Smith & Nephew plc · LSE:SN.
Smith & Nephew — FY2007 Earnings Presentation
35 slides from Smith & Nephew's earnings presentation, February 2008
Slide 1: 2007 Preliminary Results
2007 Preliminary Results Enabling people to live healthier, more active lives 0
Slide 2: Forward looking statements
Forward looking statements This presentation contains certain "forward-looking statements" within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding expected revenue growth and trading margins discussed under "Outlook" are forward- looking sta
Slide 3: John Buchanan, Chairman
John Buchanan Chairman sustainable profitable growth
Slide 4: Introduction
Introduction • 2007 – a very good year • Strategy gives confidence for the future • New management team established • Innovation, operational excellence and demographic driven growth sustainable profitable growth 3
Slide 5: David Illingworth, Chief Executive
David Illingworth Chief Executive sustainable profitable growth
Slide 6: Full year highlights
Full year highlights • Group revenues $3.4 billion, double digit growth – Reconstruction revenues growth outpaces the market for the 5th consecutive year – Endoscopy generates double digit revenue growth – Trauma and Clinical Therapies up 13% – Advanced Wound Management restructuring fuels return to
Slide 7: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer sustainable profitable growth
Slide 8: Income statement Q4 2007
Income statement Q4 2007 Fourth quarter Percentage growth Full Year 2006 2007 Actual Underlying 2006 2007 $m $m $m $m Revenue 771 967 25% 8% 2779 3369 Trading profit 183 222 21% 14% 571 706 Legal settlement - - - (30) Restructuring and acquisition costs (20) (41) (20) (89) Inventory revaluation - (1
Slide 9: Income statement Q4 2007
Income statement Q4 2007 Percentage Fourth Quarter growth Full Year 2006 2007 Actual 2006 2007 $m $m $m $m Profit before taxation 161 141 550 469 Taxation (40) (40) (156) (153) Profit from continuing operations 121 101 394 316 Discontinued operations 19 - 351 - Attributable profit 140 101 745 316 Ad
Slide 10: Revenue growth by business segment 2007
Revenue growth by business segment 2007 Actual Currency Acquisitions Underlying Quarter 4 % % % % Reconstruction 49 (7) (31) 11 Trauma and Clinical Therapies 21 (4) (8) 9 Endoscopy 10 (3) - 7 Advanced Wound Management 13 (7) (2) 4 Group 25 (5) (12) 8 Full Year Reconstruction 35 (4) (18) 13 Trauma an
Slide 11: Underlying revenue growth by geography & business segment 2007
Underlying revenue growth by geography & business segment 2007 US Growth Europe Growth ROW Growth Total Growth Quarter 4 $m % $m % $m % $m % Reconstruction 163 16 141 6 70 3 374 11 Trauma and Clinical Therapies 113 10 38 10 25 3 176 9 Endoscopy 97 4 67 12 37 7 201 7 Advanced Wound Management 45 5 11
Slide 12: Profitability by business segment Q4 2007
Profitability by business segment Q4 2007 - - - - - - - - - - - Q4 - - - - - - - - - - - Full Year Revenue Trading Profit Margin Margin 2007 $m $m % % Reconstruction - excluding Plus 289 78 27.0 25.9 - Plus 85 5 Trauma and Clinical Therapies - excluding Plus 163 43 26.4 21.0 - Plus 13 4 Endoscopy 20
Slide 13: Share buy back
Share buy back • 13m shares bought back for $164m in Q4 • In total c.55m shares bought back for c. $690m to end of last week • $400m target buy back over next year sustainable profitable growth 12
Slide 14: Outlook for 2008
Outlook for 2008 • Revenue growth – Reconstruction – exceeds market growth – Trauma – Fixation close to market growth – Endoscopy – arthroscopy steady, visualisation & DOR volatile – Advanced Wound Management – excluding NPWT, at or slightly above served market; NPWT, no guidance • Margin expansion
Slide 15: David Illingworth, Chief Executive
David Illingworth Chief Executive sustainable profitable growth
Slide 16: Key business objectives
Key business objectives • To be the company that active, informed patients look to for advanced treatment options • To offer orthopaedic customers a seamless “continuum of care” from early intervention to revision • To have a strong market presence in the major US wound management market • To have a
Slide 17: Key drivers of performance
Key drivers of performance • Above market growth rates in all segments • Improve operating margin by an average of at least 1% per year, to end 2010 • Our core strengths of customer focused sales and marketing, our industry leading innovation and product development • Focus on being a high growth, h
Slide 18: Continuum of care
Continuum of care Early intervention hip (active) Primary hip Revision hip Early intervention BHR™ & BHR CAS MIS stem Primary stems Defect filling hip Younger Older BHR Modular revision Focal defect repair Mid head R3 cup Implant removal Hemi-arthroplasty implants sustainable profitable growth 17
Slide 19: Reconstruction
