Smith & Nephew plc · LSE:SN.
Smith & Nephew — H1 2007 Earnings Presentation
51 slides from Smith & Nephew's earnings presentation, 2007
Slide 1: 2007 Interim Results
2007 Interim Results Enabling people to live healthier, more active lives 1
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 stat
Slide 3: David Illingworth, Chief Executive
David Illingworth Chief Executive
Slide 4: Agenda
Agenda Q2 Highlights David Illingworth Financial review Adrian Hennah Advanced Wound Management Joe Woody Outlook for 2007 and beyond David Illingworth 4
Slide 5: Q2 highlights: Financial
Q2 highlights Financial • Revenues increase by 12% to $813m • Industry leading growth in Reconstructive segment – BHR™ drove US hips to 50% growth • Clinical Therapies #1 in bone stimulation • Endoscopy double digit growth • Advanced Wound Management – US growth 11% underlying 5
Slide 6: Q2 highlights: Financial
Q2 highlights Financial • Measurable progress with Earnings Improvement Programme • Margin strengthens 1.3 points to 20.5% for the quarter – a combination of business performance, leverage and EIP • EPSA increased by 19% to 12.4¢ • $229m of shares bought back to end of quarter 6
Slide 7: Q2 highlights: Business
Q2 highlights Business • Two acquisitions completed – Plus Orthopedics – BlueSky • Major product launches – Highly innovative JOURNEY™ DEUCE™ Bi- Compartmental Knee System – True High Definition Endoscopy camera • Joe DeVivo joins as President of the Reconstructive business 7
Slide 8: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer
Slide 9: Income statement Q2 2007
Income statement Q2 2007 Second Percentage Half Year Quarter growth 2006 2007 Actual Underly 2006 2007 ing $m $m $m $m Revenue 686 813 19% 12% 1,329 1,557 Trading profit 132 167 27% 22% 256 315 Restructuring, rationalisation, - (5) - (22) & acquisition costs Amortisation of acquisition (3) (4) (7) i
Slide 10: Income statement Q2 2007
Income statement Q2 2007 Second Quarter Percentage Half Year growth 2006 2007 Actual 2006 2007 $m $m $m $m Profit before taxation 135 158 258 289 Taxation (39) (47) (77) (87) Profit from continuing 96 111 181 202 operations Discontinued operations - 332 Attributable profit 96 111 513 202 Add back: A
Slide 11: Profitability by business segment Q2
Profitability by business segment Q2 2007 - - - - - - - - - - - - Q2 - - - - - - ----- H1 2007 Revenu Trading Margin Margin e Profit % % $m $m Reconstruction - 267 70 26.2 25.7 excluding Plus 24 3 12.5 12.5 - Plus 146 30 20.5 18.8 Trauma and Clinical Therapies - excluding Plus 4 - - - - Plus 178 32
Slide 12: Reconstruction
Reconstruction % Grow $m Q2 07 Q2 06 th Pre-Plus: • Above market growth Revenues 267 228 15 • US hips grew at 50% US 151 126 20 • Knees grew at 7% OUS 116 102 10 worldwide, 3% in the US Trading profit 70 58 • EIP on track Margin 26.2% 25.4% • Plus Integration on track 20% New product 14% revenues %
Slide 13: Trauma & Clinical Therapies
Trauma & Clinical Therapies % Grow $m Q2 07 Q2 06 th Pre Plus: • Fixation and Clinical Revenues 146 127 15 Therapies markets strong • Fixation growth behind US 103 94 13 market Outside US 43 33 21 • Clinical Therapies strong • #1 in bone stimulation Fixation 91 83 10 • DUROLANE® progressing well Cli
Slide 14: Endoscopy
Endoscopy % Grow $m Q2 07 Q2 06 th • Arthroscopy market strong Revenues 178 156 11 • Arthroscopy growth close US 90 84 7 to market • Knee and shoulder repair Outside US 88 72 16 performing well Arthroscopy 145 126 12 • Resection growing at 6% DOR/ Visualisatio 33 30 9 n Growth is at underlying rates
Slide 15: Advanced Wound Management
Advanced Wound Management % Q2 Q2 Grow $m 07 06 th • Market conditions satisfactory Revenues 194 175 6 • US market becomes largest US 38 33 11 by revenue Outside US 156 142 5 • ALLEVYN™ performance solid • VERSAJET™ performance Trading profit 32 24 good • EIP well underway Margin 16.5% • BlueSky a b
Slide 16: Plus revenue by business segment
Plus revenue by business segment 2006 2007 Q1 Q2 Q3 Q4 2006 Q1 Q2 $m $m $m $m $m $m $m Revenue Reconstruction 66 69 60 77 272 86 79 Trauma and Clinical 8 8 8 9 33 9 8 Therapies Total 74 77 68 86 305 95 87 Underlying Growth (%) Reconstruction 11 11 9 16 12 19 11 Trauma and Clinical 61 64 58 56 59 7 (
Slide 17: Share buy back
Share buy back • 12.0m shares bought back for $156m in Q2 • In total c.31m shares bought back for c.$384m • Two year programme on track 17
