Smith & Nephew 2013 Q2 and Half Year Results

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the second quarter ended 29 June 2013.

* Q2 2013 comprises 64 trading days (2012: 63 trading days)

** H1 2013 comprises 126 trading days (2012: 127 trading days)

*** Underlying change includes the like-for-like Healthpoint growth and excludes impacts of the Bioventus transaction and currency translation

Q2 Financial Highlights

• Revenue of $1,074 million, up 3% on an underlying basis
• Trading profit of $232 million, with trading profit margin of 21.6% in-line with expectations
• EPSA was 18.0¢ (2012: 17.9¢)
• Advanced Wound Management strongly outperformed the market, driven by Bioactives and NPWT
• Advanced Surgical Devices delivered a good quarter in Sports Medicine Joint Repair
• Continued strong double digit growth in the Emerging and International Markets, with an acquisition underway in Turkey to further strengthen the platform
• Interim dividend of 10.4¢ per share, up 5% (2012: 9.9¢) 
• Share buy-back programme underway with $75 million spent to date

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

“The on-going implementation of our Strategic Priorities underpinned our performance in the quarter. We generated stand-out contributions from our areas of focused investment in the Emerging and International Markets and Negative Pressure Wound Therapy. As expected Orthopaedic Reconstruction had a slow quarter and we anticipate a better second half. Our major acquisition, Healthpoint Biotherapeutics, completed an excellent first six months as a Smith & Nephew business.

“Through the share buy-back programme and interim dividend we are delivering enhanced returns to our shareholders today. At the same time we continue to invest in the business, both for organic growth and enhancing our platform through agreed acquisitions in India, Brazil and now in Turkey. We are confident that our actions are reshaping the Group for further success.”

Analyst presentation and conference call

An analyst presentation and conference call to discuss Smith & Nephew’s second quarter results will be held at 8.00am GMT/9.00am BST/4.00am EST today, Thursday 1 August. 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/Q213. During the presentation a listen-only service will be available by calling +44 (0) 20 3427 1901 in the UK or +1 212 444 0412 in the US (passcode 5285751). Analysts should contact Jennifer Heagney on +44 (0) 20 7960 2255 or by email at jennifer.heagney@smith-nephew.com for conference call 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, amortisation of acquisition intangibles, profit on disposal of net assets held for sale and taxation thereon. See note 2 to the interim financial statements.
4. Earnings per share for the three month period and half year ended 30 June 2012 have been restated following the adoption of the revised IAS 19 Employee Benefits standard. As a result of the restatement, basic and adjusted basic earnings per share for the three months ended 30 June 2012 were reduced by 0.3¢ and 0.2¢ respectively and for the six month period ended 30 June 2012 both reduced by 0.5¢. See note 1 to the interim financial statements. 
5. All numbers given are for the quarter ended 29 June 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

Second Quarter Results

The on-going implementation of our Strategic Priorities underpinned our performance in the quarter. We generated stand-out contributions from our areas of focused investment in the Emerging and International Markets and Negative Pressure Wound Therapy (“NPWT”). As expected Orthopaedic Reconstruction had a slow quarter and we anticipate a better second half.Our major acquisition, Healthpoint Biotherapeutics, completed an excellent first six months as a Smith & Nephew business.

Our revenue was $1,074 million in the quarter, up 3% on an underlying basis or 4% reported year-on-year (2012: $1,029 million). There was a -1% foreign exchange headwind in the quarter. The one additional sales day year-on-year increased underlying revenue growth by an estimated 1%.

In the US we grew revenue by 3%. Revenue was flat in our Other Established Markets with Europe again weak. We generated strong revenue growth of 18% in the Emerging and International Markets, with the majority of countries delivering double-digit growth.

We continued to build our platform in the Emerging and International Markets, announcing the intention to acquire assets relating to the distribution of our Advanced Surgical Devices portfolio in Turkey. This will bring us closer to our customers in this important and fast growing market and follows agreements in Brazil and India announced last quarter.

Trading profit in the quarter was $232 million, up 1% underlying on the previous year (2012: $234 million). This resulted in a Group trading profit margin of 21.6%, in-line with our 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 $163 million is before these items and taxation thereon.

Adjusted earnings per share in the quarter was 18.0¢ (90.0¢ per American Depositary Share, “ADS”) (2012: 17.9¢ per share). Basic earnings per share was 14.3¢ (71.5¢ per ADS) (2012: 32.4¢).

Trading cash flow (defined as cash generated from operating activities less capital expenditure, but before acquisition related costs and restructuring and rationalisation costs) was $187 million in the quarter, reflecting a trading profit to cash conversion ratio of 81% (2012: 122%).

In-line with our new capital allocation framework, announced last quarter, we initiated a $300 million share buy-back programme and to date have completed the purchase of 6.4 million shares at a cost of $75 million.

The interim dividend is set by a formula and is equivalent to 40% of the total dividend for the previous year. The Board is therefore pleased to confirm that the interim dividend for the first half of 2013 is 10.4¢ per share (52.0¢ per ADS), compared with 9.9¢ last year. This will be paid on 29 October 2013 to shareholders on the register at the close of business on 11 October 2013.

Net debt was $281 million, up from $137 million at the end of Q1 2013, reflecting the payment of the 2012 final dividend in the quarter and the share buy-back programme.

