Smith & Nephew plc · LSE:SN.
Smith & Nephew — H1 2008 Earnings Presentation
36 slides from Smith & Nephew's earnings presentation, Nov 23, 2008
Slide 1: 2008 Interim Results
2008 Interim Results Sustainable profitable growth 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: Q2 highlights
Q2 highlights • Reported revenues up by 23% to $1 billion • Reconstruction growth driven by strong contributions from both hips and knees • Trauma changes in the US deliver increased revenues • Endoscopy returns to double digit growth • Advanced Wound Management exceeds market growth in advanced wou
Slide 5: Plus update
Plus update • No change to $100m lost revenue guidance • Notice of claim given to vendors • Plus Reconstruction and Trauma market position stabilised • Management focused on the business • Cross selling proving beneficial • Combined research and development • Cost synergies going well sustainable pr
Slide 6: Growth in US reconstruction through economic cycles, 1995 - 2007
Growth in US reconstruction through economic cycles, 1995 - 2007 7.00 5 • Demographics 4.5 continue to drive 6.00 4 procedures 5.00 3.5 • Pricing pressure in 3 4.00 some markets Annual Change(%) Sales($bn) 2.5 ‐ Innovation is 3.00 2 rewarded 2.00 1.5 • Cost inflation 1.00 1 pressures 0.5 manageable
Slide 7: Business strategy for growth
Business strategy for growth Trauma & Advanced Clinical Wound Reconstruction Therapies Endoscopy Management Customer focused product innovation to drive growth in fast growing segments Enabling Earnings Improvement Programme to people deliver improved profitability Sustainable to live profitable hea
Slide 8: Q2 Reconstruction - performance & activities
Q2 Reconstruction - performance & activities •Brand awareness campaign launched in Global revenues grow 8% (11% excluding US for BHR™ Plus impact) •OXINIUM™ Oxidised Zirconium approved in Hip revenue growth 7% Japan and C1 ™ BHR System has 3.5% of US hip market by reimbursement volume •JOURNEY™ Bi-c
Slide 9: Reconstruction – H2 growth drivers
Reconstruction – H2 growth drivers • Demographics drive demand • Plus integration – Cross selling synergies drive revenues • Building brand awareness http://youtube.com/watch?v=wPHNemSb5IE • New products – OXINIUM™ Oxidised Zirconium in Japan JOURNEY™ UNI – 2mm size increments for BHR™ Unicompartmen
Slide 10: JOURNEY™ Active Knee Solutions
JOURNEY™ Active Knee Solutions • Designed by 32 surgeons – Started 2001 – Clinical trials 2004 – First product launched 2005 • Higher level of function & activity for the patient • Efficient, ergonomic instrument sets • High technology offering for hospitals Innovative solutions to add value 10
Slide 11: Q2 Trauma and Clinical Therapies - performance & activities
Q2 Trauma and Clinical Therapies - performance & activities •10% more sales reps added in US in the year to date Revenues grow by 5% to $171 million (10% •Key opinion leader excluding Plus impact) training at multiple Europe declines by 12% (grows by 9% sites in Europe excluding Plus impact) •Recon/
Slide 12: Trauma & Clinical Therapies – H2 growth drivers
Trauma & Clinical Therapies – H2 growth drivers • Procedure volume driven growth • US sales traction as sales force management reporting aligned • Investment in full line rep training • Targeted sales programme initiatives • Additional 500+ instrument sets deployed • Plus synergies grow revenues JET
Slide 13: Q2 Endoscopy – performance and activities
Q2 Endoscopy – performance and activities •US sales and sales management organisation changes Double digit global growth, 16% outside US progressed Knee and shoulder repair products drive •FOOTPRINT™ PK growth Suture Anchor Litigation costs and increased business launch development activity impact m
Slide 14: Endoscopy - H2 growth drivers
Endoscopy - H2 growth drivers • Global leader in arthroscopy/sports medicine • Strong growth in underpenetrated outside US market • Continued investment in – innovation in fast growing repair segment – training and education • Product launches – Shoulder launches in US – FOOTPRINT™ PK Suture Anchor
Slide 15: Q2 Advanced Wound Management – performance and activities
Q2 Advanced Wound Management – performance and activities •ALLEVYN™ GENTLE BORDER has high patient benefit Revenue growth 9% •ALLEVYN™ Ag Outside US growth 10% drives infection management US revenues grow 3% growth NPWT gains traction globally •Apria for NPWT home care market Advanced Wound in US Ma
Slide 16: Advanced Wound Management – H2 growth drivers
Advanced Wound Management – H2 growth drivers • Recent product launches – ALLEVYN™ GENTLE BORDER – ALLEVYN™ Ag • US and European revenue momentum • NPWT distribution channels EZCARE™ established Negative Pressure Wound – Acute/long term care/home Therapy – Launched in all major markets ALLEVYN™ GENT
Slide 17: EIP achievements
EIP achievements Manufacturin Leverage Sales Operational Portfolio g cost of infrastructu deployment excellence goods re Reconstruction Trauma & Endoscopy Advanced Wound Clinical Management •Sales force •Back office Europe Therapies • Land bought in structure has centralisation (IT, created leverage
