend
1.5
27.0
–
(28.5)
–
–
–
–
Share-based payments
–
–
–
–
–
–
16.4
16.4
Share awards vested
–
–
4.5
–
–
–
(3.5)
1.0
Excess deferred tax benefit
from share-based
payments
–
–
–
–
–
–
0.2
0.2
At 31 December 2021
247.0
142.3
(2.2)
1,590.3
1,765.6
460.8
71.7
4,275.5
Net profit
–
–
–
85.2
–
–
–
85.2
Foreign currency
translation adjustment
–
–
–
–
–
(457.1)
–
(
457.1
)
Total comprehensive
income
–
–
–
85.2
–
(457.1)
–
(
371.9
)
Dividends paid
–
–
–
(88.1)
–
–
–
(
88.1
)
Scrip dividend
1.1
23.4
–
(24.5)
–
–
–
–
Share-based payments
–
–
–
–
–
–
16.6
16.6
Share awards vested
–
–
3.3
–
–
–
2.9
6.2
Excess deferred tax benefit
from share-based
payments
–
–
–
–
–
–
0.1
0.1
Allotment of shares to
Employee Benefit Trust
2.6
–
(2.6)
–
–
–
–
–
At 31 December 2022
250.7
165.7
(1.5)
1,562.9
1,765.6
3.7
91.3
3,838.4
For further information on share-based payments, refer to Note 19 – Share-based payments, and for dividends refer to
Note 18 – Dividends to the Consolidated Financial Statements.
219
Convatec Group Plc Annual Report and Accounts 2022
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1. BASIS OF PREPARATION
This section describes the Company’s significant accounting policies in respect of the Company Financial Statements and
explains critical accounting judgements and estimates that management has identified as having a potentially material
impact to the Company. Specific accounting policies relating to the Notes to the Company Financial Statements are
described within that note.
1.1 General information
The separate Financial Statements of the Company are presented as required by the Companies Act 2006. The Company meets
the definition of a qualifying entity under Financial Reporting Standard 100 (FRS 100) issued by the Financial Reporting Council
(FRC). Accordingly, the Financial Statements have been prepared in accordance with Financial Reporting Standard 101 (FRS 101)
Reduced Disclosure Framework as issued by the FRC.
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in
respect of share-based payments, financial instruments, capital management, comparative information, presentation of a
cash flow statement, new but not yet effective IFRSs and certain related party transactions.
As permitted by s408 of the Companies Act 2006 the Company has elected not to present its own Income Statement for
the current or prior year. The profit attributable to the Company is disclosed in the footnote to the Company’s Statement
of Financial Position.
Where required, equivalent disclosures are given in the Consolidated Financial Statements.
The auditor’s remuneration for audit and other services is disclosed in Note 3.3 – Auditor’s remuneration to the Consolidated
Financial Statements.
1.2 Significant accounting policies
Basis of accounting
The Financial Statements have been prepared on the historical cost basis, except for certain financial instruments where fair
value has been applied. The principal accounting policies adopted are the same as those set out in the Consolidated Financial
Statements except as noted below.
Foreign currencies
The functional currency of the Company is Sterling, being the currency of the primary economic environment in which it operates.
The Company has adopted US dollars as the presentation currency for its Financial Statements, in line with the presentation
currency for the Consolidated Financial Statements. For the purpose of presenting individual company financial statements,
assets and liabilities of the Company are translated into US dollars at exchange rates prevailing on the balance sheet date.
Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate
significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences
arising, if any, are recognised in other comprehensive income and accumulated in a separate component of equity, the
cumulative translation reserve, in accordance with IAS 21,
The Effects of Changes in Foreign Exchange Rates
.
Share-based payments
The Company has implemented the generally accepted accounting principle for accounting for share-based payments with
subsidiary undertakings under FRS 101, whereby the Company has granted rights to issue its shares to employees of its
subsidiary undertakings under an equity-settled arrangement and the subsidiaries have not reimbursed the Company for
these rights. Under this arrangement, the Company treats the share-based payment recognised in the subsidiary's financial
statements as an increase in the cost of investment in the subsidiary and credits equity with an equal amount.
1.3 Critical accounting judgements and key sources of estimation uncertainty
The preparation of the Company's Financial Statements in accordance with FRS 101 requires management to make
judgements, estimates and assumptions that affect the application of accounting policies and the reported value
of assets and liabilities, income and expense. Actual results may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision
affects both current and future periods.
Management has concluded that there are no critical accounting judgements and key sources of estimation uncertainty that
could result in a material adjustment in the next 12 months.
Company financial statements
continued
Convatec Group Plc Annual Report and Accounts 2022
220
Financial statements
2. STAFF COSTS
The Executive Directors of Convatec Group Plc are the only employees of the Company. The remuneration of the Executive
Directors is set out on pages 142 to 151 within the Remuneration Committee report.
Their aggregate remuneration comprised:
2022
$m
2021
$m
Wages and salaries
4.1
3.6
Share-based payment expense
3.6
3.5
Social security costs
1.0
0.5
Pension-related costs
0.3
0.3
Total
9.0
7.9
Average monthly number of employees (including Executive Directors) was 2 (2021: 2).
3. INVESTMENTS IN SUBSIDIARIES
Investments in subsidiaries represent the cost of the Company’s investment in its subsidiary undertakings, net of any
impairment charges. Refer to pages 229 to 231 for details of all the Company’s direct and indirect holdings.
Accounting policy
Investments in Group undertakings are stated at cost less any provision for impairment. The Company assesses
investments for impairment whenever events or changes in circumstances indicate that the carrying value of an
investment may not be recoverable. If any such indication of impairment exists, the Company makes an estimate
of the recoverable amount. If the recoverable amount of the investment is less than the carrying amount of the
investment, the investment is considered to be impaired and is written down to its recoverable amount.
Any impairment charge is initially taken to retained earnings and subsequently offset against any merger reserve by way
of a reserves transfer.
Cost
$m
Impairment
$m
Net book value
$m
At 1 January 2021
6,038.2
(1,732.3)
4,305.9
Capital contributions in respect of share-based payments to employees of subsidiaries
12.1
–
12.1
Reduction due to reimbursement upon exercised awards
(3.0)
–
(3.0)
Foreign exchange
(61.0)
17.5
(43.5)
At 31 December 2021
5,986.3
(1,714.8)
4,271.5
Capital contributions in respect of share-based payments to employees of subsidiaries
12.8
–
12.8
Reduction due to reimbursement upon exercised awards
(8.0)
–
(8.0)
Foreign exchange
(641.0)
183.6
(457.4)
At 31 December 2022
5,350.1
(1,531.2)
3,818.9
An impairment assessment was performed on the investments in subsidiaries at 31 December 2022 and 31 December 2021
with no impairment identified. The share price of Convatec Group plc at 31 December 2022 was £2.33 (2021: £1.93).
The following UK subsidiaries are exempt from the requirement to file audited accounts by virtue of Section 479A of the
Companies Act 2006:
Company
registration
number
Convatec Group Holdings Limited
12698069
Convatec International U.K. Limited
06622355
221
Convatec Group Plc Annual Report and Accounts 2022
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4. DEFERRED TAX ASSETS
Deferred tax assets mainly arise in relation to timing differences on the exercise of share-based awards, and taxable losses
arising in the normal course of business.
$m
At 1 January 2021
2.7
Movement in income statement
(0.8)
Movement in other comprehensive income
0.2
At 31 December 2021
2.1
Movement in income statement
0.6
Movement in other comprehensive income
0.1
Foreign exchange
(0.2)
At 31 December 2022
2.6
The deferred tax asset consists of deferred tax on the following items:
2022
$m
2021
$m
Share-based payments
2.6
2.1
At 31 December
2.6
2.1
Deferred tax assets are only recognised where it is probably that future profit will be available to utilise the tax losses.
5. OTHER RECEIVABLES
Other receivables consist of amounts due from Group undertakings, other receivables and prepaid insurance.
2022
$m
2021
$m
Amounts falling due within one year:
Amounts owed by Group undertakings
14.9
7.1
Other receivables
7.4
2.9
Prepayments
0.1
0.2
22.4
10.2
Included in the amounts owed by Group undertakings at 31 December 2022 are intercompany loans of $5.7 million
(2021: $1.5 million) with a variable interest rate set at a margin 10bps below SONIA. The loans are unsecured and are
repayable on demand.
6. TRADE AND OTHER PAYABLES
Trade payables consist of amounts payable to third parties related predominantly to the Company’s corporate responsibilities.
Other payables represent amounts owed to Group undertakings, accruals and other taxation and social security.
2022
$m
2021
$m
Amounts falling due within one year:
Trade payables
0.9
2.9
Other taxation and social security
1.2
1.0
Accruals
3.4
4.4
5.5
8.3
Company financial statements
continued
Convatec Group Plc Annual Report and Accounts 2022
222
Financial statements
7. RESERVES
All reserve balances included in this note are components of Equity and are non-distributable.
Share capital, share premium and own shares
Details of the Company's share capital, share premium and own shares are detailed in Note 17 – Share capital and reserves to
the Consolidated Financial Statements.
Merger reserve
The merger reserve represents the fair value in excess of the par value of shares issued as part of a share exchange upon
incorporation of the Company.
Currency translation reserve
The currency translation reserve comprises the exchange differences arising on the translation of the assets and liabilities
of the Company into US dollars at the prevailing balance sheet rate and income and expense items being translated at the
average exchange rates for the period.
Other reserves
Other reserves are in respect of movements on equity-settled share-based payments.
8. DISTRIBUTABLE RESERVES
As the Company is a holding company with no direct operations, the capacity of the Company to make dividend payments
is primarily derived from dividends received from subsidiary companies.
The retained surplus $1,562.9 million (2021: $1,590.3 million) of the Company equates to the distributable reserves. Details of
the considerations and rationale for the distribution of dividends are given in the Directors’ report on page 162.
9. FINANCIAL GUARANTEES
The Company has guaranteed certain external borrowings of subsidiaries which at 31 December 2022 amounted to
$1,227.2 million (2021: $1,357.9 million).
10. SUBSEQUENT EVENTS
On 1 March 2023, the Board proposed the final dividend in respect of 2022 subject to shareholder approval at the Annual
General Meeting on 18 May 2023, to be distributed on 25 May 2023. See Note 18 – Dividends to the Consolidated Financial
Statements for further details.
223
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Non-IFRS financial information or alternative performance measures (APMs) are those measures used by management on a
day-to-day basis in their assessment of profit and performance and comparison between periods. The adjustments applied
to IFRS measures reflect the effect of certain cash and non-cash items that the Board believes distort the understanding of
the quality of earnings and cashflows as, by their size or nature, they are not considered part of the core operations of the
business. Adjusted measures also form the basis for performance measures for remuneration, e.g. adjusted operating profit.
For further information see pages 225 to 228.
The APMs used include adjusted gross profit, adjusted general & administration expenses, adjusted selling & distribution
expenses, adjusted operating profit, EBITDA, adjusted EBITDA, adjusted net finance expenses, adjusted non-operating expenses,
adjusted net profit, adjusted earnings per share, adjusted working capital, adjusted cash conversion, adjusted free cash flow and
net debt. Reconciliations for these adjusted measures determined under IFRS are shown on pages 226 to 228. The definitions of
adjusted measures are as calculated within the reconciliation tables.
It should be noted that the Group’s APMs may not be comparable to other similarly titled measures used by other companies
and should not be considered in isolation or as a substitute for the equivalent measures calculated and presented in
accordance with IFRS.
In determining whether an item should be presented as an allowable adjustment to IFRS measures, the Group considers
items which are significant either because of their size or their nature and arise from events that are not considered part of
the core operations of the business. These tend to be one-off events but may still cross more than one accounting period.
Recurring items may be considered in respect of the amortisation of acquisition-related intangibles assets in order to provide
comparability between peer groups where such assets may have been internally generated and therefore, are not reflected
on that company’s balance sheet with a resulting amortisation charge.
