Smith & Nephew Q3 2012 Results

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the third quarter ended 29 September 2012.

* Q3 2012 comprises 63 trading days (2011: 63 trading days).

Q3 Financial Highlights

• Revenue of $952 million, up 1% on an underlying basis
• Trading profit of $207 million, up 10% on an underlying basis
• Trading profit margin up 190 bps to 21.7% as efficiency benefits come through
• Continued strong performance from Advanced Wound Management and Sports Medicine Joint Repair
• EPSA at 16.6 cents, up 2%
• Sustained strong cash generation with net cash now $379 million

Commenting, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:

“I am pleased to report an underlying 10% increase in trading profit for the quarter to $207 million. The benefits of our efficiency improvements have helped to offset the impact of on-going tough conditions in Europe, and we continued to make good commercial progress in the emerging markets.  Our Advanced Wound Management business continued to thrive, growing at twice the market rate.

“Smith & Nephew’s strategic priorities are about making choices for the long term benefit of our business, by allocating resources to the areas where we can achieve the greatest returns. I am confident that by following this strategy we are shaping the Group to respond to the market conditions and opportunities we face.”

Analyst presentation and conference call

An analyst presentation and conference call to discuss Smith & Nephew’s third quarter results will be held at 12.30pm GMT/8.30am EST today, Thursday 1 November.  This will be broadcast live on the company’s website and will be available on demand shortly following the close of the call at http://www.smith-nephew.com/Q312.  If interested parties are unable to connect to the web, a listen-only service is available by calling +44 (0) 20 7136 2055 in the UK or +1 21 2444 0412 in the US (passcode 7433755).  Analysts should contact Jennifer Heagney on +44 (0) 20 7960 2255 or by email for conference call details.

Notes

¹ Unless otherwise specified as ‘reported’ all revenue increases/decreases throughout this document are underlying increases/decreases after adjusting for the effects of currency translation and disposals.  See note 4 to the financial statements for a reconciliation of these measures to results reported under IFRS.

² A reconciliation from operating profit to trading profit is given in note 5 to the financial statements.  The underlying increase in trading profit is the increase in trading profit after adjusting for the effects of currency translation and disposals.

³ Adjusted earnings per ordinary share (‘EPSA’) growth is as reported, not underlying, and is stated before restructuring and rationalisation costs, amortisation of acquisition intangibles, profit on disposal of net assets held for sale and taxation thereon.  See note 2 to the financial statements.

⁴ All numbers given are for the quarter ended 29 September 2012 unless stated otherwise.

⁵ References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.

Enquiries

Investors 
Phil Cowdy  +44 (0) 20 7401 7646
Smith & Nephew 
 
Media 
Charles Reynolds  +44 (0) 20 7401 7646
Smith & Nephew 
 
Andrew Mitchell / Justine McIlroy +44 (0) 20 7404 5959
Brunswick 

 
Third Quarter Results

Our revenue was $952 million in the quarter, up 1% on an underlying basis year-on-year.  On a reported basis revenue was down -8%, reflecting a -4% negative currency impact and a -5% effect from the loss of revenues from the old Biologics and Clinical Therapies business following the Bioventus transaction.

Trading profit in the quarter was $207 million, up 10% underlying on last year (2011: $205 million).  This resulted in a Group trading profit margin of 21.7%, a strong performance, and 190 basis points ahead of 2011.  This margin improvement demonstrates the positive impact of the restructuring of Advanced Surgical Devices against the weak comparable last year.

Conditions across our Established Markets remained challenging, particularly in Europe which has further deteriorated from the previous quarter.  We delivered 2% growth in the US, in our other Established Markets we saw a -1% decline and in the Emerging and International Markets, 6% growth. 

The net interest receivable for the period was $2 million.  The tax rate for the quarter, and estimated effective rate for the full year, was 30.2% on profit before restructuring and rationalisation costs and amortisation of acquisition intangibles.  Adjusted attributable profit of $149 million is before these items and taxation thereon.

