Smith & Nephew SNATS, Inc. (SNN)

SNN 
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Smith & Nephew (SNN)

Q4 2012 Earnings Call

February 07, 2013 4:00 am ET

Executives

Olivier Bohuon - Chief Executive Officer, Director, Chairman of Disclosures Committee, Chairman of Executive Risk Committee and Member of Nominations Committee

Neil Taylor

Phil Cowdy - Group Director of Corporate Affairs

Analysts

Charles Weston - Numis Securities Ltd., Research Division

Michael K. Jungling - Morgan Stanley, Research Division

Ingeborg Øie - Jefferies & Company, Inc., Research Division

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Christoph Gretler - Crédit Suisse AG, Research Division

Martin Wales - UBS Investment Bank, Research Division

Edward Ridley-Day - BofA Merrill Lynch, Research Division

Thomas M. Jones - Berenberg Bank, Research Division

David Adlington - JP Morgan Chase & Co, Research Division

Presentation

Olivier Bohuon

Good morning, everyone. I'm Olivier Bohuon, the Chief Executive Officer, Smith & Nephew. I'm here with Neil Taylor, our Group Financial Controller; Phil Cowdy; and I'm pleased to have here with us, Julie Brown, our new CFO. She will be in mute mode today. So don't even think about asking questions to her. So we're very pleased to have Julie on the board, and I'm also very pleased also to have here our Chairman, Sir John Buchanan, with us here. John is also very pleased to have a new CFO on board, and so welcome, Julie.

I will cover the highlight and then hand over to Neil to take you through the numbers. When Neil has finished, I will come back and update you on the progress we have made this year on implementing our strategic priorities and I will give you some results on 2013. As usual, we'll take the questions later.

Last year, I said 2012 would be a year of balancing the delivery of our strategic priorities while managing our more immediate operation challenges and opportunities, and so it has proved to be. I'm pleased with our performance this year, in particular how we have liberated resources where appropriate and started investing in growth drivers of the future. These investments include individual products like negative pressure, broader franchises such as sports medicine and Trauma and Extremities, geographic expansion in the emerging markets and acquisitions, like the recently completed Healthpoint acquisition. Financially, we have grown all our key metrics. Underlying revenue growth was up 2%. Our trading profit margin increased 80 basis point to 23.3%. Our adjusted earnings per share was up 2%, and we initiated a step change in our dividend payout, increasing it 50%. Added to this, our free cash flow is excellent at over $600 million this year. I will talk more about 2013 later in my presentation. In summary, I see it as a year of continuing to implement the priorities and building on the strong platform we established in 2012.

Now turning to the highlights of Q4. We delivered a strong final quarter 2012. Highlights include double-digit growth in the emerging markets, advanced wound management again growing at well above the market trade, and improved performance in the trauma market. Our Q4 revenue was up and underlying 3% to over $1 billion, only slightly flattened by an extra selling day. This revenue growth does not include any contribution from the acquisition of Healthpoint, which completed at the end of the year. Our trading profit was $272 million. This represents a margin of 25.3%, slightly ahead of last year achievement. Adjusted earnings per share was $0.216, similar to prior year. After paying the Healthpoint consideration of $782 million, we finished the year with net debt of around $300 million. In line with the announcement on our dividend policy we made this summer, we are increasing our final dividend by 50% and proposing $0.162 per share. Finally, we promised to provide more details on our capital allocation framework in the first half of this year. We'll do that with the Q1 result presentation in May.

This slide capture our underlying growth in the quarter, on the left-hand side geographically, and on the right by product franchise. In the U.S., we grew at 1%. In the rest of our established market, we grew at 2%, but the weak macro environment we continue to see in Europe was more than offset by strong results in Japan and Australia. Growth in our emerging and international markets was strong at 14%, our best quarter this year. Growth in China, our largest market, was particularly pleasing at plus 30%. On the right, across most of our product franchises, we delivered growth rate that was the same or better than the previous quarter.

I will now turn to the next slide to look at our hip and knee franchise. Our global knee franchise increased by plus 2%. The broad dynamics of our performance are unchanged. VISIONAIRE, our patient-match cutting instrument continued growing double-digit year-on-year both in the U.S. and elsewhere. Out of the U.S. volumes now represent over 20% of the total VISIONAIRE. This growth demonstrates more customers are coming to appreciate the benefits of such systems. Our LEGION Hinge System launched in the first half is now adding to growth. Also, we further extended our knee range by adding an OXINIUM option to LEGION Narrow. Excluding BHR, Hip Implant growth was up 3% on last year. This compared to total hip market, which was 2%. We continue to achieve good growth in our focus product and have a strong quarter in our ANTHOLOGY, R3 and POLARCUP systems. In addition, our new REDAPT Revision Hip System was launched in the U.S. this quarter, which significantly improved our hip revision offering.

Turning to Sports Medicine Joint Repair, we continued delivering a healthy growth at 7%. We saw our knee repair growth being driven by FAST-FIX 360. Our Trauma growth was 7%, which was ahead of the overall market growth of 3%. I'm encouraged by this performance, which I put down to 3 drivers. And you remember that this was one of the disappointment early this year, and we have done a lot of things to change these. It shows the early benefits of the actions we have taken to refine and reinvigorate the model in the U.S. We have created a focused sales team, serving Trauma and Extremities customers, and started hiring -- that will not be reflected in this quarter actually, hiring some new reps. In the emerging market countries, we delivered good double-digit growth in the quarter. And finally, we benefited from issues. One of our competitor had lost [ph] its nail portfolio, and you know who I'm talking about.

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