Smith & Nephew Plc · LSE:SN.
Smith & Nephew — Merger or Acquisition (March 2003)
40 slides from Smith & Nephew's merger presentation, Mar 20, 2003
Slide 1: Smith & Nephew March 2003
20 March 2003 Smiths-Nephew
Slide 2: Disclaimer
Disclaimer am” ‘Smith+>Nephew
Slide 3: Presentation team
Presentation team | Dudley Eustace Chairman, Smith & Nephew pic | Max Link Chairman and CEO, Centerpulse AG | Chris O'Donnell Chief Executive, Smith & Nephew pic | Peter Hooley Finance Director, Smith & Nephew pic (centerpulse} Smith+Nephew i
Slide 4: Dudley Eustace
Dudley Eustace Chairman, Smith & Nephew ple Smith}Nephew
Slide 5: Smith & Nephew Combined Group
Smith & Nephew Combine” Group | Powerful combination of two complementary businesses | Joins global leaders in orthopaedics | Attractive long-term growth market | Cultural fit | Complementary strengths | Near-term benefits and long-term value creation am” ‘Smith+Nephew
Slide 6: Management and Board
Management and Board | Chairman: Dudley Eustace | Chief Executive: Chris O'Donnell | Finance Director: Peter Hooley | Centerpulse directors to join Smith & Nephew Group Board | Max Link to be appointed a Vice Chairman | René Braginsky to be appointed a non-executive director am” ‘Smith+Nephew
Slide 7: Dr. Max Link
7 Dr. Max Link Chairman & CEO, Centerpulse AG (centerpulse} ‘Smith+Nephew
Slide 8: Transaction Details
Transaction Details | Headline Offer price for Centerpulse shareholders of CHF 282 | Values Centerpulse at CHF 3.3 billion (£1.5 billion) | Multiple of 12.6 times Centerpulse’s 2002 continuing EBITDA | Centerpulse and InCentive shareholders’ pro forma ownership of 24% of Combined Group | Secondary l
Slide 9: Centerpulse
Centerpulse = iw ae | Leading reconstructive implant company | No 1 In Europe with 2296 market share | No 5 globally, No 6 in US | Strong reputation in tribology (science of wear), particularly in hips | Platform in spine | Global No 5 in spine (796 market share) | Leader in stabilisation devices |
Slide 10: Centerpulse - Back on Track in 2002
Centerpulse — Back on Track i in 2002 Sales Ortho Europe Ortho North america Ortho ROW Total Ortho Spine Dental Other Continuing Sales Continuing EBITA —e) Local currencies 179 228 Marain 18.4% Smith}Nephew
Slide 11: Share Price Development
Share Price Development =— iw ae New Executive Management Team in 2001 |) ™ | ofervstue= cHrzez | Successful funding of 22 | seisnaaaaecon os x dal the obligation to the ¥ Settlement Trust a | Decision to focus ‘on core business, cardio divestitures rar) Ea | Launch of innovative products tulot Now
Slide 12: Benefits for Centerpulse and Centerpulse Investors
Benefits for Centerpulse and Centerpulse Investors ers | Combined Group has financial capacity to take advantage of industry growth opportunities | Top 3 global orthopaedics company | Scale to compete, diversified product portfolio | Centerpulse investors will share in the upside of the Combined Gro
Slide 13: Chris O'Donnell
Chris O’Donnell Chief Executive, Smith & Nephew ple Smith}Nephew
Slide 14: Transaction Rationale
Transaction Rationale jx”: Creates world No 3 in $14 billion orthopaedics market Transforms scale in reconstructive implants Complementary product strengths and technological focus Geographic fit brings market leadership in Europe and strengthened position in US and Japan Enhanced position in fast-g
Slide 15: Scale Comparison
Scale Comparison = Vi Pw ae | Global No 3 in $14 billion orthopaedics market | Global No ¢ in $6 billion reconstructive implants market 2002 ORTHOPAEDICS SALES ($m), 2002 RECONSTRUCTIVE SALES ($m) myo soe | sorter Coe! oy dower ————— — one | Sone i | Comespuse ‘Sith Mephene Conterpdse — ‘Smith &Neph