Slide 18: H2 outlook for 2007
H2 outlook for 2007 • Revenue growth – Reconstruction – exceeds market growth – Trauma – Clinical Therapies lower than Q2; fixation close to market growth – Endoscopy – arthroscopy steady, visualisation & DOR volatile – Advanced Wound Management – excluding NPWT, broadly in line with served market •
Slide 19: Joe Woody, President, Advanced Wound Management
Joe Woody President, Advanced Wound Management
Slide 20: Market position
Market position • We treat more wounds • We have the largest than anyone else global reach Wounds treated* Global markets Smith & ROW Nephew KCI 26% 21% 1% Convatec US Other 15% 20% 36% Molnlycke 10% Europe J&J 3M 54% 10% 7% Global innovation leader in emerging wound care solutions * S&N estimate fo
Slide 21: The Advanced Wound Management business
The Advanced Wound Management business Sustainable market Estimated global prevalence opportunity in $4bn market of diabetes by age group (millions)* 200 Strong underlying disease 2000 2030 and morbidities 150 Key segments driving the 100 business: 50 • Exudate management 0 20 - 44 45 - 64 65+ • Inf
Slide 22: Our strategic thrusts
Our strategic thrusts Focus on fast-growing segments • New products US focus • Field sales investment Restructure for top-line growth and cost reductions • Reorganised selling structures • Manufacturing cost savings New ALLEVYN™ range 22
Slide 23: Focusing on the fast-growing segments
Focusing on the fast-growing segments Revitalising product pipeline • 18 new product launches in H1 • Filling gaps in portfolio Strengthened our ranges • Collagen-based dressings • Biosythentic dressing Entered the negative pressure wound therapy market • Largest and fastest growing segment • Synerg
Slide 24: New product launches in H1
New product launches in H1 Exudate Management Infection Management ACTICOAT™ ALLEVYN™ Actimicrobial variants Post Operative Dressing ALGISITE™ AG - Shaped & sealed Silver Algisite Dressing - Reduced maceration Surgical Debridement Negative Pressure Wound Therapy VERSAJET™ Exact V1STA 24
Slide 25: US focus
US focus Improving revenue growth • ALLEVYN™ up 22% in Q2 15% • ACTICOAT™ up 22% in Q2 Market share gains 10% • Growing faster than the 5% market in Q2 0% Q106 Q2 06 Q3 06 Q4 06 Q107 Q2 07 • Market #2 with BlueSky acquisition US underlying revenue Focus on sales force growth (excluding tissue produc
Slide 26: Earnings improvement programme - AWM
Earnings improvement programme - AWM Over 1% margin improvement Automation and better outsourcing Restructured organisation Manufacturi Leverage Sales Operationa Portfolio ng cost of infrastruct deploymen l goods ure t excellence 26
Slide 27: Continued value creation
Continued value creation Strong market fundamentals US to grow above the market New product introductions in attractive, high-growth segments BIOSTEP™ Collagen dressing Integration of negative pressure wound therapy Continued EIP contribution 27
Slide 28: David Illingworth, Chief Executive
David Illingworth Chief Executive
Slide 29: Reconstruction – H2 growth drivers
Reconstruction – H2 growth drivers • Market conditions good • Sector success continues – Young/active patients • Innovative products – BHR™ – JOURNEY™ DEUCE™ Bi-compartmental knee • Plus Orthopedics JOURNEY™ DEUCE™ Bi-compartmental Knee System First choice in solutions for the active/informed arthri
Slide 30: Plus Orthopedics – Smith & Nephew now global number 4
Plus Orthopedics – Smith & Nephew now global number •4 Doubles footprint in Europe (#3 share) • Integration progress good – Organisational structure announced – Cross selling by end of 2007 – Salesforce restructure RT-PLUS™ • Accelerated capabilities in Solution Constrained manufacturing in China Ro
Slide 31: Trauma and Clinical Therapies – H2 growth drivers
Trauma and Clinical Therapies – H2 growth drivers • Innovative products drive growth – PERI-LOC™ US Bone stimulation market share Smith & – INTERTAN™ and TRIGEN™ Nephew Orthofix 37% – EXOGEN 4000+™ 14% – DUROLANE® • Market volumes growing DJO • Sales force effectiveness 19% • EIP on track Biomet/EBI
Slide 32: Endoscopy – H2 growth drivers
Endoscopy – H2 growth drivers • Global leader in arthroscopy/sports medicine • Good momentum in Mike Frazzette’s first full year – Three quarters of double digit growth – Strong growth in underpenetrated OUS market 560P High Definition Control Unit & 560H High Definition Camera Head • Continued inve
