Okay. Good morning everybody. Are we ready to roll? Welcome to the half year 2025 Convatec results presentation. First, let me convey apologies from our CEO Karim , who is not feeling well today and won't be able to attend. I am going to present his slides as well as the CFO section and then I'll be very happy to take questions that anyone has afterwards. The usual disclaimers apply and the summary message for today is that we delivered a strong performance in the first half financially and strategically, and we're on track to deliver our guidance. The highlights are on the slide. Revenue growth was again broad based. Further operating margin expansion at the same rate as for the last three years. Second year of double-digit EPS growth.
Our product launches are progressing well and as I said, we're on track to deliver guidance and that's for 2025 and for the medium term. These strong results in the first half demonstrate the resilience of our business model. We're not reliant on any one category or geography or product for our growth. At the core of that resilient business model is first, that we operate in four chronic care categories, growing structurally over time. We have strong market positions with high levels of recurring revenue, and we expect to grow ahead of the markets consistently by virtue of our differentiated products and services. Second, we invest to develop those differentiated products and services, focusing in the fastest growing segments. Innovation is directed towards satisfying unmet customer needs, building customer loyalty and strong IP positions.
We now have the richest product pipeline in the company's history and we achieved the target 30% vitality index one year early in 2024. Third, our growth is broad based across diverse categories, geographies and products. Organic growth has accelerated in each of the last six years. We're launching 16 new products over the last three years and the next two years which will contribute to growth across all categories. That business model is resilient to external impacts on any individual areas. The FISBE strategy is delivering. We are investing to drive growth and that is leading to improving sales margin and EPS. This chart shows that on each of those four key financial metrics, the first half of this year was ahead of the results of the last three years. Momentum is building and the flywheel is turning.
Now I'll move on to the financial results in our usual format, and here are the highlights. Organic revenue growth was 6.8% on the basis of our guidance, which is excluding InnovaMatrix, or it was 6% including InnovaMatrix. Operating margin expanded by 130 basis points, or by 140 basis points at constant currency. EPS growth was nearly 20%, benefiting from operating profit growth and lower financing costs. Cash conversion was in line with our expectations, and similar to last year, we still expect over 80% cash conversion in FY 2025. Leverage improved by 0.4 turns of EBITDA to 1.9x , and the dividend will increase by 3%, same as last year, towards the full year target payout ratio of 35% to 45%. Sales growth was broad based across all four categories, as you can see in the columns on the left.
As previously reported, Infusion Care benefited from positive order phasing in the first half, and on the right you can see a small contribution from M&A, an FX headwind, and in line with our guidance, we've separated out the impact of InnovaMatrix, which was down by $6 million year- on- year. Let's look at the sales by category, starting with Advanced Wound Care, where organic growth was 4.3% excluding InnovaMatrix. Growth was strong in North America and in global emerging markets, and it improved in Europe through the first half, supported by new products. AQUACEL Ag+ Extra, our flagship brand, continued to grow well, and the launch of ConvaFoam continued to build momentum, winning more than 50% of new hospital evaluations in the U.S. and Europe. InnovaMatrix sales decreased by 13% to $39 million, as the uncertainty around the LCDs continued to weigh.
This was in line with the guidance we gave in April when the LCDs were postponed until 2026, and we continued to make progress in generating clinical evidence for the RCTs and in developing sales in indications outside the scope of the LCDs. On to Ostomy Care, where organic growth was 4.7%. Growth was good in the U.S. with a continuation of positive new patient starts, it was steady in Europe, and we saw strong growth in GEM. The highlight of the period was the launch of Esteem Body, our new one-piece soft convex product, which had an enthusiastic response from patients and clinicians, is building sales, and is now available in all of our focus markets. Growth was also supported by our updated accessories range, Esenta Incontinence Care. Organic growth of 6.7% was driven by further volume increases in the U.S.A.
backed by our outstanding customer service and the broadening portfolio of products. We saw faster growth in sales of Convatec product relative to other manufacturers which is now over 55% of the mix, and faster growth of hydrophilic product which is over 60%. We grew strongly outside the U.S.A. on a small base which again contributed over 1% point to the category growth rate and then Infusion Care where organic growth was 14.1%. As we guided in February, Infusion Care benefited from positive order phasing in H1. Growth in H2 will be lower, but that said the start to the year was ahead of expectations and has led us to increase our guidance for 2025 to double-digit growth.
