Chief Executive's Review

For the six months ended 30 June 2017

Results for the first six months demonstrate continued progress across all of our franchises. We are focused on three strategic drivers: growth, innovation and efficiency. In the first half we continued the global rollouts of Avelle™ and Esteem™+ Flex Convex, and launched GentleCath™ Glide in the U.S. and Flexi-Seal™ PROTECT in the U.S. and Europe, supporting future growth. We continued to innovate, launching our Neria Guard infusion set for non-diabetes conditions in June, and our FeelClean™ technology built into GentleCath™ Glide.

In the first half Group revenue grew 2.1%³ at CER to $831.3 million, and by 1.5%⁴ organically.

Advanced Wound Care

We continue to see strong market demand for our AQUACEL^® product lines, including AQUACEL^® Foam and AQUACEL^® Ag and Ag+. In the first half we launched Foam Lite into the U.S. bringing the total number of markets to 28, as we continue to take market share in the global $1.2 billion foam market. AQUACEL^® Surgical continues to show good growth, driven by the delivery of both economic and clinical benefits - a study by New York Presbyterian Hospital/Columbia Medical Center found a four-fold decrease in the incidence of post-operative joint infections with the use of AQUACEL^® Ag SURGICAL cover dressings, compared with a standard gauze dressing. Silver also continues to grow at above market rates, driven by AQUACEL^® Ag+ Extra which combines silver with unique anti-biofilm technology. The global rollout of Avelle™ continues - we are making sales in 12 countries, with further clinical evaluations underway in Australia, New Zealand and Canada. In the U.S., the FDA has asked us to carry out some additional testing on Avelle™ and we aim to re-submit our 510(k) at the end of September.

Reported revenue of $272.1 million grew 3.4%⁴ in the first half and 2.6%⁴ in the second quarter, impacted by a change to reimbursement rates in France, which took effect in January and reduced growth by c. 1 percentage point, along with short-term fulfilment constraints. While production lines have been successfully relocated as part of manufacturing footprint optimisation, delays in certification by certain regulatory bodies and longer than anticipated time to ramp up to full production volumes led to a delay in fulfilment of some orders in the period, particularly in the U.S. and EMEA. These temporary supply issues reduced growth by a further c. 2 percentage points. We have already taken action to resolve these supply issues and we continue to expect stronger revenue growth in the second half of 2017.

We remain focused on three priorities to drive our growth in Advanced Wound Care: expanding our core AQUACEL^® offering, in particular Ag+ and Surgical, accelerating growth in the foam market and building on our differentiated entry into the negative pressure wound therapy ("NPWT") market.

Ostomy Care

The execution of our strategy to return the Ostomy Care franchise to consistent growth has driven an improved performance, particularly in the U.S. Revenue growth includes the pricing impact following the renewal of the GPO contracts in the U.S. in the second half of 2016, which reduced total Ostomy Care revenue growth by c. 1 percentage point. We continue to see strong momentum in the U.S. market, supported by our me+^TM direct-to-consumer programme and we continue to win new hospital sponsorships in the United Kingdom ("UK") and new hospitals in Germany. The global launch of the Esteem™+ Flex Convex one-piece system in the first half was positively received, with strong demand in Japan, Italy and the U.S. We are now in the process of launching our convex Accordion range, with an encouraging response in Canada and France, the first two countries to launch.

In the first half we also introduced an innovative patient education programme called "me+^TM recovery" to help patients remain physically active post-surgery and to aid recovery. The program has initially been rolled out in the UK and is accredited by the Royal College of Nursing, with 15% of UK ostomy nurses already enrolled. We will now extend the recovery programme across Europe.

Reported revenue of $254.7 million grew 4.6%³ at CER and included a $5.3 million contribution from EuroTec, the Netherlands based manufacturer of ostomy appliances, which we acquired on 3 January 2017. On an organic basis revenue grew 2.4%⁴ in the first half, with 3.6%⁴ growth in the second quarter. EuroTec is performing as expected and the integration plan is on track.

We aim to drive further growth in Ostomy Care by continuing to strengthen relationships with ostomy nurses in hospitals and to provide them with the tools to make ostomy care simple, easy and accessible, expand our me+ direct-to-consumer programme, and continue to enhance our product portfolio.

