Smith & Nephew First Quarter 2014 Results

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the first quarter ended 29 March 2014.

For a full copy of the announcement with accounts, please click here (PDF 500KB)

First Quarter Highlights

• Revenue $1,073 million, up 1% on an underlying basis
• Trading profit was $229 million, with trading profit margin 21.3%, in-line with expectations
• Results reflect pull-forward of US procedures to previous quarter, plus continuation of additional investment to drive growth
• Multiple new product launches, including next iteration of JOURNEY^◊ II Total Knee System
• ArthroCare Corporation acquisition on track to complete in mid-2014

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

“Our underlying revenue growth was 1% in the first quarter. We remain confident in our 2014 outlook as we roll-out our strong pipeline of new products, benefit from recent investments in marketing and the salesforce and see an increasing contribution from acquisitions.

“We are today confirming the outcome from our review to optimise our Group structure. The identified activities will support our Strategic Priorities by refining and simplifying our operational platform and delivering at least $120 million of annualised efficiency savings.” 

Analyst presentation and conference call

A conference call for financial analysts to discuss Smith & Nephew’s first quarter results will be held at 8.30am BST / 3.30am EST today, 1 May.  This can be heard live via audio webcast on the Smith & Nephew website and will be available on the site archive shortly afterwards. For those who wish to dial in to the call, a listen-only service is available by calling +44 (0) 20 3427 1901 in the UK or +1 646 254 3367 in the US (passcode 3058225). If you would like to participate in the Q&A please dial +44 (0) 20 3427 1919 in the UK or +1 646 254 3361 in the US (passcode 3058225).

Notes

¹ Certain items included in ‘Trading results’, such as trading profit, trading profit margin, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures reported in this announcement are explained in Note 8 and are reconciled to the most directly comparable financial measure prepared in accordance with IFRS.

² All numbers given are for the quarter ended 29 March 2014 unless stated otherwise.

³ References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.

⁴ Q1 2014 comprised 62 trading days (2013: 62 trading days).

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

First Quarter Trading results

Our first quarter revenue was $1,073 million, a 1% underlying increase (2013: $1,075 million). There was a -1% currency headwind and a net zero effect from acquisitions and disposals.

In our Established Markets revenue was down -1%. Within this, US revenue was down -2%, reflecting the effect of US surgical procedures being pulled forward into the final months of 2013. Revenue growth in our Other Established Markets was 1%.

The Emerging & International Markets continue to deliver good revenue growth, up 9% in the quarter. China again performed strongly, at over 30% revenue growth, and our 2013 Turkish and Indian acquisitions began to deliver benefits. Performance in Brazil is being disrupted as we transition from a distributor-led to a direct-sales business model.

In-line with expectations, our additional investments behind current and future products, and the slower revenue growth in the period, resulted in a trading profit of $229 million (2013: $241 million) and a trading profit margin of 21.3% (2013: 22.4%).

The net interest charge for the period was $3 million. The tax rate for the quarter, and estimated effective rate for the full year, was 28.9% on profit before acquisition related costs, restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items. Adjusted attributable profit of $158 million is before these items and taxation thereon.

Adjusted earnings per share was 17.7¢ (88.5¢ per American Depositary Share, 'ADS') compared to 18.5¢ last year. Basic earnings per share was 16.8¢ (84.0¢ per ADS) (2013: 15.8¢).

Trading cash flow (defined as cash generated from operating activities less capital expenditure, but before acquisition related costs and restructuring and rationalisation costs) was $78 million in the quarter. The trading profit to cash conversion ratio of 34% partly reflects inventory build, including significant investment in instrument sets to support the launch of the JOURNEY II Total Knee System. We expect to return to higher cash conversion ratios during the year.

Net debt was $216 million, down from $253 million at the end of Q4 2013. In March the Group signed a new $1 billion five-year revolving credit facility. The facility replaced the Group's existing $1 billion revolving credit facility which was due to mature in December 2015.

In February the Group announced its intention to acquire ArthroCare Corporation, a highly complementary sports medicine business - for a cost of approximately $1.7 billion. ArthroCare's technology and products will significantly strengthen our portfolio, and we will use our global presence to drive substantial new growth. We are on-track to complete the acquisition in mid-2014, assuming ArthroCare shareholder approval and satisfaction of other closing conditions.

Optimisation programmes

In-line with the commitment made at the time of our Q4 2013 results, we are today confirming the outcome from our six-month review to optimise our Group structure. The identified activities willsupport our Strategic Priorities by refining and simplifying our operational platform and delivering at least $120 million of annualised efficiency savings. Our bias is to re-invest the savings to drive further growth.

The activities will be delivered over the next four years for an expected one-off cost of $150 million.

There are four main areas of action:

• Aligning and improving our corporate functions – for example, we are implementing transformation programmes across Finance, Human Resources and Legal to support the Group more effectively.
• Driving procurement savings – including enhancing logistics, travel, fleet and facilities to deliver Group-wide efficiency improvements.
• Simplifying our operating model – for instance, we are streamlining our European business model by moving to a single General Manager for each country under a new Head of Europe.
• Optimising our facilities – ensuring our facilities plan matches our strategy and future aspirations 

Our on-going $150 million structural efficiency programme to liberate resources through the simplification of back-office support in the Advanced Surgical Devices division and refine our Advanced Wound Management manufacturing footprint has now delivered annualised benefits of more than $135 million. These savings have been used to increase our investment in R&D, the salesforce, marketing and medical education and in building our Emerging & International Markets platform. 

