Smith & Nephew SNATS, Inc. (SNN)

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Smith & Nephew plc (SNN)

Q2 2010 Earnings Call

August 05, 2010 04:00 pm ET

Executives

Dave Illingworth - Chief Executive

Adrian Hennah - CFO

Analysts

David Adlington - JPMorgan Cazenove

Justin Smith - MF Global

Seb Jantet - Investec

Presentation

Dave Illingworth

Well, good morning, everyone. Welcome to our second quarter 2010 results presentation. I’m going to break the ice this morning and then hand it over to Adrian to take you through the numbers and then I’ll come back and wrap up and then Adrian and I will take questions.

Let me start with the highlights for the quarter. We’ve made good progress this quarter as we’ve continued our high level of investment in the business for the future and have stayed focused on driving out efficiencies. The long-term growth drivers of our business, demographics, emerging markets and patient demand for an active life are unchanged.

Group revenues rose by 4% in the quarter, as Advanced Wound Management outperformed its market and Endoscopy grew by 9%, while a number of issues continue to impact our high performance products in reconstructive Orthopaedics. In Orthopaedics, revenues increased by 1% overall, and trauma revenue strengthened and grew by 2%. In reconstruction, our European team grew their revenues by 3%, as their actions resulted in growth at around the market rate for the second quarter.

Revenues in Endoscopy grew by 9%, as a strong performance outside the US drove this business to near double-digit revenue growth. And in our Advanced Wound Management business, we grew revenues at above market rate with the strongest growth outside of Europe. So let me move on and talk about the margins for a second.

Trading profit was up 7% at $226 million. We increased our trading margin by 60 basis points this quarter with improvements in all of our businesses. We have an ongoing focus on improving our working capital management to strengthen our cash generation and this quarter we converted 89% of our trading profits to cash. We’ve increased our dividend in line with the policy, our long-standing policy by 10% to $0.06 per share.

And now if I move on to the individual businesses in turn, I’ll start with Orthopaedics. Our Orthopaedics business is experiencing a couple of headwinds currently. First, our higher specification products are being impacted by the economy as the effect we expected from the recession becomes more apparent.

Second, the discussions in the media and in the Orthopaedic profession about metal-on-metal implants unfortunately impacted BHR. As the gold standard for resurfacing, BHR has a long-documented history of clinical efficacy, with over 100,000 procedures done and registry data that shows superior outcomes. We know that with the proper patient selection, BHR’s results are outstanding and these views are supported by the scientific data.

So as a result of the headwinds, global revenues grew by 1% in the second quarter, with strong performance in the emerging markets. In Reconstruction in the US, our knee revenues were up 2% as GENESIS and LEGION gained from some trading down from higher specification products. VISIONAIRE has had a positive impact and we see an excellent stream of opportunities from this product. Our US Hip revenues fell by 3%.

We currently have, and continue to expect, at or above market growth in our traditional Reconstruction product lines. Our US customer service initiative is targeted to increase both the efficiency and effectiveness of our sales force and to improve customer service in line with our customer focus strategy. This project continues to progress.

In Europe, despite the tougher market conditions, the actions that our management team outlined last November for many of you are gaining traction and Reconstruction revenues grew by 3%, which is around market growth rates.

In Trauma, we’re very pleased to see our revenues grow by 2%, which is an indicator that our actions in the US are starting to deliver benefits. Our SURESHOT targeting system continues to be very well received and has driven up related revenues. Our nail sales are strong, as SURESHOT is helping us to get into a competitive accounts.

The new Foot & Ankle range, which we introduced earlier in the year, has also had a positive impact on revenues for the business. Margin in Orthopaedics was up 20 basis points in the quarter, a good performance given that we continue to make significant investments in this business while experiencing some tougher market conditions.

The next slide, and there similar slides for each of our businesses by the way, it takes a look at how our strategy is driving future growth. We’re focused on innovation, on customer service, in investments for growth and improving our efficiency. And here are some examples.

We recently appointed a Chief Operating Officer in the Orthopaedics business with a clear role to manage the day-to-day business of Orthopaedics, freeing up a very substantial amount of time for the President to spend on customer-facing activities. The recent FDA approval for our 30 year wear claim for VERILAST, which is OXINIUM with crosslinked polyethylene, is proving to be a product combination that has great appeal for our customers. We’ll also be supporting our sales force with an increase in media, direct-to-consumer advertising and sales support in the second half.

In resurfacing, we’re building a specialist team to focus on surgeon support for BHR. We appointed a national executive for China this past quarter, as part of our customer service focus and to support the development of our Chinese business. Kelvin Johnson is a member of the Executive Committee and has been responsible for our rapid growth in emerging markets. His appointment has significantly increased our management capacity in this rapidly growing market.

Read the rest of this transcript for free on seekingalpha.com