Advanced Surgical Devices global (“ASD”)

ASD delivered total revenue of $741 million in the quarter, up 1% underlying on the same period last year (2012: $774 million). While revenue was down -1% in the US and -2% in our Other Established Markets, this was more than offset by a 16% increase in the Emerging and International Markets. Like-for-like pricing pressure across our markets was similar to recent quarters.

Trading profit was $170 million (2012: $177 million) with the trading profit margin increasing slightly to 22.9% (2012: 22.8%). The benefits of our structural efficiency programmes exceeded the impact of the US medical device excise tax and the cost of our investments during the quarter.

In our Knee Implant franchise revenue was down -1% against an estimated market growth rate of 2%. Revenue from our global Hip Implant franchise was also down -1%, with the estimated market growth rate 3%. This orthopaedic reconstruction performance continues to be impacted by our position in the product cycle versus our peers, our relatively high exposure to the weak European market and metal-on-metal headwinds.

During the quarter we began to invest more to improve the performance of these franchises in the Established Markets. The increased medical education and additional marketing activity announced at Q1 has started, including commencing a direct-to-consumer TV advertising campaign in the US. We have been expanding the JOURNEY II^◊BCS Knee System US launch by increasing production to bring more instrument sets to market. We expect the benefits of all of these measures to begin to come through as the year progresses.

Our Sports Medicine Joint Repair franchise sustained the good dynamic of recent quarters, with revenue growth of 6%. We anticipate a number of new product launches in this franchise during the second half of the year. Revenue in Arthroscopic Enabling Technologies was flat, reflecting a better sequential quarter in our Other Established Markets. In the Emerging Markets we launched a value camera system during the quarter.

Our Trauma franchise grew revenue by 2%. The underlying performance from this franchise is good, although growth this quarter was somewhat slower than previous quarters and below the market rate of 5% to 6%, as the benefit from a competitor recall ended and there was no repeat of the Q1 major tender win. The areas where we have recently taken action continue to perform well, and the additional extremities US sales reps recruited earlier in the year are completing their training and will start to enter the field during the second half of 2013.

Advanced Wound Management global (“AWM”)

AWM had another excellent quarter. Revenue was up 10% on an underlying basis to $333 million (2012: $255 million). We strongly outperformed the global market, which we estimate grew at 2%. Excluding Healthpoint, AWM grew at 5%.

Trading profit was $62 million (2012: $57 million). The trading profit margin was 18.7% reflecting the initial dilution from Healthpoint and increased investment in sales and R&D (2012: 22.4%).

We delivered revenue growth across all of our market segments. In the Established Markets the US delivered another quarter of double-digit growth, up 16%. In our Other Established Markets we grew revenue by 4%, with all regions contributing. Our Emerging and International Markets continued the positive trend of recent quarters, driving revenue up 25%.

In Advanced Wound Care revenue was 1% ahead at $211 million. We performed well in the Emerging Markets and saw improvements in Europe, despite the continued weakness of the overall market. 

In Advanced Wound Devices we grew revenue by 27% to $52 million. This franchise is primarily comprised of our NPWT portfolio, where we maintained excellent momentum across the Established Markets, particularly in Japan. Our PICO^◊ Single Use NPWT System delivered strong growth as we successfully targeted a wider range of indications.

In Advanced Wound Bioactives, which currently comprises Healthpoint’s products, we again exceeded our expectations, growing revenue by 35% to $70 million. Our increased promotional efforts behind SANTYL^◊ resulted in another strong quarter. The integration continues on track and we are investing more in the commercial team. As a result we now believe that full year growth will be above 30%.

We are continuing to launch new products and invest more in R&D across AWM. During the quarter we expanded our portfolio for the Emerging and International Markets, including ALLEVYN^◊ GB and VERSAJET^◊ in China and PICO in India and Mexico.

Half Year Results

For the half year, revenue was $2,149 million, an underlying 2% increase compared to the same period last year (2012: $2,108 million).

Trading profit for the period was $473 million (2012: $486 million) with the trading profit margin of 22.0% in line with our expectations.

The net interest income for the period was $2 million. The tax charge of $120 million is based upon an estimated effective rate for the full year of 29.8% on profit before restructuring and rationalisation costs, acquisition related costs and amortisation of acquisition intangibles. Adjusted attributable profit before these items and taxation thereon was $330 million and attributable profit was $272 million.

EPSA in the first half was 36.5¢ (182.5¢ per ADS) (2012: 37.1¢). Reported basic earnings per share was 30.1¢ (150.5¢ per ADS), compared to 50.2¢ in the same period of 2012.

Trading cash flow was $405 million compared with $477 million a year ago, a trading profit to cash conversion ratio of 86% (2012: 98%).

Outlook

Our overall outlook for the full year is unchanged. Within this, in terms of revenue growth relative to their respective markets, we expect Advanced Wound Management to strongly out-perform, Trauma to grow slightly ahead, Sports Medicine to be in-line and Orthopaedic Reconstruction to be below. We anticipate that the performance of Orthopaedic Reconstruction will improve in the second half of the year.

Through the share buy-back programme and interim dividend we are delivering enhanced returns to our shareholders today. At the same time we continue to invest in the business, both for organic growth and enhancing our platform through agreed acquisitions in India, Brazil and now in Turkey. We are confident that our actions are reshaping the Group for further success.

About Smith & Nephew

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 11,000 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.

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