If an item meets at least one of these criteria, the Board, through the Audit and Risk Committee, then exercises judgement as
to whether the item should be classified as an allowable adjustment to IFRS performance measures.
Adjustments to derive adjusted operating profit, excluding the impact of tax, for the years ended 31 December 2022 and 2021
include the following costs:
•
Amortisation of intangible assets in respect of material acquisitions ($131.3 million and $130.4 million respectively).
•
Costs incurred in respect of acquisition and divestiture activities ($56.6 million and $17.8 million respectively).
•
Impairment of intangible assets from material acquisitions ($1.4 million and $nil respectively).
•
Termination costs in respect of the Group’s transformation programme and exit from hospital care business and related
industrial sales activities ($7.1 million and $4.3 million respectively).
•
Litigation expenses arising on matters deemed outside the ordinary course of business ($nil and $5.6 respectively).
The tax effect of the adjustments is reflected in the adjusted tax expense to remove the tax impact from adjusted net profit
and adjusted earnings per share.
Adjusted EBITDA, which is used to calculate the metric of adjusted cash conversion and adjusted working capital, is calculated
by adding back share-based payments to adjusted operating profit, together with the annual depreciation, amortisation
charge and impairment/write-off of assets not already removed within the adjusted operating profit.
Non-IFRS financial information
Convatec Group Plc Annual Report and Accounts 2022
224
Financial statements
Amortisation of acquisition-related intangible assets
The Group’s strategy is to grow both organically and through acquisition, with larger acquisitions being targeted to
strengthen our position in key geographies and/or business categories or which provide access to new technology.
The nature of the businesses acquired includes the acquisition of significant intangible assets, which are required to be
amortised. The Board and management regard the amortisation as a distortion to the quality of earnings and it has no cash
implications in the year. The amortisation also distorts comparability with peer groups where such assets may have been
internally generated and, therefore, not reflected on their balance sheet. Amortisation of acquisition-related intangible
assets is, by its nature, a recurring adjustment.
Acquisition-related activities
Costs directly related to potential and actual strategic transactions which have been executed, aborted or are in-flight and
which would improve the strategic positioning of the Group are deemed adjusting items.
Acquisition-related costs relate to deal costs, integration costs and earn-out adjustments including discounting impact which
are incurred directly as a result of the Group undertaking or pursuing an acquisition. Deal costs are wholly attributable to the
deal, including legal fees, due diligence fees, bankers' fees/commissions and other direct costs incurred as a result of the actual
or potential transaction. Integration costs are wholly attributable to the integration of the target and based on integration plans
presented at the point of acquisition, including the cost of retention of key people where this is in excess of normal
compensation, redundancy of target staff and early lease termination payments.
Adjusted measures in relation to acquisitions also include aborted deal costs.
Divestiture-related activities
Divestiture-related activities comprise the gains or losses resulting from disposal of assets or divestment of a business as a result
of a sale, major business change or restructuring programme. These include write-down of non-current assets, provisions to
recognise inventories at realisable value, provisions for costs of exiting contracts and associated legal fees, and any other directly
attributable costs. Any income from the ultimate disposal of a business or subsidiary is included in the gain or loss.
Adjusted measures in relation to divestiture also include aborted deal costs.
Impairment of assets
Impairments, write-offs and gains and losses from defined programmes and where the Group considers the circumstances
of such event are not reflective of normal business trading performance or when transactions relate to acquisition-related
intangible assets where the amortisation is already excluded from the calculation of adjusted measures.
Termination benefits and related costs
Termination benefits and other related costs arise from Group-wide initiatives to reduce the ongoing cost base and improve
efficiency in the business, including divestitures from non-strategic activities. The Board considers each project individually
to determine whether its size and nature warrants separate disclosure. Qualifying items are limited to termination benefits
(including retention) without condition of continuing employment in respect of major Group-wide change programmes.
Where discrete qualifying items are identified these costs are highlighted and excluded from the calculation of adjusted
measures. Due to their nature, these adjusted costs may span more than one year. Restructuring costs not related to
termination benefits are reported in the normal course of business and are not adjusted.
Litigation expenses
Litigation expenses may arise from the ongoing defence or pursuit of claims against or for the Group or the settlement of
claims. The Board considers each litigation claim individually to determine whether the financial consequences were due to
a major incident or uncontrollable factors which distort IFRS measures, and determine if adjusting for the expense would aid
the user in understanding the Group’s performance in that year and comparative periods.
225
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Reconciliation of earnings to adjusted earnings for the years ended 31 December 2022 and 2021
Year ended 31 December 2022
Revenue
$m
Gross
profit
$m
Operating
costs
$m
Operating
profit
$m
Finance
expense,
net
$m
Non-
operating
expense,
net
$m
PBT
$m
Income
tax
$m
Net
profit
$m
As reported
2,072.5
1,103.9
(896.6)
207.3
(
67.7
)
(57.7)
81.9
(19.0)
62.9
Amortisation of acquired intangibles
–
111.6
19.7
131.3
–
–
131.3
(29.2)
102.1
Acquisition-related costs
–
8.7
8.2
16.9
15.6
29.5
62.0
(3.5)
58.5
Divestiture-related costs
–
16.6
23.1
39.7
–
14.2
53.9
(7.8)
46.1
Termination benefits and related costs
–
4.8
2.3
7.1
–
–
7.1
(1.2)
5.9
Impairment of assets
–
–
1.4
1.4
–
–
1.4
–
1.4
Total adjustments including tax effect
–
141.7
54.7
196.4
15.6
43.7
255.7
(41.7)
214.0
Other discrete tax items
–
–
–
–
–
–
–
(20.1)
(20.1)
Adjusted
2,072.5
1,245.6
(841.9)
403.7
(
52.1
)
(14.0)
337.6
(80.8)
256.8
Software and R&D amortisation
16.1
Depreciation
61.8
Impairment/write-off of assets
1.7
Share-based payments
16.7
Adjusted EBITDA
500.0
Year ended 31 December 2021
Revenue
$m
Gross
profit
$m
Operating
costs
$m
Operating
profit
$m
Finance
expense,
net
$m
Non-
operating
expense,
net
$m
PBT
$m
Income
tax
$m
Net
profit
$m
As reported
2,038.3
1,123.1
(919.5)
203.6
(43.5)
(8.8)
151.3
(33.7)
117.6
Amortisation of acquired intangibles
–
109.5
20.9
130.4
–
–
130.4
(10.8)
119.6
Acquisitions and divestitures
–
–
17.8
17.8
–
–
17.8
–
17.8
Termination benefits and
related costs
–
0.7
3.6
4.3
–
–
4.3
(0.7)
3.6
Litigation expenses
–
–
5.6
5.6
–
–
5.6
–
5.6
Total adjustments including
tax effect
–
110.2
47.9
158.1
–
–
158.1
(11.5)
146.6
Other discrete tax items
–
–
–
–
–
–
–
(1.2)
(1.2)
Adjusted
2,038.3
1,233.3
(871.6)
361.7
(43.5)
(8.8)
309.4
(46.4)
263.0
Software and R&D amortisation
13.7
Amortisation of immaterial acquired
intangibles
3.1
Depreciation
63.4
Impairment/write-off of assets
5.9
Share-based payments
16.4
Adjusted EBITDA
464.2
Included within the amortisation of acquired intangibles of $131.3 million (2021: $130.4 million), $93.0 million (2021: $96.8 million)
related to intangible assets arising from the spin-out from Bristol-Myers Squibb in 2008. The carrying amount of these
intangible assets at 31 December 2022 was $330.2 million and will be fully amortised by 31 December 2026.
Acquisition-related costs of $62.0 million are directly related to potential and actual strategic transactions which have been
executed, aborted or are in-flight and which seek to improve the strategic positioning of the Group. The majority of
acquisition-related costs are in respect of the Triad Life Sciences acquisition, which included $2.4 million of legal and adviser’s
fees, $23.7 million of remeasurement charge on contingent consideration, $15.3 million of discounting unwind and $8.7 million
of inventory fair value uplift release. The net cash impact in relation to acquisition-related costs was $2.9 million.
Divestiture-related costs of $53.9 million are mainly related to the phased exit from the low margin hospital care business and
industrial sales portfolio, and include the impairment of intangible assets and property, plant and equipment, write-off of
inventories, and contract exit costs (refer to Note 27 – Divestitures). The net cash impact in relation to divestiture-related
costs was $2.1 million.
Termination benefits and related costs of $7.1 million, pre-tax, are primarily in respect of the severance costs from the Group’s
withdrawal from its hospital care and industrial sales portfolio. The net cash impact of these costs was $10.3 million.
Of the total net cash impact of $15.3 million as presented above, $4.2 million related to accruals recorded in the prior year.
Impairment of assets of $1.4 million relates to a legacy acquisition-related customer relationship asset which was impaired
aspart of rationalisation of activities in the portfolio.
Non-IFRS financial information
continued
Convatec Group Plc Annual Report and Accounts 2022
226
Financial statements
Other discrete tax items in 2022 relate to the tax benefit from the recognition of deferred tax assets following the acquisition
of Triad Life Sciences. In 2021, other discrete tax items related to the tax benefit of $6.8 million resulting from the recognition
of deferred tax following the acquisition of Cure Medical, partially offset by a tax expense of $5.6 million relating to the
revaluation of deferred tax liabilities on UK-acquired intangibles as a result of the increase in the UK corporation tax rate
from1 April 2023. For further details on deferred taxation see Note 6 – Income taxes to the Consolidated Financial Statements.
Reconciliation of operating costs to adjusted operating costs for the years ended 31 December 2022 and
31 December 2021
2022
2021
S&D
1
$m
G&A
2
$m
R&D
3
$m
Other
4
$m
Operating
costs
$m
S&D
1
$m
G&A
2
$m
R&D
3
$m
Operating
costs
$m
As reported
(575.9)
(214.9)
(92.0)
(
13.8
)
(896.6)
(539.7)
(285.3)
(94.5)
(919.5)
Amortisation of acquired intangibles
–
19.7
–
–
19.7
–
20.9
–
20.9
Acquisitions and divestitures
9.0
9.9
–
12.4
31.3
0.5
17.3
–
17.8
Impairment of assets
–
–
–
1.4
1.4
–
–
–
–
Termination benefits and
related costs
2.0
0.3
–
–
2.3
–
3.7
(0.1)
3.6
Litigation expenses
–
–
–
–
–
–
5.6
–
5.6
Adjusted
(564.9)
(185.0)
(92.0)
–
(841.9)
(539.2)
(237.8)
(94.6)
(871.6)
1.
S&D represents selling and distribution expenses.
2.
G&A represents general and administrative expenses.
3.
R&D represents research and development expenses.
4.
Other relates to the impairment of assets from the Group’s withdrawal from hospital care and industrial sales portfolio and impairment of product-related
intangible assets from previous acquisition.
Reconciliation of income tax expense to adjusted income tax expense
2022
$m
2021
$m
Income tax expense
(19.0)
(33.7)
Tax effect of adjustments
(41.7)
(11.5)
Other discrete tax items
1
(20.1)
(1.2)
Adjusted income tax expense
(80.8)
(46.4)
1.
Other discrete tax items – see note above in respect of adjustments to profit.
Reconciliation of basic and diluted earnings per share to adjusted earnings per share for the years ended
31 December 2022 and 31 December 2021
2022
$m
Adjusted 2022
$m
2021
$m
Adjusted 2021
$m
Net profit attributable to the shareholders of the Group
62.9
256.8
117.6
263.0
Number
Number
Basic weighted average ordinary shares in issue
1
2,023,839,657
2,008,923,797
Diluted weighted average ordinary shares in issue
1
2,040,247,468
2,026,340,345
Cents per share
Cents per share
Cents per share
Cents per share
Basic earnings per share
3.1
12.7
5.9
13.1
Diluted earnings per share
3.1
12.6
5.8
13.0
1.