There was continued strong demand in diabetes across long-standing and newer customers as the penetration of automated insulin delivery over multiple daily injections is increasing, and outside diabetes growth was very strong led by infusion sets for AbbVie’s Parkinson’s treatment. Our other therapies now represent mid-teens of Infusion Care revenue, up from about 10% that we have previously reported, and the scope to grow further as a share of the category. We've got a strong position in Infusion Care with increasing diversity across new customers and products gives us confidence that we can sustain high single-digit growth for years to come. Let's move on to profitability. Operating margin expanded by 130 points or 140 points in constant currency in line with progress of the last few years. In this period there were significant mix effects.
The faster growth in Infusion Care, which has lower gross margin but lower operating cost ratio, and the sales decline in InnovaMatrix, which has higher gross margin and higher operating cost ratio, led to a negative mix in the gross margin and a positive mix in the operating costs highlighted on the chart there, which offset each other and had no impact on operating margin. Gross margin declined by 60 basis points, but without that mix effect it would have increased slightly. Price and productivity combined contributed 40 and 110 basis points respectively. Excuse me. Inflation was 3%. As expected, a headwind of 110 basis points and we expect it to continue at that level through the second half of the year.
Operating costs, in addition to the mix effect, there were further benefits from our simplification and productivity programs, which also delivered more improvement in the G&A ratio, down 50 basis points to 7% of sales. This rate of progress in margin, we'd expect to be roughly the same in the second half of the year. Now onto the bottom of the P&L, EPS increased 19% in the first half, benefiting from an increase in operating profit and a reduction in financing costs, that's shown on the left. This was a reverse of the effect last year when EPS was flat in the first half because of increasing financing costs, but it finished the year in double-digit growth. Finance costs have now stabilized. We're expecting them to be roughly flat in the second half of the year. That's in the middle column.
EPS is on track for double-digit growth for the second year in a row, in line with our guidance. Cash conversion was in line with expectations and similar to last year at 60% operating and 35% equity. The components of cash flow, which you can see on the chart, were also a similar shape to last year, and we're on track for equity cash conversion of over 80% for the full year. Net debt increased by $107 million, but leverage reduced to 1.9x . Following the strong first half, we are confident of delivering our full year guidance, which is unchanged on the four key metrics set out on the chart in the detail. The guidance for growth of Infusion Care has increased to double-digit, and the guidance for finance costs has reduced by $5 million, with all other items remaining the same.
This is the fifth consecutive year of delivering sales growth within our target range, the fourth consecutive year of operating margin expansion towards the target of mid-20s, and the second consecutive year of double-digit EPS growth. These financial results are starting to compound. Now let's move on to the strategic update. Convatec is well positioned to deliver that compound growth in top line, earnings, and cash because of our leading positions in attractive and growing markets, the resilient business model that I described at the start of the presentation, and the pivot to sustainable and profitable growth that has been delivered through the FISBE strategy. The growth delivered has been broad based. This chart shows the progress over the last three years, with each category contributing. There is strength and resilience in the broad-based portfolio.
The individual contributions to growth will change from period to period, but the diversified portfolio keeps delivering. We have been delivering this growth across the four categories which you can see at the top of the chart through changes in the reimbursement landscape. Reimbursement dynamics are an expected part of our business. We plan for them. We focus on delivering value for patients, payers, and healthcare professionals. We believe that in the end, product efficacy always wins. We've developed strong competencies to work continuously in this area of reimbursement across our centers of excellence at the bottom of the chart, which manage pricing, market access and reimbursement, medical and regulatory. Here in the middle of the chart are some examples of recent or current areas of work in Advanced Wound Care.
We're developing ConvaNiox and generating clinical evidence to demonstrate its strong unique efficacy and to secure reimbursement based on its high value to the healthcare system. Also generating clinical evidence for InnovaMatrix to secure long-term coverage and access to the private payer market. In the U.S. in Ostomy Care, we're launching Esteem Body Soft Convexity One- Piece at a higher reimbursement rate based on improved efficacy, and we're developing the two piece equivalent as well. On the other hand, we will be providing feedback on the recently proposed competitive bidding process. More on that in a moment. In Continence Care, we're developing the portfolio of Convatec manufactured and hydrophilic products to be best positioned to serve customers and to be best positioned for whatever changes there are in reimbursement.
