Smith & Nephew First Quarter 2013 Results

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the first quarter ended 31 March 2013.

*Q1 2013 comprised 62 trading days (2012: 64 trading days)
**Underlying change includes the like-for-like Healthpoint growth and excludes impacts of the Bioventus transaction and currency translation

Highlights

• Revenue $1,075 million, up 1% on an underlying basis
• Trading profit was $241 million, with trading profit margin 22.4%, in-line with expectations
• New capital allocation framework announced, confirming commitment to further investment and acquisitions and a $300 million share buyback programme
• Advanced Wound Management performed strongly, with Healthpoint Biotherapeutics excelling in its first quarter as a Smith & Nephew business
• In Advanced Surgical Devices, Trauma again performed strongly and Orthopaedic Reconstruction was slightly weaker than anticipated, with targeted investments underway to improve growth 
• Strong growth in the Emerging and International Markets, with further investment planned to develop the platform and portfolio through acquisitions of an Indian trauma business (announced today) and our Brazilian distributor

Commenting on Q1, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:

“Smith & Nephew has consistently delivered revenue and earnings growth together with strong cash generation in the challenging markets of the last few years.  In light of this, and our confidence in the continued execution of our Strategic Priorities, we have undertaken a major review of our capital allocation framework.

“We will continue to invest in our growth products, franchises and geographies and maintain adequate headroom for further significant acquisitions.  We have increased the level of dividend and moved to a progressive policy.  Further to these commitments, today we are announcing the start of a share buy-back programme to return $300 million of surplus capital to our shareholders.”

Analyst presentation and conference call

An analyst presentation and conference call to discuss Smith & Nephew’s first quarter and preliminary results will be held at 8.30am BST/3.30am EST today, 2 May.  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/Q113. A podcast will also be available at the same address.  If interested parties are unable to connect to the web, a listen-only service is available by calling +44(0)20 7138 0815 (passcode 8142812) in the UK or +1718 354 1152 (passcode 8142812) in the US.  Analysts should contact Jennifer Heagney on +44 (0) 20 7960 2255 or by email at jennifer.heagney@smith-nephew.com for conference details.

Notes

¹ Unless otherwise specified as ‘reported’ all revenue growths throughout this document are underlying increases/decreases after adjusting for the effects of currency translation, and inclusion of the comparative impact of acquisitions and exclusion of disposals.  See note 3 to the interim 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 4 to the interim financial statements.  The underlying growth in trading profit is the growth in trading profit after adjusting for the effects of currency translation, inclusion of the comparative impact of acquisitions and exclusion of disposals.

³ Adjusted earnings per ordinary share (“EPSA”) growth is our reported trend measure and is stated before acquisition related costs, restructuring and rationalisation costs and amortisation of acquisition intangibles and taxation thereon.  See note 2 to the interim financial statements.

⁴ Earnings per share for the three month period ended 31 March 2012 have been restated following the adoption of the revised IAS 19 Employee Benefits standard. Basic and adjusted basic earnings per share were reduced by 0.2¢ as a result of the restatement. See note 1 to the interim financial statements.

⁵ All numbers given are for the quarter ended 30 March 2013 unless stated otherwise.

⁶ 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

For a full copy of the announcement with accounts, please click here

First Quarter Results

Our first quarter results built upon our achievements of last year, with the higher growth areas, where we have focused our recent investments, all performing strongly.  In particular, Healthpoint Biotherapeutics (“Healthpoint”) excelled in its first quarter as a Smith & Nephew business, we generated double-digit growth in the emerging markets, gained market share in negative pressure wound therapy (“NPWT”) and Trauma continued to improve.  Orthopaedic Reconstruction was slightly weaker than we anticipated, and we aim to improve performance during the year as we launch new products.

We delivered revenue of $1,075 million in the quarter, up 1% on an underlying basis.  Excluding Healthpoint, underlying revenue was down -1%.  The two fewer sales-days year-on-year reduced underlying revenue growth by an estimated -3%. 

In the Established Markets (US, Europe, Canada, Japan, Australia and New Zealand) our US performance benefitted from strong growth at Healthpoint.  This partially offset further weakness in Europe, with overall Established Markets revenue slightly down at -1%. 