Slide 16: Reconstructive Implants - Geographic Fit
Reconstructive Implants - Geographic Fit = Vi Pw ae | Centerpulse’s strengths in Europe complement Smith & Nephew’s in US 16 | Market leader in reconstructive implants in Europe | Substantially strengthened position in US and Japan EUROPE /ROW MARKET SHARE ($2.2 bn market) US MARKET SHARE ($3.5 bn m
Slide 17: Complementary Products
Complementary Products | Creates global No 3 in hips and No 4 in knees | Complete ‘menu’ of knee products | Broad range of alternative bearing technologies (Metasul, Durasul, Oxinium) WORLDWIDE MARKET SHARE-HIPS WORLDWIDE MARKET SHARE-KNEES $2.6 bn market), $2.8 bn market), Stryker 24% 38a DePuy 26%
Slide 18: Platform for Growth in Spine
Platform for Growth in Spine Doe ae | Spinal Implant Market | Rapidly growing $2.3 billion global market | Estimated annual market growth of 19% in 2001-2005 | Spine-Tech | Leader in stabilisation devices | 7% global share, with 85% sales in US | Full range of spinal implants | New Spine Division wi
Slide 19: Shape of Combined Group
Shape of Combined Group Tee ane | 5 business divisions: Orthopaedics, Wound Management, Endoscopy, Spine and Dental | Approximately 74% of revenues from broad Orthopaedics | Maintain strong growth in Wound Management and Endoscopy 2002 SALES ‘SMITH & NEPHEW: £1.1 billion CENTERPULSE: £0.5 billion EN
Slide 20: Well positioned in rapidly expanding markets
| Well positioned in rapidly expanding markets | Enhanced position in high growth spinal segment 2001-2003E CAGR, Recon Trauma Endoscopy Spinal ‘Dental Advanced Implants ‘Wound Care US 14% 11% 6% 25% 16% 15% Outside US 13% 5% 6% 10% 14% 10% Global 14% 9% 6% 22% 18% 12% 9% Pro Forma Revenues 43.6% 9.
Slide 21: Margin targets and cost savings
27% Orthopaedics margin target by _ 23% Group 2005/06* £45 million margin target annual cost by 2005/06* savings by 2005 Growth ‘Transfer of est practice Long O CmEIMED * Gperating margin before amortisation af goxdwil and exceptional tems Smith++Nephew
Slide 22: Peter Hooley
Peter Hooley Finance Director, Smith & Nephew pic Smith}Nephew
Slide 23: Financial Overview
Financial Overview =— iw ae Creation of £1.6 billion sales revenue business 74% orthopaedics, arthroscopy, spine and dental Similar growth +14% and EBITA margins 18% {e) (centerpulse} “Before gnodwil amortisation and exceptional items 2002 Dec y/e (Em) Smith & Nephew — Centerpulse —Pro-forma ém ém é
Slide 24: Cost Savings
Cost Savings ja” | Net sales dissynergies peaking at 1% of Ortho sales in 2004 | Annual cost savings of £45m anticipated by 2005 | Manufacturing, logistics, R&D | Corporate, administration | Exceptional cash costs of implementation: £130m, a 35% return | Non-cash costs still to be determined (center
Slide 25: Financial Effects
Financial Effects | Margin improvement | Overall Combined Group operating margin target rises to 23% by 2005/06" | Combined Orthopaedics margin target rises to 27% by 2005/06" | Stronger cash flow conversion | Maintained 29% tax charge going forward | ROIC meets WACC in 2005 | Earnings per share“ |
Slide 26: Transaction Structure
Transaction Structure 3p. ”: | New holding company: Smith & Nephew Group ple | UK registered company | Preserves Swiss tax environment | Maintains tax treatment of dividends | Dual bid by Smith & Nephew Group ple for | Centerpulse | InCentive (which owns 19% of Centerpulse) on equivalent terms | 25.