In Infusion Care, the recent developments in our product portfolio in Extended Wear for Diabetes and Neria Guard for Parkinson's, they attract higher pricing reflecting their improved value to customers and patients. The message is that we're working in an evolving reimbursement landscape all the time with our resilient business model, our diverse base of growth. We expect to deliver sustainably 5% to 7% organic revenue growth and double-digit EPS growth through the reimbursement dynamics that arise. Let's look at the two most recent developments. First, in Advanced Wound Care, there is uncertainty about the potential implementation of the LCDs next January, and CMS has just announced a potential price of $125 per sq cm for all skin substitutes for consultation. This price is much lower than most products are currently reimbursed at, including ours.
It would have significant implications for the structure of the segment, especially for the more expensive human tissue products exposed to. This change is approximately 3% of group revenue and if it's implemented as drafted, we expect the impact could be a headwind of about 1%- 2% of group revenue in 2026. Now there's a long way to go before this is implemented. A lot of moving parts and there could very well be changes to the draft proposal as there were to the initial draft LCDs. We're focusing on strengthening our position and we're confident of the long term growth opportunity irrespective of any short term volatility. InnovaMatrix Works product efficacy is the most important factor leading to market share. Our clinical evidence is good and it's increasing and ours is an advantageous position for supply and on cost of goods.
If this proposal happens as currently drafted, it would have a far greater impact on higher cost players presenting a volume opportunity for us. Second, on the right in Ostomy Care and Continence Care. CMS has just announced the proposal to change rules to enable a competitive bidding process in these areas. This too is in consultation and may face changes before any implementation. 7% of our group revenue is directly exposed to this potential change being the reimbursement to 180 from Medicare. There is an additional 2% of sales to other distributors which we estimate are also reimbursed by Medicare. The impact of any CBP on that indirect revenue would be much less. If implemented as drafted, which it might not be, we would expect a net headwind of 1%- 2% of revenue in 2027 or later.
You get to that 2% using an average price reduction delivered across previous CBPs of 30% on the 7% of revenue. The range down to 1% is because of the volume gain opportunity that there would be. We're in a strong position for whatever changes arise and therefore here too we are confident of the long term growth opportunity, whatever the short term volatility. We are an integrated distributor and manufacturer with the leading position of the largest and loyal customer base, a strong and broadening portfolio of products. There are approximately 3,000 distributors which are reimbursed by Medicare for these products currently. CMS has indicated that under a competitive bidding process it might expect seven or eight for each category, not 3,000. If this proposal is implemented as drafted, there would be far fewer players and there will be an opportunity for us to gain volume.
To summarize on reimbursement, these dynamics have always been a feature of the healthcare market and will continue to be so. These recent consultations are not extraordinary. In 2025 we have a similar headwind from InnovaMatrix of just over 1%. We will still deliver within our target sales growth and double-digit EPS growth. We set our guidance assuming that such reimbursement dynamics will arise. We'd not expect these recent announcements to knock us off track from delivering our medium-term targets of sustainable growth. Now let's take a quick look at the focus areas for each category, starting with Advanced Wound Care. On this chart you see the four segments of wound care that we focus on and the structural growth rates in each. The middle row shows the key and new products in each segment.
On the left, AQUACEL Ag+ Extra is our new market-leading flagship brand which continues to perform well. The other products are all new. This is the richest pipeline of new products, we believe, of any competitor in wound care. Our focus currently in wound care is to continue driving the success of AQUACEL, to build on the launch of ConvaFoam, to begin launching ConvaNiox and ConvaFiber this year and ConvaVac next year, and to deliver further clinical evidence of the efficacy of these products, especially in ovumetrics in Ostomy Care. This chart shows the segments we compete in and their respective growth rates. In the middle of the chart are our main products in each segment, existing and new, and the innovation is focused in the fastest-growing segments.
Our focus is on driving the Esteem Body launch, building on the good momentum we have in GEM with our existing product portfolio, further developing the Esenta and accessories range, and filling the main remaining gap in our product portfolio with Natura Body in 2027. In Continence Care, here we're showing the category by geographic region. We've got a strong presence in the U.S., the number one home care brand 180 Medical with over 40% share, but we're small in Europe and GEM. In the middle you see our existing and new products, in particular the GC Air brand using our hydrophilic Feel Clean Technology and the value brand Cure. Our focus is on maintaining our outstanding customer satisfaction and loyalty scores in the U.S.