See Note 7 – Earnings per share to the Consolidated Financial Statements.
227
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Cash conversion for the years ended 31 December 2022 and 31 December 2021
2022
$m
2021
$m
Operating profit
207.3
203.6
Depreciation of property, plant and equipment
39.7
40.6
Depreciation of right-of-use assets
22.1
22.8
Amortisation of intangible assets
147.4
147.2
Impairment/write-off of intangible assets and property, plant and equipment
15.5
5.9
EBITDA
432.0
420.1
Non-cash items
Share-based payments
16.7
16.4
Working capital movement
(62.5)
(31.6)
Loss on foreign exchange derivatives
(1.7)
(4.3)
Net cash generated from operations
384.5
400.6
Acquisition of property, plant and equipment and intangibles assets
(144.2)
(94.1)
Net cash for cash conversion
240.3
306.5
Income taxes paid
(52.9)
(59.2)
Free cash flow (post-tax)
187.4
247.3
Reconciliation of adjusted net cash and adjusted free cash flow (to calculate adjusted cash conversion)
2022
$m
2021
$m
Net cash for cash conversion
240.3
306.5
Non-operating (gain)/loss on foreign exchange forward contracts
–
0.4
Acquisitions and divestitures adjustments
5.0
13.0
Termination benefits and related costs adjustments
10.2
8.4
Litigation costs adjustments
–
5.6
Adjusted net cash for cash conversion
255.5
333.9
Income taxes paid
(52.9)
(59.2)
Adjusted free cash flow (post-tax)
202.6
274.7
EBITDA
432.0
420.1
Adjusted EBITDA
500.0
464.2
Cash conversion
55.6%
73.0%
Adjusted cash conversion
51.1%
71.9%
Reconciliation of adjusted working capital
2022
$m
2021
$m
Working capital movement
1
(62.5)
(31.6)
Decrease in termination benefits
2
3.1
4.1
Increase in respect of acquisitions and divestitures
2
(39.2)
(4.8)
Adjusted working capital movement
(98.6)
(32.3)
1.
Working capital movement is the change in assets and liabilities total within the Consolidated Statement of Cash Flows on page 171.
2.
These are the cash flow impacts to the adjusted items shown in the reconciliation of earnings to adjusted earnings table on page 226.
Net debt
Net debt is calculated as the carrying value of current and non-current borrowings (Note 21 – Borrowings), net of cash and
cash equivalents (Note 22 – Cash and cash equivalents) and excluding lease liabilities.
2022
$m
2021
$m
Borrowings
1,211.9
1,344.6
Lease liabilities
88.3
90.5
Interest-bearing liabilities
1,300.2
1,435.1
Cash and cash equivalents
(143.8)
(463.4)
Interest-bearing liabilities net of cash
1,156.4
971.7
Net debt (excluding lease liabilities)
1,068.1
881.2
Net debt (excluding lease liabilities)/adjusted EBITDA
2.1
1.9
Non-IFRS financial information
continued
Convatec Group Plc Annual Report and Accounts 2022
228
Financial statements
Details of the Company’s subsidiaries and associated undertakings at 31 December 2022 are as follows:
Name
Place of business and
registered office
Portion of ownership
interest
%
Portion of
voting power held
%
Akers & Dickinson Limited
1
United Kingdom
100%
100%
Allied Medical (UK) Services Limited
1
United Kingdom
100%
100%
Alpha-Med (Medical & Surgical) Limited
1
United Kingdom
100%
100%
Amcare Limited
1
United Kingdom
100%
100%
Arthur Wood Limited
1
United Kingdom
100%
100%
B.C.A. Direct Limited
1
United Kingdom
100%
100%
Bradgate-Unitech Limited
1
United Kingdom
100%
100%
Convatec Accessories Limited
1
United Kingdom
100%
100%
Convatec Holdings U.K. Limited
1
United Kingdom
100%
100%
Convatec Speciality Fibres Limited
1
United Kingdom
100%
100%
Convatec International U.K. Limited
1
United Kingdom
100%
100%
Convatec Limited
1
United Kingdom
100%
100%
Farnhurst Medical Limited
1
United Kingdom
100%
100%
Lance Blades Limited
1
United Kingdom
100%
100%
M.S.B. Limited
1
United Kingdom
100%
100%
Needle Industries (Sheffield) Limited
1
United Kingdom
100%
100%
Nottingham Medical Equipment Limited
1
United Kingdom
100%
100%
Novacare UK Limited
1
United Kingdom
100%
100%
Pharma-Plast Limited
1
United Kingdom
100%
100%
Resus Positive Limited
1
United Kingdom
100%
100%
Rotax Razor Company Limited
1
United Kingdom
100%
100%
Shrimpton & Fletcher Limited
1
United Kingdom
100%
100%
Steriseal Limited
1
United Kingdom
100%
100%
SureCalm Healthcare Holdings Limited
1
United Kingdom
100%
100%
SureCalm Healthcare Ltd
1
United Kingdom
100%
100%
SureCalm Pharmacy Limited
1
United Kingdom
100%
100%
Unomedical Developments Limited
1
United Kingdom
100%
100%
Unomedical Holdings Limited
1
United Kingdom
100%
100%
Unomedical Limited
1
United Kingdom
100%
100%
Unoplast (U.K.) Limited
1
United Kingdom
100%
100%
Convatec Finance Holdings Limited*
2
United Kingdom
100%
100%
Convatec Management Holdings Limited*
2
United Kingdom
100%
100%
Convatec Group Holdings Limited*
2
United Kingdom
100%
100%
Convatec Services Limited (dissolved)
2
United Kingdom
100%
100%
Cidron Healthcare Limited*
3
Jersey
100%
100%
Convatec Healthcare Ireland Limited
4
Ireland
100%
100%
Convatec France Holdings SAS
5
France
100%
100%
Laboratoires Convatec SAS
5
France
100%
100%
Convatec Healthcare D S.à.r.l.
6
Luxembourg
100%
100%
Convatec Spain Holdings, S.L.
7
Spain
100%
100%
Convatec Spain S.L.
7
Spain
100%
100%
CVT Business Services, Unipessoal Lda.
8
Portugal
100%
100%
KVTech Portugal – Produtos Medicos Unipessoal Ltda
9
Portugal
100%
100%
Convatec OY
10
Finland
100%
100%
Convatec (Switzerland) GmbH
11
Switzerland
100%
100%
Convatec International Services GmbH
12
Switzerland
100%
100%
Convatec (Austria) GmbH
13
Austria
100%
100%
Convatec Italia S.r.l.
14
Italy
100%
100%
Convatec Hellas Medical Products S.A.
15
Greece
100%
100%
Convatec Polska Sp. Z.o.o
16
Poland
100%
100%
Convatec Ceska Republika s.r.o.
17
Czech Republic
100%
100%
Convatec (Australia) PTY Limited
18
Australia
100%
100%
Convatec (New Zealand) Limited
19
New Zealand
100%
100%
Convatec Sağlik Ürünleri Limited Şirketi
20
Turkey
100%
100%
Convatec (Sweden) AB
21
Sweden
100%
100%
Convatec Norway AS
22
Norway
100%
100%
229
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Subsidiary and related undertakings
Name
Place of business and
registered office
Portion of ownership
interest
%
Portion of
voting power held
%
Convatec (Germany) GmbH
23
Germany
100%
100%
EuroTec GmbH
24
Germany
100%
100%
Unomedical s.r.o.
25
Slovakia
100%
100%
EuroTec B.V.
26
Netherlands
100%
100%
EuroTec Beheer B.V.
26
Netherlands
100%
100%
Convatec Nederland B.V.
27
Netherlands
100%
100%
Convatec Belgium BVBA
28
Belgium
100%
100%
EuroTec BV (Belgium Branch)
29
Belgium
100%
NA
Papyro-Tex A/S
30
Denmark
100%
100%
Convatec Denmark A/S
31
Denmark
100%
100%
Unomedical A/S
32
Denmark
100%
100%
Convatec Denmark Holdings ApS
32
Denmark
100%
100%
Convatec South Africa (PTY) Limited
33
South Africa
100%
100%
ConvaCare Medical South Africa (PTY) Ltd
33
South Africa
100%
100%
Convatec Middle East & Africa LLC
34
Egypt
100%
100%
Convatec Middle East FZ-LLC
35
United Arab Emirates
100%
100%
Convatec (Singapore) PTE Limited
36
Singapore
100%
100%
ConvaCare Medical Singapore Pte Ltd (liquidated)
36
Singapore
100%
100%
Convatec Malaysia Sdn Bhd
37
Malaysia
100%
100%
Convatec China Limited (Beijing Branch)
38
China
100%
NA
Convatec China Limited (Guang Zhou Branch)
39
China
100%
NA
Convatec China Limited
40
China
100%
100%
Convatec Dominican Republic Inc.
41
Dominican Republic
100%
100%
Boston Medical Device Dominicana S.R.L.
42
Dominican Republic
100%
100%
Convatec Hong Kong Limited
43
Hong Kong
100%
100%
Convatec Japan KK
44
Japan
100%
100%
Convatec (Singapore) PTE Limited (Taiwan Branch)
45
Taiwan
100%
NA
Convatec (Thailand) Co. Limited
46
Thailand
100%
100%
ZAO Convatec
47
Russia
100%
100%
Convatec Korea, Ltd
48
Korea
100%
100%
Convatec Argentina SRL
49
Argentina
100%
100%
Convatec Canada Limited
50
Canada
100%
100%
Unomedical S.A de C.V.
51
Mexico
100%
100%
Boston Medical Care, S. de R.L. de C.V.
52
Mexico
100%
100%
Boston Medical Device de México, S. de R.L. de C.V.
52
Mexico
100%
100%
Unomedical Devices S.A. de C.V.
53
Mexico
100%
100%
Convatec Peru S.A.C.
54
Peru
100%
100%
Convatec Brasil Ltda.
55
Brazil
100%
100%
Convatec Medical Care Assistência a Paciente Ltda
55
Brazil
100%
100%
Boston Medical Devices Colombia Ltda.
56
Colombia
100%
100%
Boston Medical Care S.A.S IPS
57
Colombia
100%
100%
Boston Medical Care de Chile S.P.A
58
Chile
100%
100%
Boston Medical Device de Chile S.A.
58
Chile
100%
100%
Boston Medical Device Ecuador S.A.
59
Ecuador
100%
100%
Boston Medical Device de Venezuela, C.A.
60
Venezuela
100%
100%
Convatec India Private Limited
61
India
100%
100%
ConvaCare Medical India Private Limited
62
India
100%
100%
180 Medical Acquisition Inc.
63
US
100%
100%
180 Medical Holdings Inc.
63
US
100%
100%
180 Medical Inc.
63
US
100%
100%
AbViser Medical, LLC
64
US
100%
100%
Boston Medical Device, Inc.
64
US
100%
100%
Convatec Inc.
64
US
100%
100%
Boston Medical Device International, LLC
65
US
100%
100%
Cidron Healthcare GP, Inc.
66
US
100%
100%
Convatec Technologies Inc.
67
US
100%
100%
Personally Delivered, Inc.
68
US
100%
100%
Convatec Group Plc Annual Report and Accounts 2022
230
Financial statements
Subsidiary and related undertakings
continued
Name
Place of business and
registered office
Portion of ownership
interest
%
Portion of
voting power held
%
Woodbury Holdings, Inc.
68
US
100%
100%
WPI Acquisition Corporation
68
US
100%
100%
WPI Holdings Corporation
68
US
100%
100%
Wilmington Medical Supply, Inc.
69
US
100%
100%
PRN Medical Services, LLC
70
US
100%
100%
PRNMS Investments LLC
70
US
100%
100%
Symbius Medical Inc.
70
US
100%
100%
South Shore Medical Supply, Inc.
