Smith & Nephew Plc · LSE:SN.
Smith & Nephew — Q2 2006 Earnings Presentation
39 slides from Smith & Nephew's earnings presentation, 2006
Slide 1: 2006 Interim Results
2006 Interim Results 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: Chris O'Donnell, Chief Executive
Chris O’Donnell Chief Executive
Slide 4: Agenda
Agenda Introduction and business highlights Chris O’Donnell Financial results Adrian Hennah Business review David Illingworth Questions Chris O’Donnell All figures are for Q2 2006 unless otherwise stated 3
Slide 5: Introduction
Introduction • Financials on track despite tougher market conditions – progressive improvement in the quarter • Focused on four growing markets where technology adoption is strong • Key new product launches successfully driving growth • Full year earnings guidance maintained 4
Slide 6: Key H1 corporate events
Key H1 corporate events • 11 July: Acquisition of OsteoBiologics, Inc. • 30 June: Received subpoena from Department of Justice • 28 June: Strategic partnership with Q-Med • 12 June: Adrian Hennah appointed as CFO • 10 May: Approval by FDA for BHR™ in US • 24 Feb: Disposal of 50% interest in BSN • 9
Slide 7: Business highlights Q2 2006
Business highlights Q2 2006 • Group revenue growth up 6% to $686m • Positive effect of divisionalisation shows in US Reconstruction growth – successful new knee products launched in US – BHR™ approved in the US • Trauma improves to 13% growth • Endoscopy revenue growth of 6% • Advanced Wound Managem
Slide 8: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer
Slide 9: Income statement Q2 2006
Income statement Q2 2006 Second Quarter Percentage growth Half Year 2005 2006 Actual CER 2005 2006 $m $m $m $m Revenue 642 686 7% 6% 1,270 1,329 Trading profit 129 138 7% 7% 253 265 Amortisation (3) (2) (6) (4) Operating profit 126 136 247 261 Net interest income 2 3 5 6 Other finance income – IAS 1
Slide 10: Income statement Q2 2006
Income statement Q2 2006 Second Quarter Percentage growth Half Year 2005 2006 Actual CER 2005 2006 $m $m $m $m Profit before taxation 128 141 252 267 Taxation (39) (41) (77) (80) Profit from continuing operations 89 100 175 187 Discontinued operations 8 - 15 332 Attributable profit 97 100 190 519 Ad
Slide 11: Revenue growth by business segment 2006
Revenue growth by business segment 2006 Actual Currency CER Quarter 2 % % % Orthopaedic Reconstruction 8 (1) 7 Orthopaedic Trauma 14 (1) 13 Endoscopy 7 (1) 6 Advanced Wound Management 2 (2) - Group 7 (1) 6 Half Year Orthopaedic Reconstruction 6 1 7 Orthopaedic Trauma 10 1 11 Endoscopy 5 2 7 Advanced
Slide 12: 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 2 $m % $m % $m % $m % Orthopaedic Reconstruction 126 7 57 3 45 13 228 7 Orthopaedic Trauma 90 14 17 12 16 9 123 13 Endoscopy 86 5 46 5 28 11 160 6 Advanced Wound Management 33 (3) 97 1 45
Slide 13: Profitability by business segment Q2 2006
Profitability by business segment Q2 2006 - - - - - - - - - Q2 - - - - - - - - - H1 Revenue Trading Profit Margin Margin $m $m % % 2006 Orthopaedic Reconstruction 228 61 26.8 26.3 Orthopaedic Trauma 123 24 19.5 18.6 Endoscopy 160 28 17.5 18.3 Advanced Wound Management 175 25 14.3 13.9 686 138 20.1 1
