Smith & Nephew Plc · LSE:SN.
Smith & Nephew — Q2 2005 Earnings Presentation
46 slides from Smith & Nephew's earnings presentation, 2005
Slide 1: Smith & Nephew 2005 second quarter & interim results
Smith & Nephew 2005 second quarter & interim results: Continued momentum across the group
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 operating margins discussed under "Outlook" are forward-looking st
Slide 3: Chris O'Donnell, Chief Executive
Chris O’Donnell Chief Executive
Slide 4: Agenda
Agenda Business highlights Chris O’Donnell Financial results Peter Hooley Business review Chris O’Donnell Advanced Wound Management Jim Dick Questions and answers All figures are for Q2 2005 unless otherwise stated 4
Slide 5: Business highlights Q2 2005
Business highlights Q2 2005 • Revenue growth to 12% in Q2 • Orthopaedics continues to lead market at 18% • Endoscopy predicted slower quarter, at 7% • Advanced Wound Management improves to 6% All revenue increases are given after adjusting for the effect of translation into sterling, sales days in Q
Slide 6: Peter Hooley, Finance Director
Peter Hooley Finance Director
Slide 7: Financial highlights Q2 2005
Financial highlights Q2 2005 • Revenue growth of 12% in Q2 and H1 • Margin improves to 20% in Q2 and H1 • EPSA growth 16% in Q2 and H1 • Dividend increase of 10% for H1 • Endoscopy to close a US facility All revenue increases are given after adjusting for the effect of translation into sterling, sal
Slide 8: Trading results Q2 2005
Trading results Q2 2005 Second Quarter Half Year 2004 2005 2004 2005 £m £m £m £m Revenue 307 351 609 681 + 12% + 14% Trading profit 59½ 70 115 136 + 18% + 18% Interest and finance costs ½ 1 1 3 60 71 116 139 Taxation (17) (21) (34) (42) Joint venture 4 4½ 8 8 Attributable profit before 47 54 ½ 90 10
Slide 9: Results in US dollars – Q2
Results in US dollars – Q2 - - - - - - - - - Q2 - - - - - - - - - - - - - - - H1 - - - - - - --- --- 2004 2005 2004 2005 Revenue $559m $643m +15% $1115m $1270m +14% Earnings per ADS $0.46 $0.54 +17% $0.89 $1.05 +18% Reported revenue and earnings per ADS before amortisation of acquisition intangibles
Slide 10: Revenue growth 2005
Revenue growth 2005 Acquisiti Sales Underlyi Reported Currency Quarter 2 ons Days ng % % % % % Orthopaedics 20 - (½) (1½) 18 Endoscopy 9 - (½) (1½) 7 Wound Management 8 - (½) (1½) 6 Group 14 - (½) (1½) 12 Half Year Orthopaedics 18 (2) 1 1 18 Endoscopy 8 - - 1 9 Wound Management 5 - (1) 1 5 Group 12
Slide 11: Geographic revenue growth 2005
Geographic revenue growth 2005 Growt Europ Growt Growt Growt US ROW Total Quarter 2 h e h h h £m £m £m % £m % % % Orthopaedics 108 22 37 10 30 21 175 18 Endoscopy 44 2 24 11 14 16 82 7 Wound 19 -4 51 6 24 12 94 6 Management 171 13 112 9 68 16 351 12 Half Year Orthopaedics 209 22 75 5 56 19 340 18 En
Slide 12: Profitability Q2 2005
Profitability Q2 2005 - - - - - - - - - Q2 - - - - - - - - - H1 Revenu EBITA Margin Margin e £m % % £m 200 5 Orthopaedics 175 42 23.9 24.0 Endoscopy 82 16 20.0 20.0 Advanced Wound 94 12 12.8 12.2 Management 351 70 20.0 19.9 200 4 Orthopaedics 145 33 23.1 22.9 Endoscopy 75 14 19.0 18.9 Advanced Wound
Slide 13: Cash flow
Cash flow H1 2004 H1 2005 £m £m Trading cash flow 47 52 Rationalisation/Macrotexture (2) (13) Operating cash flow after capex 45 39 Joint venture 6 6 Interest and tax (14) (30) Free cash flow 37 15 Dividends (29) (30) Acquisitions (76) (9) Shares 2 5 Net cash flow (66) (19) Currency 21 (40) Opening
Slide 14: 2005 guidance
2005 guidance • Targeting 18% revenue growth at Orthopaedics, 8% at Endoscopy and 6% at Advanced Wound Management • With $1.77 currency translation will be 1½% positive for the full year • Margin progression of ½% in H2, approaching 21% full year • Interest and financing costs will net to £1m positi
Slide 15: Chris O'Donnell, Chief Executive
Chris O’Donnell Chief Executive
Slide 16: Smith & Nephew strategy
Smith & Nephew strategy • Exploit positive market dynamics • Build on technology leadership to expand markets • Organic growth - innovative product pipeline - sales force development • Pursue synergistic technology acquisitions • Build on Smith & Nephew brand 16
Slide 17: Orthopaedics