Reconstruction $m % Growth* % Growth* Q4 07 Q4 Full Year Pre-Plus • 5 years outperforming the market Revenue 289 11 13 • Australian registry data establishes Hips – global 127† 14 21 BHR™ System as the gold standard – US 74 27 37 • Plus integration on track Knees – global 153† 10 9 • Margin up 50 ba
Slide 20: Reconstruction – recent new products
Reconstruction – recent new products JOURNEY™ DEUCE™ R3™ BIRMINGHAM HIP™ ANTHOLOGY™ Bi-Compartmental Knee System Acetabular System Resurfacing System Primary Hip System with OXINIUM™ femoral head JOURNEY™ BCS JOURNEY™ BCS Bi-Cruciate Stabilised Knee System Bi-Cruciate Stabilised Knee System LEGION™
Slide 21: Trauma & Clinical Therapies
Trauma & Clinical Therapies Q4 07 % Growth* % Growth* $m Q4 Full Year Pre-Plus • Fixation volumes strong Revenue 163 9 13 • #1 in bone stim, growth 3 x market Fixation 101 7 10 • Fixation now a full service offering Clinical Therapies 62 11 20 • Joint fluid market under pressure, volumes good • Marg
Slide 22: Endoscopy
Endoscopy Q4 07 % Growth* % Growth* $m Q4 Full Year Revenue 201 7 10 • Double digit revenue growth for year US 97 4 4 • Arthroscopy market strong Outside US 104 10 15 • Knee and shoulder repair performing Arthroscopy 161 7 10 well DOR/Visualisation 40 6 9 • Resection growing in mid single digits • H
Slide 23: Advanced Wound Management
Advanced Wound Management Q4 07 % Growth* % Growth* $m Q4 Full Year Revenue 216 4 5 • US revenue growth sustained US 45 5 9 • Silver product range expanded Outside US 171 4 4 • Manufacturing reorganisation underway • Substantial headcount reductions • Margin up 120 basis points for the year • Global
Slide 24: Strategy for continued value growth
Strategy for continued value growth • Customer and market focus – Innovation to provide clinical benefits and value for healthcare systems – Focus on active informed patients • Value enhancing acquisitions – Unique/additive technologies – Improved channels to market • Earnings improvement – Aim for
Slide 25: We are smith&nephew
>KWe are smith&nephew
Slide 26: Appendices
i smith&nephew Appendices
Slide 27: Exchange rates
Exchange rates €:$ Q4/06 FY06 Q4/07 FY07 Period end 1.32 1.32 1.46 1.46 Average 1.31 1.27 1.45 1.37 26
Slide 28: Quarterly revenues
Quarterly revenues Smith & Nephew Key Product Line Revenues, excluding Plus, in $m at Average Rates Quarterly and Underlying Growth* 2007 Q1 Q2 Q3 Q4 Full Year Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth $m % $m % $m % $m % $m % Orthopaedic Reconstruction Knees 143 12%
Slide 29: Analysis of restructuring and acquisition costs
Analysis of restructuring and acquisition costs P&L Charge Cash cost Q4 FY Q4 FY $m $m $m $m EIP – cash costs (15) (41) (8) (32) - asset w/offs - (4) - - Plus Integration cash costs (27) (46) (17) (22) - asset w/offs - (5) - - Other income/(costs) 1 7 (1) (18) (41) (89) (26) (72) 28
Slide 30: Plus and BlueSky
Plus and BlueSky Quarter 4 Percentage growth Full Year Percentage growth 2006 2007 Actual CER 2006 2007 Actual CER $m $m $m $m Revenue Plus - 98 - 200 BlueSky - 3 - 6 Smith & Nephew 771 866 2779 3163 Total Smith & Nephew 771 967 25% 8% 2779 3369 21% 10% Trading profit Plus - 9 - 23 BlueSky - (2) - (
Slide 31: Plus revenue by business segment
Plus revenue by business segment 2006 2007 Q1 Q2 Q3 Q4 2006 Q1 Q2 Q3 Q4 2007 $m $m $m $m $m $m $m $m $m $m Revenue Reconstruction 66 69 60 77 272 86 79 64 85 314 Trauma & Clinical Therapies 8 8 8 9 33 9 8 10 13 40 Total 74 77 68 86 305 95 87 74 98 354 Underlying growth % Reconstruction 11 11 9 16 12
Slide 32: Plus guidance (given March 2007)
Plus guidance (given 12 March 2007) • EPSA – Broadly neutral in 2007 – Accretive in 2008 and beyond • Return on invested capital – Exceeds WACC in third full year • Year three synergies – Costs: Equivalent to at least 15% of acquired cost base – Revenue: Approximately 15% of current acquired revenue
Slide 33: Earnings Improvement Programme Principal Financial Effects
Earnings Improvement Programme Principal Financial Effects (given 3 May 2007) • Group trading margin increase averaging at least 1% p.a. to end 2010 – Net of an increase in R&D spend from 4.3% of sales in 2006 to c. 5% of sales – Includes both EIP and other improvements (except Plus) – Assumes no ch
Slide 34: Earnings Improvement Programme Principal Financial Effects
Earnings Improvement Programme Principal Financial Effects (given 3 May 2007) • Costs expected to be incurred broadly evenly over three years – but provisioning will be more uneven • Not providing a break-down of targets by GBU, but – Around half improvement in Ortho – Much of the remainder in Wound
Slide 35: Blue Sky Guidance (given May 11)
Blue Sky Guidance (given May 11) The acquisition of Blue Sky is expected to dilute Smith & Nephew’s 2007 earnings by around 1%, to be broadly neutral in 2008, and to be accretive from 2009 onwards. The impact in 2007 will be to reduce the trading margin of the Advance Wound Management business by ap