Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the Fourth Quarter and Full Year ended 31 December 2012.
For a full copy of the announcement with results please click here (PDF 500KB)
| 3 Months* to | 12 Months to | ||||||
| 31 Dec 2012 $m | 31 Dec 2011 $m | Underlying change % | 31 Dec 2012 $m | 31 Dec 2011 $m | Underlying change** % | ||
| Revenue 1 | 1,077 | 1,106 | 3 | 4,137 | 4,270 | 2 | |
| Trading profit 2 | 272 | 279 | 2 | 965 | 961 | 6 | |
| Operating profit 2 | 213 | 214 | 846 | 862 | |||
| Trading margin (%) | 25.3 | 25.2 | 10bps | 23.3 | 22.5 | 80bps | |
| EPSA (cents) 3 | 21.6 | 21.9 | 75.7 | 74.5 | |||
| EPS (cents) | 15.8 | 15.7 | 81.3 | 65.3 | |||
| Divisional revenue 1 | |||||||
| Advanced Surgical Devices global | 797 | 835 | 3 | 3,108 | 3,251 | 2 | |
| Advanced Wound Management global | 280 | 271 | 4 | 1,029 | 1,019 | 4 | |
* Q4 2012 comprises 61 trading days (2011: 60). ** excludes effects of currency exchange rates and Bioventus transaction.
Financial Highlights
- Good underlying growth in Q4 with revenue up 3% at $1,077m and trading profit up 2% at $272m
- Strong Full Year - underlying growth in revenue up 2% to $4,137m and in trading profit up 6% to $965m
- Full Year trading profit margin up 80bps to 23.3%, driven by actions to implement strategic priorities
- Final Dividend up 50% to 16.2 cents per share, giving total 2012 dividends of 26.1 cents per share
Strategic Highlights
- Systemic efficiency programme progressing to plan, on track for $150m annual savings in 2014
- Maintained high rate of product introductions
- Emerging markets platform significantly strengthened
- Bioventus transaction realised resources for investment in near-term opportunities
- Healthpoint acquisition completed, giving strong position in fastest growing woundcare segment
Commenting, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:
“Smith & Nephew finished the year strongly, with both underlying Q4 revenue and trading profit up on the prior year and the completion of the Healthpoint Biotherapeutics acquisition. Advanced Wound Management grew at well above the market rate and the Group delivered double digit growth in the emerging markets. It was also pleasing that our Trauma performance improved.
“There is no doubt that we are benefitting from implementing our Strategic Priorities. Our choices to invest in products and geographic areas of higher growth are enabling us to drive greater value from existing resources. Looking at the Full Year, we generated good revenue and profit growth and a healthy 80 basis points increase in trading profit margin. The acquisition of Healthpoint, a leader in the fastest growing area of advanced wound management, clearly demonstrates our delivery in action.
“Our confidence in continued strategic progress, coupled with our financial strength, is reflected in the significant 50% uplift in our 2012 dividends.”
Analyst presentation and conference call
An analyst presentation and conference call to discuss Smith & Nephew’s fourth quarter and preliminary results will be held at 9:00am GMT/4:00am EST today, Thursday 7 February. 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/Q412. If interested parties are unable to connect to the web, a listen-only service is available by calling +44(0)20 7138 0813 (passcode 3548180) in the UK or +1718 354 1359 (passcode 3548180) 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 call details.
Notes
- 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.
- 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.
- Adjusted earnings per ordinary share (“EPSA”) growth is as reported, not underlying, and is stated before acquisition related costs, restructuring and rationalisation costs, amortisation of acquisition intangibles, profit on disposal of net assets held for sale, legal provision and taxation thereon. See note 2 to the financial statements.
- All numbers given are for the quarter ended 31 December 2012 unless stated otherwise.
- References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.
Enquiries
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Fourth Quarter Results
Smith & Nephew finished the year strongly, with both underlying Q4 revenue and trading profit up on the prior year and the completion of the acquisition of Healthpoint Biotherapeutics (“Healthpoint”), a leader in bioactive debridement, dermal repair and regeneration wound care treatments.