Orthopaedics obal market growth 2004 and 2005 13%* elivering growth substantially ahead of market Global growth 2005 Q2 H1 20% 18% • Global revenue 18 18% 16% growth % 14% 22 12% US growth 22% 10% • % MIS and OXINIUM™ drive knee and 8% hip revenues Outside US 14 6% 11% 4% • growth % BHR drives hips
Slide 18: Orthopaedics growth prospects
Orthopaedics growth prospects • Sales force investment and segmentation • OXINIUM™ technology – extended to revision knee • Resurfacing hip – continued growth outside US – US approval/launch • PERI-LOC™ plating system – lower extremity and targeter launched – upper extremity 2006 • Extended indicati
Slide 19: Endoscopy
Endoscopy Arthroscopy global market growth 8%* Q2 H1 • Global revenue 7% 9% growth US growth 2% 8% Outside US 13% 10% growth • Knee/shoulder repair driving growth • Timing of camera launch slows All revenue US growth sales numbers are on an underlying basis * Smith & Nephew estimate for Resection (l
Slide 20: Endoscopy growth prospects
Endoscopy growth prospects • Specialised procedure sales force driving repair growth • New 400 Series camera launched in June • Excellent market acceptance of DIGITAL OR™ • Long term growth opportunity in hip arthroscopy 20
Slide 21: Endoscopy manufacturing restructure
Endoscopy manufacturing restructure • Close Andover manufacturing • Improve Andover s utilisation of ation r ope Manufacturi Mansfield and em b ly s ing / ng ss u Oklahoma A re ho ion t Mansfield processe Wa tribu s facilities dis Oklahoma • 1% margin City improvement Outsource expected in 2007 21
Slide 22: Advanced Wound Management
Advanced Wound Management obal market growth 8%*, 12%* including KCI Q2 H1 • Global revenue 6% 5% * growth US growth (4)% (6)% * • Outside US Strong performance8% outside8% US growth • US performance improving - lower intermediate product contract sales - US end user sales up 7% • New products 16% o
Slide 23: Advanced Wound Management – Jim Dick, President
Advanced Wound Management Jim Dick, President
Slide 24: Advanced Wound Management business
Advanced Wound Management business We provide innovative solutions to help improve the life of people with serious wounds Acute • Burns, post operative wounds • Life threatening • Scarring Chronic • Leg ulcers, pressure ulcers, diabetic foot ulcers • Quality of life • Cost burden 24
Slide 25: Sustainable growth opportunity
Sustainable growth opportunity • Long term growth fundamentals are strong – Ageing population – increased chronic wounds – Significant potential for converting wounds to advanced treatments – Advancing technology – Patient expectations • Underlying medical issues are driving growth – Diabetes – Obes
Slide 26: Cost of healing
Strong economic arguments • Products represent small proportion of the cost of treatment Cost of healing • Increasing our share of reduced cost to provider • Health economics driving use of advanced technology Traditional Advanced Active Nursing time Wound management products Other costs 26
Slide 27: Market position
Market position Revenue • Global reach • Leading positions in foams, silver and hydrosurgery • Technology increasing market value Market size £1.9 bn Wounds treated • KCI addresses 2% of wounds treated Source: S&N estimates 27
Slide 28: Current business challenges
Current business challenges • Leverage superbrand growth • Accelerate US growth • Build DERMAGRAFT™ profitability • Improve margins 28
Slide 29: Leverage superbrands globally for growth and share gain
Leverage superbrands globally for growth and share gain ALLEVYN™ - The global standard for exudate management H1 +13% Superbrand Superbrand s Films, gels, ands compressio 33% new n, skincare technology ACTICOAT™ - Leading the 67% 37% way in managing infection H1 +32% 29
Slide 30: ALLEVYN the global standard for exudate management
ALLEVYN™ the global standard for exudate management • Largest brand – H1 revenues £47m +13% • Strong broad based therapy range across various channels • Continues to take market share • Brand extensions strengthen range - Improved ALLEVYN™ Plus launched • Global Brand Director 30
Slide 31: ACTICOAT leading the way in managing infection
