Smith & Nephew plc · LSE:SN.
Smith & Nephew — FY2006 Earnings Presentation
42 slides from Smith & Nephew's earnings presentation, February 2007
Slide 1: Preliminary results announcement 2006
Preliminary results announcement 2006 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: John Buchanan, Chairman
rg smith&nephew John Buchanan Chairman
Slide 4: Introduction
Introduction • New management structure working well • Excellent close to the year • Good progress from all four businesses • Return up to $1.5 billion capital to shareholders over two years • Update on rigorous review of margin improvement opportunities 3
Slide 5: Sir Christopher O'Donnell, Chief Executive
Sir Christopher O’Donnell Chief Executive
Slide 6: 2006 – An eventful year
2006 – An eventful year • Recon market – Dramatic slowdown – Growth rate halved • Business structure – Divisionalised Ortho into Recon and Trauma • Management progression – New chairman, new CFO, COO • BSN divestment – Successful but dilutes earnings • Biomet negotiations – Lengthy but not fruitful
Slide 7: Business highlights Q4 2006
Business highlights Q4 2006 • Group revenue growth up 11% to $771m • Trading profit increased 17% to $183m • Good performance across all divisions • Reconstruction revenue grows with added momentum at 15% • Trauma revenue growth improves again to 17% • Endoscopy achieves revenue growth of 9% • Advan
Slide 8: Strategy: growth
Strategy: growth • Continued organic growth through innovation – Clinical benefits for patients – Value for healthcare systems – Focus on younger, more active patients • Targeting above market revenue growth in each sector • Continued investment in R&D and innovation 7
Slide 9: Strategy: acquisitions
Strategy: acquisitions • Seek value-enhancing acquisitions – Unique/additive technologies – Improved channels to market • Particular focus on emerging markets for biological repair of cartilage and bone – EXOGEN™ - proven, non-invasive bone repair – TRU-FIT™ (OBI) – focal cartilage defects • Maintai
Slide 10: Biomet
Biomet • Opportunity to gain scale/improve margin • Serious review and negotiations • Identified substantial synergies with some unique to Smith & Nephew • Private equity bid at upper end of value • Eventual outcome means no fundamental change to market structure/players 9
Slide 11: Strategy: balance sheet
Strategy: balance sheet • BSN divestment has delivered net cash on balance sheet • Aim to maintain investment grade credit rating – Efficient balance sheet – Flexibility for future acquisitions • Intention to return up to $1.5 billion via share buyback over next two years 10
Slide 12: Strategy: earnings improvement
Strategy: earnings improvement • Smith & Nephew invests strongly in ortho growth and leads recon sector growth in 15 of last 16 quarters • Continued investment in all businesses to maintain above market growth • Competitor ortho companies have leading edge margins in med- tech sector (30% plus). End
Slide 13: Strategy: Advanced Wound Management
Strategy: Advanced Wound Management • Wound is the global market leader in the wound dressing sector • Baby boomers have benefited Ortho Recon, but have yet to impact the wound sector • 2006 a year of transition for Wound – DERMAGRAFT® exit completed – New business focus/model – New management globa
Slide 14: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer
Slide 15: Income statement 2006
Income statement 2006 Q4 Full Year 2005 2006 % growth % growth 2005 2006 % growth $m $m Actual CER $m $m CER Restated Restated Revenue 670 771 15% 11% 2552 2779 8% Trading profit 156 183 17% 13% 517 571 9% Restructuring costs (40) (84) Bid related costs (20) (20) Amortisation of acquisition intangib
Slide 16: Income statement 2006
Income statement 2006 Q4 % growth Full Year % growth 2005 2006 Actual 2005 2006 Actual $m $m $m $m Restated Restated Profit before taxation 114 161 428 550 Taxation (34) (40) (126) (156) Profit from continuing operations 80 121 302 394 Discontinued operations 7 19 31 351 Attributable profit 87 140 3
Slide 17: Revenue growth by business segment 2006
Revenue growth by business segment 2006 Actual Currency Acq Effect CER Quarter 4 % % % % Reconstruction 18 (3) 15 Trauma and Clinical Therapies 18 (1) 17 Endoscopy 14 (4) (1) 9 Advanced Wound Management 10 (7) 3 Group 15 (4) 11 Full Year Reconstruction 11 (1) 10 Trauma and Clinical Therapies 13 0 13
Slide 18: CER revenue growth by geography & business segment 2006
CER revenue growth by geography & business segment 2006 US Growth Europe Growth ROW Growth Total Growth Quarter 4 $m % $m % $m % $m % Reconstruction 137 16 66 8 48 22 251 15 Trauma and Clinical Therapies 100 14 20 21 21 30 141 17 Endoscopy 97 4 57 14 33 20 187 9 Advanced Wound Management 40 (5) 100
Slide 19: Profitability by business segment 2006
Profitability by business segment 2006 - - - - - - - - - Q4 - - - - - - - - - Full Year Revenue Trading Profit Margin Margin $m $m % % 2006 Reconstruction 251 69 27.5 25.4 Trauma and Clinical Therapies 141 34 24.1 20.3 Endoscopy 187 40 21.4 18.5 Advanced Wound Management 192 40 20.8 16.3 771 183 23.
