Smith & Nephew Plc · LSE:SN.
Smith & Nephew — FY2005 Earnings Presentation
42 slides from Smith & Nephew's earnings presentation, February 2006
Slide 1: Preliminary announcement 2005
Preliminary announcement 2005 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 operating margins discussed under "Outlook" are forward- looking s
Slide 3: Dudley Eustace, Chairman
>V smith&nephew Dudley Eustace Chairman 150 years Innovation. For generations.
Slide 4: Strategy & organisation for future growth
Strategy & organisation for future growth
Slide 5: Smith & Nephew - key characteristics
Smith & Nephew - key characteristics • High growth global business • Advanced medical device technologies • Excellent management • Strong financial performance 4
Slide 6: Board appointments
Board appointments Succession planning Chairman John Buchanan Finance Director Adrian Hennah Chief Operating Officer David Illingworth 5
Slide 7: 2005 business highlights
2005 business highlights • Continued growth in tighter market conditions • Orthopaedics gained share in reconstruction and trauma • Divestment of BSN completes business transformation • Delivered on earnings and profits • Strategic move to dollar reporting 6
Slide 8: Peter Hooley, Finance Director
Peter Hooley Finance Director
Slide 9: Financial highlights Q4 2005
Financial highlights Q4 2005 • Orthopaedics 15%, Endoscopy 9% and Wound Management 6% • Revenue growth of 11%, full year 11% • Margin improves to 23.2%, full year 20.6% • EPSA growth 15% for quarter, full year 14% • DERMAGRAFT™ exit • £49m special contribution to pension plans • BSN divestment for £
Slide 10: Trading results 2005
Trading results 2005 Fourth Quarter Full Year 2004 2005 2004 2005 £m £m £m £m Revenue 332 385 + 16% 1249 1407 + 13% Trading profit 75 89 +19% 250 290 + 16% Interest and finance costs 1 (1) 2 2 76 88 252 292 Taxation (22) (26) (72) (86) Joint venture 4 4 15 17 Attributable profit before restructuring
Slide 11: Revenue growth 2005
Revenue growth 2005 Reported Acquisitions Currency Underlying Quarter 4 % % % % Orthopaedics 21 - (6) 15 Endoscopy 14 - (5) 9 Advanced Wound Management 8 - (2) 6 Group 16 - (5) 11 Full Year Orthopaedics 19 (1) (2) 16 Endoscopy 10 - (2) 8 Advanced Wound Management 5 - (1) 4 Group 13 - (2) 11 10
Slide 12: Orthopaedics - 2005
Orthopaedics - 2005 Q4 FY Knees 12% 15% Global Growth 2005 Hips 13% 13% 18% Trauma 16% 14% 16% Clinical Therapies 31% 38% 14% Global 15% 16% 12% 10% US 15% 19% 8% Outside US 15% 12% 6% 4% • Outperformed H2 market growth of 10% 2% • Knees await LEGION™ & JOURNEY™ 0% Stryker Biomet Synthes* DePuy Zimm
Slide 13: Endoscopy - 2005
Endoscopy - 2005 Q4 FY Repair 20% 21% Visualisation & DOR 8% 7% Blade 7% 4% Radio frequency 6% - Global 9% 8% US 6% 6% Outside US 12% 10% • Strong knee and shoulder repair • Rationalisation of manufacturing underway Digital Operating Room • New products 24% 12
Slide 14: Advanced Wound Management - 2005
Advanced Wound Management - 2005 Q4 FY ALLEVYN™ 16% 13% ACTICOAT™ 16% 25% DERMAGRAFT™ & related products - (16%) Global 6% 4% US 8% (2)% ACTICOAT™ Moisture Control dressing Outside US 5% 6% • Abatement of destocking and intermediate products benefit US • Underlying end customer revenues +7% in US •
Slide 15: Profitability 2005
Profitability 2005 - - - - - - - - - Q4 - - - - - - - - - Full Year Revenue Trading Profit Margin Margin £m £m % % 2005 Orthopaedics 191 49 25.5 23.9 Endoscopy 94 23 24.9 20.9 Advanced Wound Management 100 17 17.3 14.3 385 89 23.2 20.6 2004 Orthopaedics 157 40 25.4 23.4 Endoscopy 83 20 24.1 20.1 Adv
Slide 16: Cash flow
Cash flow 2004 2005 £m £m Trading cash flow after capex 145 173 Special pension contribution - (49) Macrotextured settlements (17) (26) Restructuring and rationalisation (2) (4) Operating cash flow after capex 126 94 Joint venture 14 14 Interest and tax (34) (57) Free cash flow 106 51 Dividends (47)
