2014 second quarter results - smith+nephew€¦ · q2 2014 highlights 4 key comments •q2 revenues...
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2014 Second Quarter Results
Forward looking statements
This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and dispositions, our success in performing due diligence, valuing and integrating acquired businesses; disruption that may result from transactions or other changes we make in our business plans or organisation to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20-F, for a discussion of certain of these factors.
Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.
2
Chief Executive Officer
Olivier Bohuon
Q2 2014 highlights
4
Key Comments
• Q2 revenues +3% underlying (+7% reported)
‐ Recon improvement led by US Knees ‐ strong Emerging Markets +17%, ‐ Advanced Wound Bioactives +21% ‐ Sports Medicine Joint Repair +9% ‐ ArthroCare acquisition closed
• Trading profit margin 22.3%
• EPSA 20.4¢ (up 13%)
• Interim dividend 11.0¢ (up 6%)
• Strategy update
Second Quarter
2014 2013 Underlying
growth
$m $m %
Revenue
Advanced Surgical Devices 810 741 4
Advanced Wound Management 337 333 0
Group 1,147 1,074 3
Trading profit
Advanced Surgical Devices 191 170
Advanced Wound Management 64 62
Group 255 232 6
Trading Profit Margin 22.3% 21.6%
EPSA 20.4¢ 18.0¢
0%
7%
-1%
9%
3%
2%
-6% -4% -2% 0% 2% 4% 6% 8% 10%
Q2 revenue growth
5
Geographic growth Product franchise growth Revenue split
Underlying change (%) Underlying change (%)
Note: ‘Other ASD’ +18% includes ArthroCare’s ENT franchise, ‘Est OUS’ is Australia, Canada, Europe, Japan and New Zealand
17%
-3%
4%
-4% 0% 4% 8% 12% 16% 20%
EM/IM
Est OUS
US
AWM
ASD
AWM
Other ASD
Trauma
Enab
Tech
Joint
Repair
Hip
Knee
Advanced Surgical Devices – Knee and Hip Implants
• Revenue performance
‐ Knees: global +2%, US +4%, OUS +1% ($221m)
‐ Hips: global +3%, US +3%, OUS +2% ($167m)
• Commentary
‐ S&N US Recon growth improved to +3%
‐ JOURNEY◊ II BCS and CR strong growth
‐ Successful VERILAST◊ Technology for Hips campaign
6
VERILAST◊ Technology
for Hip Replacements
Advanced Surgical Devices – Sports Medicine and Trauma
• Revenue performance
‐ Sports Medicine Joint Repair +9% ($141m)
‐ Arthroscopic Enabling Technologies (AET) -1% ($121m)
‐ Trauma & Extremities +7% ($129m)
• Commentary
‐ Good Joint Repair growth across all geographies and product areas, including one month of ArthroCare
‐ Trauma benefited from Middle East tender
‐ Strong pipeline of product launches in H2 7
HAT-TRICK◊
Lesser toe repair system
Advanced Wound Management
• Revenue performance
‐ Advanced Wound Care -8% ($199m)
‐ Advanced Wound Devices +1% ($53m)
‐ Advanced Wound Bioactives +21% ($85m)
• Commentary
‐ AWC impacted by weak US performance and some destocking as expected
‐ US RENASYS◊ distribution suspended
‐ SANTYL◊ benefitted from underlying volume growth and stocking
8
PICO◊ Launched in Japan
Chief Financial Officer
Julie Brown
Agenda items
1. Revenue and profitability by business segment
2. Group income statement
3. Cash flow and capital allocation
4. 2014 outlook
10
Revenue growth by business segment Q2 2014
11
Underlying
Quarter 2* %
Advanced Surgical Devices
Advanced Wound Management
Group
4
-
3
Reported
%
9
7
1
* Unadjusted for trading days: Q2 2014 comprises 63 trading days (2013 – 64 trading days)
Acquisitions
%
4
-
3
Currency
%
1
1
1
7% (8)%
13%
0%
US Other Est Mkts Emerging markets Total