71
US
100%
100%
Unomedical America, Inc.
72
US
100%
100%
Unomedical, Inc.
72
US
100%
100%
J&R Medical, LLC
73
US
100%
100%
Cure Medical LLC
74
US
100%
100%
Convatec Triad Life Sciences, LLC
75
US
100%
100%
1
GDC First Avenue, Deeside Industrial Park,
Deeside, Flintshire CH5 2NU, UK
2
3 Forbury Place, 23 Forbury Road, Reading,
RG1 3JH, UK
3
44 Esplanade, St. Helier, Jersey, JE4 9WG,
Channel Islands
4
10 Earlsfort Terrace, Dublin 2, D02 T380,
Ireland
5
90, Boulevard National, La Garenne
Colombes, F-92250, Paris, France
6
12C, rue Guillaume Kroll, L-1882, Luxembourg
7
Constitucion 1, 3ªPlanta, 08960 Sant Just
Desvern, Barcelona, Spain
8
Avenida da Liberdade, 249 ‐1, 1250‐143 Lisbon,
Portugal
9
Avenida da Liberdade, 144, 7º 1250-146,
Lisbon, Portugal
10
Life Science Center, Keilaranta 16 B, 02150
Espoo, Finland
11
Mühlentalstrasse 38, 8200 Schaffhausen,
Switzerland
12
Mühlentalstrasse 36/38, 8200 Schaffhausen,
Switzerland
13
Schubertring 6, 1010 Wien, Austria
14
Via della Sierra Nevada, 60-00144 Rome, Italy
15
392A Mesogeion Avenue, Ag. Paraskevi, 15341,
Athens, Greece
16
Al. Armii Ludowej 26, 00-609 Warszawa,
Poland
17
Olivova 2096/4, Prague 1, 110 00, Praha 1,
Czech Republic
18
Level 2 Building 5, Brandon Office Park,
530-540 Springvale Road, Glen Waverley VIC
3150, Australia
19
Crowe Horwath, Level 29, 188 Quay Street,
Auckland 1010, New Zealand
20
Şehit İlknur Keles Sokak, Hüseyin
Bağdatlioğlu Plaza 7/3, Kozyatagi, Istanbul,
Turkey 34742
21
Gårdsfogdevägen 18B, 168 67 Bromma,
Sweden
22
Nils Hansen vei 2, 0667 Oslo, Norway
23
Gisela-Stein-Strasse 6, 81671 Munich,
Germany
24
Solinger Strasse 93 40764 Langenfeld,
Germany
25
Priemyselný Park 3, 071 01 Michalovce,
Slovakia
26
Schotsbossenstraat 8, 4705AG Roosendaal,
Netherlands
27
Houttuinlaan 5F, 3447 GM Woerden,
Netherlands
28
Parc d’Alliance, Boulevard de France 9,
B-1420 Braine l’Alleud, Belgium
29
Stationsstraat 35, 2950 Kapellen, Belgium
30
c/o Convatec Harlev Skinderskovvej 32-36,
2730, Harlev, Denmark
31
Lautruphøj 1 DK-2750 Ballerup, Denmark
32
Åholmvej 1-3, 4320 Lejre, Denmark
33
Workshop 17 Office 1-4, 16 Baker Street,
Rosebank, Johannesburg, Gauteng 2196,
South Africa
34
22 Kamal El Din Hussein St, 3rd Floor,
Heliopolis Sheraton, Post Code 11977, Cairo,
Egypt
35
Customer Services Counter, Building N. 02,
First Floor, Dubai Studio City, UAE
36
456 Alexandra Road, Fragrance Empire
Building #18-01/02, Singapore 119962
37
10th floor, Menara Hap Seng, No. 1 & 3, Jalan
P. Ramlee, 50250 Kuala Lumpur, Malaysia
38
Unit 805, 8F Jinbao Tower, No.89 Jinbao
Street Dongcheng District, Beijing 100005,
P.R.C.
39
Unit 808, Level 8, Fortune Plaza, No.116 Ti Yu
Dong Road, Tianhe District, Guangzhou City,
Guangdong Province, 510620, P.R.C.
40
Unit 1105-1106, Crystal Plaza Office Tower 1,
No.1359 Yaolong Road, Pudong District,
Shanghai 200124, P.R.C
41
Carretera Sanchez km 18 ½, Parque Industrial
Itabo, Haina, San Cristóbal, Dominican
Republic
42
Avenida Winston Churchill ES1. 27 de
Febrero, Apto Plaza Central, Tercer Nivel, del
Sector PIANTINI de la Ciudad de Santo
Domingo de Guzman, Suite A-368, Dominican
Republic
43
Unit 1901 Yue Xiu Bldg 160–174, Lockhart
Road, Wan Chai, Hong Kong
44
1-1-7 Choraku, Bunkyo-ku, Tokyo 112-0004,
Japan
45
5F.-4, No. 57, Fuxing N. Rd, Songshan Dist.,
Taipei City, Taiwan (Post code: 10595)
46
No. 87, 9th Floor M Thai Tower All Seasons
Place, Wireless Road, Lumpini, Phatumwan,
Bangkok, Thailand
47
Kosmodamianskaya nab. 52, building 1, 9th
floor, 115054, Moscow, Russia
48
4F, American Standard B/D,
Yeongdongdaero 112gil 66, Gangnam-Gu,
Seoul, Republic of Korea 06083
49
CERRITO 1070 Piso:3 Dpto:71, 1010-CIUDAD
AUTONOMA BUENOS AIRES, Argentina
50
900-1959 Upper Water Street, Halifax, Nova
Scotia B3J 2N2, Canada
51
Avenida Industrial Falcón, L7, Parque
Industrial del Norte, Reynosa Tamps, Mexico
C.P. 88736
52
Avenida Insurgentes sur 619, 3° Piso, CIUDAD
DE MEXICO, Nápoles, 03810, Mexico
53
Av. Fomento Industrial L9 M3, Parque
Industrial del Norte, Reynosa Tamps, Mexico
C.P. 88736
54
Av. La Encalada 1010 of. 806, Santiago de
Surco, Lima 15023, Perú
55
Rua Alexandre Dumas, 2100,15º. Andar, Ed
Corporate Plaza, Conj 151 e 152, – Chácará Stº
Antonio – São Paulo, Brazil Cep: 04717-913
56
Torre los Nogales, Calle 76 # 11-17, Fifth and
Second Floor, Bogotá, Colombia
57
Calle 82 # 18-31, Bogotá, Colombia
58
Av Suecia 0181, Providencia, Santiago, Chile
59
Robles E4-136 y Av. Amazonas, Edificio
Proinco Calisto, piso 12, Quito, Ecuador
EC170526
60
Av. Sorocaima, Libertador con Venezuela,
Edif Atrium. Piso 3, Oficina 3G, Urb El Rosal,
Municipio Chacao, Edo, Miranda, Venezuela
61
Next Logistics, Unit No 206, Tower B, Digital
Greens, Sector-61 Golf Course Extension
Road,
Gurgaon-122102, Haryana, India
62
10th Floor 1002 B, Mangnum Tower-1, Gold
Course Extention Road, Sector 58,
Gurugram, Gurgaon, Haryana, India, 122011
63
8516 Northwest Expressway, Oklahoma City,
OK 73162, US
64
200 Crossing Boulevard, Suite 101
Bridgewater,
NJ 08807, US
65
2315 NW 107th Avenue Suite A30, Doral,
Florida 33172, US
66
The Corporation Trust Company,
Corporation Trust Center, 1209 Orange
Street, Wilmington, New Castle, Delaware
19801, US
67
3993 Howard Hughes Parkway Suite 250, Las
Vagas, Nevada 89169-6754, US
68
725 Primera Blvd, Suite 230, Lake Mary, FL
32746-2127, US
69
1206 N. 23rd Street, Wilmington, NC
28405-1810, US
70
20333 N. 19th Avenue, Suite 101, Phoenix, AZ
85027-3627, US
71
58 Norfolk Avenue, Unit 2, South Easton, MA
02375-1907, US
72
5701-1 S Ware RD, McAllen, TX 78504, US
73
4635 Southwest Freeway, Suite 800,
Houston, TX 77027-7105, US
74
120 South Central Avenue, Clayton, Mo 63105
75
251 Little Falls Drive, Wilmington, Delaware,
19808, US
*
Directly held investment by Convatec
Group Plc
231
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CONVATEC GROUP PLC
Report on the audit of the Financial Statements
1. Opinion
We have audited the Financial Statements which comprise:
–
the Consolidated Income Statement;
–
the Consolidated Statement of Comprehensive Income;
–
the Consolidated and Company Statements of Financial Position;
–
the Consolidated and Company Statements of Changes in Equity;
–
the Consolidated Statement of Cash Flows; and
–
the related notes 1 to 30 of the Consolidated Financial Statements and Notes 1 to 10 of the Company Financial
Statements.
The financial reporting framework that has been applied in the preparation of the Group Financial Statements is
applicable law and United Kingdom adopted international accounting standards and IFRSs as issued by the IASB.
The financial reporting framework that has been applied in the preparation of the Company Financial Statements
is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework”
(United Kingdom Generally Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the
Financial Statements section of our report.
We are independent of the Group and the Company in accordance with the ethical requirements that are relevant
to our audit of the Financial Statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical
Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements. The non-audit services provided to the Group and the Company for the year
are disclosed in note 3.3 to the Financial Statements. We confirm that we have not provided any non-audit services
prohibited by the FRC’s Ethical Standard to the Group or the Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
In our opinion:
–
the Financial Statements of Convatec Group Plc (the ‘Company’) and its subsidiaries (the ‘Group’) give a true and
fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2022 and of the Group’s profit
for the year then ended;
–
the Group Financial Statements have been properly prepared in accordance with United Kingdom adopted
international accounting standards and International Financial Reporting Standards (IFRSs) as issued by the
International Accounting Standards Board (IASB);
–
the Company Financial Statements have been properly prepared in accordance with United Kingdom Generally
Accepted Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and
–
the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006.
Independent auditor’s report
Convatec Group Plc Annual Report and Accounts 2022
232
Financial statements
3. Summary of our audit approach
Key audit matters
In the current year, we have identified the following new key audit matters:
–
Acquisition of Triad Life Sciences Inc;
–
Accounting for the exit of hospital care and related industrial sales activities; and
–
Revenue recognition across key markets.
Further explanation of the reasons these have been assessed as key audit matters is
provided in Section 5.
In 2021, we identified four key audit matters, none of which have been identified as continuing
in the current year. These included: (i) changes in cash-generating unit (“CGU”) groups and
reallocation of goodwill, for which there were no CGU changes in 2022 (ii) Taxation – uncertain
tax positions (UTPs) in connection with transfer pricing arrangements which we did not
identify as a significant risk in 2022 (iii) identification and valuation of adjusting items
reported within Alternative Performance Measures (“APMs”), where management policy
for APMs is embedded and is no longer deemed to be a key audit matter, and (iv) acquisition
accounting of Cure Medical LLC – focusing on the intangible asset valuation which is non
recurring in nature.
Materiality
The materiality that we used for the Group Financial Statements was $9.8m which was
determined based on adjusted profit before tax.
Scoping
Combined, we performed audit procedures across fourteen countries accounting for 82%
of revenue, 88% of profit before tax and 81% of net assets.
Significant changes in
our approach
In addition to changes in key audit matters discussed above, our audit approach for 2022,
changed in response to management’s decision to centralise certain finance processes in
the Group’s Global Business Services “GBS” hub which is a shared service centre located
in Lisbon, Portugal. In line with the considerable extent of finance processes transitioned
from the markets to Lisbon, we delivered a significant proportion of the component audits
from GBS.
4. Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the Directors’ use of the going concern basis of accounting
in the preparation of the Financial Statements is appropriate.