Slide 17: Retained profit and capital employed
Retained profit and capital employed 2004 2005 Reported Adjusted Reported Adjusted £m £m £m £m Profit Tax Profit Tax Trading Profit 250 250 290 290 Interest and finance costs 2 2 3 2 Restructuring and rationalisation - (47) Amortisation of intangibles (4) (6) Macrotextured provision (80) - Profit be
Slide 18: Other items
Other items 2004 2005 £m £m Capital Expenditure - 8% of sales 102 111 Depreciation - 5% of sales 59 69 Currency in profit - Transactional gain 9 6 - Translational gain (14) 3 IFRS Pension deficit (135) (95) Restructuring and rationalisation Endoscopy (8) DERMAGRAFT™ (inc impairment) (39) (47) Averag
Slide 19: Results in US dollars – 2005
Results in US dollars – 2005 - - - - - - - - - Q4 - - - - - - - - - - - - - - -Full Year - - - - - - - 2004 2005 2004 2005 Revenue $631m $670m +6% $2300m $2552m +11% Earnings per ADS $0.59 $0.62 +5% $1.92 $2.15 +12% Reported revenue and earnings per ADS before restructuring and rationalisation costs
Slide 20: 2006 Guidance
2006 Guidance • Revenue growth: Trauma = mid-teens Reconstruction = just below mid-teens Endoscopy = just into double digits Wound Management = mid single digits/ low single digits after DERMAGRAFT™ • Margin expansion around 1½% (½% in Q1) • Trading profit growth in high teens • Interest/finance inc
Slide 21: Chris O’Donnell, Chief Executive
Chris O’Donnell Chief Executive
Slide 22: Strategy and organisation for forward growth
Strategy and organisation for forward growth • Group strategy • Strategic initiatives • Forward growth opportunities 21
Slide 23: Positive market dynamics
Positive market dynamics • Ageing population – baby boomers reach age 60 • Reducing age threshold for joint reconstruction through new technologies (OXINIUM™, BHR™) • Lifestyle trends – Increasingly active lifestyles – increased injuries – More obesity – more product applications • Demand for improv
Slide 24: Smith & Nephew strategy
Smith & Nephew strategy • Exploit positive market dynamics • Build on technology leadership to expand markets • Organic growth - innovative product pipeline - sales force development • Pursue synergistic technology acquisitions • Build on Smith & Nephew brand Strategy continuing to drive growth and
Slide 25: Strategic initiatives for growth
Strategic initiatives for growth Improve market and customer focus • Separate segment and identity for Reconstruction/Trauma • Revised business focus for Advanced Wound Management Provide additional management capacity • CEO to focus strategy/businesses • COO to drive business growth. Move to dollar
Slide 26: Business structure
Business structure • Four growth opportunities Advanced • Market and business focus Wound Management Reconstruction • Structured for growth $679m* $829m* • Targeted markets • Common science base Endoscopy Trauma $606m* $438m* Heal and repair the human body * 2005 revenues 25
Slide 27: Reconstruction
Reconstruction Market • Growth slowed in H205 to around 10% • Mix/price big element of slowdown • Forward global growth rate around 10% Innovation grows Reconstruction above market • Enhanced sales coverage US/UK/Japan • Strong new product rollout • 2005 revenues $830m - growth 14% • President – Sco
Slide 28: Reconstruction forward growth
Reconstruction forward growth • Strongest pipeline for some years • Two new OXINIUM™ knees – LEGION™ revision knee system – JOURNEY™ anatomic knee • Two new hip systems – ANTHOLOGY™ straight stem – EMPERION™ modular hip • BHR™ in US* • Mobile training laboratory (US) 50 sessions planned MOBILAB™ Mob
Slide 29: Trauma