Slide 14: Free cash flow Q2 2006
Free cash flow Q2 2006 Second Quarter Half Year 2005 2006 2005 2006 $m $m $m $m Operating profit 126 136 247 261 Share based payment 3 5 7 9 Depreciation and Amortisation 37 41 72 77 Capital expenditure (60) (72) (109) (130) Working capital movements (48) (28) (120) (88) Trading cash flow 58 82 97 1
Slide 15: 2006 outlook at Q2
2006 outlook at Q2 • Full year revenue growth – Reconstruction plus Trauma - low double digits – Endoscopy - high single digits – Advanced Wound Management – low single digits • Reconfirm full year EPSA* guidance from Q1 – reduced by c. 1% for impact of OBI acquisition. • At end Q2 rates, no impact
Slide 16: David Illingworth, Chief Operating Officer
David Illingworth Chief Operating Officer
Slide 17: Orthopaedic Recon and Trauma overview
Orthopaedic Recon and Trauma overview • Market issues • As expected, Orthopaedic market growth stable but down from 2005 (tough comparables) – OUS market growth down (Japan pricing, Europe conditions) – US market seeing slight rebound • Smith & Nephew • Q1: Divisionalisation of salesforce - a focus
Slide 18: Reconstruction – Q2 & H1 2006
Reconstruction – Q2 & H1 2006 Q2 H1 US 7% 4% Outside US 7% 11% Global 7% 7% Knees 10% 10% Hips 2% 4% • Improved quarter in US • Difficult market conditions in Europe • Revenue build throughout second quarter • New product launches contribute to knees • Slow hip revenue growth in soft market conditio
Slide 19: Reconstruction – H2 growth drivers
Reconstruction – H2 growth drivers • High single digit market growth expected in 2006 • New product pipeline exceeding expectations – LEGION™ Revision Knee a major success – JOURNEY™ Anatomic Knee attracts significant interest – EMPERION™ hip in Q3, earlier than planned BIRMINGHAM HIP™ revision syst
Slide 20: BHR™ in H2
BHR™ in H2 • Only hip resurfacing product in US • 75 US based surgeons trained • First surgery performed 5th June • 50 primary training sites identified – Existing and competitive accounts • 400 surgeons planned to be Dr. Robert Barrack of Barnes-Jewish Hospital, St. Louis, trained by end of 2007 wi
Slide 21: Trauma – Q2 & H1 2006
Trauma – Q2 & H1 2006 Q2 H1 US 14% 12% Outside US 10% 8% Global 13% 11% Fixation 9% 8% Clinical Therapies 22% 18% • Sales force specialisation enabling increase in market share • Success of PERI-LOC™ boosting growth • TAYLOR SPATIAL FRAME™ and JET-X™ growth • Strong Clinical Therapies growth returns
Slide 22: Trauma – H2 growth drivers
Trauma – H2 growth drivers • Low double digit market growth expected in 2006 • PERI-LOC™ upper extremity Q3 launch completes PERI-LOC range • TRIGEN™ INTERTAN™ nail indicated for breaks in the thigh bone strengthens the successful IM nail range • EXOGEN™ 4000+ received FDA approval for ease of use u
Slide 23: Endoscopy – Q2 & H1 2006
Endoscopy – Q2 & H1 2006 Q2 H1 US 5% 5% Outside US 7% 8% Global 6% 7% Repair 18% 18% DOR/Visualisation 3% 2% • Strong growth continues for Repair, driven by knee, shoulder & hip • Resection/Access – slower quarter Hip Positioning System • Healthcare funding uncertainties slowed large cap purchases.