Our evaluation of the Directors’ assessment of the Group’s and the Company’s ability to continue to adopt the going
concern basis of accounting included:
–
Evaluating the recently completed financing facilities including nature of facilities, repayment terms and covenants;
–
Assessing the appropriateness of underlying assumptions used in the forecasts and historical forecasting accuracy;
–
Evaluating level of headroom in the forecasts (cash and covenants); and
–
Applying sensitivity analysis to forecasting models.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions
that, individually or collectively, may cast significant doubt on the Group’s and the Company’s ability to continue as a going
concern for a period of at least twelve months from when the Financial Statements are authorised for issue.
In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material
to add or draw attention to in relation to the Directors’ statement in the Financial Statements about whether the Directors
considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant
sections of this report.
233
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
Financial Statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall
audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
5.1. Acquisition of Triad Life Sciences Inc.
Key audit matter
description
In March 2022, the Group completed the acquisition of 100% of the issued share capital of
Triad Life Sciences Inc (“Triad”) a company based in Memphis, Tennessee for a consideration
of $281.0m. The acquisition resulted in the recognition of identifiable product related
intangible assets of $154.8m and goodwill of $129.9m.
Key judgements related to the acquisition included:
–
The valuation of intangible assets identified and resulting goodwill. Management used
a third party expert to assist with the valuation of the acquired intangibles;
–
The valuation of contingent consideration payable. Triad was acquired early in its business
lifecycle and a key judgement at acquisition and at 31 December 2022 related to the fair
value of contingent consideration payable.
–
Following cash milestone payments in the year totalling $50.0m, at 31 December 2022
$130.8 million was estimated as the remaining contingent consideration which is included
within provisions. The range of reasonably possible discounted outcomes within the next
financial year is between $85.2 million and $230.8 million, compared to a maximum
remaining undiscounted contingent consideration of $275.0 million over the earn out
period to 31 March 2024.
The valuation of contingent consideration has been disclosed as a “Critical accounting
judgement and a key source of estimation uncertainty” within Note 1.4 to the Consolidated
Financial Statements. Full details in relation to the acquisition accounting are included within
Note 26. The Audit and Risk Committee include their assessment of this matter on page 129.
How the scope of our
audit responded to the
key audit matter
We performed the following procedures in respect of this key audit matter:
–
We obtained an understanding of the relevant controls over the acquisition accounting,
including the determination of contingent consideration and the fair valuation
of intangible assets arising on acquisition.
–
We reviewed the significant terms of the acquisition within the sale and purchase
agreement.
–
We assessed the competence, capability, and objectivity of management’s expert.
–
With involvement of our internal valuation experts, we evaluated management’s
assumptions and the appropriateness and application of the valuation methodology.
–
We assessed performance and budgeting accuracy since acquisition to evaluate whether
the forecasts that underpin the valuation of intangibles arising on acquisition were
appropriate.
–
We assessed the accuracy of the revenue used in the calculation of contingent
consideration, including verification of a sample of actual revenue transactions for FY22
and evaluation of forecasts for the remainder of the earn out period to 31 March 2024.
–
We evaluated the appropriateness of the disclosures in the Financial Statements including
the disclosure as a key source of estimation uncertainty.
Key observations
We conclude the fair values of the goodwill and product related intangible assets recognised
on acquisition to be appropriate. We are satisfied the assumptions used in the valuation of
the discounted fair value of the contingent consideration are within an acceptable range and
reasonable. We consider the disclosures in relation to the acquisition and the range of
possible outcomes to the earn out to be appropriate.
Independent auditor’s report
continued
Convatec Group Plc Annual Report and Accounts 2022
234
Financial statements
5.2. Accounting for the exit of hospital care and related industrial sales activities.
Key audit matter
description
In May 2022, the Group announced the decision to withdraw from its hospital care activities
and related industrial sales by the end of 2022.
As a result of the exit, the Group has recognised $46.7m of costs of which $25.8m relates to
impairments of product related intangibles, inventory and property, plant and equipment
(“PPE”). The exit costs also included $7.3 million of severance costs, $6.9 million on estimated
contract exit costs and $6.7m of legal and closing down costs.
The completeness of the accounting for the exit has been identified as a key judgement as
this has an impact on the accuracy and reasonability of provisions recognised as well as the
appropriateness of disclosures in the annual report and accounts.
The related disclosure is included within Note 27. The Audit and Risk Committee included
their assessment of this risk on page 129. For specific detail on the Group’s accounting policy,
please see Note 215.
How the scope of our
audit responded to the
key audit matter
We performed the following procedures in respect of this key audit matter:
–
We obtained an understanding of the relevant controls related to the identification and
quantification of impairments and contract exit costs associated with the exit.
–
We assessed the accuracy and completeness of management’s impairments relating to
intangible assets and property plant and equipment based on the assets previously used
in the hospital care and industrial sales activities.
–
We have assessed the inventory write down and provision by substantively testing the post
year-end sales and orders to ensure the accuracy and completeness of the provision.
–
We tested the severance costs substantively by agreeing a sample of the costs to
correspondence with the employees and to payment.
–
We held direct discussions with Convatec’s internal and external legal advisors as well as
operational leads to assess the level of provisioning for contract exit costs. In addition we
reviewed the correspondence received in the year relating to this matter.
–
We evaluated the appropriateness of the disclosures in the Financial Statements.
Key observations
We consider the accounting for the exit of hospital care and related industrial sales activities
to be reasonable and complete. We are satisfied the disclosures made in the Financial
Statements are appropriate.
5.3. Revenue recognition across key markets.
Key audit matter
description
The Group recorded revenue of $2,072.5m million for the year ended 31 December 2022 (31
December 2021: $2,038.3m) under IFRS 15:
Revenue from contracts with customers
.
As disclosed in Note 2.1 to the Financial Statements, the Group’s policy is to recognise revenue
when control over a product has transferred, generally on delivery, to a customer, distributor
or wholesaler. The Group measures revenue for goods sold based on the consideration
specified in a contract with a customer, net of discounts, rebates, chargeback allowances and
sales-related taxes. The UK, US and Denmark make up the Group’s key sales markets. Further
information is included in the geographic segment information in Note 2.2.
As the audit of revenue is one of the key determinants of our overall audit strategy, revenue
recognition has been included as a key audit matter. Significant allocation of audit resources
as well as increased levels of direction and supervision of the components was required in the
current year, partly as a result of the transfer of a number of processes to the Group’s Global
Business Services centre.
235
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
How the scope of our
audit responded to the
key audit matter
We performed the following procedures in respect of this key audit matter:
–
We completed walkthroughs of the revenue cycle to gain an understanding of the end-to-
end revenue process and to evaluate relevant controls across the Group, and tested
controls at the following components: the US, UK and Denmark;
–
We tested the general IT controls, including three-way matching in SAP which is the main
financial reporting system in the Group;
–
We performed analytical reviews in certain components to identify any unusual sales
trends and obtained an explanation for any such movements;
–
We held direct enquiries with category and geographic market leaders, assessing changes
in customer demand and new product introductions that might impact sales patterns;
–
We performed detailed transaction testing on a sample basis, agreeing sales through to
invoice, final sales contracts and delivery notes;
–
We also reviewed a sample of distributor contracts to assess the terms of sale and to
support recalculation of rebates and chargebacks associated with the revenue.
–
We assessed whether the disclosures within the annual report and accounts are in
compliance with the requirements of IFRS 15
Revenue from contracts with customers.
Key observations
We are satisfied that revenue recognised across key markets and the disclosures made are in
compliance with the requirements of IFRS 15.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the Financial Statements that makes it probable that the
economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both
in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the Financial Statements as a whole as follows:
Group Financial Statements
Company Financial Statements
Materiality
$9.8m (2021: $8.4m)
$5.9m (2021: $5.0m)
Basis for determining
materiality
4.8% (2021: 4.7%) of pre-tax profit adjusted for
acquisition and divestiture costs, termination
benefits and asset impairment.
The Company materiality equates to 0.2%
(2021: 0.1%) of net assets, which is capped
at 60% (2021: 60%) of Group materiality.
Rationale for the
benchmark applied
In determining our materiality benchmark,
we considered the focus of the users of the
Financial Statements. Pre-tax profit is the
base from which key performance measures
are calculated as well as key metrics used in
providing trading updates. We have adjusted
pre-tax profit for certain non-recurring items
as summarised above.
In determining our materiality, based on
professional judgement, we have considered
net assets as the appropriate benchmark
given the Company is primarily a holding
company for the Group. We then capped
materiality at 60% of Group materiality.
PBT adjusted for certain items
Group materiality $9.8m
Component materiality
range $4.9m to $6.8m
Audit Committee reporting
threshold $0.5m
PBT adjusted for certain items
Group materiality
PBT adjusted
for certain items
$206.3m
Independent auditor’s report
continued
Convatec Group Plc Annual Report and Accounts 2022
236
Financial statements
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected
and undetected misstatements exceed the materiality for the Financial Statements as a whole.
Group Financial Statements
Company Financial Statements
Performance materiality
70% (2021: 70%) of Group materiality
70% (2021: 70%) of Company materiality
Basis and rationale for
determining performance
materiality
In determining performance materiality, we considered the following factors:
a. our risk assessment, including our understanding of the entity and its overall control
environment;
b. the disaggregated nature of the Group and the likelihood of an individually material error;
and
c. our cumulative experience from prior year audits and level of corrected and uncorrected
misstatements identified.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of $0.5m
(2021: $0.4m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation
of the Financial Statements.
7. An overview of the scope of our audit
7.1. Identification and scoping of components
Our Group audit was scoped on an entity level basis, assessing components against the risk of material misstatement
at the Group level. We have also considered the quantum of Financial Statement balances and individual financial
transactions of a significant nature. In performing our assessment, we have considered the geographical spread of the
Group and any risks presented within each region.
Based on this assessment, we focused our work on thirteen (2021: thirteen) components covering seven (2021: eight)
countries, 70% (2021: 72%) of revenue, 83% (2021: 83%) of profit before tax and 74% (2021: 77%) of net assets. All thirteen
(2021: thirteen) components were subject to a full scope audit. The thirteen (2021: thirteen) components are in the United
States of America, United Kingdom, Switzerland, Denmark, Germany, Italy and France, which include the principal operating
units of the Group.
In addition, we have performed specified audit procedures in ten (2021: eight) components covering nine (2021: eight)
countries, 12% (2021: 8%) of revenue, 5% (2021: 4%) of profit before tax, and 7% (2021: 6%) of net assets. The eleven (2021:
eight) components are located in: the United States of America, Denmark, Spain, Canada, Brazil, the Dominican Republic,
Japan, Australia and Slovakia.
In carrying out our work, we responded to management’s decision to centralise finance processes in the GBS hub. In line
with the considerable extent of finance processes transitioned from the markets to Lisbon, we delivered a significant
proportion of the component audits from GBS whilst providing direction and exercising supervision of component work
at the Group level. We centrally determined the scope of the audit procedures executed by component audit teams and
at the GBS.
Full audit scope 70%
Review at group level 18%
Speciﬁed audit procedures 12%
Revenue
Full audit scope 83%
Review at group level 12%
Speciﬁed audit procedures 5%
Profit before tax
Full audit scope 74%
Review at group level 19%
Speciﬁed audit procedures 7%
Net assets
237
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Independent auditor’s report
continued
7.2. Our consideration of the control
environment
Our audit approach is evolving
alongside management’s plans to
continue standardising the control
environment across the Group,
including at GBS. Whilst our audit
remains largely substantive, we
increased the extent of our procedures
performed on the control environment
in 2022, focusing on enhancing our
understanding of the progress made
in the standardisation by testing the
relevant controls in the business
processes that have transitioned to
the shared service centre.
For components we identified relevant
IT systems for the purpose of our audit
work, we obtained an understanding
of relevant IT controls and tested the
general IT controls for some operating
companies with the involvement of our
IT specialists. We performed focused
controls tests on the main financial
reporting IT environment in the shared
service centre and used the results of
this work as part of our Group reporting
and to support the components
reporting under local statutory
requirements.