Advanced Surgical Devices global (“ASD”)

ASD delivered revenue of $758 million in the quarter, up 1% underlying (2013: $760 million).

Revenue in the US was down -2%. This was due in part to the pull forward of procedures seen in Q4 2013 ahead of changes in the US health insurance system. In our Other Established Markets, revenue was flat as conditions in Europe remained challenging. Our Emerging & International Markets continue to be strong, as we delivered 13% revenue growth. The like-for-like pricing pressure in the quarter remained unchanged across our markets. 

Trading profit for the quarter was $174 million (2013: $184 million), with the trading profit margin of 22.9% (2013: 24.3%) reflecting the increased investment behind our products, including a US TV advertising campaign in the quarter.

In our Knee Implant franchise revenue was flat in the quarter, below the market growth rate of 3%. In the US, knee revenue was down -1%, reflecting the significant slowdown in market growth rate. The JOURNEY^◊ II BCS Knee System continues to build momentum, but sales of our core knee range were down sequentially following a strong Q4 2013 performance.

We introduced the JOURNEY II Cruciate Retaining (‘CR’) Knee System at the American Academy of Orthopaedic Surgeons (‘AAOS’) annual meeting during the quarter. This extends the JOURNEY II Total Knee System to procedures that preserve the posterior cruciate ligament (‘PCL’), which accounts for approximately half of all knee replacement procedures. We alsoannounced an agreement with OrthoSensor to provide VERASENSE^TM Sensor Assisted Surgery Technology for improved soft tissue balancing when implanting our knee systems.

Revenue growth from our global Hip Implant franchise was flat, compared to the market growth rate of 2%. Revenue growth was 1% in our core hips, excluding the BIRMINGHAM HIP^◊Resurfacing System.

We announced the US launch of the POLARSTEM^◊ cementless stem for total hip replacementduring the quarter. This is one of the Group’s most popular stems globally and features a unique geometry and surface texture. We also invested more in marketing behind our hip portfolio, starting a TV advertising campaign featuring our VERILAST^◊ bearing surface, similar to our successful knee campaigns.

In Sports Medicine, the Sports Medicine Joint Repair franchise delivered 5% revenue growth. The HEALICOIL^◊ REGENESORB bio-composite suture anchor, launched last quarter, has been well received by customers. The Arthroscopic Enabling Technologies franchise, which consists primarily of our core resection and visualisation products, saw a -2% decline in revenue, similar to previous quarters. New products introduced in the quarter included the DYONICS^◊PLAN Hip Impingement Planning System, a revolutionary 3D software system that provides a standardised and repeatable way of assessing hip impingement treatment options based on data from low-dose CT scans.

In our Trauma & Extremities franchise revenue was down -1%, not unexpected as the comparable period included the benefit in the US from a competitor nail recall. Where we have added more Extremities sales reps in the US, we delivered double digit revenue growth. We are starting to launch a more comprehensive Hand and Wrist range to complement our ALL28 Foot and Ankle portfolio. We launched the TFCC FAST-FIX^◊ Kit during the quarter. This gives wrist surgeons performing triangular fibrocartilage surgery an all-inside repair solution that can minimise recovery time.

Advanced Wound Management global (“AWM”)

AWM revenue was flat in the first quarter at $315 million (2013: $315 million) against an estimated global market growth rate of 3%.

Revenue fell -4% in the US and grew 3% in our Other Established Markets. Revenue was flat in the Emerging & International Markets against a strong comparator driven by a large tender win last year. 

Trading profit was $55 million (2013: $57 million), resulting in a trading profit margin of 17.6% (2013: 17.9%). This partly reflects the slower Q1 revenue growth, as well as the continued investment in the HP-802 phase III trials which are now underway in Europe. 

In Advanced Wound Care revenue was down -6%. Our sales channel includes wholesaler distributors and typically stocking and destocking patterns roughly equal out. However, this quarter saw an unusual combination of distributor destocking in multiple countries, notably the US, UK and Japan. Some of this is a structural trend, partly due to distributor consolidation and partly due to distributors holding less stock than in the past.

In Advanced Wound Devices we grew revenue by 13%, as we benefitted from a stronger than normal VERSAJET^◊ performance following its launch in China. In Negative Pressure Wound Therapy, our single-use portable system PICO^◊ had a good quarter, while the traditional canister-based market remained challenging.

In Advanced Wound Bioactives we grew revenue by 8%, on-track for our full year mid-teens guidance. This reflects a strong comparator quarter as customers stocked SANTYL^◊ ahead of a significant price rise in early 2013. Our successful re-launch of REGRANEX^◊ Gel continued. Sales of OASIS^◊ were, as expected, adversely affected by the change in US re-imbursement rates for skin-substitutes.

Outlook

We remain confident in our 2014 outlook as we roll-out our strong pipeline of new products, benefit from recent investments in marketing and the salesforce and see an increasing contribution from acquisitions.

About us

Smith & Nephew is a global medical technology business dedicated to helping healthcare professionals improve people's lives. With leadership positions in Orthopaedic Reconstruction, Advanced Wound Management,Sports Medicine and Trauma & Extremities, Smith & Nephew has around 11,000 employees and a presence in more than 90 countries. Annual sales in 2013 were more than $4.3 billion. Smith & Nephew is a member of the FTSE100 (LSE: SN, NYSE: SNN).

For more information about Smith & Nephew Gynecology, please visit our website, follow @SmithNephew on Twitter or visit Smith & Nephew USA on Facebook.com 

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.

◊ Trademark of Smith & Nephew. Certain marks registered US Patent and Trademark Office.