Adjusted earnings per share in the quarter grew 2% to 16.6¢ (83.0¢ per American Depositary Share, “ADS”), compared to 16.2¢ last year (81.0¢ per ADS).  Basic earnings per share was 15.0¢ (75.0¢ per ADS) (2011: 14.9¢).

Trading cash flow (defined as cash generated from operations less capital expenditure but before restructuring and rationalisation costs) was $264 million in the quarter, continuing its positive trend and reflecting a trading profit to cash conversion ratio of 128% (2011: 102%).

The Group had $379 million net cash at the period end, against net cash of $150 million at the end of Q2 2012 and net debt of $196 million at Q3 2011.

Advanced Surgical Devices global (“ASD”)

ASD delivered total revenue of $698 million in the quarter, flat on last year on an underlying basis (excluding a -3% currency headwind and -7% impact from the Bioventus transaction) (2011: $774 million).  Revenue in the US was flat, whilst our other Established Markets declined by -1% and overall we saw weaker market conditions, particularly in Europe.  We achieved a 3% increase in the Emerging and International Markets.  This increase, lower than recent quarters, mainly reflects distributor buying patterns and is against a strong comparable.  In China we continue to grow at over 20%.

Trading profit margin increased 330 basis points to 21.3% (2011: 18.0%) and trading profit increased to $149 million, as the benefits from our actions to restructure ASD come through against a weak comparable.  The US restructuring is well advanced and our programmes are fully underway in Europe, from which we expect to deliver further efficiency benefits in the future.

Like-for-like price pressure across our Hip and Knee Implant and Trauma franchises remained similar to previous quarters, at around -2%.  Price pressure was partially offset through mix gains.

Our Knee Implant franchise had a weaker quarter with a decline of -1% against a strong comparable.  This compares to an estimated market growth of 2%.   This reflects both the increased weakness in the European market where we have a proportionately larger market position, and also our position in the knee new product cycle.  Our new JOURNEY◊ II system is in clinical evaluation and full global market release is expected in late 2013 or early 2014.  The LEGION◊ Hinge Knee system with its leading kinematic design was launched in the US last quarter and will be introduced in Europe early next year.

In Hip Implants, excluding our metal-on-metal products, revenues were flat, an improvement on the prior quarter.  The total hip market was estimated to be flat at 0%.  The focus areas of our traditional hip implant portfolio, including the R3◊ Acetabular System, the POLARCUP◊ Dual Mobility Hip System, the SMF◊ Short Modular Femoral Hip System and products featuring our VERILAST◊ bearing technology, all saw good growth in revenue. Our new hip revision system, REDAPT◊, is currently in limited market release and is on track to launch in the US in late Q4 2012.

Revenue across the whole hip franchise was down -4%.  Sales of our BIRMINGHAM HIP◊ Resurfacing System (“BHR”) were down -36% compared with last year.

Our Sports Medicine Joint Repair franchise had a strong quarter, with revenue up 8%.  The US was particularly strong, with double digit revenue growth.  In the quarter we launched several new products.  This included the ENDOBUTTON◊ CL Ultra 10mm fixation device, which extends this leading range to the growing number of surgeons who use the anatomic technique for anterior cruciate ligament (ACL) knee repair.  We also obtained US FDA clearance for expanding the indications of six of our repair products, including HEALICOIL◊ PK Suture Anchor and the OSTEORAPTOR◊ Suture Anchor for use in hip arthroscopy.

Revenue in our Arthroscopic Enabling Technologies franchise fell by -3%, consistent with the prior quarter, as customers reduced their capital spending on visualisation equipment. 
 
Revenue from our Trauma franchise was up 2%, which was the same as the overall estimated market growth rate of 3% after the -1% impact of our expiring US royalties, as previously highlighted.  We have started implementing our refined Trauma commercial model, as we increase our focus and resources to address the opportunities we see in the high growth trauma and extremities markets.  In particular, we have started creating focused US sales teams to serve our trauma and extremities customers and their differing requirements.