Slide 20: Free cash flow 2006
Free cash flow 2006 Fourth Quarter Full Year 2005 2005 2006 2006 $m $m $m $m Restated Restated Profit before taxation 114 161 428 550 Interest received (2) (2) (9) (10) Share based payment 2 1 13 14 Depreciation, amortisation and impairment 38 48 180 169 Capital expenditure (47) (37) (200) (222) Wor
Slide 21: Restatement
Restatement Profit ($m) 2006 2005 2004 2003 Profit in Stock Elimination (2) (9) (8) Trading Profit (2) (9) (8) Finance Income (1) - - Taxation 1 3 3 Profit after Tax (2) (6) (5) Death-in-Service Liability after tax 3 3 1 Exchange difference (6) 3 (2) Equity Impact (5) - (6) Balance Sheet ($m) Invent
Slide 22: Restatement (2)
Restatement (2) Total Q1 Q2 Q3 Q4 $m Reconstruction 1 - (3) (3) 7 Trauma and Clinical Therapies - - - - - Endoscopy - - (2) (1) 3 Wound Management (3) (3) (1) 2 (1) Trading profit (2) (3) (6) (2) 9 Finance costs (1) - - - (1) Taxation 1 1 2 1 (3) Profit after tax (2) (2) (4) (1) 5 21
Slide 23: Capital structure
Capital structure • Dividend • Share Buy Back – up to $1.5 billion over two years 22
Slide 24: 2007 outlook
2007 outlook • Revenues – continued market outperformance – Q1 growth lower than Q4 2006 exit rate • Margins – anticipate slight improvement pre EIP in 2007 • Tax – 31% or thereabouts 23
Slide 25: David Illingworth, Chief Operating Officer
David Illingworth Chief Operating Officer
Slide 26: Market comment
Market comment • Continued strengthening of US Global Orthopaedics Growth 4th Qtr FY reconstructive market 20% • Mixed picture in European 18% markets with continued 16% constraints on healthcare 14% 12% spending 10% • Japanese market remains 8% difficult but pressures reducing 4%6% • Overall, stron
Slide 27: Reconstruction – Q4 2006
Reconstruction – Q4 2006 Q4 FY US 16% 9% Outside US 14% 12% Global 15% 10% Knees 12% 12% Hips 19% 10% • US market recovery maintained, mixed situation OUS • Growth rate improves in US and OUS • Improved knee growth outside US • Outstanding hip growth with BHR™ in US - ahead of plan at $16 million BH
Slide 28: Reconstruction in 2007
Reconstruction in 2007 • Market fundamentals remain strong • Expect modest US market recovery to continue • Leading the younger active patient segment – expanding market • 2006 new products driving growth • US BHR™ introduction gaining traction • Innovation and technology attracting new customers 27
Slide 29: Trauma and Clinical Therapies – Q4 2006
Trauma and Clinical Therapies – Q4 2006 Q4 FY US 14% 13% Outside US 26% 15% Global 17% 13% Fixation 9% 9% Clinical Therapies 33% 23% • Growth momentum continues • PERI-LOC™ plates and INTERTAN™ nails drive growth • Outstanding quarter for Clinical Therapies • Successful integration of DUROLANE® JFT
Slide 30: Trauma and Clinical Therapies in 2007
Trauma and Clinical Therapies in 2007 • Ageing population and active life styles underpin growth • Customer focus strategy delivering benefits • Complete year of full PERI-LOC™ range • Extended nailing range (INTERTAN™ and TRIGEN™ Meta Nail) strengthens leadership position • Thriving JFT (SUPARTZ® a
