Smith & Nephew plc · LSE:SN.
Smith & Nephew — Q1 2007 Earnings Presentation
41 slides from Smith & Nephew's earnings presentation, May 2007
Slide 1: Financial Results Q1 2007
Financial Results Q1 2007
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: Chris O'Donnell, Chief Executive
Chris O’Donnell Chief Executive
Slide 4: Strategy for Continued Value Growth
Strategy for Continued Value Growth • Market focus – Innovation to provide clinical benefits and value for healthcare systems – Focus on active informed patients • Earnings improvement – Aim for above market revenue growth – Continue to invest in R&D/innovation – Margin enhancement through EIP • Bal
Slide 5: Acquisitions update
Acquisitions update • Plus Orthopedics – expected to complete mid-year – reconstruction to global market #4 • DUROLANE® licence agreement and OBI integration • Covalon worldwide distribution agreement in Advanced Wound Management DUROLANE® is a trademark of Q-Med AB 5
Slide 6: Q1 Strong start to 2007
Q1 Strong start to 2007 • Group revenue growth of 12% • Excellent growth in all businesses – Orthopaedic Reconstruction +15% – Orthopaedic Trauma & Clinical Therapies +19% – Endoscopy +12% – Advanced Wound Management +4% (ex tissue engineering) • Share buy-back programme started • Earnings Improveme
Slide 7: Adrian Hennah, Finance Director
Adrian Hennah Finance Director
Slide 8: Income statement 2007
Income statement 2007 Q1 Q1 2006 2007 Percentage growth $m $m Actual CER Restated Revenue 643 744 16% 12% Trading profit 124 148 19% 14% Restructuring costs - (17) Amortisation of acquisition intangibles (2) (4) Operating profit 122 127 Net interest income 3 2 Other finance income 1 2 Fair value of
Slide 9: Income statement 2007
Income statement 2007 Q1 Percentage growth 2006 2007 Actual $m $m Restated Profit before taxation 123 131 Taxation (38) (40) Profit from continuing operations 85 91 Gain on sale of BSN 332 - Attributable profit 417 91 Add back: Amortisation of acquisition intangibles 2 4 Restructuring costs - 17 BSN
Slide 10: Revenue growth by business segment 2007
Revenue growth by business segment 2007 Actual Currency Acq Effect CER Quarter 1 % % % % Reconstruction 19 (4) 15 Trauma and Clinical Therapies 21 (2) 19 Endoscopy 16 (3) (1) 12 Advanced Wound Management 8 (6) 2 Group 16 (4) - 12 10
Slide 11: CER revenue growth by geography & business segment 2007
CER revenue growth by geography & business segment 2007 US Growth Europe Growth ROW Growth Total Growth Quarter 1 $m % $m % $m % $m % Reconstruction 150 20 68 8 44 11 262 15 Trauma and Clinical Therapies 96 18 21 21 19 20 136 19 Endoscopy 89 6 57 15 31 28 177 12 Advanced Wound Management 34 10 94 2
Slide 12: Profitability by business segment 2007
Profitability by business segment 2007 - - - - - - - - - Q1 - - - - - - - - - Revenue Trading Profit Margin $m $m % 2007 Reconstruction 262 66 25.2 Trauma and Clinical Therapies 136 23 16.9 Endoscopy 177 33 18.6 Advanced Wound Management 169 26 15.4 744 148 19.9 2006 Reconstruction 221 56 25.3 Traum
Slide 13: Free cash flow 2007
Free cash flow 2007 Quarter 1 Restated 2006 2007 $m $m Profit before taxation 123 131 Less: Net interest receivable (3) (2) Depreciation and amortisation 36 45 Share based payment expense 4 7 Movement in working capital (55) (32) Capital expenditure (58) (38) Cash generated from operations after cap
Slide 14: Share Buy Back
Share Buy Back • 6.4m shares bought back in Q1 • Programme on track 14
Slide 15: 2007 Outlook
2007 Outlook • Revenue growth – Reconstruction – exceeds market growth – Trauma – Clinical Therapies lower than Q1; fixation close to market growth – Endoscopy – arthroscopy steady, visualisation & DOR volatile – Advanced Wound Management – broadly in line with served market • Margin expansion • Tax
Slide 16: David Illingworth, Chief Operating Officer
David Illingworth Chief Operating Officer
Slide 17: Strong market segment positions
Strong market segment positions Orthopaedic Reconstruction* Endoscopy (arthroscopy) Other Biomet 6% Plus Other 11% 3% Linvatec/ Arthrocare DePuy/J&J 13% Conmed 8% 22% Smith & 9% Smith & Nephew Stryker Nephew 9% 11% 23% Stryker 20% Zimmer Mitek/J&J Arthrex 29% 17% 19% Orthopaedic Trauma & Clinical Th
Slide 18: Reconstruction – Q1 2007
Reconstruction – Q1 2007 Q1 07 revenue growth FY 06 Q1 07 20% US 9% 20% 15% Outside US 12% 9% 10% Global 10% 15% 5% Knees 12% 12% Hips 10% 23% 0% Stryker Biomet DePuy Zimmer S&N • Market recovery in US continues, with improvement in some European countries Smith & Nephew revenue growth by quarter 20
Slide 19: Plus Orthopedics
Plus Orthopedics • Strategic rationale – Move from #5 to #4 globally – Doubles European business – Highly complementary products • Financials – Purchase price $889m – 2006 revenue $300m, 1Q revenue on track – Earnings accretive in 2008 – Expected closing summer 2007 • Integration – Integration plann
Slide 20: Trauma & Clinical Therapies – Q1 2007
Trauma & Clinical Therapies – Q1 2007 Q1 07 revenue growth - fixation FY 06 Q1 07 20% US 13% 18% 15% Outside US 15% 21% 10% Global 13% 19% 5% Fixation 9% 13% 0% Clinical Therapies 23% 33% -5% Stryker Biomet Synthes DePuy Zimmer S&N • Sales force effectiveness management driving performance Smith & N