7.3. Our consideration of climate-
related risks
In planning our audit, we have
considered the potential impact of
climate change on the Group’s
business and its Financial Statements.
The Group has reassessed the risk and
opportunities relevant to climate
change and maintained the
Environment & Communities risk as a
principal risk across the Group. This
risk grading has been maintained at
the same level as the prior year and
has been considered and embedded
into the business as explained in the
Strategic Report.
As a part of our audit procedures,
we have reviewed management’s
environment related risk assessment
and held discussions with the Audit
and Risk Committee to understand
the process of identifying climate-
related risks, the determination of
mitigating actions and the impact on
the Group’s Financial Statements.
While management has acknowledged
that the transition and physical risks
posed by climate change have the
potential to impact the medium to
long term success of the business, they
have assessed that there is no material
impact arising from climate change on
the judgements and estimates made
in the Financial Statements as at
31 December 2022 as explained in
note 1.3 on page 173.
We performed our own qualitative risk
assessment of the potential impact of
climate change on the Group’s account
balances and classes of transactions
and did not identify any additional
risks of material misstatement.
Our procedures include reviewing
disclosures included in the Strategic
Report to consider whether they are
materially consistent with the
Financial Statements and our
knowledge obtained in the audit.
7.4. Working with other auditors
As part of our oversight of the
component teams, planning meetings
were held with all component audit
teams. The purpose of these planning
meetings was to determine whether
the component teams had sufficient
understanding of the Group’s
businesses, its core strategy and
significant risks.
We issued our component teams
detailed instructions, included them
in our team briefings and discussed
their risk assessment. We also
provided direction in response to
enquiries made by the component
auditors. All the findings observed
were discussed with the component
auditors in detail and instructions to
perform further procedures were
issued where relevant.
In response to the easing
Covid-19 restrictions and increased
opportunities to travel, we visited local
operations in Denmark, the United
States of America, GBS in Portugal, and
the UK. Considering the new GBS
centre, we increased the frequency of
interactions with management and
component teams during the planning
and audit execution stages. The shared
service centre audit represented a
substantial change to our planned
approach from the prior year.
Members of the Group engagement
team responded to this change by
investing significant effort in directing,
supervising and reviewing the work of
the GBS audit team in Lisbon, with
visits to Lisbon through the year
and regular virtual meetings.
8. Other information
The other information comprises the
information included in the annual
report, other than the Financial
Statements and our auditor’s report
thereon. The Directors are responsible
for the other information contained
within the annual report.
Our opinion on the Financial
Statements does not cover the other
information and, except to the extent
otherwise explicitly stated in our
report, we do not express any form
of assurance conclusion thereon.
Our responsibility is to read the
other information and, in doing so,
consider whether the other
information is materially inconsistent
with the Financial Statements or our
knowledge obtained in the course of
the audit, or otherwise appears to be
materially misstated.
If we identify such material
inconsistencies or apparent material
misstatements, we are required to
determine whether this gives rise to a
material misstatement in the Financial
Statements themselves. If, based on
the work we have performed, we
conclude that there is a material
misstatement of this other
information, we are required to
report that fact.
We have nothing to report in this
regard.
9. Responsibilities of Directors
As explained more fully in the
Directors’ responsibilities statement,
the Directors are responsible for the
preparation of the Financial
Statements and for being satisfied
that they give a true and fair view,
and for such internal control as the
Directors determine is necessary to
enable the preparation of Financial
Statements that are free from material
misstatement, whether due to fraud
or error.
In preparing the Financial Statements,
the Directors are responsible for
assessing the Group’s and the
Company’s ability to continue as a
going concern, disclosing as
applicable, matters related to going
concern and using the going concern
basis of accounting unless the
Directors either intend to liquidate
the Group or the Company or to
cease operations, or have no realistic
alternative but to do so.
10. Auditor’s responsibilities for
the audit of the Financial
Statements
Our objectives are to obtain
reasonable assurance about whether
the Financial Statements as a whole
are free from material misstatement,
whether due to fraud or error, and to
issue an auditor’s report that includes
our opinion. Reasonable assurance is
a high level of assurance, but is not a
Convatec Group Plc Annual Report and Accounts 2022
238
Financial statements
guarantee that an audit conducted in
accordance with ISAs (UK) will always
detect a material misstatement when
it exists. Misstatements can arise from
fraud or error and are considered
material if, individually or in the
aggregate, they could reasonably be
expected to influence the economic
decisions of users taken on the basis
of these Financial Statements.
A further description of our
responsibilities for the audit of the
Financial Statements is located on the
FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This
description forms part of our
auditor’s report.
11. Extent to which the audit was
considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are
instances of non-compliance with laws
and regulations. We design procedures
in line with our responsibilities,
outlined above, to detect material
misstatements in respect of
irregularities, including fraud. The
extent to which our procedures are
capable of detecting irregularities,
including fraud is detailed below.
11.1. Identifying and assessing potential
risks related to irregularities
In identifying and assessing risks of
material misstatement in respect of
irregularities, including fraud and
non-compliance with laws and
regulations, we considered the
following:
–
the nature of the industry and
sector, control environment and
business performance including the
design of the Group’s remuneration
policies, key drivers for Directors’
remuneration, bonus levels and
performance targets;
–
the Group’s own assessment of the
risks that irregularities may occur
either as a result of fraud or error
that was approved by the Board;
–
results of our enquiries of
management, internal audit, the
Directors and the audit committee
about their own identification and
assessment of the risks of
irregularities, including those that
are specific to the Group’s sector;
–
any matters we identified having
obtained and reviewed the Group’s
documentation of their policies and
procedures relating to:
–
identifying, evaluating and complying
with laws and regulations and whether
they were aware of any instances of
non-compliance.
–
detecting and responding to the risks
of fraud and whether they have
knowledge of any actual, suspected or
alleged fraud;
–
the internal controls established to
mitigate risks of fraud or non-
compliance with laws and regulations ;
–
the matters discussed among the
audit engagement team including
component audit teams and
relevant internal specialists,
including tax, valuations, IT and
forensics specialists regarding how
and where fraud might occur in the
Financial Statements and any
potential indicators of fraud.
As a result of these procedures, we
considered the opportunities and
incentives that may exist within the
organisation for fraud and identified
the greatest potential for fraud in the
accounting for the exit in hospital care
and related industrial sales activities.
In common with all audits under ISAs
(UK), we are also required to perform
specific procedures to respond to the
risk of management override.
We also obtained an understanding of
the legal and regulatory frameworks
that the Group operates in, focusing
on provisions of those laws and
regulations that had a direct effect on
the determination of material amounts
and disclosures in the Financial
Statements. The key laws and
regulations we considered in this
context included the UK Companies
Act, Listing Rules, pensions legislation
and tax legislation.
In addition, we considered provisions of
other laws and regulations that do not
have a direct effect on the Financial
Statements but compliance with which
may be fundamental to the Group’s
ability to operate or to avoid a material
penalty. These included the Food and
Drug Administration (“FDA”) and the
Medical Devices Regulation (“MDR”).
11.2. Audit response to risks identified
As a result of performing the above,
we identified the accounting for the
exit from the hospital care and related
industrial sales activities as a key audit
matter related to the potential risk of
fraud. The key audit matters section of
our report explains the matter in more
detail and also describes the specific
procedures we performed in response
to that key audit matter.
In addition to the above, our
procedures to respond to risks
identified included the following:
–
reviewing the financial statement
disclosures and testing to
supporting documentation to assess
compliance with provisions of
relevant laws and regulations
described as having a direct effect
on the Financial Statements;
–
enquiring of management, the audit
committee and both in-house and
external legal counsel concerning
actual and potential litigation and
claims;
–
performing analytical procedures to
identify any unusual or unexpected
relationships that may indicate risks
of material misstatement due to
fraud;
–
reading minutes of meetings of
those charged with governance,
reviewing internal audit reports
correspondence with HMRC;
–
in addressing the risk of fraud
through management override
of controls, testing the
appropriateness of journal entries
and other adjustments; assessing
whether the judgements made in
making accounting estimates are
indicative of a potential bias; and
evaluating the business rationale
of any significant transactions that
are unusual or outside the normal
course of business.
We also communicated relevant
identified laws and regulations and
potential fraud risks to all engagement
team members including internal
specialists and component audit
teams and remained alert to any
indications of fraud or non-
compliance with laws and regulations
throughout the audit.
239
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Independent auditor’s report
continued
Report on other legal and
regulatory requirements
12. Opinions on other matters
prescribed by the Companies
Act 2006
In our opinion the part of the
Directors’ remuneration report to be
audited has been properly prepared
in accordance with the Companies Act
2006.
In our opinion, based on the work
undertaken in the course of the audit:
–
the information given in
the strategic report and the
Directors’ report for the financial
year for which the Financial
Statements are prepared is
consistent with the Financial
Statements; and
–
the strategic report and the
Directors’ report have been
prepared in accordance with
applicable legal requirements.
In the light of the knowledge and
understanding of the Group and the
Company and their environment
obtained in the course of the audit,
we have not identified any material
misstatements in the strategic
report or the Directors’ report.
13. Corporate Governance
Statement
The Listing Rules require us to review
the Directors’ statement in relation
to going concern, longer-term
viability and that part of the
Corporate Governance Statement
relating to the Group’s compliance
with the provisions of the UK
Corporate Governance Code
specified for our review.
Based on the work undertaken as
part of our audit, we have concluded
that each of the following elements
of the Corporate Governance
Statement is materially consistent
with the Financial Statements and
our knowledge obtained during the
audit:
–
the Directors’ statement with
regards to the appropriateness
of adopting the going concern
basis of accounting and any
material uncertainties identified
set out on page 165;
–
the Directors’ explanation as to
its assessment of the Group’s
prospects, the period this
assessment covers and why the
period is appropriate set out on
page 98;
–
the Directors’ statement on fair,
balanced and understandable set
out on page 165;
–
the Board’s confirmation that it
has carried out a robust
assessment of the emerging and
principal risks set out on page 103;
–
the section of the annual report
that describes the review of
effectiveness of risk management
and internal control systems set
out on pages 88 and 89; and
–
the section describing the work of
the audit committee set out on
page 126.
14. Matters on which we are
required to report by exception
14.1. Adequacy of explanations received
and accounting records
Under the Companies Act 2006 we are
required to report to you if, in our
opinion:
–
we have not received all the
information and explanations we
require for our audit; or
–
adequate accounting records have
not been kept by the Company, or
returns adequate for our audit have
not been received from branches
not visited by us; or
–
the Company Financial Statements
are not in agreement with the
accounting records and returns.
We have nothing to report in
respect of these matters
14.2. Directors’ remuneration
Under the Companies Act 2006 we are
also required to report if in our opinion
certain disclosures of Directors’
remuneration have not been made or
the part of the Directors’ remuneration
report to be audited is not in
agreement with the accounting
records and returns.
We have nothing to report in
respect of these matters
15. Other matters which we are
required to address
15.1. Auditor tenure
Following the recommendation of the
audit committee, we were appointed
by the Directors to audit the Financial
Statements for the year ending
31 December 2016 and subsequent
financial periods. The period of
total uninterrupted engagement
including previous renewals and
reappointments of the firm is 7 years,
covering the years ending 31 December
2016 to 31 December 2022.
15.2. Consistency of the audit report
with the additional report to the audit
committee
Our audit opinion is consistent with
the additional report to the audit
committee we are required to provide
in accordance with ISAs (UK).
16. Use of our report
This report is made solely to the
company’s members, as a body, in
accordance with Chapter 3 of Part 16
of the Companies Act 2006. Our audit
work has been undertaken so that
we might state to the company’s
members those matters we are
required to state to them in an
auditor’s report and for no other
purpose. To the fullest extent
permitted by law, we do not accept or
assume responsibility to anyone other
than the company and the company’s
members as a body, for our audit work,
for this report, or for the opinions we
have formed.
