We are delivering on our strategy to rebalance Smith & Nephew
Smith & Nephew plc (LSE: SN, NYSE: SNN) results for the third quarter ended 27 September 2014.
For a full copy of the announcement with accounts, please click here (PDF 680KB)
| 3 months to | 9 months to | ||||||
| 27 Sep 2014 $m | 28 Sep 2013 $m | Underlying growth % | 27 Sep 2014 $m | 28 Sep 2013 $m | Underlying growth % | ||
| Trading results1 | |||||||
| Revenue | 1,148 | 1,027 | 3 | 3,368 | 3,176 | 2 | |
| Divisional revenue | |||||||
| Advanced Surgical Devices global | 816 | 696 | 4 | 2,384 | 2,197 | 3 | |
| Advanced Wound Management global | 332 | 331 | -1 | 984 | 979 | -1 | |
| Trading profit | 246 | 222 | 3 | 730 | 695 | 1 | |
| Trading profit margin (%) | 21.4 | 21.6 | 21.7 | 21.9 | |||
| EPSA (cents) | 19.5 | 17.1 | 57.6 | 53.6 | |||
| Reported results | |||||||
| Revenue | 1,148 | 1,027 | 3,368 | 3,176 | |||
| Operating profit | 160 | 180 | 523 | 575 | |||
| EPS (cents) | 11.4 | 13.6 | 38.2 | 43.6 | |||
Third quarter highlights1
- Revenue was $1,148 million, up 3% underlying and 12% on a reported basis
- Trading profit was $246 million, up 3% underlying and 10% on a reported basis
- Trading profit margin was 21.4%, down 20bps
- EPSA 19.5¢, up 14%
- Performance accelerated in Sports Medicine and Trauma & Extremities, driven by recent product introductions and investment in the sales force
- US orthopaedic reconstruction grew at 4%, with Hip Implants up 6%
- Emerging & International Markets revenue up 20%; improved contribution from Brazilian acquisitions
- $188 million cash repayment of loan and interest received after quarter-end from Bioventus
Commenting on Q3, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:
“We are delivering on our strategy to rebalance Smith & Nephew by strengthening our higher growth platforms, which currently represent more than half the business, up from just 35% three years ago. Sports Medicine Joint Repair and Advanced Wound Bioactives both produced double-digit growth in the quarter, and the emerging markets business increased revenue by 20%. We are pleased with our momentum, enhanced by Group optimisation, tax improvement and the acquisition of ArthroCare. EPSA grew 14% in the quarter.”
Analyst conference call
An analyst presentation and conference call to discuss Smith & Nephew’s third quarter results will be held at 1.15pm GMT/9.15am EST on Thursday 30 October. This can be heard live via audio webcast on the Smith & Nephew website at www.smith-nephew.com/results and will be available on the site archive shortly afterward. For those who wish to dial in to the call, a listen-only service is available by calling +44 (0) 20 3427 1916 in the UK or +1 646 254 3360 in the US (passcode 3625151). If you would like to participate in the Q&A please dial +44 (0) 20 3427 1908 in the UK or +1 646 254 3364 in the US (passcode 3625151).
Enquiries
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| Ingeborg Øie | +44 (0) 20 7401 7646 |
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| Media |
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| Charles Reynolds | +44 (0) 20 7401 7646 |
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| Deborah Scott / Matthew Cole | +44 (0) 20 3727 1000 |
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Notes
- 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.
- Unless otherwise specified as ‘reported’ all revenue growth throughout this document is ‘underlying’ after adjusting for the effects of currency translation and including the comparative impact of acquisitions and excluding disposals. All percentages compare to the equivalent 2013 period.
- All numbers given are for the quarter ended 27 September 2014 unless stated otherwise.
- References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.
- Q3 2014 comprised 63 trading days (2013: 63 trading days).
Third quarter Trading results
Our third quarter revenue was $1,148 million (2013: $1,027 million), an increase of 3% on an underlying basis and 12% on a reported basis. Foreign exchange and acquisitions added 0% and 9% respectively to the reported growth rate.
Sports Medicine and Trauma & Extremities performed well as we benefitted from recent product launches and investment in the US sales force. Orthopaedic Reconstruction delivered a solid quarter, with strong growth in US Hips. Our performance in Advanced Wound Management was, as expected, held back by US Negative Pressure Wound Therapy (‘NPWT’).