Advanced Wound Management global (“AWM”)

AWM continued to deliver strong underlying growth, with revenue growing at 4% (excluding a -6% currency impact) to $254 million (2011: $258 million), double the estimated market rate of 2%. This was another good result set against a slightly weaker market.  In addition, we had a strong comparator quarter when we benefitted from the effects of the consolidation of our distributor network in Canada, which particularly impacted our Exudate and Infection Management franchises.

The US achieved growth of 11%, driven by a very strong performance from Negative Pressure Wound Therapy (“NPWT”).  The Established Markets outside the US were flat, we saw good performances from France, Germany and the Nordics, but Spain was very weak, declining at over -20%.  Our Emerging and International Markets grew strongly at 15%.  Exudate Management and Infection Management declined in the quarter at  1% and  6% respectively.

Growth from our NPWT portfolio was very strong.  We had a successful launch of RENASYS◊ NPWT and VERSAJET◊ in Japan in the quarter and expect to gain significant market share from our position in Japan as the market leader in advanced wound care.  More generally in NPWT we continue winning large hospital accounts in the US and Europe.  PICO◊ is now making a meaningful contribution to our growth rate and revenues.
In total we added 10 new products and line-extensions in the quarter. Last quarter we launched ALLEVYN◊ Life, which has been progressing well and we are expanding into additional countries and adding to the range.

Smith & Nephew has entered into a global settlement agreement with Wake Forest University that will resolve all existing NPWT patent litigation between the two parties. The terms of the agreement are confidential.

The AWM trading margin was 250 basis points lower than the prior year at 22.9% (2011: 25.4%) largely due to the settlement with Wake Forest University. Trading profit in the quarter was $58 million (2011: $66 million).

Nine Months to 29 September 2012

For the period, reported revenues were $3,060 million, with underlying growth up 2% compared to the same period last year (excluding a -2% currency headwind and -3% impact of Bioventus transaction) (2011: $3,164 million).

Reported trading profit for the nine month period was $693 million (2011: $682 million) with the trading profit margin up 110 basis points to 22.6%. 

The net interest charge was $nil.  The tax charge of $298 million is based upon an estimated effective rate for the full year of 30.2% on profit before restructuring and rationalisation costs, amortisation of acquisition intangibles and profit on disposal of net assets held for sale.  Adjusted attributable profit before these items and taxation thereon was $485 million and attributable profit was $587 million.

EPSA increased year-on-year to 54.2¢ (271.0¢ per ADS) (2011: 52.6¢).  Reported basic earnings per share was 65.6¢ (328.0¢ per ADS), compared to 49.6¢ (248.0¢ per ADS) in the same period of 2011.

Trading cash flow was $741 million compared with $657 million a year ago.  This is a trading profit to cash conversion ratio of 107% compared with 96%.

Outlook

We do not see any change in the outlook for the Group as a whole for 2012; however, we continue to see variation in performance at a product franchise level. 

In Advanced Wound Management, we are seeing excellent growth relative to the market, driven by NPWT market share gains. Conversely in hips we have seen stronger and longer-lasting BHR headwinds and we are seeing a slightly lower knee growth relative to market than we had expected.  Sports Medicine and Trauma continue performing in line with our expectations.

We are seeing significant challenges in Europe, where we have about 30% of our revenues, and expect this to continue.

We have consistently been delivering on our trading profit margin improvement, and our guidance for the full year is unchanged.

About Us

Smith & Nephew is a global medical technology business dedicated to helping improve people's lives.  With leadership positions in Orthopaedic Reconstruction, Advanced Wound Management, Sports Medicine and Trauma, Smith & Nephew has almost 11,000 employees and a presence in more than 90 countries. Annual sales in 2011 were nearly $4.3 billion.  Smith & Nephew is a member of the FTSE100 (LSE: SN, NYSE: SNN).

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, payors 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 integrating acquired businesses, and disruption that may result from 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 or competitive 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.

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