To develop our market leading position, growing the penetration of Convatec and hydrophilic products and building our services and product presence in Europe and GEM to grow quickly from a small base and then in Infusion Care we show the diabetes segment and other therapies. In diabetes, the number of insulin intensive people using pumps is still very small at about 6% of the potential total. The growth in pump use is accelerating, driven by innovation in pumps and monitors in therapies. Outside diabetes, pump usage is growing quickly for pain management, for immunoglobulin deficiency and especially for Parkinson's led by AbbVie's new VYALEV therapy. Our infusion set technology can support a wide range of different types of pumps. Our focus in this category is working with customers to innovate, meeting the growing demand for our infusion sets with great service and diversifying our customer and product base.
I hope that summary update of our strategic agenda by category is helpful in demonstrating the breadth and diversity of Convatec's current and future growth. Let me finish with a recap. We have a resilient business model based on leading positions in growing markets, diversity of growth across our categories, geographies and products, all underpinned by a strong pipeline of new product innovation. The first half saw strong delivery from that business model financially and strategically, including good progress on product pipeline, colleague engagement and customer loyalty. We are on track to deliver our financial guidance for 2025 and for the medium term. Thanks very much. I'll now be happy to take any questions. David, are you going to help compare the questions?
There we go.
It's Graham from UBS. Thanks guys. Just two questions for me. Firstly, on the wound acceleration through the year, should we expect that to get to mid to high single digits once you get ConvaNiox? Does ConvaNiox launch a bit differently to ConvaFoam, maybe faster? The second question is on CBP, you've given us the revenue potential outlook. I suppose on the cost side, is it feasible that you can switch more products to your own brand, which would presumably help gross margins? Is there much OpEx change in the business model in case studies where you've gone to CBP elsewhere?
Yeah.
Okay, thank you. Wound care. First of all, the acceleration in sales growth we do expect to build through this year, but we're aiming for mid single digits growth in 2025 for Wound Care. ConvaNiox won't have a material impact in 2025. You asked if ConvaNiox would launch differently from ConvaFoam. To a certain extent it will because it's effectively a new category in our minds. In ConvaFoam we are updating, replacing existing foams with a superior product. In ConvaNiox there's nothing like it out there. ConvaNiox we wouldn't expect to build quickly. Let's not, you know, get carried away. It'll build steadily and slowly but for a long time in our mind once the new products are all launched, because we got five of them in wound care, we do see wound care being a high single digit business in the medium term, but not this year.
On competitive bidding, what is the opportunity if that happens? I do want to emphasize it's early days. Can we replace, can we sell more of our own product? I think that was one of the questions. Yes, we can and we already are doing. There's been a steady increase in the proportion of Convatec manufactured product because our product portfolio is getting better. Remember in 180 Medical the emphasis is what does the customer want? It's about customer loyalty driving that retention, driving the growth in volume of customers. As we get better products and as our portfolio expands, one would expect naturally for more of the products to be Convatec that are sold. I would expect that trend to continue, maybe accelerate a bit. Operating costs are variable as they are in all of our categories. We will adjust accordingly.
Our emphasis will be on driving that growth long term.
Do you want to.
Good morning, John Erdmann from Barclays. I have two questions. Both are on InnovaMatrix. In the current environment, the doctor maybe gets reimbursed at like $1,000. Convatec maybe gets half of that. There's a differential there. In a world where the doctor is getting reimbursed at $125, what would you expect Convatec's realized price to be? The second question is on the price cut and the revenue headwind guidance. If your realized price is going from $500 to maybe $125, that feels like a bigger price cut than the 1%- 2% headwind that you're guiding to, which is like a 40% to 60% cut to the 3% revenue. Why is it not a bigger headwind if the price cut is greater?
Yeah, good questions. Thanks, John. So, InnovaMatrix, let's recognize, you know, this development in InnovaMatrix in the U.S. has been going for some time. We've shared previously that we are developing our sales in other indications as well. To the question on what will the discount be in the physician's office, obviously if the price is as low as $125, this is going to lead to a significant change in the structure of the segment. To our estimation, there could be many of the especially higher cost human tissue type operators that just don't continue. You'd expect for sure there to be some incentives for the physician's office to continue, but it would be much less than currently. We've made an estimation of what we think it is, but that remains to be proven out.