ACTICOAT™ leading the way in managing infection • Revenues of £12m H1 +32% • New ACTICOAT™ Moisture Control launch in US • MRSA and hospital acquired infection opportunity • Continuous stream of clinical evidence • Global Brand Director 31
Slide 32: Accelerate US growth: status
Accelerate US growth: status Q1 Q2 H1 Revenue £86m £94m £180m Global growth 4% 6% 5% Outside US growth 8% 8% 8% US growth -7% -4% -6% US (excluding - 1% - intermediates) H1 US end user traced sales grew 7% H2 US end user growth expected to continue on trend – after intermediates, H2 revenues expecte
Slide 33: Accelerate US growth: action plan
Accelerate US growth: action plan • Large unconverted market, only 20% of global revenues • New management team • Investment in sales force and promotion • Segmentation of sales force – ALLEVYN™ – ACTICOAT™ – DERMAGRAFT™ – VERSAJET™ • Brand driven strategy 33
Slide 34: Build DERMAGRAFT profitability
Build DERMAGRAFT™ profitability • Clinical performance exceeds expectations • Strong economic arguments for price improvement • Deeper penetration of fewer accounts driving productivity • Venous leg ulcer approval in progress 34
Slide 35: Improve margins
Improve margins • Sales force productivity • Operational efficiencies – logistics rationalisation – manufacturing automation • DERMAGRAFT™ profitability • Targeting 17% margin for 2008 35
Slide 36: Growth prospects
Growth prospects • Global product rollout 2005/2006 – ALLEVYN™ Plus – ACTICOAT™ Moisture Control • Sales force investment – US +15% year on year in H1 – Japan +13% year on year in H1 • Forward product programme 2006/2008 – ALLEVYN™ major product upgrades – ACTICOAT™ range/geographical expansion • VE
Slide 37: VERSAJET – the next generation in debridement
VERSAJET™ - the next generation in •debridement Hydrosurgery system for fast effective debridement • Patented technology US revenue progression • Positive economic case Actual 10% Growth Rate • Exciting first year performance • Strong potential for growth P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 P1 P2
Slide 38: Advanced Wound Management value builders
Advanced Wound Management value builders • Favourable market dynamics • Leveraging strong market position • Innovative solutions for serious wounds • Superbrands to drive growth • Clear margin progression plans Attractive market for strong value creation 38
Slide 39: Chris O'Donnell, Chief Executive
Chris O’Donnell Chief Executive
Slide 40: Summary and outlook
Summary and outlook • Growing and expanding markets driving revenues • Orthopaedics market continues fundamentally strong – We continue to lead orthopaedic growth • Improving growth prospects in Endoscopy and Advanced Wound Management • New product launches taking share and expanding markets • Sales
Slide 41: Appendix
>¢ smith&nephew Appendix
Slide 42: New products 2005
New products 2005 Q1 Q2 Q3 Q4 GENESIS™ II OXINIUM™ ACTICOAT™ moisture Ceramic-on-ceramic hip PROFIX™ 5 in 1 knee revision femoral control – Europe PERI-LOC™ interlocking CONDOR™ Digital Disc Diagnostic System plating system for bone Operating Room (DOR) for the spine repair control system IMHS intra
Slide 43: Macrotexture knee withdrawal
Macrotexture knee withdrawal • 2971 implanted before voluntary withdrawal in August 2003 • 897* revisions confirmed, of which 627* settled, total cost £63m*, of which £32m* is in dispute with our insurers • Primary insurer provided coverage until policy exhausted and as one of three first excess lay
Slide 44: Quarterly revenues
Quarterly revenues 2005 Q1 Q2 H1 Revenue Growth % Revenue Growth % Revenue Growth % £m £m £m Orthopaedics Knees 61 17% 64 20% 125 18% Hips 45 12%* 48 16% 93 14%* Trauma 39 14% 42 13% 81 14% Clinical Therapies 14 51% 18 42% 32 46% Endoscopy Repair 23 21% 24 23% 47 22% Visualisation & DOR 14 21% 16 3%
Slide 45: Quarterly phasing under IFRS
Quarterly phasing under IFRS 2004 2005 Q1 Q2 Q3 Q4 Full Year Q1 Q2 Revenue growth (underlying) Ortho 17% 14% 19% 20% 17% 17% 18% Endo 8% 6% 8% 16% 9% 10% 7% Wound 7% 3% 6% 5% 5% 4% 6% 12% 8% 12% 14% 11½% 11½% 12% Revenue £302m £307m £307m £332m £1249m £330m £351m Trading profit* £56m £59½m £59m £75½
Slide 46: We are smith&nephew
*We are smith&nephew