Smith & Nephew plc · LSE:SN.
Smith & Nephew — Q3 2007 Earnings Presentation
33 slides from Smith & Nephew's earnings presentation, 2007
Slide 1: Q3 2007 Results
Q3 2007 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: David Illingworth, Chief Executive
David Illingworth Chief Executive
Slide 4: Q3 financial highlights
Q3 financial highlights • Revenues increase by 10% to $845m • Outpacing the market in Reconstructive segment – revenues up 11% • Trauma & Clinical Therapies 11% revenue growth • Endoscopy revenues outside US up 17%, overall up 9% • Advanced Wound Management – US growth 9%, globally 8% • Margin stren
Slide 5: Q3 business highlights
Q3 business highlights • A quarter of good performance • 10 year anniversary for BHR™ • 3 knee systems approved as gender specific • Balanced growth and momentum in Advanced Wound Management • EIP events – Factory to be built in China – ACTICOAT™ agreement • DOJ settled 4
Slide 6: Adrian Hennah, Chief Financial Officer
Adrian Hennah Chief Financial Officer
Slide 7: Income statement Q3 2007
Income statement Q3 2007 Third Quarter Percentage growth Year to Date 2006 2007 Actual Underlying 2006 2007 $m $m $m $m Revenue 679 845 24% 10% 2,008 2,402 Trading profit 132 169 28% 19% 388 484 Legal settlement - (30) - (30) Restructuring and integration costs - (26) - (48) Inventory revaluation -
Slide 8: Income statement Q3 2007
Income statement Q3 2007 Third Quarter Percentage Year to Date growth 2006 2007 Actual 2006 2007 $m $m $m $m Profit before taxation 131 39 389 328 Taxation (39) (26) (116) (113) Profit from continuing operations 92 13 273 215 Discontinued operations - - 332 - Attributable profit 92 13 605 215 Add ba
Slide 9: Revenue growth by business segment 2007
Revenue growth by business segment 2007 Actual Currency Acquisitions Underlying Quarter 3 % % % % Reconstruction 43 (3) (29) 11 Trauma and Clinical Therapies 21 (2) (8) 11 Endoscopy 12 (3) - 9 Advanced Wound Management 15 (6) (1) 8 Group 24 (3) (11) 10 Year to Date Reconstruction 30 (3) (13) 14 Trau
Slide 10: Underlying revenue growth by geography & business segment
Underlying revenue growth by geography & business segment 2007 US Growth Europe Growth ROW Growth Total Growth Quarter 3 $m % $m % $m % $m % Reconstruction 152 15 112 4 49 4 313 11 Trauma and Clinical Therapies 102 10 33 10 21 19 156 11 Endoscopy 85 2 52 20 39 14 176 9 Advanced Wound Management 40 9
Slide 11: Profitability by business segment Q3 2007
Profitability by business segment Q3 2007 - - - - - - - - - - - - Q3 - - - - - - - - - - - YTD 2007 Revenue Trading Profit Margin Margin $m $m % % Reconstruction - excluding Plus 249 63 25.3 25.4 - Plus 64 10 15.6 15.9 Trauma and Clinical Therapies - excluding Plus 146 28 19.2 18.9 - Plus 10 - - - E
Slide 12: Share buy back
Share buy back • 20m shares bought back for $247m in Q3 • In total c.44m shares bought back for c.$537m at 26 October • Two year programme on track 11
Slide 13: Q4 outlook for 2007
Q4 outlook for 2007 • Revenue growth – Reconstruction – exceeds market growth – Trauma – Fixation close to market growth; clinical therapies lower than ytd – Endoscopy – arthroscopy steady, visualisation & DOR volatile – Advanced Wound Management – excluding NPWT, slightly above served market • Marg
Slide 14: David Illingworth, Chief Executive
David Illingworth Chief Executive
Slide 15: Reconstruction
Reconstruction % $m Q3 07 Q3 06 Growth Pre-Plus • Continues to outperform market Revenue 249 219 11 • Global hip growth 20%, US hips US 145 126 15 35% Outside US 104 93 4 • Knees grew at 5% worldwide, 4% in the US Trading profit 63 50 • Plus Integration on track Margin % 25.3 22.8 • Building EIP fou
Slide 16: Trauma & Clinical Therapies
Trauma & Clinical Therapies % $m Q3 07 Q3 06 Growth Pre-Plus • Fixation volumes strong Revenue 146 129 11 • #1 in bone stim, growth above US 102 93 10 market Outside US 44 36 14 • Fixation now a full service offering Fixation 94 84 9 • Joint fluid market under Clinical Therapies 52 45 15 pressure Tr
Slide 17: Endoscopy
Endoscopy % $m Q3 07 Q3 06 Growth Revenue 176 157 9 • Arthroscopy market strong US 85 83 2 • Knee and shoulder repair Outside US 91 74 17 performing well Arthroscopy 142 124 11 • Resection growing in mid single DOR/Visualisation 34 33 2 digits Trading profit 34 27 • Margin up over 200 basis points M