Trauma Market • Volume growth continues • Technology improves mix • Global growth rate around 12% Established Trauma as a growth opportunity • Sales force investment 2003/4/5 • New product introductions 2004/5/6 • Clinical Therapies channel Create separate identity and strategy 2006 • 2005 revenues
Slide 30: Trauma forward growth
Trauma forward growth • Strong new products • PERI-LOC™ upper extremity (US) • TRIGEN™ InterTAN™ nail • PERI-LOC™ lower extremity global rollout • Sales force investment increasing outside US • Clinical Therapies • SUPARTZ™ 3/4/5 injection • EXOGEN™ 4000 launch TRIGEN™ InterTAN nail 29
Slide 31: Endoscopy
Endoscopy Market • Volume trending upwards • Technology improves mix • Arthroscopy growth rate around 8% Increasing momentum • Strong new product programme • Expanding international business • Digital Operating Room programme new business opportunity • 2005 revenues $610m - growth 8% DYONICS™ 25 Flu
Slide 32: Endoscopy forward growth
Endoscopy forward growth • Repair procedure growth • knee • shoulder • hip • Core arthroscopy refocus • access • resection • Progressive innovation in DOR/Visualisation • Salesforce segmentation to support delivery DYONICS™ GLIDER™ RF Articular Cartilage Probe 31
Slide 33: Advanced Wound Management
Advanced Wound Management Market • Volume trending upwards • Mix positive but offset by price • Global growth 7% Revised business focus • Refocused sales force on class leading products • Leveraging strong market position for growth and margin improvement • Increased focus on cost effective solution
Slide 34: Advanced Wound Management forward growth
Advanced Wound Management forward growth • Driving class leading products ALLEVYN™/ACTICOAT™ • Comprehensive range/wide treatment options • Innovation in debridement - VERSAJET™ • Margin improvement from DERMAGRAFT™ exit IODOSORB™ Cadexomer Iodine Dressing 33
Slide 35: Dollar functional currency
Dollar functional currency New Group profile: • Group revenues $2.6bn • Group trading profit $525m • Group shareholders: UK 50% US 30% Europe/Asia 20% • Market cap $9bn 34
Slide 36: Outlook
Outlook • Continued demographic and procedural growth • Four focused market segments • Sales force expansion and development momentum • Strong new product launch programme is a key competitive advantage 35
Slide 37: We are smith&nephew
7 We are smith&nephew
Slide 38: Appendix
>V smith&nephew Appendix 150 years Innovation. For generations.
Slide 39: Geographic revenue growth 2005
Geographic revenue growth 2005 US Growth Europe Growth ROW Growth Total Growth Quarter 4 £m % £m % £m % £m % Orthopaedics 119 15 41 9 31 24 191 15 Endoscopy 52 6 25 8 17 18 94 9 Advanced Wound Management 23 8 51 4 26 8 100 6 194 12 117 7 74 16 385 11 Full Year Orthopaedics 433 19 148 7 117 19 698 16
Slide 40: Quarterly growth - percentages
Quarterly growth - percentages 2004 2005 Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Orthopaedics Knees 24% 16% 22% 23% 21% 17% 20% 13% 12% 15% Hips 18% 14% 15% 14% 15% 12% 16% 10% 13% 13% Trauma 10% 9% 13% 14% 11% 14% 13% 15% 16% 14% Clinical Therapies 31% 33% 49% 62% 44% 51% 42% 35% 31% 38% Endoscopy Repair 17%
Slide 41: Reconstruction & Trauma (including Clinical Therapies)
Reconstruction & Trauma (including Clinical Therapies) —————————— 2005 ——————————— 2004 Q1 Q2 Q3 Q4 FY FY $m $m $m $m $m $m Revenue Reconstruction 211 212 193 213 829 722 Trauma & CT 102 108 109 119 438 363 313 320 302 331 1267 1085 Trading profit Reconstruction 57 54 44 57 212 186 Trauma & CT 18 23
Slide 42: New products 2006
New products 2006 Q1 Q2 Q3 Q4 LEGION™ revision knee system JOURNEY™ anatomic knee PERI-LOC™ upper extremity EMPERION™ hip BIRMINGHAM HIP RESURFACING™ - US* EXOGEN™ 4000+ bone healing ACTICOAT™ surgical line ANTHOLOGY™ flat hip stem system extension DYONICS™ POWERMAX™ ELITE Arthroscopic Shaver ALLEVY