4%
0%
19%
4%
US Other Est Mkts Emerging markets Total
Underlying revenue growth by geography & business segment Q2 2014
12
ASD $810m
Emerging markets $132m
Other Established
Markets $309m
US $369m
US $125m
Emerging markets $42m
Other Established
Markets $170m
AWM $337m
Profitability by business segment Q2 2014
13
Second Quarter
Revenue Trading Profit
Margin
2014 $m $m %
Advanced Surgical Devices 810 191 23.7
Advanced Wound Management 337 64 18.8
Group 1,147 255 22.3
2013
Advanced Surgical Devices 741 170 22.9
Advanced Wound Management 333 62 18.7
Group 1,074 232 21.6
Half Year
Margin
%
23.3
18.2
21.8
23.6
18.3
22.0
Income statement Q2 2014
14
Second Quarter Quarterly growth
2014 2013 Underlying Reported
$m $m
Revenue 1,147 1,074 3% 7%
Trading profit 255 232 6% 10%
Restructuring and rationalisation costs (13) (17)
Acquisition and integration costs (53) (5)
Amortisation of acquisition intangibles (30) (22)
Legal and other (25) -
Operating profit 134 188
Net interest (costs)/income (4) 1
Other finance costs (2) (2)
Profit before taxation and associates 128 187
Trading margin (%) 22.3% 21.6%
Half Year
2014 2013
$m $m
2,220 2,149
484 473
(19) (25)
(58) (10)
(54) (43)
10 -
363 395
(7) 2
(5) (4)
351 393
21.8% 22.0%
Income statement Q2 2014
15
Second Quarter
2014 2013
$m $m
Profit before taxation and associates 128 187
Associate - 1
Profit before taxation 128 188
Taxation (39) (59) Tax rate* 28.0%
Attributable profit 89 129
Add back:
Adjusting items from previous slide 121 44
Acquisition costs reported in interest 2 -
Taxation on excluded items (30) (10)
Adjusted attributable profit 182 163
Adjusted earnings per share ("EPSA") 20.4¢ 18.0¢ Q2 EPSA Growth
13%
Earnings per share ("EPS") 10.0¢ 14.3¢
* Forecast full year rate excluding restructuring and rationalisation costs, acquisition and integration costs, amortisation of acquisition intangibles and legal and other.
Half Year
2014 2013
$m $m
351 393
(2) (1)
349 392
(110) (120)
239 272
121 78
3 -
(23) (20)
340 330
38.1¢ 36.5¢
26.8¢ 30.1¢
Free cash flow Q2 2014
16
Second Quarter
2014 2013
$m $m
Trading profit 255 232
Share based payment 7 8
Depreciation and amortisation 71 70
Capital expenditure (96) (86)
Movements in working capital and provisions (58) (37)
Trading cash flow 179 187
Restructuring, rationalisation & acquisition costs (23) (17)
Operating cash flow 156 170
Net interest paid (3) (2)
Taxation paid (107) (99)
Free cash flow 46 69
Closing Net Debt
Half Year
2014 2013
$m $m
484 473
16 17
140 139
(161) (141)
(222) (83)
257 405
(37) (44)
220 361
(12) (3)
(136) (152)
72 206
(1,911) (281)
(253)
(1,911)
233
-
(161) (152)
(1,572)
(6)
(2,500)
(2,000)
(1,500)
(1,000)
(500)
0
Dec-13 FCF pre capex Capex Dividends Acquisitions Share buy back Other Jun-14
H1 cash flow and capital allocation
17
$m
Reinvest for organic growth
Progressive dividend policy
Acquisitions in line with strategy
Return excess to share-holders 1 2 3 4
2014 outlook
• Confident in overall Group outlook
‐ AWM below market due to RENASYS in US
• Margin guidance maintained
• Tax rate guidance
‐ 2014 tax rate now expected to be 28.0%
‐ Outlook 150-200 bps improvement over next two years
• ArthroCare guidance
• Q3 comments ‐ Currency impact
‐ H2 cost phasing 18
Chief Executive Officer
Olivier Bohuon
Progressing our Strategic Priorities
20
Sh
are
ho
lde
r V
alu
e
Increased R&D. Launch momentum. Strong pipeline.
