Smith & Nephew SNATS, Inc. (SNN)

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Smith & Nephew (SNN)

Q1 2013 Earnings Call

May 02, 2013 3:30 am ET

Executives

Olivier Bohuon - Chief Executive Officer, Director, Chairman of Disclosures Committee, Chairman of Executive Risk Committee and Member of Nomination & Governance Committee

Julie Brown - Chief Financial Officer, Executive Director and Member of Disclosures Committee

Analysts

Christoph Gretler - Crédit Suisse AG, Research Division

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Julien Dormois - Exane BNP Paribas, Research Division

Michael K. Jungling - Morgan Stanley, Research Division

Edward Ridley-Day - BofA Merrill Lynch, Research Division

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

Thomas M. Jones - Berenberg, Research Division

Charles Weston - Numis Securities Ltd., Research Division

Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division

Presentation

Operator

Good day, and welcome to the Smith & Nephew Q1 2013 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Olivier Bohuon. Please go ahead.

Olivier Bohuon

Thank you. Good morning, everyone. This is Olivier Bohuon, and I'm here with Julie Brown, our new CFO. Welcome to our first quarter results call. I will cover the highlights and then hand over to Julie to take you through the numbers, including the new capital allocation framework for our company. As usual, we'll take questions at the end.

Our first quarter results built on our investments and achievements of last year. Our Q1 revenues were just over $1 billion. This was up an underlying 1%, assuming we had owned Healthpoint last year and excluding the Bioventus transaction. Those areas where we have focused on recent investment all started the year very well. Trauma continued to build momentum as we progressed the expansion of sales force. In the emerging markets, we delivered double-digit growth. In Advanced Wound Management, Healthpoint excelled in its first quarter as a Smith & Nephew business, supplementing the continuing share gains in Negative Pressure Wound Therapy. Our recon implant business [ph] in the established market was slightly weaker than what we expected following our restructuring program in this area and, with new products beginning to come through, we expect performance to improve for the second half of this year.

Trading profit was $241 million, giving a trading profit margin of 22.4%, which was in line with our expectations. Adjusted earnings per share were $0.185 compared to $0.193 last year, mainly reflecting the Bioventus dilution effect previously highlighted.

Today, we announced the agreement to acquire an Indian trauma business. This acquisition gives us an entry point into India's fast-growing mid-tier trauma segment. Together with the recent agreement to buy a Brazilian distributor, you can see how we are selectively adding to our emerging market platform.

Smith & Nephew has consistently delivered growth and strong cash generation in challenging markets over the last few years. We are self-confident in the continued execution of our strategic priorities. In light of this, we have undertaken a major review of our capital allocation framework. We'll continue to invest in the growth drivers we have identified and maintain adequate headroom for further significant acquisitions. We are also announcing today a $300 million share buyback program.

This slide captures our underlying growth in the quarter, on the left-hand side, geographically; and on the right, by product franchise. The quarter had 2 fewer selling days, an impact of around minus 3% on underlying gross rate. In the U.S., we grew at 4%. Healthpoint was a significant contributor to this, growing at 49%. I will talk about this in detail in a couple of slide. In the rest of our established market, growth was down 5%. The market in Europe has weakened sequentially across the majority of our market segments. Our growth in the emerging and international markets was very strong, at 19%. This was led by growth in China, our largest market, and other regions where we have been investing, such as Mexico and the Middle East.

I will now turn to look at each franchise in more detail, starting with hips and knees. Our global recon implant [ph] revenue fell by minus 6%, and this compares to a market growth rate which we estimate to be minus 1%. We have talked before about the 3 short-term headwinds we face, namely: our position in the product cycle, particularly in knees; our disproportionate exposure to Europe relative to our peers; and our exposure to metal-on-metal hips, and these dynamics remain. In Europe, this weakness was most marked in Germany, our largest market, where we believe the recon [ph] market was down almost 10%. Over the last few quarters, we have seen increased pressure from German payers and health care providers to reduce the number of procedures.

Over the last 18 months, as you know, we have been successfully restructuring our ASC business in the established market to be leaner and to be more efficient. The benefits of this program are clear. It has both given us a better commercial platform and identified areas for making targeted investments to improve our customer-facing services. These outweighed some short-term disruption to our sales channel that we are seeing.

We are accelerating our investment behind JOURNEY II following its very successful U.S. launch at the academy meeting in Chicago. This truly differentiated product has had great surgeon feedback. We are also making further sales force effectiveness improvements and increasing medical education and marketing.

Our Sports Medicine Joint Repair franchise performed well, growing at 4%, effectively the same rate as recent quarters. In Arthroscopic Enabling Technologies we declined by 7% and the current economic conditions continue to impact the sales of capital-related items such as cameras and, to a lesser extent, the blades used in resection.

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