We grew underlying revenue by 3% year-on-year to $1,077 million (2011: $1,106 million). On a reported basis, revenue reflects currency exchange rates (-1%) and the effect of the Bioventus transaction (-5%). In addition, there was one extra trading day compared to Q4 2011 which, given where it fell, we estimate increased the Group’s growth rate by less than 1%.
Trading profit in the quarter was $272 million, up 2% underlying on last year (2011: $279 million). As a result, Group trading profit margin was 25.3%, a strong performance similar to last year (2011: 25.2%). For the Full Year, our margin was up 80 basis points to 23.3%, reflecting the early benefits of implementing our Strategic Priorities, in particular restructuring the Group to give us the right commercial models and cost structure.
We saw little change in the business environment in our Established Markets in the quarter, with Europe continuing to be challenging. We delivered 1% growth in the US, 2% in our Other Established Markets and 14% in the Emerging and International Markets, with revenue in China up an impressive 30%. Advanced Wound Management grew at well above the market rate and Trauma delivered an improved performance.
The net interest income for the period was $2 million. The final tax rate for 2012 was 29.9%, resulting in a 29.2% rate for the quarter on profit before acquisition related costs, restructuring and rationalisation costs and amortisation of acquisition intangibles. Adjusted attributable profit of $194 million is before these items and taxation thereon.
Adjusted earnings per share in the quarter was 21.6¢ (108¢ per American Depositary Share, “ADS”), broadly in-line with last year (2011: 21.9¢). Basic earnings per share was 15.8¢ (79¢ per ADS) (2011: 15.7¢).
Trading cash flow (defined as cash generated from operations less capital expenditure but before restructuring and rationalisation costs and acquisition related costs) was $258 million in the quarter, reflecting a trading profit to cash conversion ratio of 95%, compared with 65% a year ago.
The Group had $288 million of net debt at the period end, against net debt of $138 million at the end of Q4 2011 and $379 million net cash at the end of Q3 2012. The $782 million purchase of Healthpoint in the period was financed from existing cash and debt facilities.
In 2012 the Board approved a step-change increase in the level of dividend pay-out and a move to a progressive dividend policy. The Board is recommending a 50% increase in the Final Dividend to 16.2¢ per share (81¢ per ADS), reflecting our confidence in continued strategic progress and our financial strength.
Advanced Wound Management global (“AWM”)
AWM again performed strongly, with revenue up 4% to $280 million (2011: $271 million), against an estimated flat market.
Despite subdued market conditions we performed well in Europe and our Other Established Markets with revenue growth of 4%. In the US revenue was flat in the quarter. The Emerging and International Markets grew 10%. Exudate Management grew at 1% and Infection Management was down -6%.
Our expansion in Negative Pressure Wound Therapy (“NPWT”) continued as we invested further in this area. We made good progress in Japan following the launch of RENASYS◊ at the end of August. In Europe, where both our established and newer products positively contributed, we believe we have now taken a 25% share of the segment.
We added six new products and line-extensions in the quarter, while the roll out of recent introductions, such as ALLEVYN◊ Life and VERSAJET◊ II Hydrosurgery System, continues apace. VERSAJET performed well across a number of markets.
The AWM trading profit for Q4 was $72 million (2011: $75 million), giving a trading profit margin of 25.8% (2011: 27.9%). This reflects the investment in new launches, such as NPWT in Japan, as well as the effect of the product mix within the quarter on our gross margin.
The strong Q4 AWM performance does not include Healthpoint, which we acquired in late December 2012. It delivered revenue of $190 million in 2012, up from $151 million in the prior year. Healthpoint trading will be reported within AWM from Q1 2013.
Advanced Surgical Devices global (“ASD”)
ASD delivered total revenue of $797 million in the quarter, up 3% underlying on the same period last year (2011: $835 million). Revenue in the US was up 1%, while in our Other Established Markets it was in-line with last year, with good growth in Japan and Australia. The performance in the Emerging and International Markets was strong, with revenue up 16%.
Trading profit was $200 million (2011: $204 million). The trading profit margin increased 70 basis points to 25.1% (2011: 24.4%), as we benefited from our actions to restructure ASD earlier in the year.