The worst it can be in InnovaMatrix obviously is a 3% headwind because that's all the sales there are. We don't think it's going to be like that because as our product, which is strongly positioned, and we continue to generate clinical evidence to prove that, as that has a volume gain opportunity and as the other indications grow, we think that there is a long-term growth opportunity for InnovaMatrix and therefore in a worst case 2% down, we'd like to aim for 1% down even at that low price level if that's what happens. I mean with 3% as the worst case, I don't think 1%- 2% is overly racy in terms of headwind.
Hi, Seb Jantet with Panmure Liberum. Just sticking on skin substitutes and CBP, just the first on the skin substitutes, you talked about revenue. Just help me understand what that happens, what the 1%- 2% hit does to your bottom line. Because obviously you're taking some big price cuts there, which are going to obviously affect your gross margin and your bottom line. You've obviously got some OpEx you can move around there. I'm just trying to understand what that does. The other piece is just on the CBP piece, just trying to understand. You said 1%- 2%, you've talked about 30% price cuts, you talk about 9% of potential sales. There must be some volume assumptions that you are making to get to that 1%- 2%, even the top end.
If I could just get a sense of what you're assuming for volume kind of improvements against that.
Yeah, sure thing. Let me do it in reverse. On the CBP, 1%- 2%. What we have done there is, first of all, it's 7% of revenue that is directly impacted. The indirect impact on the smaller piece of revenue we think is a fraction of that and probably a rounding error. We have taken very simply 30% price reduction, which is the average of the CBP's over time. Again, 7% of sales. There's your 2%. Reducing 2% towards the 1% would rely on volume recovery of some kind. We think we'll be successful in that. I quoted the number of distributors currently in the U.S. market as, you know, approximately 3,000. If that goes down to under 20, which is the expressed desire of CMS, we think we'd be in a very good position to gain volume. That's why it might not be as bad as 2%.
Worst case could be better towards 1%. That's how we've come up with that number. On InnovaMatrix dropping to the bottom line, yes, it's a price cut. Do remember what I described in the margin bridge, which is that InnovaMatrix has very high operating costs. It's a complicated sale, and so we would have to adjust accordingly. What we've previously said is that although it's very high gross margin, InnovaMatrix operating margin is not that far from the group's average. You'd expect a drop through rate a bit above the group's average operating margin, but not dramatically so.
Hi Ed Ridley-Day from Redburn . Bigger question on the CMS discussions. To what extent are you speaking to them about the broader benefits of xenograft versus allograft, the safety benefits, the administrative benefits, and to what extent are they actually receptive in those conversations?
I had a quick question on Neria Guard, clearly an interesting product.
Can you talk to the contribution from?
Neria Guard to IC?
Okay. We have a very close and extensive dialogue with CMS. As you would expect, like many others in the industry, the discussion, the debate, the lobbying is flowing freely. We talk to them about all sorts of things. I won't get into the details of what they are, but that's why we want to be cautious about these two announcements. They are initial draft proposals and they are under discussion, and that discussion is genuine. There are pros and cons and there are lots of people for and lots of people against. We saw how that played out with the LCDs. They were extended, they changed. We wouldn't be surprised if a similar thing happens in the case of these announcements too. Your other question, sorry.
On Neria Guard.
Yes, look, Neria Guard and in particular for Parkinson's and AbbVie.
Look, it's growing really well, growing really strongly. We've said it's now that other therapies area has grown from 10% of the category to now being over 15% of the category. We won't get into specifics, but I said in the presentation that the pricing reflects the value to the healthcare system. It does come at a higher, higher margin. Yeah.
Thank you. Richard Felton from Goldman Sachs. Two questions for me, please. First one is just a clarification, the 1%- 2% headwind from InnovaMatrix, is that including both reimbursement changes announced this month and LCD? That's the first question. The second question is on the midterm guide for mid-20s margin by 2026, 2027. Obviously you've reiterated that guidance this morning. Is it fair to assume that the path to achieve that is maybe a little bit different now versus what it was six or 12 months ago? If that is the case, what gives you confidence that the other parts of your business can pick up some of the slack to compensate for the reimbursement headwinds?
Thank you.