Continence & Critical Care

Revenue of $175.1 million declined 1.1%⁴ in the first half and by 2.0%⁴ in the second quarter, reflecting good growth in our Continence Care portfolio being more than offset by the planned rationalisation initiatives within the Critical Care business, part of our MIP Programme. We continue to innovate and expand the GentleCath™ portfolio to address a wider range of needs and during the period we launched GentleCath™ Glide, our hydrophilic catheter, in the U.S. along with the GentleCath™ me+™ programme for Continence Care, expanding our existing Ostomy Care direct-to-consumer programme to support intermittent catheter users. Later this year, we intend to commence the launch of GentleCath™ outside the U.S. market. During the first half we also launched Flexi-Seal™ PROTECT in the U.S. and Europe, which further strengthens our leading position in this segment.

On 20 July 2017, we announced we had agreed to acquire Woodbury, a U.S.-based independent national distributor of incontinence and catheter-related supplies. With this acquisition our Continence and Critical Care franchise will create a new home distribution business unit for catheter and incontinence related products in the U.S., encapsulating 180 Medical, Symbius Medical, South Shore Medical Supply, Wilmington Medical Supply and Woodbury Health Products to better serve patients.  On completion, the acquisition will be immediately accretive to Group sales and EBITDA growth, with the opportunity to benefit from both cost and revenue synergies, and builds on the success of our 180 Medical business. The addition of Woodbury to the Group will provide further breadth and reach to our new home distribution unit and further consolidate our leading position in this market to bring our comprehensive end-to-end suite of services to even more patients. Refer to note 16 - Subsequent events for further details.

Infusion Devices

We continue to see strong demand for our infusion sets, and during the period our Unomedical subsidiary announced an expansion of its manufacturing technology platform for the insulin pump therapy business at Medtronic, increasing our production capabilities to support the range of infusion sets and insulin pump therapy solutions offered by the Diabetes Group at Medtronic.

In June we launched our Neria Guard infusion set ('Ulysses') at the International Congress of Parkinson's Disease and Movement Disorders in Vancouver and we have already shipped our first orders.

Reported revenue of $129.4 million declined 0.7%⁴ in the first half, and grew by 1.7%⁴ in the second quarter due to the timing of new product launches by a major customer, which saw some demand move out to the second half, along with some customer inventory reductions in the period. As a result we expect faster growth in the second half.

We continue to focus on three priorities to drive our growth in Infusion Devices - strengthen our strong and long-term partnerships with insulin pump manufacturers, continue to develop innovative products for both insulin and other drug delivery, and leverage our leading industry position.

Regional Revenue

Revenue in Americas grew 4.1%⁴ driven by growth across a number of franchises, including strong growth in Ostomy Care and a good performance from 180 Medical, partially offset by the impact of product rationalisation in Continence and Critical Care.

Revenue in EMEA declined 1.2%⁴ with growth in Advanced Wound Care more than counterbalanced by the impact of product rationalisation in Continence and Critical Care and timing of orders in Infusion Devices. The reported decline of 4.4% includes the $5.3 million revenue from EuroTec acquisition, which was more than offset by unfavourable foreign exchange movements.

Revenue in Asia Pacific grew 0.2%⁴ with growth in the Advanced Wound Care and Ostomy Care franchises being counterbalanced by the impact of MIP initiatives in Continence & Critical Care.

MIP Programme

The MIP targets a minimum net positive impact on gross margins of 300 bps by 2020 and we remain on track to deliver approximately half of this benefit cumulatively in the current financial year. Key areas of delivery in the first six months of 2017 include:

·      the closure of our Greensboro plant in the U.S. and transfer of production of DuoDERM and AQUACEL^® Surgical to Haina, Dominican Republic. This completes our reduction from 11 manufacturing plants to 8;

·      continued product rationalisation in our Continence & Critical Care franchise to eliminate low margin products from our catalogue - this had a c. $9 million impact on revenue in the first half but is broadly EBITDA neutral; we expect a further c. $6 million revenue impact in the second half of 2017;

·      Advanced Pouching System ("APS") - portfolio changes for these Ostomy Care products have been determined and lines implemented in Haina and Slovakia;

·      c. 80% of our manufacturing workforce are now trained in LEAN manufacturing principles; and

·      c. 84% of our manufacturing workforce are now in lower cost locations.

Our key focus areas for the second half of the year will be the completion of the Dominican Republic process qualifications and in Slovakia, completion of the validation milestones including for Ostomy Care adhesives equipment and for new APS closed pouch lines, along with ramping up Ostomy Care and Advanced Wound Care production in Haina and Ostomy Care in Slovakia. We will continue to develop our continuous improvement culture and our Sourcing Excellence capabilities.