Slide 18: Advanced Wound Management
Advanced Wound Management % $m Q3 07 Q3 06 Growth Pre-BlueSky • US revenue growth sustained Revenue 198 174 8 • Silver product range expanded US 38 35 9 • Manufacturing reorganisation Outside US 160 139 8 in progress • Margin up 90 basis points Trading profit 37 31 • Global BlueSky launch in 2008 Ma
Slide 19: In summary
In summary • A quarter of good performance • BHR™ - 10th anniversary • Balanced growth and momentum in Advanced Wound Management • Clear measurable progress with EIP 18
Slide 20: We are smith&nephew
>KWe are smith&nephew
Slide 21: Appendices
i smith&nephew Appendices
Slide 22: Exchange rates
Exchange rates €:$ 12/05 Q3/06 12/06 Q3/07 Period end 1.18 1.27 1.32 1.42 Average 1.24 1.28 1.27 1.37 £:$ 12/05 Q3/06 12/06 Q3/07 Period end 1.72 1.87 1.96 2.04 Average 1.81 1.90 1.86 2.02 21
Slide 23: Analysis of restructuring and acquisition costs
Analysis of restructuring and acquisition costs P&L Charge Cash Cost Q3 YTD Q3 YTD $m $m $m $m EIP (4) (30) (9) (24) Plus – Integration (22) (24) (3) (5) - inventory revln (45) (45) - - Macrotexture - - 15 6 Other income/(costs) - 6 - (17) (71) (93) 3 (40) 22
Slide 24: Free cash flow Q3 2007
Free cash flow Q3 2007 Q3 YTD 2006 2007 2006 2007 $m $m $m $m Operating profit 128 53 380 339 Share based payment 4 6 13 19 Depreciation and Amortisation 44 116 121 211 Capital expenditure (55) (34) (185) (139) Working capital movements (64) 14 (143) (28) Trading cash flow 57 155 186 402 Restructuri
Slide 25: Reconciliation of free cash flow to IAS 7 net cash flow
Reconciliation of free cash flow to IAS 7 net cash flow from operating activities Quarter 3 YTD 2006 2007 2006 2007 $m $m $m $m Free cash flow 14 58 57 150 Add back: capital expenditure 55 34 185 139 Net cash inflow from operating activities (IAS 7) 69 92 242 289 24
Slide 26: Plus and BlueSky
Plus and BlueSky Third Quarter Percentage Growth Year to Date Percentage Growth 2006 2007 Actual CER 2006 2007 Actual CER $m $m $m $m Revenue Plus - 74 - 102 BlueSky - 2 - 3 Smith & Nephew 679 769 2008 2297 Total Smith & Nephew 679 845 24 10 2008 2402 20 11 Trading Profit Plus - 10 - 14 BlueSky - (3
Slide 27: Plus revenue by business segment
Plus revenue by business segment 2006 2007 Q1 Q2 Q3 Q4 2006 Q1 Q2 Q3 $m $m $m $m $m $m $m $m Revenue Reconstruction 66 69 60 77 272 86 79 64 Trauma and Clinical Therapies 8 8 8 9 33 9 8 10 Total 74 77 68 86 305 95 87 74 Underlying Growth (%) Reconstruction 11 11 9 16 12 19 11 3 Trauma and Clinical T
Slide 28: Quarterly revenues
Quarterly revenues Smith & Nephew Key Product Line Revenues, excluding Plus, in $m at Average Rates Quarterly and Underlying Growth* 2006 2007 Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth Revenue Growth $m % $m % $m
Slide 29: New products 2007
New products 2007 Q1 Q2 Q3 Q4 LEGION™ CoCr (OUS) JOURNEY™ DEUCE™ Bi-compartmental bi-cruciate retaining knee replacement TRIGEN™ TAN/FAN instrument upgrades CAPTION™ Disposable Platelet Concentrator (limited release) KINSA™ Suture Anchor for Large Cannulated Screws Rotator Cuff repair TRIGEN™ META N
Slide 30: Plus guidance (given March 2007)
Plus guidance (given 12 March 2007) • EPSA – Broadly neutral in 2007 – Accretive in 2008 and beyond • Return on invested capital – Exceeds WACC in third full year • Year three synergies – Costs: Equivalent to at least 15% of acquired cost base – Revenue: Approximately 15% of current acquired revenue
Slide 31: Earnings Improvement Programme Principal Financial Effects
Earnings Improvement Programme Principal Financial Effects (given 3 May 2007) • 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 – Includes both EIP and other improvements (except Plus) – Assumes no ch
Slide 32: Earnings Improvement Programme Principal Financial Effects
Earnings Improvement Programme Principal Financial Effects (given 3 May 2007) • 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
Slide 33: Blue Sky Guidance (given May 11)
Blue Sky Guidance (given May 11) The acquisition of Blue Sky is expected to dilute Smith & Nephew’s 2007 earnings by around 1%, to be broadly neutral in 2008, and to be accretive from 2009 onwards. The impact in 2007 will be to reduce the trading margin of the Advance Wound Management business by ap