As required by the Financial Conduct
Authority (FCA) Disclosure Guidance
and Transparency Rule (DTR) 4.1.14R,
these Financial Statements form part
of the European Single Electronic
Format (ESEF) prepared Annual
Financial Report filed on the National
Storage Mechanism of the UK FCA in
accordance with the ESEF Regulatory
Technical Standard (‘ESEF RTS’). This
auditor’s report provides no assurance
over whether the annual financial
report has been prepared using the
single electronic format specified in
the ESEF RTS.
Claire Faulkner, FCA
(Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
8 March 2023
Convatec Group Plc Annual Report and Accounts 2022
240
Financial statements
Basis of reporting for metrics whose
2022 progress metrics underwent a
formal assurance process as listed on
page 74, as well as voluntary turnover
and Scope 3 emissions can be found
at www.convatecgroup.com/
sustainability/esg-reports-and-data/.
1. Quality:
Align existing quality metrics to
industry standards and our continued
focus in product safety by Q4 2022
(end of December 2022) to ensure
metrics cover both product quality
and safety aspects.
New:
Reduce our complaints per
million (CPM) by 8% for 2023
(calculated as CPM during 1 January
2023 through to 31 December 2023)
against a 2022 baseline (calculated
as CPM during 1 January 2022 through
to 31 December 2022). CPM is
calculated as the number of
complaints received divided by the
number of sales for the given period,
multiplied by one million, rounded to
the nearest whole number. Complaints
include all input from customers that
meet the criteria of a complaint, as
defined in our procedures, and are
received primarily via our customer
service and sales channels. All
Convatec employees have a
responsibility to report a complaint
at any time when interacting with
anyone that has used our products.
2. Product vitality:
Improve Vitality Index to 30% by Q4
2025 (end of December 2025). Vitality
index is defined as the percentage of
revenues that are generated from new
or significantly upgraded products,
and products launched by Convatec
in the preceding five-year period.
This includes products that enter
our portfolio, including through
acquisitions, when treated as
organic revenue.
3. Product development:
Implement Convatec Group’s
Green Design Guidelines (GDG), which
assess products in five environmentally
related areas, as part of our internal
product development processes
(new product development and
material change processes) for all
new products. Expand the user base
of our new GDG digital tool to at least
50 users by Q4 2022 (end of December
2022). Users are defined by licences to
the software, will come from research
and Development (R&D) and Sustaining
Engineering Group (SEG), and will be
trained on using the tool.
New:
Expand use of GDG digital
tools, with at least five new product
launches assessed by Q4 2023.
Strategic projects are defined as
current or future prioritised projects.
Assessment involves comparing the
new product’s Bill of Materials against
the most similar thing that Convatec
currently markets.
4. Health & Safety:
4.1
Increase our Operations Hazard
Observation Rate to above 200
per 200,000 hours worked by Q4
2 2022 (end of December 2022).
Operations comprise our nine
manufacturing locations, with the
rate normalised per 200,000 hours
worked, during calendar year 2022.
The metric includes contractor/
agency staff working at our sites,
as well as permanent staff. Hazard
Observation Rate is defined based
on OSHA definitions.
4.2
Reduce Operations Lost Time Injury
Rate (LTIR) to below 0.22 by Q4 2025
(end of December 2025). Operations
comprises our nine manufacturing
locations, with the rate normalised
per 200,000 hours worked, during
calendar year 2022. LTIR is defined
as per OSHA definitions.
5. Diversity, Equity & Inclusion
and Wellbeing:
5.1
Reach at least 40% females among
senior management and CELT roles
combined by Q4 2024 (end of
December 2024). Senior
management roles include direct
reports of CELT members,
excluding executive assistants.
Calculated on employees as
at December 2024.
5.2
Reduce voluntary turnover to less
than 10% by Q4 2023. Voluntary
turnover includes retirement and
excludes redundancies,
terminations, apprentices, interns,
working students, temporary
workers, fixed term and contingent
workers. It is calculated as total
employees leaving for the year/
average monthly headcount.
6. Human rights:
Complete the (internal) review, update
and publication of our human rights-
related policies, our Human Rights and
Labour Standards Policy and Supplier
Code of Conduct, by Q4 2022 (end of
December 2022).
New:
Launch annual compulsory
training programme on Human Rights
for all employees by Q4 2023. Training
module to include asynchronous and
live training materials required for
full-time, part-time and fixed term
employees, leveraging our established
learning management platform and
completion monitoring tracked
through Compliance teams.
New:
Strengthen our risk management
practices focused on labour standards
and modern slavery through our
procurement and supply chain,
including through the introduction
of a new responsible supplier
assessment platform by Q2 2023.
Practices supported by the platform
and included in the target include
but are not limited to risk assessment
methodology, due diligence,
additional audit insights and training
for stakeholders.
7. Code of Conduct:
Have at least 95% of employees
trained on an annual basis by Q4 2023
and in subsequent years. Training is
conducted digitally. It includes
part-time and full-time employees and
excludes contractors, agency workers
and employees on long-term absence.
Percentage is calculated as number of
employees trained and employed on
31 December divided by total number
of employees as at 31 December.
8. Procurement and supply chain:
By 31 December 2023, ensure that 80%
of Convatec’s spend (from all Business
Units globally) is supported by
suppliers who we have requested to
participate in our EcoVadis platform.
Suppliers include direct material and
external manufacturers and exclude
indirect service/materials providers.
Participation is considered when a
supplier is either: assessed by
EcoVadis on all four themes covered in
the platform, or when an invitation to
participate has been extended and the
supplier has declined to participate,
and Convatec has a documented audit
trail of the dialogue between parties.
ESG target definitions
241
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
9. Emission reduction:
9.1
Achieve net zero carbon (in line
with our SBTi target) by 2045.
This includes reducing all value
chain carbon emissions (Scope 1, 2
& 3) in line with SBTi 1.5
o
C targets
by 2036, with defined five-year
milestone targets developed by Q4
2022 aligned to SBTi. All value chain
emissions will be reduced to zero
by beginning of Q1 2045
9.2
Complete the Scope 3 materiality
assessment and develop the
measurement strategy by Q4 2022,
with the intention of publishing our
Scope 3 greenhouse gas (GHG)
inventory by Q4 2023. Analyse
existing data available for all 15
categories of Scope 3 emissions and
determine a measurement strategy
to determine a full GHG inventory for
material Scope 3 emissions in 2023.
Scope 3 inventory to be published by
Q4 2023.
9.3 Reduce our combined Scope 1 and 2
GHG emissions by 5%, against a
2021 baseline by Q4 2022.
10. Science Based Target
commitment:
10.1
Set quantitative Science Based
Targets (SBT) for Scope 1 and 2
emissions, against a 2021 baseline,
by Q4 2022 (end of December
2022). Set aligned SBTs for Scope 1
and 2, utilising the SBTi (1.5
o
C)
calculation tool, to predict
expected verified SBTi’s at the end
of 2022
New:
Reduce our combined Scope 1
and 2 GHG emissions by 70% in line
with our SBTs by 2030. See basis of
reporting document for reporting
boundaries.
10.2 Set quantitative targets for Scope
3 GHG emissions, against a 2021
baseline, aligned with the SBT
criteria by Q4 2023. Set aligned
SBTs for Scope 3, utilising the SBTi
(1.5
o
C) calculation tool, to predict
expected verified SBTi’s at the end
of 2023.
10.3 Achieve validated SBTs for Scope 1,
2 & 3 emissions by Q4 2023. Gain
fully validated SBTi’s, certified by
the SBT Initiative, covering Scope 1,
2 & 3 emissions, using the 2021
baseline.
11. Community contributions:
11.1
Establish new NGO partnership(s)
and funding commitments by
Q4 2022 (end of December 2022).
Partnerships are formalised via
Letters of Agreement and may
involve product or monetary
donations, in-kind support,
volunteering, or other means
of cooperation.
New:
Contribute at least $2 million
in cash and in-kind support to our
community partners to improve lives
by Q4 2025. Cash contributions are
valued at face value; product
donations are calculated at regional
commercial value. Lives touched
include immediate contact as well as
number of individuals supported by
trained healthcare professionals (HCP)
during the reporting period, Q1 2023 to
Q4 2025.
11.2
Contribute responsibly to a
range of HCP and patient
education programmes by Q4 2022
(end of December 2022). Set
specific targets for 2023-25 on
reach and impact. Contributions
may include monetary and in-kind
donations or other types
of partnerships.
New:
Continue to expand the reach
of our HCP education programmes,
including through the development
of a global medical education digital
platform and recategorisation of
activity to improve impact by Q4 2023.
Expansion may include unique number
of HCPs touched, number of
programes, depth of programming,
and geographic reach.
ESG target definitions
continued
Additional information
Convatec Group Plc Annual Report and Accounts 2022
242
Our corporate website:
www.convatecgroup.com
Information about our Stock Exchange
announcements, key dates in our
financial calendar, our share price
information and background
information is available on our
corporate website at
www.convatecgroup.com/investors.
The date for the release of our
interim results for the six months
ended 30 June 2023 will be posted
in due course on our website.
Shareholders may also receive
information by email by signing up
to the news alert service available at
www.convatecgroup.com/investors/
sign-up-for-more-information.
Share price information
Our closing share price as at
31 December 2022 was 232.60p.
Managing your shareholding
You can manage your shareholding
online by registering to use Investor
Centre, a free and secure website.
Investor Centre is available 24 hours
a day, 365 days a year. To find out
more about Investor Centre visit
www.investorcentre.co.uk.
Registration is a straightforward
process and all you will need is your
shareholder reference number (SRN)
and registered address details.
Shareholders who prefer not to
manage their shareholding online
can contact our Registrars,
Computershare Investor Services
PLC, who manage our share register.
The shareholder helpline number
is +44 (0) 370 703 6219 and further
information about Computershare
Investor Services PLC is set out below.
Internet share dealing
Please note that, if you wish to
purchase shares in the Company,
you may do so through a bank or
stockbroker. Alternatively, please go to
www.computershare.com/dealing/uk
for a range of dealing services made
available by Computershare; this
service is only available to
shareholders in the UK. This service
provides shareholders with a
convenient way to buy or sell the
Company’s ordinary shares on the
London Stock Exchange. The
commission is 1.4%, subject to a
minimum charge of £40. In addition,
stamp duty, currently 0.5%, is payable
on purchases. Real-time dealing is
available during market hours. In
addition, there is a convenient
facility to place your order outside
of market hours.
Up to 90-day limit orders are available
for sales. Before you can trade you will
need to register for the service. To
access the service log on to www.
computershare.com/dealing/uk.
Shareholders should have their SRN
available. The SRN appears on share
certificates as it will be required as
part of the registration process.
A bank debit card will be required
for purchases.
Postal share dealing
Please note this service is, at present,
only available to shareholders resident
in the UK. The commission is 1.4% plus a
charge of £40. In addition, stamp duty,
currently 0.5%, is payable on purchases.
The service is available from 8.00am to
4.30pm Monday to Friday, excluding
bank holidays, on telephone number
+44 (0) 370 703 0084. Before you trade
you will need to register for this service.
This can be done by going online at
www.computershare.com/dealing/uk.
Shareholders should have their SRN
ready when making the call. The SRN
appears on share certificates. A bank
debit card will be required for
purchases. Detailed terms and
conditions are available on request by
telephoning +44 (0) 370 703 0084.
Please note that due to the regulations
in the UK, Computershare are required
to check that you have read and
accepted their Terms and Conditions
before being able to trade, which
could delay your first telephone trade.
If you wish to trade quickly, we suggest
visiting their website and registering
online first.