Group revenue growth from our Established Markets was flat. Within this, revenue was up 2% in the US and down -2% in Other Established Markets. In the Emerging & International Markets we continue to deliver strong growth, with revenue up 20% in the quarter, including an improving contribution from our distributor acquisitions in Brazil.
Trading profit was $246 million (2013: $222 million), up 3% underlying and 10% on a reported basis. The trading profit margin was 21.4% (2013: 21.6%). The reported operating profit of $160 million (2013: $180 million) reflects integration costs and increased amortisation of acquisition intangibles from the acquisition of ArthroCare, as well as restructuring and rationalisation and legal and other items incurred in the quarter (see note 8 to the Interim Financial Statements).
The estimated tax rate for the full year is 28.0% on Trading results. Since 2012 our full-year effective tax rate has been reduced by approximately 200bps, and we expect it to reduce by a further 150-200bps over the next two years, notwithstanding any changes to applicable tax legislation.
Adjusted earnings per share was 19.5¢ (97.5¢ per American Depositary Share, ‘ADS’), up 14% (2013: 17.1¢). Basic earnings per share was 11.4¢ (57.0¢ per ADS) (2013: 13.6¢). On 14 October 2014 Smith & Nephew changed its ADS ratio from one ADS per five ordinary shares to one ADS per two ordinary shares. There was no change to the underlying ordinary shares. The adjusted earnings and basic earnings per ADS calculated according to the new ratio are therefore 39.0¢ and 22.8¢ respectively.
Trading cash flow (cash generated from operating activities less capital expenditure, but before acquisition related costs, restructuring and rationalisation costs and other exceptional costs) was $158 million in the quarter. The trading profit to cash conversion ratio was 64%.
The net interest charge for the period was $5 million. Net debt was $1,880 million, down from $1,911 million at the end of Q2 2014.
Advanced Surgical Devices global (‘ASD’)
ASD delivered revenue of $816 million in the quarter, up 4% (2013: $696 million).
Revenue growth was up 5% in the US and down -2% in Other Established Markets. Our Emerging & International Markets delivered revenue growth of 21%. The like-for-like pricing pressure in the quarter remained unchanged across our markets.
Trading profit for the quarter was $187 million (2013: $157 million). The trading profit margin of 22.8% (2013: 22.5%) reflects sales growth and the benefits of our efficiency programmes.
We grew revenue in our global Hip Implant franchise by 1%, against a market growth rate of 3%. In the US our hip revenue was up 6%, our strongest quarterly growth for more than four years, as we benefitted from strong demand for our unique VERILAST◊ hip products.
In our Knee Implant franchise revenue was up 1%, against a market growth rate of 4%. In the US, knee revenue was up 3%, with the JOURNEY◊ II Total Knee System continuing to be well received. Performance in Europe was adversely impacted by a packaging issue affecting the RT-PLUS◊ knee, particularly in Germany, which has now been addressed.
Syncera, the innovative commercial solution for Orthopaedic Reconstruction announced with our Q2 results, is making good progress.
In Sports Medicine Joint Repair we delivered 11% revenue growth. We benefitted from the success of a number of recent product launches, such as the HEALICOIL◊ REGENESORB bio-composite suture anchor. We continue to innovate, extending our SUTUREFIX◊ ULTRA all-suture fixation device for instability repair through the launch of the only soft anchor for hip repair currently available.
In Arthroscopic Enabling Technologies revenue grew 3%, an improvement over recent quarters, and now including the radio frequency Coblation◊ portfolio acquired with ArthroCare.
The integration of ArthroCare is progressing well. Smith & Nephew is hosting a Capital Markets Event on 11 November 2014 where institutional investors and analysts will be able to learn more about this and the enhanced Sports Medicine Joint Repair/Arthroscopic Enabling Technologies business. More details of the event are available on the Smith & Nephew website.
Our Trauma & Extremities franchise delivered 8% revenue growth, building on the good momentum of the previous quarter. Extremities delivered strong growth, with the HAT-TRICK◊ Lesser Toe Repair System, launched earlier this year, being well received. A number of additional new products are now on the market, including the D-RAD SMART PACK◊ System that offers sterile single-use instrument kits and implants for the treatment of distal radius fractures.
In our Other ASD franchise, which includes Ear, Nose & Throat (‘ENT’) and Gynaecology, we increased revenue by 6%.
