Smith & Nephew Plc · LSE:SN.
Smith & Nephew — Q3 2007 Earnings Presentation
33 slides from Smith & Nephew's earnings presentation, 2007
Slide 1: Q3 2007 Results
Q3 2007 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: Q3 financial highlights
Q3 financial highlights • Revenues increase by 10% to $845m • Outpacing the market in Reconstructive segment – revenues up 11% • Trauma & Clinical Therapies 11% revenue growth • Endoscopy revenues outside US up 17%, overall up 9% • Advanced Wound Management – US growth 9%, globally 8% • Margin stren
Slide 5: Q3 business highlights
Q3 business highlights • A quarter of good performance • 10 year anniversary for BHR™ • 3 knee systems approved as gender specific • Balanced growth and momentum in Advanced Wound Management • EIP events – Factory to be built in China – ACTICOAT™ agreement • DOJ settled 5
Slide 6: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer
Slide 7: Income statement Q3 2007
Income statement Q3 2007 Third Quarter Percentage growth Year to Date 2006 2007 Actual Underlying 2006 2007 $m $m $m $m Revenue 679 845 24% 10% 2,008 2,402 Trading profit 132 169 28% 19% 388 484 Legal settlement - (30) - (30) Restructuring and integration costs - (26) - (48) (45) Inventory revaluati
Slide 8: Income statement Q3 2007
Income statement Q3 2007 Third Quarter Percentage Year to Date growth 2006 2007 Actual 2006 2007 $m $m $m $m Profit before taxation 131 39 389 328 Taxation (39) (26) (116) (113) Profit from continuing operations 92 13 273 215 Discontinued operations - - 332 - Attributable profit 92 13 605 215 Add ba
Slide 9: Revenue growth by business segment 2007
Revenue growth by business segment 2007 Acquisitio Actual Currency Underlyin Quarter 3 ns g % % % % Reconstruction 43 (3) (29) 11 Trauma and Clinical 21 (2) (8) 11 Therapies Endoscopy 12 (3) - 9 Advanced Wound 15 (6) (1) 8 Management Group 24 (3) (11) 10 Year to Date Reconstruction 30 (3) (13) 14 Tr
Slide 10: Underlying revenue growth by geography & business segment
Underlying revenue growth by geography & business Quarter 3 segment US h 2007 Growt Europ Growt e h ROW Growt h Total Growt h $m $m $m % $m % % % Reconstruction 152 15 112 4 49 4 313 11 Trauma and Clinical 102 10 33 10 21 19 156 11 Therapies Endoscopy 85 2 52 20 39 14 176 9 Advanced Wound 40 9 107 7
Slide 11: Profitability by business segment Q3
Profitability by business segment Q3 2007 YTD - - - - - - - - - - - - Q3 - - - - - - - - - - - 2007 Revenue Margin Margin Trading Profit $m $m % % Reconstruction - excluding 249 63 25.3 25.4 Plus 64 10 15.6 15.9 - Plus 146 28 19.2 18.9 Trauma and Clinical Therapies - excluding Plus 10 - - - - Plus 1
Slide 12: Share buy back
Share buy back • 20m shares bought back for $247m in Q3 • In total c.44m shares bought back for c.$537m at 26 October • Two year programme on track 12
Slide 13: Q4 outlook for 2007
Q4 outlook for 2007 • Revenue growth – Reconstruction – exceeds market growth – Trauma – Fixation close to market growth; clinical therapies lower than ytd – Endoscopy – arthroscopy steady, visualisation & DOR volatile – Advanced Wound Management – excluding NPWT, slightly above served market • Marg
Slide 14: David Illingworth, Chief Executive
David Illingworth Chief Executive
Slide 15: Reconstruction
Reconstruction % Grow $m Q3 07 Q3 06 th • Continues to outperform Pre-Plus market Revenue 249 219 11 • Global hip growth 20%, US 145 126 15 US hips 35% Outside US 104 93 4 • Knees grew at 5% Trading profit 63 50 worldwide, 4% in the US • Plus Integration on track Margin % 25.3 22.8 • Building EIP fo
Slide 16: Trauma & Clinical Therapies