Slide 27: Outline Timetable
Outline Timetable | Formal offer expected by mid April | Smith & Nephew shareholders approval in May | Transaction expected to close towards mid-year Offers mutually conditional and subject to regulatory clearances Smith}Nephew
Slide 28: Financing
Financing | 3and5 year bank facilities 1,300 | 2003 requirements Existing net debt assumption 440 Acquisition cash component 400 Transaction costs 45 Other non recurring Items 140 1,025 | Headroom 275 | Peak net debt to EBITDA of ea | Dividend policy unchanged, Interim dividend the first entitlement
Slide 29: Other Financials
Other Financials Translational Currency 2003 EBITA Smith & Nephew -1% $1.58, Euro 1.46 Centerpulse +1% | Cash flow drivers: Depreciation to sales 52% Capital expenditure to sales 7%2% Working capital to sales growth 27% — 25% am” ‘Smith+Nephew
Slide 30: Value Creating Transaction
Value Creating Transaction = iw ae | Cost savings and synergies add significantly to profit | Greater cash generation from higher margins | Step-up in orthopaedic positioning | Longer term growth prospects of Combined Group (centerpulse} ‘Smith+Nephew
Slide 31: Significant long-term value creation
| Significant long-term value creation | Earnings enhancing from 2004 and materially so in 2005 | Accelerated margin improvement from scale and synergy benefits | Complementary product, geographic and technology strengths | Creation of a global orthopaedics leader am” ‘Smith+Nephew
Slide 32: Smith & Nephew
Smiths-Nephew
Slide 33: Appendices
Appendices Smith}Nephew
Slide 34: Combined product portfolio
Combined product portfolio = tw ur”. Reconstruction | Hips Knees suited Other Jspecten ott Veneer Nuneaton hou Echelon aoe JAccuris Uni © Innex Srey Nuri (pape cunspace fefecion —oCerverge olereto cs ols Itmage eur Trauma | Trigen Nail | tlearow | Russell Taylor Nail | Taylor Spatial Frame ‘OrthoGua
Slide 35: Combined product pipeline
Combined product pipeline = iw ae One of the most innovative new product line ups in orthopaedics 35 ORTHOPAEDICS SPIE ENDO / DENTAL | Seber © BAK vita Gadotucent cope) Suretac I System Echelon Porous Plus (HA) Stem (© ST3E0 (pedicle sere system) Quick TFnation Device | Synergy Select Stern © Cervic
Slide 36: Focused medical technology group
Focused medical technology group Centerpulse's continuing operations have the following business mix: Centerpulse Orthopaedics Spine-Tech Dental Sales (CHFm) 923 179 131 as % of total 75% 14% 11% EBITA* (CHFm) 219 30 21 as % of sales 23.7% 16.7% 16.0% fe) “Pre exceptionals (centerpulse} ‘Smith+Nephe
Slide 37: Centerpulse - Financial Results 2002 Overview
Centerpulse - Financial Results 2002 Overview Sales and EBITDA Significant improyse _ = it 2002 2001 Nominal Currency adj. (in CHFm except growth rates) Growth Growth Net Sales 1,70 1,418 4% 10% Continuing operations 1,241 1,158 47% 14% Discontinuing operations 229 260 12% na EBITDA excl. exceptiona
Slide 38: Centerpulse - Financial Results 2002
Centerpulse - Financial Results 2002 Improved profitability iq port Qoner gions EBITDA Margin’ (in 2%) EBITA Margin “(in 9%) 25.1% 9% . 9% 25% 23.6% 20% —183% 13.4% 50% 17.6% 15% 18% 10% 10% a9 5% 0% 2000 2001 2002 2000 2001 2002 EBIT Margin® (in %) 20% ——— excluding exceptional tems 18% 10% 5% 0% (
Slide 39: Centerpulse Financial Results 2002
Centerpulse Financial Results 2002 Solid balance sheet i De ale 79% 80% 60% 40% 20% Equity in % of total assets 54% Cash and Cash equivalents (in CHFm) 633 550 400 156 199 260 400 om 2000 Net Debt (in CHFrn) 400 “528 160 2000 2001 2002 388 “61 2001 2002 2000 2001 2002 Smith}Nephew
Slide 40: Note to spinal products
Note to spinal products ‘The BAK, BAK Vista, Proximity, Polar and BP implants and the methods and instrumentation for implanting the same are licensed under and protected by U.S, Patents 5,0115,2475, 484,437 and 5,741,253 and related international patents issued to GARY KARLIN MICHELSON, M.D. and by