ConvaTec Reports Strong Growth and Boosts Guidance

Shares of ConvaTec (LON:CTEC) surged by 20% on Tuesday following the company's announcement of robust organic revenue growth for the first ten months of 2024, exceeding prior guidance.

Revenue Growth Performance

ConvaTec reported a 7.7% rise in organic revenue for the period ending October 30, outpacing its earlier full-year target which was set in the range of 5.0% to 7.0%. This strong performance has prompted the company to enhance its full-year 2024 guidance to a new range of 7.25% to 8.0% for organic revenue growth. The adjusted operating profit margin is now expected to be at or above 21.5%, up from a previous minimum of 21.0%. However, a 70-basis point headwind from foreign exchange rates may affect the reported margin.

Earnings and Growth Expectations

The company reiterated its expectations for double-digit growth in both earnings per share (EPS) and free cash flow to equity, which exceeds the market consensus of 8% growth in adjusted EPS. Although ConvaTec experienced slower growth in EBIT margins and adjusted EPS during the first half of 2024, solid performance in the second half has alleviated investor concerns, particularly regarding potential reimbursement changes for its Advanced Wound Care products in the United States. The company has confirmed that these adjustments will not impact FY25 group guidance, contributing to the recent stock rally.

Advanced Wound Care Segment

ConvaTec's Advanced Wound Care division saw strong demand in the U.S. for its ConvaFoam product, significantly boosting growth in this segment to the high single digits, surpassing earlier forecasts. Sales of InnovaMatrix, a key component of the wound care segment, rose by 40%, contributing an additional 1.1% to the company's overall organic sales growth. Although it fell short of initial projections of $110 million in annual sales, InnovaMatrix is still on track to generate around $100 million for FY24, with 25% of sales now in areas unaffected by upcoming U.S. local coverage determinations (LCDs).

Clinical Trials and Market Growth

Analysts at RBC Capital Markets noted that strong growth in InnovaMatrix for indications outside the LCD scope is a positive sign, reinforcing growth and profitability indications for FY2025. ConvaTec is also advancing with two new clinical trials, expected to yield data by 2026, to foster further growth.

Other Segments Performance

In the Ostomy Care division, ConvaTec posted steady mid-single-digit growth due to strong performance in emerging markets and increased patient referrals in North America. The Continence Care division also reported high single-digit growth, attributed to the expansion of the U.S. Home Services Group's market share. The company sees opportunities to enhance margins with changes to catheter reimbursement codes expected to take effect in 2026. The Infusion Care segment experienced high single-digit growth driven by rising adoption of durable insulin pumps and new customer demand.

Outlook for FY25

Looking toward FY25, ConvaTec anticipates achieving organic revenue growth of 5-7%, excluding sales from InnovaMatrix. Analysts at Stifel predict a consensus growth of 5.5%, potentially factoring in some InnovaMatrix sales, indicating a strong outlook for the company. ConvaTec aims for further operating margin expansion to support double-digit adjusted EPS growth, targeting a mid-20s operating margin by 2026 or 2027, with Stifel projecting 23.9% by 2027.