Slide 31: Endoscopy – Q4 2006
Endoscopy – Q4 2006 Q4* FY* US 6% 7% Outside US 16% 11% Global 10% 9% Repair 27% 21% DOR 25% 38% • Strong growth continues for Repair from success of shoulder knee and hip product portfolios • Resection growth improves helped by new hand control and enhanced blade range • Quieter quarter for DOR ill
Slide 32: Endoscopy in 2007
Endoscopy in 2007 • Patient demand for minimally invasive surgery • Use strength of arthroscopy market position • Continued success in fast growing repair segment • New pump/new hand control to drive competitive conversions • Benefit of 2006 new product launches • Continued investment in new innovat
Slide 33: Advanced Wound Management – Q4 2006
Advanced Wound Management – Q4 2006 Q4 FY US ex DERMAGRAFT® 10% 11% US incl. DERMAGRAFT® (4)% (3)% Outside US 6% 3% Global 3% 1% ALLEVYN™ 9% 9% Wound bed prep 19% 13% • Strong consecutive quarterly US growth • Healthcare spending constraints OUS have continued to impact the business • Excellent Woun
Slide 34: Advanced Wound Management in 2007
Advanced Wound Management in 2007 • US market penetration opportunity • Obesity continues to add to diabetic patient population • ALLEVYN™ leadership strengthened by updated product range • Sustain rapid growth of VERSAJET™ hydrosurgery system • Improved pace of new product introductions • Significa
Slide 35: New products 2007
New products 2007 Q1 Q2 Q3 Q4 REFLECTION™ 3 Universal shell TRIGEN™ META Nail LEGION™ system line LEGION™ CoCr (EU, Japan) with interchangeable poly, (international release) extensions metal, ceramic liners JOURNEY™ DEUCE™ Anatomic ACL instrument set Large Cannulated Screws Bi-compartmental bi-cruci
Slide 36: Sir Christopher O'Donnell, Chief Executive
Sir Christopher O’Donnell Chief Executive
Slide 37: Summary
Summary • Global market conditions continue to be favourable • 2006 new products plus 2007 introductions provide strong platform for growth • Aiming for continued market outperformance • Expect Earnings Improvement Programme to have a substantial impact across the business – announcement with Q1 res
Slide 38: We are smith&nephew
>KWe are smith&nephew
Slide 39: Appendix
rg smith&nephew Appendix
Slide 40: 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 Fourth Quarter Full Year 2005 2006 2005 2006 $m $m $m $m Restated Restated 16 93 94 150 Free cash flow Add back: capital expenditure 47 37 200 222 Deduct: dividends received from JV (13) - (25) - Net cash inflow from o
Slide 41: Exchange rates
Exchange rates € : $ 12/04 Q4/05 12/05 Q4/06 12/06 Period end 1.36 - 1.18 - 1.32 Average 1.25 1.18 1.24 1.31 1.27 £:$ 12/04 Q4/05 12/05 Q4/06 12/06 Period end 1.92 - 1.72 - 1.96 Average 1.84 1.73 1.81 1.95 1.86 40
Slide 42: Quarterly revenues
Quarterly revenues Smith & Nephew Key Product Line Revenues in $m at Average Rates Quarterly and Underlying Growth* 2005 2006 Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Growth Growth Growth Growth Growth Growth Growth Growth Growth Growth % % % % % % % % % % Reconstruction Knees 17% 20% 13% 12% 15% 9% 10% 15% 12