We delivered a good quarter in our Emerging and International Markets, growing revenue by 19%, led by excellent growth in China and the Middle East.  We are investing further to build our platform and accelerate the development of products for the mid-tier in these markets, today announcing an agreement to acquire an Indian based Trauma business.  This follows last month’s agreement to acquire our Brazilian reconstruction, trauma and sports medicine distributor. 

Our trading profit was $241 million (2012: $252 million). The resulting Group trading profit margin of 22.4% was in-line with expectations.

The net interest income for the period was $1 million.  The tax rate for the quarter, and estimated effective rate for the full year, was 29.8% on profit before restructuring and rationalisation costs, acquisition related costs, and amortisation of acquisition intangibles.  Adjusted attributable profit of $167 million is before these items and taxation thereon. 

Adjusted earnings per share was 18.5¢ (92.5¢ per American Depositary Share, “ADS”) compared to 19.3¢ last year.  Basic earnings per share was 15.8¢ (79.0¢ per ADS) (2012: 17.8¢).

Trading cash flow (defined as cash generated from operations less capital expenditure, but before acquisition related costs and restructuring and rationalisation costs) was $218 million in the quarter, reflecting a trading profit to cash conversion ratio of 90%.  Net debt reduced to $137 million from $288 million at the end of Q4 2012.

Capital allocation framework

The Board of Smith & Nephew considers that the efficient use of capital on behalf of shareholders is an important objective and we set out below the new framework within which the Group will operate.
 
Smith & Nephew has consistently delivered revenue and earnings growth and strong cash generation in the challenging markets of the last few years.  During 2011 we announced our new Strategic Priorities, focusing our business on liberating resources to invest in driving greater growth.  In order to support this strategy, the Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value enhancing acquisitions. To the extent there is surplus capital it will be returned to shareholders.

Hence, Smith & Nephew will use the following capital allocation framework to prioritise the use of cash and ensure an appropriate capital structure:

• invest in the business to drive organic growth;
• maintain debt ratios which we believe would give Smith & Nephew a ‘solid’ investment grade rating;
• maintain our existing dividend policy.  During 2012 we reviewed the level of dividend paid, increasing it by 50%, and moved to a progressive policy;
• continue pursuing acquisitions in-line with our previously stated strategy and maintain sufficient financial resources to take advantage of such opportunities; and
• return surplus capital to shareholders, keeping this under review.

The Board believes that this framework will ensure a disciplined use of Smith & Nephew’s strong cash flow and support our Strategic Priorities to generate value for shareholders.

As at 30 March 2013 Smith & Nephew had net debt of $137 million.  In line with the above framework, and reflecting our confidence in successful execution of our Strategic Priorities, we are commencing a $300 million share buyback programme.

Acquisitions

Smith & Nephew has today announced an agreement to acquire a leading manufacturer and distributor of mid-tier, orthopaedic trauma products for the Indian market.  Adler Mediequip Private Limited, and with it the brands and assets of Sushrut Surgicals Private Limited, will give Smith & Nephew a well-established platform from which to provide and develop portfolios for the mid-tier market in the Emerging and International Markets.

This follows the 2 April 2013 announcement of an agreement to acquire assets related to the distribution business for our sports medicine, orthopaedic reconstruction and trauma products in Brazil, currently conducted through Pró Cirurgia Especializada.

Through these acquisitions we are implementing a number of our Strategic Priorities; to build leadership positions in the emerging markets, to supplement our organic growth through acquisitions, and to bring forward mid-tier portfolios for these countries.  The aggregate cost of both acquisitions is estimated to be approximately $70 million. 

Advanced Surgical Devices global (“ASD”)

ASD delivered revenue of $760 million in the quarter (2012: $839 million).  On an underlying basis this was -2% down, in part due to fewer selling days.  Revenue growth in the US was down -2%.  In our other Established Markets it fell -7%, as market conditions in Europe weakened from Q4 2012.  Our Emerging and International Markets continued to be strong, as we delivered 16% revenue growth.  This quarter like-for-like pricing pressure remained unchanged. 

Trading profit for the quarter was $184 million (2012: $202 million) and the trading profit margin of 24.3% was up 20bps year-on-year (2012: 24.1%).  This was mainly due to the continuing benefits of our structural efficiency programmes, started last year, which enabled us to offset the impact of the US medical device excise tax. 

In our Knee Implant franchise revenue growth was down -6%, against a strong comparable and an estimated Q1 2013 market growth rate of -1%.  Revenue growth from our global Hip Implant franchise was also -6%, against an estimated market growth rate of -1%.  Our core hips, excluding the BIRMINGHAM HIP◊ Resurfacing System (“BHR”), were down -3%. 