Slide 33: Active patient
Active patient • Expands Market • Requires favourable economics • Requires innovation S&N uniquely positioned to own this space 33
Slide 34: Next steps
Next steps • Develop innovative products to drive growth • Focus on fast growing segments • Successful acquisitions within our strategy • Real profitable growth contribution from EIP 34
Slide 35: We are Smith & Nephew
We are Smith & Nephew We have • Long term upward demand curve for products • Innovative products with strong patient, medical professional and payor benefits • Continuous flow of new products and technologies • Strong and strengthening market position & Plus Orthopedics • Upside in trading margin fr
Slide 36: We are smith&nephew
We are smith&nephew
Slide 37: Appendices
>¢ smith&nephew Appendices
Slide 38: Exchange rates
Exchange rates € :$ 12/05 Q2/06 12/06 Q2/07 Period end 1.18 1.28 1.32 1.35 Average 1.24 1.28 1.27 1.35 £:$ 12/05 Q2/06 12/06 Q2/07 Period end 1.72 1.85 1.96 2.01 Average 1.81 1.87 1.86 1.99 38
Slide 39: Analysis of restructuring costs
Analysis of restructuring costs P&L Charge Cash Cost Q2 Half Q2 Half Year Year $m $m $m $m EIP (9) (26) (13) (16) Plus (2) (2) (1) (1) Macrotexture (3) (9) Other 6 6 (5) (17) income/(costs) (5) (22) (22) (43) 39
Slide 40: Revenue growth by business segment 2007
Revenue growth by business segment 2007 Acquisitio Actual Currency Underlyin Quarter 2 ns g % % % % Reconstruction 28 (2) (11) 15 Trauma and Clinical 18 - (3) 15 Therapies Endoscopy 14 (2) (1) 11 Advanced Wound 11 (4) (1) 6 Management Group 19 (3) (4) 12 Half Year Reconstruction 23 (3) (5) 15 Trauma
Slide 41: Underlying revenue growth by geography and business segment
Underlying revenue growth by geography & business Quarter 2 segment US h 2007 Growt Europ Growt e h ROW Growt h Total Growt h $m $m $m % $m % % % 291 Reconstruction 153 20 87 11 51 8 15 Trauma and Clinical 103 13 28 26 19 16 150 15 Therapies Endoscopy 90 7 54 14 34 19 178 11 Advanced Wound 38 11 105
Slide 42: Free cash flow Q2 2007
Free cash flow Q2 2007 Second Quarter Half Year 2006 2007 2006 2007 $m $m $m $m Operating profit 130 159 252 286 Share based payment 5 6 9 13 Depreciation and Amortisation 41 50 77 95 Capital expenditure (72) (67) (130) (105) Working capital movements (22) (12) (79) (42) Trading cash flow 82 136 129
Slide 43: Reconciliation of free cash flow to IAS net cash flow from operating activities
Reconciliation of free cash flow to IAS 7 net cash flow from operating activities Quarter 2 2006 2007 Half Year 2006 2007 $m $m $m $m Free cash flow 36 32 43 92 67 105 Add back: capital expenditure 72 130 Net cash inflow from operating 99 108 173 197 activities (IAS 7) 43
Slide 44: Plus and BlueSky
Plus and BlueSky Second Percentage Half Year Percentage Quarter Growth Growth 200 200 Actu CER 200 200 Actu CER 6 7 al 6 7 al $m $m $m $m Revenue Plus - 28 28 BlueSky - 1 - 1 Smith & Nephew 686 784 14% 15% 1,32 1,52 9 8 Total Smith & 686 813 19% 12% 17% 12% Nephew 1,32 1,55 9 7 Trading Profit Plus -
Slide 45: Plus trading profit
Plus trading profit 2006 2007 Q1 Q2 Q3 Q4 2006 Q1 Q2 $m $m $m $m $m $m $m Trading Profit Reconstruction 11 3 9 34 15 7 11 Trading Margin (% ) Reconstruction 15.1 14.0 4.3 11.0 11.2 15.8 8.6 45
Slide 46: Quarterly revenues
Quarterly revenues h & Nephew Key Product Line Revenues, excluding Plus, in $m at Average Rates Quarterly and Underlying Growth* 2006 2007 Q1 Q2 Q3 Q4 FY Q1 Q2 Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth $m % $m % $m % $m % $m % $m % $m %
Slide 47: Plus guidance (given 12 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 48: Earnings Improvement Programme Principal Financial Effects (given 3 May 2007)
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 49: Earnings Improvement Programme Principal Financial Effects (given 3 May 2007)
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 50: 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
Slide 51: New products 2007
New products 2007 Q1 Q2 Q3 Q4 LEGION™ CoCr (OUS) JOURNEY™ DEUCE™ Bi-compartmental bi- cruciate retaining knee replacement TRIGEN™ TAN/FAN instrument upgrades CAPTION™ Disposable Platelet Concentrator REFLECTION™ 3 (OUS) BIORAPTOR™ OC suture Large Cannulated Universal shell with anchor for the hip &