China, focus countries. Direct. Acquisitions. Mid-tier. Emerging Markets
Established Markets Focused investment & management. Greater efficiency.
Innovation
More agile and efficient. Group optimisation plan. Simplification
Acquisitions 13 deals, $2.8bn.
Rebalancing Smith & Nephew
Lower Growth
65%
Lower Growth
• Reconstruction (Established Markets)
• Advanced Wound Care (Established Markets)
• Enabling Technologies (Established Markets)
Higher Growth
• Emerging markets (all franchises)
• Sports Medicine Joint Repair
• ArthroCare
• Trauma & Extremities
• Gynecology
• Advanced Wound Bioactives
• Advanced Wound Devices
1 Excluding Clinical Therapies 2 H1 2014 including proforma ArthroCare for full period
Franchises / Geographies
Lower Growth
50%
Proportion of Revenue
2011 1 2014 H1 2
Higher Growth
50%
Lower Growth
65%
Higher Growth
35%
21
Reconstruction - addressing customer needs
• Complex market dynamics
• Customer needs ‐ better outcomes from procedures
‐ greater access to benefits
‐ lower cost of delivery
• Geographic trends
‐ Emerging markets: mid-tier demand
‐ Established markets: ‘admin-led’ accounts growth
• Addressing these needs is about choice, not simply scale
22
Implant systems OR and inventory efficiency
REDAPT™ hip revision
Reconstruction - innovative product development
23
Bearing surfaces Augmented instrumentation
VERASENSETM Sensor Technology OXINIUM◊-on-OXINIUM
VISIONAIRE◊ Disposable Instruments JOURNEY◊ II Knee REDAPT◊ hip revision
NavioTM Surgical System
The Syncera solution
24
Hip/Knee implant solutions for progressive customers
Products from Smith & Nephew addressing the vast majority of primary joint procedures
Customer interfaces using innovative technology to reduce cost while improving efficiency
High levels of service and support
Transparent prices driving substantial benefit for providers Attractive economics
Value
Clinically proven
Automation
Full support
1
2
3
4
5
Knees: GENESIS™ II TKA
• Comprehensive primary cemented knee system
• Most widely sold Smith & Nephew knee system worldwide
• Outstanding long-term survivorship ‐ 98.1% survivorship ‐ 15 year follow-up¹
Hips: SYNERGY™ / REFLECTION™
• Simple and efficient cementless hip replacement system
• Most widely sold Smith & Nephew hip combination worldwide
• Outstanding long-term survivorship ‐ 95.2% survivorship ‐ 12 year follow-up ²
1 UK National Joint Registry 2013 and Victor et al, Internat, Ortho, 2013 2 UK National Joint Registry, 2013
Clinically Proven, Market Relevant
25
Clinically proven products
• Technology that streamlines supply
chain and logistics operations
• Automatic ordering and product replenishment
• Point-of-care automated tools
• Comprehensive pre-launch training and support at world-class facilities
• Access to technical and live account support when needed
Improving OR and logistics efficiency with ongoing customer support
26
A technology enabled solution
27
Attractive economics Customer Smith & Nephew
• Macro pressure: increasing demand, decreasing reimbursement
• Syncera benefits for customer ‐ supply chain efficiency savings ‐ reduced waste ‐ effectively offering implant price
at a substantial discount to the average US implant price of $5,500 1
• Alternative solution for a new set of customers
• Estimate 5-10% of US market are interested in this commercial model ‐ Syncera solution co-exists with
traditional sales rep based service