Yeah. Okay, let me do that in reverse as well. One of the points we're trying to make in the presentation was that we plan for something to happen. It's the nature of the healthcare industry. Reimbursement dynamics. Are we still expecting to hit our medium term margin target? Yes we are. Is the shape of it going to be different from how we originally planned it? I'd say no, not really because we had planned to be delivering on the levers which are within our control. It is simplification and productivity across operations, commercial and G&A. It's pricing, which we saw another 40 basis points of price improvement in the first half. Operating leverage is helping us as our top line growth picks up. All of those levers within our control are still contributing to mix improvement to margin improvement. Excuse me.
We've got some things going on in reimbursement, but we always have had and we always will have. I don't think these most recent announcements knock us off track from the trajectory that we were on. What was the first one?
Does the 1%- 2% for an InnovaMatrix headwind, is that LCD and the.
That's right. Excuse me. No, it doesn't because we think that if the price goes to $1.25, that achieves the objective that the LCD was seeking to achieve, which is reducing excess cost and removing bad actors from the sector. If the price were to stick at $1.25, no guarantees, but we don't expect the LCD would carry on in its current form.
Yeah.
Hi there. Thanks for taking the questions. Jack from RBC. First on Infusion Care manufacturing, I think you mentioned in the release that you're looking to expand manufacturing in Infusion Care. Is that a change given the strength you've had kind of the back end of this half or was that already in the plan? How much opportunity is there to really automate processes within that manufacturing footprint there to improve gross margin over the medium term? Just following up on the ex-U.S. InnovaMatrix and the other indications you spoke about, could you give a bit more detail there? What the timelines are and what your expectations are over the next couple of years.
Yeah. InnovaMatrix capacity. I think what I said in the presentation was we have a focus on growing, on meeting the growing demand with great service. It's not a new plan. No. We've always said Infusion Care is going to be growing high single digits. It's a long-standing plan of ours to be expanding our capacity to meet that demand.
Sure.
This year we think it's going to be double digit, not high single digit. In the grand scheme of things, that doesn't make much difference to the manufacturing plan. These automation projects, capacity projects, they take years to bring to fruition. We've been planning this a long time. InnovaMatrix outside the U.S.A., look, we are launching in Latin America now. We have ambitions to launch in other markets too. Honestly, the market opportunity is currently much smaller outside the U.S.A. It's the U.S.A. that's going to move the needle most when it comes to InnovaMatrix and Biologics.
Great, thanks a lot.
Yeah, great, thanks. Hi, it's Sam England from Berenberg. First one just on Ostomy Care in the U.S., you called out growth in new patient starts in the release. Do you think you're now growing ahead of the market in the U.S., or do you think it's going to take the Natura launch to sort of get that business sustainably growing ahead of the U.S. market? On the Wound Care side, can you just give us a bit of an update on ConvaVac ahead of the planned launch in 2026? I suppose, where are you in the product development cycle at the moment, and what are you doing to avoid some of the issues the business has had historically in negative pressure?
Yeah. ConvaVac then. We are well progressed with our product development. We're developing a very nice product we're very excited about, will have features that the existing single use negative pressure wound products don't have. We think we've got a good opportunity to grow share. Convatec has had a checkered history in this area with the launch of Avelle, which wasn't really good enough and hasn't competed effectively. We've learned our lesson there, I think, and the launch of ConvaVac is being properly prepared, not being rushed. We're on track for next year and we're looking forward to a good launch and growing share. Yes. In the U.S., I wouldn't say we're gaining new patients ahead of the market yet. Honestly, we have stabilized our share loss with a much improved commercial execution, much better customer loyalty, contact centers, websites, better training, better leadership, better education. We've stabilized that.
We are gaining share revenue-wise because our accessories range does really well. To really get motoring in terms of market share growth there, you're right, we do need to get Esteem Body to make a big difference for us.
Hi, good morning, this is Anchal Verma from JPMorgan. Two questions please, Jonny. The first one is on H2 margins. The full year guidance implies a decent step up in H2 margins, which is in line with seasonality and the efficiency measures. Can you provide a bit more color on the potential magnitude? Is it fair to assume a similar year- on- year improvement as we saw in H1 continuing to H2, so around 130 bps of year- on- year improvement in H2? The second one is on tariffs. You've outlined around $5 million-$ 10 million of headwind. Can you please outline what are your assumptions for this number and what are the tariff rates that you've used for this?