Slide 21: Endoscopy – Q1 2007
Endoscopy – Q1 2007 FY 06 Q1 07 US 7% 6% Product line growths Outside US 11% 19% 100% Global 9% 12% 80% Repair 21% 22% DOR 38% 35% 60% 40% • Return to double-digit growth 20% • Very strong quarter outside US – improved growth in UK, Japan and Australia 0% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 • Consistently
Slide 22: Advanced Wound Management strategy
Advanced Wound Management strategy • Rework the portfolio US growth rates by quarter Ex tissue engineering 25% • Focus on costs 20% 15% • Focus on the US 10% 5% 0% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 22
Slide 23: Advanced Wound Management – Q1 2007
Advanced Wound Management – Q1 2007 FY 06 Q1 07 US ex tissue engineering 11% 22% Product line growths US incl. tissue engineering (3)% 10% 120% Outside US 3% 0% 100% Global 1% 2% 80% Global ex tissue engineering 7% 4% 60% 40% ALLEVYN™ 9% 10% 20% • Revenues improve strongly in the US 0% -20% • VERSAJ
Slide 24: Earnings Improvement Programme
David Illingworth and Adrian Hennah Earnings Improvement Programme
Slide 25: Objectives and strategy for programme
Objectives and strategy for programme Objectives • Identify and assess true peer group gaps • Enhance overall competitiveness of Smith & Nephew • Liberate resources for reinvestment in high priority growth areas • Enhance performance of company over 1 – 4 years • Establish culture of long term conti
Slide 26: Where we are now
Where we are now • 19 total workstreams – 12 active – 7 in advanced planning • Both operating efficiencies and effectiveness being addressed • Leveraging overhead and support functions across businesses – IT – Procurement – HR • Establishing a “profitable growth culture” through change management •
Slide 27: Wide range of activities
Wide range of activities Manufacturing Leverage/ Sales Operational cost of goods Portfolio combine deployment excellence (Cogs) infrastructure 27
Slide 28: Wide range of activities
Wide range of activities Manufacturing Leverage/ Sales Operational cost of goods Portfolio combine deployment excellence (Cogs) infrastructure Continuous product cost reduction: • Increased use of Asia partners in Malaysia / China • Invest in expanded footprint in China • Leverage PLUS China operati
Slide 29: Wide range of activities
Wide range of activities Manufacturing Leverage/ Sales Operational cost of goods Portfolio combine deployment excellence (Cogs) infrastructure • Centralise IT • Group wide purchasing initiatives • Leverage HR • Others 29
Slide 30: Wide range of activities
Wide range of activities Sales Structure and Deployment: • Channel growth at a slower pace • Optimise structure, deployment and efficiency Manufacturing Leverage/ Sales Operational cost of goods Portfolio combine deployment excellence (Cogs) infrastructure 30
Slide 31: Earnings Improvement Programme principal financial effects
Earnings Improvement Programme principal financial effects • 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 in 2009 – Includes both EIP and other improvements (except Plus) – Assumes no change in cur
Slide 32: Earnings Improvement Programme principal financial effects
Earnings Improvement Programme principal financial effects • 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 – Modest improveme
Slide 33: Summary
Summary • Excellent first quarter results • New products driving sustainable growth • Ambitious but realistic EIP • Outlook for year unchanged 33
Slide 34: Questions?
rg smith&nephew Questions?
Slide 35: We are smith&nephew
>KWe are smith&nephew
Slide 36: Appendices
rg smith&nephew Appendices
Slide 37: Exchange rates
Exchange rates € : $ Q1/05 12/05 Q1/06 12/06 Q1/07 Period end 1.30 1.18 1.21 1.32 1.33 Average 1.31 1.24 1.20 1.27 1.32 £:$ Q1/05 12/05 Q1/06 12/06 Q1/07 Period end 1.89 1.72 1.73 1.96 1.96 Average 1.90 1.81 1.75 1.86 1.96 37
Slide 38: Comparison of old and new methods to get to quoted tax rate
Comparison of old and new methods to get to quoted tax rate Restated Q1, 2006 Q1, 2007 Old New New Profit before tax 123 123 131 Add back: Fair value of hedge of BSN proceeds 3 3 - Earnings Improvement Programme - restructuring costs - - 17 Amortisation of acquisition intangibles 2 - - Profit before
Slide 39: Quarterly revenues
Quarterly revenues Smith & Nephew Key Product Line Revenues in $m at Average Rates Quarterly and Underlying Growth* 2006 2007 Q1 Q2 Q3 Q4 FY Q1 Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth $m % $m % $m % $m % $m % $m % Orthopaedic Reconstruction Knees 124
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 First Quarter 2006 2007 Restated $m $m Free cash flow 7 60 Add back: capital expenditure 58 38 Net cash inflow from operating activities (IAS 7) 65 98 40
Slide 41: New products 2007
New products 2007 Q1 Q2 Q3 Q4 REFLECTION™ 3 (OUS) Universal TRIGEN™ META Nail Large Cannulated Screws LEGION™ CoCr (OUS) shell with interchangeable (international release) poly, metal, ceramic liners JOURNEY™ DEUCE™ Anatomic ACL instrument set CAPTION™ Disposable Platelet Bi-compartmental bi-cruciat