As disclosed previously, our Orthopaedic Reconstruction franchises face three headwinds this year: our position in the product cycle versus our peers; our significant exposure to a weakening European market with conditions deteriorating in Germany, our largest European market, during the quarter; and continuing metal-on-metal headwinds. 

We have been restructuring our Hip and Knee Implant franchises over the last 18 months.  We now have a much more efficient and lean platform, and have identified areas for improvement.  These include additional marketing spend and increased medical education.  We are also accelerating our investment in the JOURNEY II◊ BCS Knee System launch following excellent feedback at the AAOS annual meeting in March. 

In Sports Medicine our Sports Medicine Joint Repair franchise performed well, before adjusting for the two fewer sales days in the quarter, delivering 4% revenue growth.  The Arthroscopic Enabling Technologies franchise, which consists primarily of our core resection and visualisation products, saw a -7% decline in revenue as hospital budgets remained under pressure.

Our Trauma franchise sustained the positive dynamics of the previous quarter as we continued to build on our investment in this segment.  In the US we have added more than 50 new Trauma and Extremities sales reps, and benefitted from a competitor nail recall and a large tender win in the Middle East.  We launched a new Modular Rail System for external fixation and deformity correction during the quarter.  Revenue growth was 8%, ahead of the estimated market growth rate of 4%. 

Advanced Wound Management global (“AWM”)

We delivered strong underlying growth in AWM, with revenue up 12% to $315 million in the quarter, again outperforming the estimated global market growth rate of 2% including bioactives and 0% without. Excluding Healthpoint, AWM’s revenue growth rate was 5%.  Conditions across many of our European markets remained challenging. 

We delivered a good trading profit of $57 million (2012: $50 million).  The trading profit margin of 17.9% is diluted by Healthpoint (2012: 20.8% excluding Healthpoint).

We performed very well in the US, with revenue growth of 28%.  We also grew strongly in the Emerging and International Markets, where revenue was up 29%.  In the non-US Established Markets revenue growth was up 1% despite the challenges in Europe.

As previously announced we are now reporting AWM in three business units:
• Advanced Wound Care, including our exudate and infection management products;
• Advanced Wound Devices, primarily NPWT; and
• Advanced Wound Bioactives, currently comprising Healthpoint’s products.

In Advanced Wound Care revenue growth was up 1% to $200 million.  We continued to roll out our recently introduced ALLEVYN◊ Life range across the Established Markets.  In our infection management range, we focused on surgical site infections, publishing research demonstrating the efficacy of our ACTICOAT◊ Silver-Coated Antimicrobial Dressings against some antibiotic resistant organisms carrying the NDM-1 enzyme, often referred to as ‘superbugs’.

In Advanced Wound Devices we had another good quarter, growing revenue by 26% to $48 million.  We continue to gain market share in NPWT, with particularly good results in Japan, where we have recruited more sales reps, and are starting to target the Emerging and International Markets where we see many opportunities.  We launched ACTICOAT Flex for PICO◊ in the quarter, extending our nanocrystalline silver technology to surgical incisions that would benefit from both NPWT and antimicrobial barrier protection.

In Advanced Wound Bioactives we exceeded our expectations, growing revenue 49% to $67 million.  The integration of Healthpoint with Smith & Nephew is on track, with all milestones met.  We implemented a price increase for SANTYL◊, which took effect in the quarter and had a material impact on Q1 revenue as customers realised stocking opportunities ahead of the change.  We now expect growth for the full year to be ahead of our previous guidance at more than 20%.

Outlook

We see the outlook for the Group as a whole for 2013 as unchanged from the view which we set out with our 2012 Full Year Results in February.  We do expect, however, to see some variation in performance at the product franchise level.

In particular, in Advanced Wound Management, Healthpoint is performing more strongly than we previously guided. Conversely, we are seeing slightly lower growth in Orthopaedic Reconstruction, relative to the market, than we had expected.

2013 is a year of transition for Smith & Nephew, when we continue to deliver on our plans to reshape the Group for further growth.  Our new capital allocation framework is further evidence of our confidence in implementing this programme and creating greater value for our stakeholders.

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 around 10,500 employees and a presence in more than 90 countries.  Annual sales in 2012 were more than $4.1 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, 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.

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