Like-for-like price pressure across our Hip Implant, Knee Implant and Trauma franchises remained similar to previous quarters, at around -2% in aggregate, including the effects of the recent biennial price reductions in Japan. We continued to see price pressure partially offset through mix gains.
The performance of our Knee Implant franchise reflected our position in the product cycle and our relative strength in Europe, returning growth of 2% against a market growth rate of 3%. Highlights in the quarter included VISIONAIRE◊, our patient matched instrumentation sets, which continued to grow double-digit year-on-year, both in the US and OUS, the latter of which now represents over one-fifth of total sales. Our new LEGION◊ HK (hinge knee) also contributed to our growth, and we extended the LEGION system with the launch of LEGION Narrow Femoral Components with OXINIUM◊. These feature our proprietary VERILAST◊ Technology, offering the potential for implants with better fit and wear performance.
In our Hip Implant franchise revenue grew 3% excluding our BIRMINGHAM HIP◊ Resurfacing (“BHR”) system (-2% including BHR). This was a sequential improvement on a flat Q3 and compared to a Q4 market rate of 2%. Highlights included good growth from the ANTHOLOGY◊ Hip and R3◊ Acetabular systems and the launch of the REDAPT◊ Revision Femoral System, strengthening our position in the revision market which is growing faster than primary hips. BHR sales were 40% lower year-on-year and it now accounts for less than 8% of franchise revenue.
Sports Medicine Joint Repair revenue was up a healthy 7%. Growth in knee repair, particularly the FAST-FIX◊ 360 Meniscal Repair System, was good, as was revenue from the HEALICOIL◊ PK Suture Anchor. Arthroscopic Enabling Technologies revenue was in-line with last year.
Our Trauma franchise continued on the path to recovery, growing 7% in the quarter, compared to the market rate of 3%. This good performance included the early benefits of our actions to refine the commercial model to address the opportunities we see in the higher growth trauma and extremities markets. In particular, in the US we are recruiting more sales representatives and have created specialist sales teams to serve the differing requirements of our trauma and extremities customers.
Full Year Results
Looking at the Full Year, we delivered healthy underlying revenue and profit growth and a strong uplift in trading profit margin.
Our revenue was $4,137 million, with underlying growth up 2% year-on-year (excluding a -2% currency headwind and -3% impact of the Bioventus transaction) (2011: $4,270 million).
Reported trading profit was $965 million, up 6% underlying on last year (2011: $961 million). The trading profit margin was up 80 basis points at 23.3% (2011: 22.5%), as we benefitted from implementing the Strategic Priorities.
AWM delivered $1,029 million of revenue, up 4% year-on-year on an underlying basis (2011: $1,019) and ahead of the estimated market rate of 1%. Revenue was up 7% in the US, 2% in Other Established Markets and 11% in the Emerging and International Markets. Exudate Management grew at 1% over the year, while Infection Management was down -2%. Other AWM grew 7% with NPWT performing strongly. We reached a global settlement agreement with Wake Forest University that resolved all existing NPWT patent litigation between us. AWM delivered more than 30 new products or line extensions during 2012.
ASD delivered $3,108 million of revenue, up 2% year-on-year on an underlying basis (2011: $3,251 million). We grew revenue by 1% in both the US and Other Established Markets, and 10% in the Emerging and International Markets. Our Knee Implant franchise grew 3% across the year. The Hip Implant franchise declined -3% in the face of the continuing metal-on-metal headwinds. Trauma grew 3%, with the performance substantially improving in the second half of 2012 as our actions to return this franchise to growth took effect. Sports Medicine Joint Repair continued to be a strong market for us, growing at 8%. Arthroscopic Enabling Technologies revenue was -2%. In the Other franchise, growth of 5% included a four month contribution from US Clinical Therapies (ahead of the creation of Bioventus) and good growth from our small gynaecology business.
The net interest income for the year was $2 million. The tax charge of $371 million is based upon an effective rate for the full year of 29.9% on profit before acquisition related costs, 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 $679 million and attributable profit was $729 million.