• Smith & Nephew financial model ‐ reduction in sales & marketing
expense ‐ reduced capital & inventory ‐ reduced logistics expense
1 Smith & Nephew, The Millennium Research Group
Supplementing organic growth through acquisition
28
AWM deals ASD deals
Emerging market deals
M&A deals
$bn invested
TENET Medical
Healthpoint
ArthroCare
2010 2011 2012 2013 2014
Kalypto Medical
LifeModeler
ADERMA
Politec
Plato Grup
Sushrut-Adler
0.1 0.8 0.1 0 1.8
0 2 4 5 2
PCE
NPWT IP Portfolio
Foot & Ankle Product
A2 Surgical
ArthroCare
29
Strategic rationale
• Investing in high growth sports medicine
• Complementary product fit
- coblation technology
- shoulder repair
- ENT adjacency
• Cross - selling opportunities
• Significant revenue and cost synergies
Integration
• Solid trading performance
• All integration workstreams on track
• Commercial integration
‐ rolling out single US commercial organisation
‐ Europe reporting lines changed
‐ emerging markets distributors being restructured
Q2 summary
• Q2 performance ‐ majority of franchises trading well ‐ ArthroCare completed and integration underway
• Successful first three years
‐ Strategic Priorities successful model ‐ re-balancing to higher growth opportunities ‐ improving execution capabilities ‐ re-invigorating Smith & Nephew
• Building a better Smith & Nephew
30
Questions
32
Appendices
Q2 2014 financials
34
Q2 2014 Q2 2013
$m $m
Revenue
ASD 810 741
AWM 337 333
Group 1,147 1,074
Trading Profit
ASD 191 170
AWM 64 62
Group 255 232
Group Margin 22.3% 21.6%
Operating Profit 134 188
PBT 128 188
EPSA 20.4¢ 18.0¢
Key Comments
• Revenue Underlying growth of 3%
• Trading Profit Underlying growth of 6%
• Group Margin Margin of 22.3% - 70 bps higher than 2013
• EPSA 13% growth on prior year at 20.4¢ per share
H1 2014 financial highlights
35
H1 2014 H1 2013
$m $m
Revenue
ASD 1,568 1,501
AWM 652 648
Group 2,220 2,149
Trading Profit
ASD 365 354
AWM 119 119
Group 484 473
Group Margin 21.8% 22.0%
Operating Profit 363 395
PBT 349 392
EPSA 38.1¢ 36.5¢
Key Comments
• Revenue Underlying growth of 2%
• Trading Profit Underlying growth flat
• Group Margin Margin of 21.8% - 20bps lower than 2013
• EPSA 4% growth on prior year at 38.1¢ per share
Update to 2014 technical guidance
36
Guidance At Feb’14
(excluding ArthroCare)
Update (incl. ArthroCare and Group Optimisation)
Restructuring costs $40m – 50m $50m – 60m
Acquisition and integration costs $10m –15m + c. $100m
Amortisation of acquisition intangibles $90m – 100m $120m – 140m
Interest payable c. 4% plus fees c. 3%
Other finance costs $8m – 11m no change
Bioventus loan note interest receivable $11m – 12m no change
Associate: Bioventus contribution Nil no change
Effective tax rate* c.29% c.28%
* Excluding acquisition related costs, restructuring and rationalisation costs, amortisation of acquisition intangibles, and legal and other items.
Underlying revenue growth by geography & business segment Q2 2014
37
Established Markets
Emerging & International
Markets Group
US OUS Total Total Total
Quarter 2 Revenue $m $m $m $m $m
Advanced Surgical Devices 369 309 678 132 810
Advanced Wound Management 125 170 295 42 337
Group 494 479 973 174 1,147
Quarter 2 Growth % % % % %
Advanced Surgical Devices 4 - 2 19 4
Advanced Wound Management 7 (8) (2) 13 -
Group 4 (3) 1 17 3
ArthroCare historic revenue
39
* Q2 sales pro-rated to reflect the period under S&N ownership
2013 2014
Q2* Q3 Q4 Q1 Q2*
Revenue Revenue Revenue Revenue Revenue
$m $m $m $m $m