Margin? First, yes, we would expect a similar quantum of improvement in the second half year- over- year. It might not be 130, it might be 100, but we're on track to deliver our mid-22s as it were. 22- 25 is our target range and we're on track to achieve that. That requires a significant step up in operating margin in H2 compared to H1, just like we did last year. There is a little bit of seasonality in the margin and with a growth of 130 in H1, we're bang on track to deliver that for the full year. On tariffs, it's a moving target, but most of our products are exempt under the Nairobi Protocol. What we have included in that estimate is the few products that aren't.
That's mostly a bit of the Advanced Wound Care and the FMS within Ostomy Care, which are subject to those tariffs. The tariff rates vary depending where they're coming from. We've used what's out there, mostly 20%, but there are some exceptions for different sources of product. We've looked into it in great detail.
If there's one more in the room, and then I've got a couple online, Miles.
Thank you. It's Miles Dixon from Peel Hunt. Just a couple of quick ones if I could. Jonny, on ConvaNiox, firstly, is that supposed to be adjunctive therapy relative to InnovaMatrix? Secondly, you've kindly given us a guide on the CBP and the LCD. Can you give me a broad idea of what the U.S. revenue portfolio exposure is to Medicaid, Medicare, and commercial payers? Maybe I'll do the third one last, separate.
Yeah, thank you. Don't stretch my memory too far. On the second one, I think we've shared those numbers, which is Medicare public payers. Altogether it's 12% of group revenue and the Medicare piece itself is 7%, and that spreads across Ostomy and Continence Care, which is the primary components. What was the first one.
On ConvaNiox and whether it's a jug.
Yes.
Oh, I'm sorry, of course it is, yeah. ConvaNiox works. Yes. With InnovaMatrix, they do different things. InnovaMatrix offers a scaffolding on which the skin can be triggered to regrow. ConvaNiox you might use earlier in your wound treatment protocol. It has a dual function. It increases the blood flow, which accelerates healing, and it also is an antimicrobial. In InnovaMatrix, there is no antimicrobial action. For instance, if you've got an infection, you wouldn't use InnovaMatrix, you would use ConvaNiox. InnovaMatrix you might use later on and for bigger wounds. They work together.
Got it, thank you. Lastly, on what's been going on since early July in managed care, are you seeing any signs yet of days sales out stretching? Is there any risk to year end receivables?
Not that we've seen, no.
Thanks. We've got a couple of questions online. I'll just take them in the order that they came. The first one was also related to ConvaNiox. Have we got any update on the likely price point for that product, and is there any crossover into the biologics dressing price cap range?
On the latter, no, because it's not a skin substitute, and on the former, I think best wait and see. What we are doing at the moment is launching steadily, slowly, properly in Europe. We're building clinical evidence to demonstrate the product's efficacy and will come to reimbursement levels in the U.S. at the right time next year. You know, what we'll be keen to secure is reimbursement that reflects the strong value that we think ConvaNiox adds to the healthcare system.
Thank you. That was from Grégoire du Mesnil at Rothschild. The next one is from Kane. His first question around InnovaMatrix has been answered already. He's asked about whether there's any change to our capital allocation priorities and whether we would consider a share buyback at the certain level.
At the current levels.
No change to capital allocation priorities. Just to remind us, they are investing to drive organic growth. We're doing more of that this year than we have ever done before. Ordinary dividend, we are targeting a payout ratio of 35%- 45%, and we're comfortably within that this year. Appropriate M&A, we're still looking for M&A, which adds to our competitive strengths in our focus areas, but we're very disciplined about it. Thereafter, any surplus capital would be returned to shareholders. We're not triggered by share prices in applying those capital allocation priorities.
Thank you. Any more questions in the room? Follow up on Jonny.
Just on ConvaNiox. It obviously has an antimicrobial element to it, and I know you said this is a new category of product, but does it expand indications to wounds that normal antimicrobials can't treat? What I'm getting at, is there any risk of cannibalization between ConvaNiox and the AQUACEL range if they're both antimicrobials and one's much better than the other?
There may be times when you would choose to use ConvaNiox as your antimicrobial instead of, for instance, a silver product. I don't think we'd mind that because it's more effective and therefore we would be expecting better reimbursement. Stunned them into silence. Thank you, everybody, for your attention this morning. You know where we are. Any further questions, please let us know. Thanks very much.