Share fraud
We would like to warn all of our
shareholders to be very wary of any
unsolicited telephone calls or letters
which offer investment advice, offer to
buy your shares at a discounted price,
or sell them at an inflated price or
offers free company reports. This
type of call should be treated as an
investment scam. Further information
about investment scams and how they
should be reported is available at
www.convatecgroup.com/investors/
shareholder-services/.
Company Secretary and
registered office
Evelyn Douglas
3 Forbury Place
23 Forbury Road
Reading RG1 3JH
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol, BS13 8AE
Telephone +44 (0) 370 703 6219
Email www.investorcentre.co.uk/
contactus
Auditor
Deloitte LLP
Brokers
Citigroup Global Markets Limited
UBS Limited
Solicitors
Freshfields Bruckhaus Deringer LLP
Shareholder information
243
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Adjusted free
cash flow
Adjusted net cash
generated from
operations, net of PP&E
and tax paid
Adjusted or
alternative
performance
measures
(APMs)
Certain financial
measures in this Annual
Report and Accounts
not prepared in
accordance with IFRS
and used as a
meaningful supplement
to reported measures
Advanced
Wound Care
(AWC)
Advanced wound
dressings and skin care
products for the
management of acute
and chronic wounds
resulting from ongoing
conditions such as
diabetes and acute
conditions resulting
from traumatic injury
and burns
AGM
Annual General Meeting
of the Company
ARA
Annual Report and
Accounts
ARC
Audit and Risk
Committee
Articles
The Articles of
Association of the
Company for the time
being in force
Base erosion
and profit
shifting (BEPS)
initiative
OECD initiative which
seeks to close gaps in
international taxation
for companies that
allegedly avoid tax or
reduce tax burden in
their home country by
engaging in tax
inversions
Basic earnings
per share
Net profit available for
Convatec shareholders
divided by the weighted
average number of
ordinary shares in issue
during the year
Basis points
(bps)
One hundredth of a
percentage point. Used,
for example, in quoting
movements in margin
percentages
BEIS
Business, Energy &
Industrial Strategy
Board
The Board of Directors
of Convatec Group Plc
Book tax rate
The tax charge in the
income statement as a
percentage of profit
before tax
Brexit
The UK’s withdrawal
from the European
Union
Compound
annual growth
rate (CAGR)
CAGR shows the rate of
growth over a certain
period of time,
expressed in annual
percentage terms
Capital
expenditure
(capex)
Purchases of property,
plant and equipment
and intangible assets
Cash
conversion
Cash generated from
operations, net of PP&E
divided by EBITDA
Cash-
generating
units (CGUs)
The smallest
identifiable groups of
assets that generate
cash inflows that are
largely independent of
the cash inflows from
other assets or groups
of assets
CE mark
Certification mark that
indicates conformity
with health, safety and
environmental
protection standards
for products sold within
the European Economic
Area
CELT
Convatec Executive
Leadership Team
Code
UK Corporate
Governance Code 2018
in effect from 1 January
2019, issued by the FRC
Code of
Conduct
Our code of conduct
which covers business
conduct and
compliance issues,
including bribery and
corruption
CoE
Centre of Excellence
COGS
Cost of goods sold
Companies Act
Companies Act 2006, as
amended, of England
and Wales
Company or
parent
company
Convatec Group Plc
Constant
currency
growth
Constant currency
growth is calculated by
applying the applicable
prior period average
exchange rates to the
Group’s actual
performance in the
respective period
Continence &
Critical Care
(CCC)
Products and services
for people with urinary
continence issues
related to spinal cord
injuries, multiple
sclerosis, spina bifida
and other causes, and
devices and products
used in intensive care
units and hospital
settings
COSO
The Committee of
Sponsoring
Organizations, a global
organisation providing
a framework for risk
management, internal
control, governance
and fraud deterrence
COVID-19
Coronavirus disease
2019
CR
Corporate
responsibility.
DE&I
Diversity, equity and
inclusion
Derivatives
Financial instruments
used to reduce risk, the
price of which is derived
from an underlying
asset, index or rate
Diluted
earnings per
share
The calculation of
diluted earnings per
share includes the
dilutive impact of share
awards where the
average market price of
the Group’s ordinary
shares exceeds the
exercise price
Director
A member of the Board
of Directors of Convatec
Group Plc
Disclosure
guidance and
transparency
rules (DTRs)
FCA disclosure
guidance and
transparency rules with
which the Group must
comply
Dividend cover
Adjusted cash
generated from
operations, net of PP&E
(see page 67) divided by
dividend paid (dividend
payable), excluding the
effect of a scrip option
EBITDA
Earnings before
interest, tax,
depreciation and
amortisation
Effective tax
rate (ETR)
The tax charge in the
income statement as a
percentage of profit
before tax
EMEA
Countries located in
Europe, Middle East and
Africa
ESG
Environmental, Social
and Governance
ESMA
European Securities
and Markets Authority
EU
The European Union
EURIBOR
Euro Interbank
Offered Rate
FCA
Financial Conduct
Authority
FDA
US Food and Drug
Administration
FRC
Financial Reporting
Council
FX
Foreign exchange
GDGs
Green Design
Guidelines
GDPR
General Data
Protection Regulation
GHG
emissions
Greenhouse gas
emissions
Group
The Company and its
subsidiaries
GPO
Group purchasing
organisations
H&S
Health and safety
Glossary
Additional information
Convatec Group Plc Annual Report and Accounts 2022
244
Home Services
Group (HSG)
The Group’s home
services business unit
for distribution of
catheter and ostomy
products
IASB
International
Accounting Standards
Board – the
independent
standard setting body
of the IFRS Foundation
IBOR
Interbank Offered
Rate
IFRS
International Financial
Reporting Standards
as issued by the IASB
IFRIC
International Financial
Reporting
Interpretations as
issued by the IASB
Infusion Care
(IC)
Disposable infusion
sets for diabetes
insulin pumps, similar
pumps used in
continuous infusion
treatments for
conditions such as
Parkinson’s disease
and a range of
products for hospital
and home healthcare
markets
IP
Intellectual property
IPO
Initial public offering
IR
Investor relations
KPI – Key
Performance
Indicator
Financial and non-
financial measures
that the Group uses to
assess performance
and strategic progress
LIBOR
London Inter-bank
Offered Rate
Leverage
Net debt divided by
covenant adjusted
EBITDA
LTIP
Long-term incentive
plan
LTIR
Lost time injury rate
M&A
Mergers and
acquisitions
MAR
Market abuse
regulation
MDR
Medical Device
Regulations
introduced in the EU
with required
transition by May 2021.
MDR imposes rigorous
requirements in
relation to a number
of areas including
clinical data and
post-market
surveillance
MedTech
Medical technology
MIP
Margin Improvement
Programme
Net debt
Borrowings less cash
and cash equivalents
and excluding lease
liabilities
NHS
The UK National
Health Service
OECD
Organisation for
Economic Co-
operation and
Development
Opex
Operating expenses,
being the total of
selling and
distribution expenses,
general administrative
expenses and
research and
development, and
other operating
expenses
Organic
growth
Period-over-period
growth at constant
currency, adjusted for:
Triad Life Sciences
(March 2022), Cure
Medical (March 2021)
and Patient Care
Medical (December
2021) acquisitions;
Incontinence
divestment
(December 2021) and,
from 31 May, the
discontinuation of
hospital care, related
industrial sales and
associated Russia
operations
Organisational
Health
Index (OHI)
An index tracking the
organisational
elements that drive
performance
Ostomy Care
(OC)
Devices, accessories
and services for
people with a stoma
(surgicallycreated
opening where bodily
waste is discharged),
commonly resulting
from causes such as
colorectal cancer,
inflammatory bowel
disease and bladder
cancer
PBT
Profit before income
taxes
PP&E
Property, plant and
equipment
Product
categories
The Group has four
product groups, being
Advanced Wound
Care, Ostomy Care,
Continence & Critical
Care and Infusion Care
R&D
Research and
development
ROIC
Return on invested
capital
SBTi
Science Based Target
initiative
SBTs
Science Based Targets
SID
Senior Independent
Director
SKU
Stock keeping unit
SNC
Special nomination
committee
SOFR
Secured Overnight
Financing Rate
SONIA
Sterling Overnight
Index Rate
Sterling, £,
pence or p
The currency of the
United Kingdom
Subsidiary
A company over which
the Group exercises
control
TCFD
Task Force on Climate-
related Financial
Disclosures
Transformation
Initiative
Initiatives and
associated investment
focused on
transforming the
business to deliver
sustainable and
profitable growth
TSL
Total Safety
Leadership
TSR
Total shareholder
return
UKLA
The UK’s Listing
Authority
US dollar, $,
cent or ¢
The currency of the
United States of
America
Viability
period
The three-year period
from January 2023 to
December 2025
245
Convatec Group Plc Annual Report and Accounts 2022
Additional information
Governance
Strategic report
Overview
Financial statements
Cautionary statement regarding
forward-looking statements
The purpose of this Annual Report is
to provide information to the
members of the Company. The Group
and its Directors, employees, agents
and advisers do not accept or assume
responsibility to any other person to
whom this Annual Report is shown or
into whose hands it may come and
any such responsibility or liability is
expressly disclaimed. In order, among
other things, to utilise the “safe
harbour” provisions of the US Private
Securities Litigation Reform Act 1995
and the UK Companies Act 2006, we
are providing the following cautionary
statement: This Annual Report
contains certain forward-looking
statements with respect to the
operations, performance and financial
condition of the Group, including
among other things, statements about
expected revenues, margins, earnings
per share or other financial or other
measures. Forward-looking
statements are generally identified
by the use terms such as “believes”,
“estimates”, “aims”, “anticipates”,
“expects”, “intends”, “plans”,
“predicts”, “may”, “will”, “could”,
“targets”, “continues” or , in each
case, their negatives or other similar
expressions. These forward-looking
statements include all matters that
are not historical facts.
Forward-looking statements are
necessarily based upon a number
of estimates and assumptions that,
while considered reasonable by the
Company, are inherently subject to
significant business, economic and
competitive risks, uncertainties and
contingencies that are difficult to
predict and many of which are
outside the Group’s control. As
such, no assurance can be given
that such future results, including
guidance provided by the Group,
will be achieved.
Forward-looking statements are not
guarantees of future performance and
such uncertainties and contingencies,
including the factors set out in the
“Principal Risks” section of the
Strategic report which begins on
page92, could cause the actual results
of operations, financial condition and
liquidity, and the development of the
industry in which the Group operates,
to differ materially from the position
expressed or implied in the forward-
looking statements set out in this
Annual Report. Past performance of
the Group cannot be relied on as a
guide to future performance. Nothing
in this Annual Report should be
construed as a profit forecast.
Forward-looking statements are based
only on knowledge and information
available to the Group at the date of
preparation of this document and speak
only as at the date of this Annual Report.
The Group and its Directors, officers,
employees, agents, affiliates and advisers
expressly disclaim any obligations to
update any forward-looking statements
(except to the extent required by
applicable law or regulation).
Third-party data
The industry and market data
contained in this Annual Report
has come from third-party sources
and from the Group’s own internal
research and estimates based on the
knowledge and experience of the
Group’s management in the market
in which the Group operates. While
the Group believes that such sources,
research and estimates are reasonable
and reliable, they have not been
independently verified and are subject
to change without notice. Accordingly,
undue reliance should not be placed
on any of the industry or market data
in this Annual Report.
Convatec website
Information on or accessible through
our website www.convatecgroup.com
and other websites mentioned in this
Annual Report, does not form part of
and is not incorporated into this
Annual Report.
Figures
Figures in parentheses in tables and
in the Financial Statements are used
to represent negative numbers.
Important information for readers of this Annual Report
Additional information
Convatec Group Plc Annual Report and Accounts 2022
246
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Convatec Group Plc
3 Forbury Place
23 Forbury Road
Reading
RG1 3JH
T: + 44 (0) 118 952 8100
www.convatecgroup.com
Company No: 10361298
www.convatecgroup.com