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 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: 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 3
Slide 5: Q2 highlights
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 4
Slide 6: Q2 highlights
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 5
Slide 7: Q2 highlights
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 6
Slide 8: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer
Slide 9: Income statement Q2 2007
Income statement Q2 2007 Second Quarter Percentage growth Half Year 2006 2007 Actual Underlying 2006 2007 $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 intangibles (2
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 operations 96 111 181 202 Discontinued operations - 332 Attributable profit 96 111 513 202 Add back: A
Slide 11: Profitability by business segment Q2 2007
Profitability by business segment Q2 2007 - - - - - - - - - - - - Q2 - - - - - - - - - - - H1 2007 Revenue Trading Profit Margin Margin $m $m % % Reconstruction - excluding Plus 267 70 26.2 25.7 - Plus 24 3 12.5 12.5 Trauma and Clinical Therapies - excluding Plus 146 30 20.5 18.8 - Plus 4 - - - Endo
Slide 12: Reconstruction
Reconstruction % $m Q2 07 Q2 06 Growth Pre-Plus: Revenues 267 228 15 • Above market growth US 151 126 20 • US hips grew at 50% OUS 116 102 10 • Knees grew at 7% worldwide, Trading profit 70 58 3% in the US Margin 26.2% 25.4% • EIP on track New product • Plus Integration on track 20% 14% revenues % P
Slide 13: Trauma & Clinical Therapies
Trauma & Clinical Therapies % $m Q2 07 Q2 06 Growth Pre Plus: Revenues 146 127 15 • Fixation and Clinical Therapies markets strong US 103 94 13 • Fixation growth behind market Outside US 43 33 21 • Clinical Therapies strong Fixation 91 83 10 • #1 in bone stimulation Clinical Therapies 55 44 25 • DUR
Slide 14: Endoscopy
Endoscopy % $m Q2 07 Q2 06 Growth Revenues 178 156 11 • Arthroscopy market strong US 90 84 7 • Arthroscopy growth close to Outside US 88 72 16 market • Knee and shoulder repair Arthroscopy 145 126 12 performing well DOR/Visualisation 33 30 9 • Resection growing at 6% Trading profit 32 26 Margin 18.0
Slide 15: Advanced Wound Management
Advanced Wound Management % $m Q2 07 Q2 06 Growth Revenues 194 175 6 • Market conditions satisfactory US 38 33 11 • US market becomes largest by revenue Outside US 156 142 5 • ALLEVYN™ performance solid Trading profit 32 24 • VERSAJET™ performance good Margin 16.5% 13.7% • EIP well underway • BlueSk
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 Therapies 8 8 8 9 33 9 8 Total 74 77 68 86 305 95 87 Underlying Growth (%) Reconstruction 11 11 9 16 12 19 11 Trauma and Clinical Therapies 61 64 58
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 16
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 than • We have the largest global anyone else 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 opportunity in Estimated global prevalence of diabetes by age group (millions)* $4bn market 200 Strong underlying disease and 2000 2030 morbidities 150 Key segments driving the business: 100 • Exudate management 50 • Infection management 0 20
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 21
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™ Actimicrobial ALLEVYN™ variants Post Operative Dressing - Shaped & sealed ALGISITE™ AG - Reduced maceration Silver Algisite Dressing Surgical Debridement Negative Pressure Wound Therapy VERSAJET™ Exact V1STA 23
Slide 25: US focus
US focus Improving revenue growth • ALLEVYN™ up 22% in Q2 15% • ACTICOAT™ up 22% in Q2 10% Market share gains • Growing faster than the market 5% in Q2 0% • Market #2 with BlueSky Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 acquisition US underlying revenue growth (excluding tissue engineering) Focus on sal
Slide 26: Earnings improvement programme - AWM
Earnings improvement programme - AWM Over 1% margin improvement Automation and better outsourcing Restructured organisation Manufacturing Leverage Sales Operational Portfolio cost of goods infrastructure deployment excellence 25
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™ Integration of negative pressure wound Collagen dressing therapy Continued EIP contribution 26
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 • Accelerated capabilities in manufacturing in China RT-PLUS™ Solution Constrained R
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 • Continued investment in innovation in 560P High Definition Control Unit & fast grow
Slide 33: Active patient
Active patient • Expands Market • Requires favourable economics • Requires innovation S&N uniquely positioned to own this space 32
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 33
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
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Slide 37: Appendices
i 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 37
Slide 39: Analysis of restructuring costs
Analysis of restructuring costs P&L Charge Cash Cost Q2 Half Year Q2 Half Year $m $m $m $m EIP (9) (26) (13) (16) Plus (2) (2) (1) (1) Macrotexture (3) (9) Other income/(costs) 6 6 (5) (17) (5) (22) (22) (43) 38
Slide 40: Revenue growth by business segment 2007
Revenue growth by business segment 2007 Actual Currency Acquisitions Underlying Quarter 2 % % % % Reconstruction 28 (2) (11) 15 Trauma and Clinical Therapies 18 - (3) 15 Endoscopy 14 (2) (1) 11 Advanced Wound Management 11 (4) (1) 6 Group 19 (3) (4) 12 Half Year Reconstruction 23 (3) (5) 15 Trauma a
Slide 41: 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 2 $m % $m % $m % $m % Reconstruction 153 20 87 11 51 8 291 15 Trauma and Clinical Therapies 103 13 28 26 19 16 150 15 Endoscopy 90 7 54 14 34 19 178 11 Advanced Wound Management 38
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 7 net cash flow
Reconciliation of free cash flow to IAS 7 net cash flow from operating activities Quarter 2 Half Year 2006 2007 2006 2007 $m $m $m $m Free cash flow 36 32 43 92 105 Add back: capital expenditure 72 67 130 Net cash inflow from operating activities (IAS 7) 108 99 173 197 42
Slide 44: Plus and BlueSky
Plus and BlueSky Second Quarter Percentage Growth Half Year Percentage Growth 2006 2007 Actual CER 2006 2007 Actual CER $m $m $m $m Revenue Plus - 28 28 BlueSky - 1 - 1 Smith & Nephew 686 784 14% 1,329 1,528 15% Total Smith & Nephew 686 813 19% 12% 1,329 1,557 17% 12% Trading Profit Plus - 3 - 3 Blu
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 11 3 9 34 15 7 Trading Margin (% ) Reconstruction 15.1 14.0 4.3 11.0 11.2 15.8 8.6 44
Slide 46: Quarterly revenues
Quarterly revenues Smith & 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 % $
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
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
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) Universal BIORAPTOR™ OC suture anchor Large Cannulated Screws shell with intercha