ArthroCare Revenue
Sports Medicine Joint Repair 6 19 22 21 14
Arthroscopic Enabling Technologies 12 36 43 41 28
Other ASD 11 29 29 26 19
Total Franchise Revenue 29 84 94 88 61
Accounting policy differences 1 1 1
Sales to S&N 6 7 7
Total Reported ArthroCare Revenue 91 102 96
Product line revenues and underlying growth
39 All revenue growth rates are on an underlying basis
2013 2014
Q1 Q2 Q3 Q4 Full Year Q1 Q2
Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % $m
Advanced Surgical Devices
Reconstruction
Knee Implants (6) (1) 2 5 - - 221 2
Hip Implants (6) (1) 3 2 (1) - 167 3
Trauma 8 2 2 5 4 (1) 129 7
Sports Medicine Joint Repair 4 6 7 11 7 5 141 9
Arthroscopic Enabling Technologies (7) - (1) (1) (2) (2) 121 (1)
Other ASD 6 10 11 27 14 23 31 18
Advanced Wound Management
Advanced Wound Care 1 1 2 - 1 (6) 199 (8)
Advanced Wound Devices 26 27 11 17 20 13 53 1
Advanced Wound Bioactives 49 35 55 52 47 8 85 21
Group 1 3 5 6 4 1 1,147 3
Analysis of restructuring costs
40
P&L Charge Cash Spend
Previous Total to Date
Q2 Total to date Previous Total
to Date Q2 Total to date
Structural Efficiency Programme
$m $m $m $m $m $m
Cash costs 134 - 134 127 1 128
Asset w/offs 21 - 21 n/a n/a n/a
Total 155 - 155 127 1 128
Group Optimisation Plan
$m $m $m $m $m $m
Cash costs - 13 13 - 13 13
Asset w/offs - - - n/a n/a n/a
Total - 13 13 - 13 13
Of the $13m total charged in Q2, $11m are reflected in ‘selling, general and administrative expenses’ and
$2m are reflected in ‘cost of goods sold’ in the Group Income Statement.
Restructuring target of $160m cash costs and $40m asset write-offs.
Group Optimisation target of $150m total costs.
Reconciliation of free cash flow to IAS 7 net cash flow from operating activities
41
Second Quarter Half Year
2014 2013 2014 2013
$m $m $m $m
Free cash flow 46 69 72 206
Add back: capital expenditure 96 86 161 141
Net cash inflow from operating activities (IAS 7)
142 155 233 347
Business days per quarter
42
Q1 Q2 Q3 Q4 Full Year
2013 62 64 63 62 251
2014 62 63 63 63 251
Exchange rates
43
Q2/13 FY/13 Q1/14 Q2/14
$:€
Period end 1.30 1.38 1.38 1.36
Average 1.31 1.33 1.37 1.37
$:£
Period end 1.52 1.66 1.66 1.70
Average 1.54 1.56 1.65 1.68
H1 2014 Q3 2014
Knee and Hip Implants
• JOURNEY◊ II CR
• POLARSTEM◊ Cementless Stem System for hips (US)
• JOURNEY◊ II BCS Constrained insert
• VERASENSE for knees (an OrthoSensor product)
• Navio for JOURNEY◊ UNI (BlueBelt commercial agreement)
Sports Medicine/ Arthroscopic Enabling Technologies
• Hip Positioning System with Active Heel◊ Technology – full system release
• TRUEPASS◊ Suture passer
• TRUCLEAR◊ Indication Expansion
• DYONICS◊ POWER Small and Large Bone powered instruments
• Distal Thigh Holder
• SUTUREFIX◊ All-Suture Anchor for shoulder
• SUTUREFIX ULTRA◊ Hip Anchor
• DYONICS◊ Pulse wireless iPad image data management
• DYONICS◊ PLAN Hip impingement planning system
Trauma & Extremities
• TFCC FAST-FIX◊ Kit for wrist repair • SURESHOT◊ Drill Depth Measurement Software Upgrade
• HAT-TRICK◊ Lesser toe repair system • D-RAD SMART PACK◊ Single-Use Volar Distal
Radius Plating System (wrist plating system) • TRIGEN INTERTAN◊ Gold Instrument Set
Advanced Wound Management
• IV3000◊ improvements • SANTYL◊ 90g • ALLEVYN◊ variants • PICO◊ enhancements/extensions • RENASYS◊ (India) • OPSITE◊ Post Op Visible (China)
• DURATOUCH◊ larger size • ALLEVYN◊ variants rebrand • RELICARE◊ (Japan)
2014 key new products progression
44