Slide 24: Endoscopy – H2 growth drivers
Endoscopy – H2 growth drivers • High single digit market growth expected in 2006 • Expect Repair growth to continue • Hip arthroscopy building • CONDOR™ Control System building strong DOR order book – New CONDOR Express release • OBI acquisition provides opportunity for growth from TRUFIT™ BGS CONDO
Slide 25: OBI acquisition benefits
OBI acquisition benefits • Major long term opportunity in cartilage repair – over 1.1 million potential treatable knees – currently less than 20% are treated • Further strengthens our leadership position in arthroscopy, particularly knee repair • Substantial leverage through our global distribution
Slide 26: Advanced Wound Management – Q2 & H1 2006
Advanced Wound Management – Q2 & H1 2006 Q2 H1 US ex DERMAGRAFT™ 14% 9% US incl. DERMAGRAFT™ (3)% (3)% Outside US 1% 2% Global 0% 1% ALLEVYN™ 9% 8% ACTICOAT™ 12% 16% • Revenues on track • Tougher market conditions OUS - UK and Germany healthcare cost pressures greatest • Improved ALLEVYN™ dressings
Slide 27: Advanced Wound Management – H2 growth drivers
Advanced Wound Management – H2 growth drivers • 9% expected market growth in 2006 • Continued improvement of US market penetration • Benefit of ALLEVYN™ and ACTICOAT™ product line improvements • Anticipate acceleration in US for VERSAJET™ from burns indication approval VERSAJET™ Hydrosurgery System
Slide 28: Chris O'Donnell, Chief Executive
Chris O’Donnell Chief Executive
Slide 29: Innovative solutions – the key to future growth
Innovative solutions – – the key to future growth
Slide 30: Innovation in knees
Innovation in knees JOURNEY™ Bi-Cruciate Stabilised Knee System LEGION™ Revision Knee System Durolane® single injection joint fluid CALAXO™ Osteoconductive therapy Interference Screw 29 OBI Bone graft substitute range
Slide 31: Summary
Summary • Recon and Trauma showing progressive improvement • Advanced Wound Management on expectations • Endoscopy - added impetus from new leadership, strong repair and DOR offering - and new acquisition • Continued focus on operating efficiencies • Driving new products across all businesses • Stro
Slide 32: We are smith&nephew
7 We are smith&nephew
Slide 33: Appendix
>V smith&nephew Appendix 150 years Innovation. For generations.
Slide 34: New products 2006
New products 2006 Q1 Q2 Q3 Q4 JOURNEY™ Bi-Cruciate ALLEVYN™ major product LEGION™ revision knee system EMPERION™ hip Stabilised upgrade BIRMINGHAM HIP ANTHOLOGY™ flat hip stem PERI-LOC™ upper extremity RESURFACING™ - US DYONICS™ POWERMAX™ ELITE Arthroscopic Shaver EXOGEN™ 4000+ bone healing TRIGEN™
Slide 35: Reconciliation of free cash flow to IAS 7 net cash flow from operating activities
Appendix Reconciliation of free cash flow to IAS 7 net cash flow from operating activities Second Quarter Half Year 2005 2006 2005 2006 $m $m $m $m Free cash flow 9 36 28 43 Add back: Net capex 60 72 109 130 Deduct: Dividends received from JV - - (11) - Net cash flow from operating activities (IAS 7
Slide 36: Movement in net debt/cash
Movement in net debt/cash Second Quarter Half Year 2005 2006 2005 2006 $m $m $m $m Opening net debt (216) 271 (232) (306) Free cash flow 9 36 28 43 Dividends paid (56) (57) (56) (57) Acquisition costs (14) (3) (17) (7) Net divestment proceeds - (8) - 543 Proceeds from issue of ordinary 7 2 9 5 share
Slide 37: Balance sheet
Balance sheet 1st July 1st April 31st Dec 2006 2006 2005 $m $m $m Property, plant & equipment 627 600 589 Goodwill intangibles 723 687 673 Investments 10 10 10 Investment in JV - - 218 Net trading assets 874 761 762 Deferred tax 75 105 78 Net pension liability (156) (157) (190) Provisions (112) (125
Slide 38: Exchange rates
Exchange rates $ : € 12/04 06/05 12/05 03/06 06/06 Period End 1.359 1.197 1.180 1.211 1.279 H1 05 Q2 05 H1 06 Q2 06 Average 1.270 1.236 1.243 1.282 £:$ 12/04 06/05 12/05 03/06 06/06 Period End 1.920 1.771 1.717 1.733 1.848 H1 05 Q2 05 H1 06 Q2 06 Average 1.864 1.827 1.807 1.865 37
Slide 39: Quarterly revenues
Quarterly revenues 2005 2006 Q1 Q2 Q3 Q4 FY Q1 Q2 Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth $m % $m % $m % $m % $m % $m % $m % Orthopaedic Reconstruction Knees 116 17% 117 20% 103 13% 118 12% 454 15% 124 9% 130 10% Hips 86 12% 88 16% 80