People

We are pleased to announce the appointment of Dr Ros Rivaz as a Non-Executive Director of the Company. Dr Rivaz's non-executive Board experience spans FTSE100, large private and not-for-profit organisations. She has also held a range of senior executive management roles across major FTSE100 and international businesses. From 2011 to 2014 she was Global Chief Operating Officer of Smith & Nephew, having previously served in senior Operations, Manufacturing and Supply Chain roles at Premier Foods, Diageo, ICI, and Tate & Lyle. Dr Rivaz has a detailed understanding of the medical products and technology sector, and will make a valuable contribution to ConvaTec.

During July Antonio La Regina, our President of EMEA region, left the Group. Frank Gehres, General Manager of DACH and UKI, has assumed the role of Interim President, EMEA.

It was announced separately today that Nigel Clerkin, Group CFO, will be leaving the Company. The Board of ConvaTec decided that the position of Group CFO should be relocated to the Head Office in Reading and Nigel concluded that he did not wish to move his family from Dublin. Frank Schulkes, who until 2015 was CFO and Executive Vice President of GE Healthcare and latterly CFO of Wittur Group, has been appointed CFO Designate of ConvaTec. Nigel will remain in his position until 31 October 2017, to ensure a full and proper handover of his responsibilities to Frank.

Acquisition of Woodbury Holdings

On 20 July 2017, the Group announced an agreement to acquire Woodbury, a U.S.-based independent national distributor of incontinence and catheter-related supplies, from MTS Health Investors LLC for an enterprise value of $120.5 million. Woodbury distributes a broad product portfolio of over 500 incontinence and over 650 catheter products nationally across the U.S., along with a wide array of nutritional, enteral feeding and vascular compression products. Upon completion of the transaction, which is expected to close in the third quarter of 2017, earnings from Woodbury will be immediately accretive to the financial accounts of ConvaTec Group Plc. Refer to note 16 - Subsequent events for further details.

Outlook and Guidance

The outlook for the Group is unchanged from that announced at the time of the full year 2016 results on 2 March 2017.

We expect to deliver an organic revenue growth rate greater than the 2016 rate at CER, reflecting the contribution from new products and expansion of our portfolio into new geographic areas, as well as continuing to build on our leading market positions in all of our franchises. This guidance incorporates approximately 1% point of negative headwind resulting from the impact of product rationalisation in connection with our MIP Programme (c. $15 million full year effect) and excludes the first year of revenue contribution from our recently acquired EuroTec business (2016 revenues of €10 million) and Woodbury (2016 revenues of $50 million).

We continue to expect revenue growth to be weighted towards the second half of the year reflecting the timing of our product rationalisation MIP initiatives, the anticipated impact of product launches, and some timing impacts within our Ostomy Care and Infusion Devices franchises, specifically annualisation of U.S. GPO contract renewals in Ostomy Care and customer product launches in Infusion Devices.

Foreign exchange continues to impact our business and we now expect reported revenue growth to be favourably impacted by approximately 0.5 percentage points based on current spot rates.

With regards to our MIP Programme, we continue to expect to deliver approximately half of our targeted 300 bps gross margin benefit cumulatively during 2017.

We expect capital expenditure of 2-3% of revenue with a further $50 million related to the MIP Programme in the full year. We expect to incur $15 million of incremental public company related costs in 2017.

Our adjusted tax rate is expected to be broadly in line with the full 2016 pro forma effective tax rate.

Principal risks and uncertainties

The Group has a robust risk management process in place to identify, evaluate and manage the identified risks that could impact the Group's performance. The current risks, together with an explanation of the impact and mitigation actions, are set out in the 2016 Annual Report on pages 28 to 33. The Group has reviewed these risks and concluded that they represent the current position and remain relevant for the first half of the financial year. A summary of the relevant key risks and uncertainties is: macroeconomic and foreign exchange; governmental social health care policy; intellectual property and product innovation; regulatory; product quality and safety; ethics, bribery and corruption; data loss/mistreatment.

Going concern

The Group has adequate financial resources and its customers and suppliers are diversified across different geographic areas. The directors believe the Group is well placed to manage its business risks successfully. The directors have a reasonable expectation and a high level of confidence that the Group has the adequate liquid resources to meet its liabilities as they become due and will be able to sustain its business model, strategy and operations and remain solvent for the foreseeable future.  Thus the directors continue to adopt the going concern basis in preparing these Condensed Consolidated Financial Statements.

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(3)   Constant exchange rates ("CER") growth is calculated by applying the applicable prior period average exchange rates to the Group's actual performance in the respective period.  Growth at CER includes $5.3 million revenue from EuroTec in the six months ended 30 June 2017. Excluding EuroTec, organic growth in the six months ended 30 June 2017 was 1.5% for total revenue, and 2.4% for Ostomy Care.

(4)   Organic growth presents period over period growth at CER, excluding M&A activities.