Slide 18: EIP in process
EIP in process Manufacturin Leverage Sales Operational Portfolio g cost of infrastructu deployment excellence goods re Orthopaedics Endoscopy Advanced Wound •China production for •Distribution centre Management 2010 Switzerland •China factory start up •Synergies from late 2009 combining •US factory
Slide 19: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer
Slide 20: Income statement Q2 2008
Income statement Q2 2008 Second Quarter Half Year 2007 2008 % Growth 2007 2008 $m $m Reporte Underlyi $m $m d ng Revenue 813 1,000 23% 8% 1,557 1,911 Trading profit 167 198 19% 8% 315 380 Restructuring and acquisition (5) (17) (22) (32) costs Inventory revaluation* (10) - (10) (15) Amortisation of a
Slide 21: Income statement Q2 2008
Income statement Q2 2008 Second Quarter Half Year 2007 2008 2007 2008 $m $m $m $m Profit before taxation* 147 157 278 283 Taxation* (44) (54) Tax Rate (84) (97) 31%** Attributable profit 103 103 194 186 Add back: Amortisation of acquisition 4 7 8 17 intangibles* Restructuring & acquisition 5 17 22 3
Slide 22: Revenue growth by business segment Q2
Revenue growth by business segment Q2 2008 Underlyi ng Acquisiti Underlyi Excludin Actual Currency g Sales Quarter 2 * ons ng % % Practice % % Changes ** % Reconstruction 36 (8) (20) 8 11 Trauma and Clinical 14 (3) (6) 5 10 Therapies Endoscopy 15 (5) - 10 10 Advanced Wound 18 (9) - 9 9 Management Gr
Slide 23: Underlying revenue growth by geography & business segment
Underlying revenue growth by geography & business segment US Q2Europ Growt 2008Growt ROW Growt Total Growt Quarter 2 h e h h h $m $m $m % $m % % % Reconstruction 172 9 155 3 69 16 396 8 Trauma and Clinical 110 6 34 (12) 27 29 171 5 Therapies Endoscopy 93 4 71 15 41 18 205 10 Advanced Wound 39 3 128
Slide 24: Profitability by business segment Q2
Profitability by business segment Q2 2008 - - - - - - - - - - - - - - - - - - Q2 - - - - - - - - - - - - ------ Trading Underlying H1 Revenue Margin Profit Change Margin $m % $m bps % 2008 Reconstruction 396 96 24.4 170 24.8 Trauma and Clinical Therapies 171 30 17.4 (200) 18.5 Endoscopy 205 40 19.3
Slide 25: 2008 outlook confirmed
2008 outlook confirmed • Revenue growth – Ortho (Recon and Trauma) – no change – Endoscopy – no change – Advanced Wound Management – no change • Margin expansion on track. Temporary impact from Plus sales practice changes – no change • Plus sales practice changes to reduce revenues by c.$100m in a f
Slide 26: David Illingworth, Chief Executive
David Illingworth Chief Executive
Slide 27: Business strategy for growth
Business strategy for growth Advanced Wound Orthopaedics Endoscopy Management Customer focused product innovation to drive growth in fast growing segments Enabling Earnings Improvement Programme to people deliver improved profitability Sustainable to live profitable healthier, To strengthen our mark
Slide 28: We are smith&nephew
We are smith&nephew
Slide 29: Appendices
>¢ smith&nephew Appendices
Slide 30: Quarterly revenues
Quarterly revenues mith & Nephew Key Product Line Revenues in $m at Average Rates and Underlying Growth* 2007 2008 Q1 Q2 Q3 Q4 Full Year Q1 Q2 Growth* Growth* Growth* Growth* Growth* Growth* Revenue Growth* % % % % % % $m % Orthopaedic Reconstruction Knees 12% 7% 5% 10% 9% 1% 201 9% Hips 23% 29% 20%
Slide 31: Free cash flow Q2 2008
Free cash flow Q2 2008 Second Quarter H1 2007 2008 2007 2008 $m $m $m $m Trading profit 167 198 315 380 Share based payment 6 5 13 10 Depreciation and amortisation 47 56 88 108 Capital expenditure (67) (73) (105) (134) Separate out working capital movements as: – Movement in inventory (26) (36) (43)
Slide 32: New products 2008
New products 2008 Q1 Q2 Q3 Q4 PiGALILEO™ Mini System PERI-LOC™ Titanium- VERILAST™ Technology VDR Patient Matched R3™ Acetabular Cup JOURNEY™ Program (Phase II - InterTAN CHS System Unicompartmental knee Extended Evaluation) CAPTION™ Disposable JET-X™ Bar Quick BHR™ 2mm Incremental PERI-LOC™ Screws
Slide 33: Exchange rates
Exchange rates Q2/07 FY/07 Q2/08 €:$ Period end 1.35 1.46 1.58 Average 1.35 1.37 1.56 £:$ Period end 2.01 1.99 1.99 Average 1.99 2.00 1.97 Percentage of Revenue by Geographic Q2 H1 Market: % % United States 41 42 United Kingdom 9 9 Other Europe 30 30 Other 20 19 100 100 33
Slide 34: Analysis of restructuring and acquisition costs
Analysis of restructuring and acquisition costs P&L Charge Cash spend Total to Total to Q2 Q2 date date $m $m $m $m EIP – cash costs* 6 55 8 52 – asset w/offs - 4 n/a n/a Plus Integration – cash costs** 9 61 10 45 – asset w/offs 1 7 n/a n/a * Target $125m over three years ** Target $60-80m 34
Slide 35: Reconciliation of free cash flow to IAS 7 net cash flow from operating activities
Reconciliation of free cash flow to IAS 7 net cash flow from operating activities Second Quarter H1 2007 2008 2007 2008 $m $m $m $m Free cash flow 32 55 92 97 Add back: capital expenditure 67 73 105 134 Net cash inflow from operating 99 128 197 231 activities (IAS 7) 35
Slide 36: Business days per quarter
Business days per quarter Q1 Q2 Q3 Q4 Full Year 2007 64 63 63 61 251 2008 62 64 63 63 252 2009 61 63 63 65 252 36