Adjusted earnings per share increased by 2% year-on-year to 75.7¢ (378.5¢ per ADS) from 74.5¢ in 2011. Reported basic earnings per share was 81.3¢ (406.5¢ per ADS) compared to 65.3¢ in the same period of 2011. The Interim Dividend (9.9¢) and proposed Final Dividend (16.2¢) are in aggregate up 50% to 26.1 cents per share.
Trading cash flow was $999 million compared with $838 million a year ago. This is a trading profit to cash conversion ratio of 104%, compared with 87% in 2011.
Strategic Priorities
In August 2011 we announced an ambitious set of Strategic Priorities to make Smith & Nephew fit and effective for the future. We made good progress throughout 2012 delivering on these commitments, refining our commercial models and cost structure to liberate resources to enable us to invest in higher growth products, franchises and geographies.
Our strong growth in the emerging market countries validated our focus here. We have recruited additional experienced leadership to drive us into the BRIC countries and invested in new headquarters, and in developing the right business model to serve the needs of local customers effectively. Throughout 2012 we made progress registering and selling more of our existing products, and are developing new portfolios specifically for the middle tier in these countries.
We have made significant improvements to our cost base, removing duplication and creating a more effective, engaged organisation. Our systemic efficiency programme to liberate $150 million of annual cost savings by the end of 2014 delivered around half of the benefit this year, principally from ASD, and remains on track.
We completed the spin-out of our Biologics and Clinical Therapies business into Bioventus, allowing it to continue with its longer-term development projects, while we retained access to this important area and realised resources for reinvestment in nearer-term opportunities.
Throughout 2012 we maintained a high rate of innovation, launching many new products. These included advances in hip and knee implants and trauma systems, further innovations in sports medicine and more than 30 new products and line extensions in AWM. We increased our investment in R&D to 4.1% of revenue and expect to invest more again in 2013.
We have been successful in reducing our cost of goods to combat the effects of continued price pressure. This has been achieved through a range of programmes including manufacturing efficiencies. The transfer of orthopaedics manufacturing in Beijing to our new facility was completed ahead of schedule, as was the significant expansion of our wound management manufacturing plant in Suzhou.
We completed a number of acquisitions in 2012, most notably Healthpoint. This had compelling strategic and financial rationale. It gives us a strong position in bioactives, the fastest growing area of advanced wound management. It brought a complementary range of bioactive debridement, dermal repair and regeneration products led by Collagenase SANTYL◊ Ointment, an enzymatic debrider for dermal ulcers and burns. It added an established R&D capability in next-generation bioactive therapies for the treatment of chronic wounds. And it doubled our US AWM sales force, strengthening our commercial scale and capabilities. We also secured a number of smaller acquisitions that either gave us complementary products to augment our offer to customers, or enhanced our ability to innovate.
In 2013 we will continue to implement our Strategic Priorities, building upon the progress made in 2012. We are maintaining our focus on delivering efficiency improvements and strengthening our operational platform. We are also accelerating our investment in the higher growth opportunities within our existing portfolio, in geographic expansion, in more R&D and in further acquisitions.
Outlook
We expect the market conditions seen in 2012 broadly to continue in 2013.
During 2013, we expect to maintain our excellent record in Advanced Wound Management and again grow at above the market rate.
We expect Trauma and Extremities to continue to build upon our recent investment and grow slightly ahead of the market rate.
In Sports Medicine we anticipate growing at around the market rate, with a stronger finish to the year, as we introduce new products in the second half of 2013.
Orthopaedic Reconstruction is likely to grow more slowly than the market, reflecting our position in the product cycle and the metal-on-metal headwinds, albeit with performance improving throughout the year as we realise the benefits of recent and planned product launches.
We exceeded our trading profit margin expectation for 2012 and remain focused on creating a business capable of delivering a sustainable 24% margin.
During 2013, we will gain further benefit from our efficiency programme, and continue investing for growth. We will also see the first effects of the US Medical Device excise tax, and the Healthpoint acquisition, which is initially dilutive to the Group margin. Taking all these factors together, our trading profit margin in 2013 is expected to be below the 23.3% achieved in 2012.
Smith & Nephew exited 2012 with a much stronger platform than we entered the year. In 2013 we will continue to focus on our Strategic Priorities to deliver greater value for our Company and 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 almost 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 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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