Trauma & Clinical Therapies % Grow $m Q3 07 Q3 06 th • Fixation volumes strong Pre-Plus • #1 in bone stim, growth Revenue 146 129 11 above market US 102 93 10 • Fixation now a full Outside US 44 36 14 service offering Fixation 94 84 9 • Joint fluid market under Clinical pressure 52 45 15 Therapies •
Slide 17: Endoscopy
Endoscopy % Grow $m Q3 07 Q3 06 th • Arthroscopy market Revenue 176 157 9 strong US 85 83 2 • Knee and shoulder repair Outside US 91 74 17 performing well Arthroscopy 142 124 11 • Resection growing in mid DOR/ single digits Visualisatio 34 33 2 n • Margin up over 200 basis points Trading profit 34 2
Slide 18: Advanced Wound Management
Advanced Wound Management % Grow $m Q3 07 Q3 06 th • US revenue growth Pre-BlueSky sustained Revenue 198 174 8 • Silver product range US 38 35 9 expanded Outside US 160 139 8 • Manufacturing reorganisation in Trading profit 37 31 progress • Margin up 90 basis Margin % 18.7 17.8 points New product •
Slide 19: In summary
In summary • A quarter of good performance • BHR™ - 10th anniversary • Balanced growth and momentum in Advanced Wound Management • Clear measurable progress with EIP 19
Slide 20: We are smith&nephew
We are smith&nephew
Slide 21: Appendices
>¢ smith&nephew Appendices
Slide 22: Exchange rates
Exchange rates €:$ 12/05 Q3/06 12/06 Q3/07 Period 1.18 1.27 1.32 1.42 end Average 1.24 1.28 1.27 1.37 £:$ 12/05 Q3/06 12/06 Q3/07 Period 1.72 1.87 1.96 2.04 end Average 1.81 1.90 1.86 2.02 22
Slide 23: Analysis of restructuring and acquisition costs
Analysis of restructuring and acquisition costs P&L Charge Cash Cost Q3 YTD Q3 YTD $m $m $m $m EIP (4) (30) (9) (24) Plus – Integration (22) (24) (3) (5) - inventory revln - - (45) (45) Macrotexture - - 15 6 Other income/(costs) - 6 - (17) (71) (93) 3 (40) 23
Slide 24: Free cash flow Q3 2007
Free cash flow Q3 2007 Q3 YTD 2006 2007 2006 2007 $m $m $m $m Operating profit 128 53 380 339 Share based payment 4 6 13 19 Depreciation and Amortisation 44 116 121 211 Capital expenditure (55) (34) (185) (139) Working capital movements (64) 14 (143) (28) Trading cash flow 57 155 186 402 Restructuri
Slide 25: 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 3 2006 2007 2006 YTD 2007 $m $m $m $m Free cash flow 14 58 57 150 Add back: capital expenditure 55 34 185 139 Net cash inflow from operating 69 92 242 289 activities (IAS 7) 25
Slide 26: Plus and BlueSky
Plus and BlueSky Third Quarter Percentage Growth Year to Date Percentage Growth 200 200 Actu CER 2006 2007 Actu CER 6 7 al al $m $m $m $m Revenue Plus - 74 - 102 BlueSky - 2 - 3 Smith & Nephew 679 769 2008 2297 Total Smith & Nephew 679 845 24 10 2008 2402 20 11 Trading Profit Plus - 10 - 14 BlueSky
Slide 27: Plus revenue by business segment
Plus revenue by business segment 2006 2007 Q1 Q2 Q3 Q4 2006 Q1 Q2 Q3 $m $m $m $m $m $m $m $m Revenue Reconstruction 66 69 60 77 272 86 79 64 Trauma and Clinical Therapies 8 8 8 9 33 9 8 10 Total 74 77 68 86 305 95 87 74 Underlying Growth (%) Reconstruction 11 11 9 16 12 19 11 3 Trauma and Clinical T
Slide 28: 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 Q3 Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth $m % $m % $m % $m
Slide 29: 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 (limited release) Large Cannulated KINSA™ Suture Anchor Screws for Rotator Cuff repair ENDOBUTTON™ D
Slide 30: 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 31: 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 32: 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 33: 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