Advanced Wound Management global (‘AWM’)
In AWM revenue was $332 million (2013: $331 million), down -1%. The estimated global market growth rate was 2%. Our revenue fell -8% in the US and -1% in our Other Established Markets. We delivered 19% revenue growth in our Emerging & International Markets.
The AWM performance reflects the effects of the US RENASYS◊ distribution hold, announced in June. As a result, revenue in Advanced Wound Devices fell -17% in the quarter. This overshadowed an excellent quarter for our single-use disposable NPWT system PICO◊. Our decision to maintain and transition the sales force to other products, including PICO, diluted the AWM trading profit margin in Q3. This was 17.9% (2013: 19.9%); the Q3 trading profit was $59 million (2013: $65 million).
In Advanced Wound Care revenue was down -3%, an improvement from Q2 that reflects a better dynamic, led by ALLEVYN◊ Life and strong sales in the emerging markets. The new management team is focused on improving our execution in the Established Markets.
In Advanced Wound Bioactives we delivered revenue growth of 14%. The re-launched REGRANEXà Gel is performing well. SANTYL◊ continued to benefit from distributor stocking patterns, as seen last quarter, and we expect this pull-forward effect to reverse next quarter. The top-line result of a US Phase 3 study of HP802-247, a living cell spray-on therapy designed to stimulate healing of venous leg ulcers, was announced after the quarter end. A full analysis is underway to determine why HP802-247 did not meet the primary endpoint in this trial and to decide the best route forward for this programme.
Bioventus update
In May 2012 we completed the spin-out of our Biologics and Clinical Therapies business into Bioventus, alongside a consortium led by Essex Woodlands, a specialist healthcare growth equity and venture capital firm. This was to enable Bioventus to continue to focus on R&D opportunities in orthobiologic therapies whilst releasing resources for Smith & Nephew to invest in near-term programmes.
At the time of creation, Smith & Nephew received $103 million in cash and a $160 million 5-year loan-note from Bioventus. The $160 million loan-note, plus $28 million of accrued interest, was repaid in October 2014 following a successful external refinancing and will be reflected in our Q4 net debt. We continue to hold 49% of investor equity in Bioventus, which is now established as a stand-alone growth platform for orthobiologic therapies with a number of exciting assets in its R&D pipeline.
Bioventus has made a number of strategic acquisitions to accelerate its development. These included in July 2013 an exclusive, worldwide license for Pfizer’s bone morphogenetic protein (BMP) portfolio, including a next-generation BMP in development. And in October 2014 it acquired the OsteoAMP® business from Advanced Biologics LLC. This is a tissue based bone biologic product that is used by spine surgeons to promote natural bone growth and healing. Bioventus continues to market the EXOGEN® ultrasound bone healing system and two joint fluid therapy products, delivering solid results.
Nine months to 27 September 2014
For the nine month period, reported revenues were $3,368 million, up 2% on an underlying basis year-on-year (2013: $3,176 million). Trading profit was $730 million (2013: $695 million) with the trading profit margin 21.7% (2013: 21.9%). Operating profit was $523 million (2013: $575 million).
The net interest charge was $12 million (2013: income of $3 million), mainly reflecting the financing of the ArthroCare acquisition. The tax charge of $161 million (2013: $176 million) is based upon an estimated effective rate for the full year of 28.0% on Trading results. Adjusted attributable profit was $514 million (2013: $484 million) and attributable profit was $341 million (2013: $394 million).
Adjusted earnings per share in the period was 57.6¢ (288.0¢ per ADS) (2013: 53.6¢). Reported basic earnings per share was 38.2¢ (191.0¢ per ADS) (2013: 43.6¢). For the nine-month period the adjusted earnings and basic earnings per ADS calculated according to the new ADS to ordinary share ratio (effective 14 October 2014) is 115.2¢ and 76.4¢ respectively.
Trading cash flow was $415 million, compared with $596 million a year ago, representing a trading profit to cash conversion ratio of 57% (2013: 86%).
Outlook
Our outlook for the Group for the full year remains unchanged.
The quarter positively reflects our strategy to rebalance towards higher growth markets, and we have many actions underway to further build upon these achievements.
About Smith & Nephew
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 14,000 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, please visit our corporate website www.smith-nephew.com, follow @SmithNephewplc on Twitter or visit SmithNephewplc 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.
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