Smith & Nephew SNATS, Inc. (SNN)

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Smith & Nephew plc (SNN)

Q2 2011 Earnings Call

August 05, 2011 4:00 am ET

Executives

Olivier Bohuon - Chief Executive officer, Director and Chairman of Disclosures Committee

Adrian Hennah - Chief Financial Officer, Executive Director, Member of Disclosures Committee and Member of Risk Committee

Analysts

Martin Wales - UBS Investment Bank

Navid Malik - Matrix Group Limited

Thomas Jones - Berenberg Bank

Justin Smith - MF Global UK Limited

Ingeborg Øie - Jefferies & Company, Inc.

David Adlington - JP Morgan Chase & Co

Unknown Analyst -

Presentation

Olivier Bohuon

Okay, good morning. So I'm Olivier Bohuon. I'm the Chief Executive Officer of Smith & Nephew and I welcome you to our presentation of the second quarter results 2011. I will speak about our achievements for the second quarter and then to Adrian for the Q2 numbers. When Adrian is finished, I will come back and discuss my observations in finance about Smith & Nephew, our industry for my first months here. So I'll then talk about the changes I intend to make to better focus our resources to deliver value for our customers and for our shareholders. As usual, we'll take questions at the end of the formal presentation.

So despite the difficult environment, we've had another strong quarter of revenue growth. Overall, our revenues were up and underlying 5% to just over $1 billion. It's another good performance as our market conditions remain soft. Once again, Orthopaedic Reconstruction generative revenue growth at above the market rate. The highlight remains our U.S. franchise, which grew 10%, compared to the U.S. market gross of minus 3%. Stromile [ph] is now consistently delivering the good growth going forward. We'll now be challenging the team to beat it from here. Endoscopy grew 5%.

In the U.S., our gross rate was higher than for some quarters. Within Europe, we're now seeing the impact of austerity measures more clearly in our numbers. Despite the difficult environment in Europe, Advanced Wound Management was our fastest-growing business. Our growth continues at above the market trade in the large part due to our negative pressure when therapy product range, which will continue to expand. The trade profit margin was 21.9%, and Adrian will talk to you through the details behind this, including some nonrecurring factors.

Adjusted earnings per share were $0.181, an increase of 6% benefiting from the weak U.S. dollar. We're declaring an interim dividend of $0.066, which is an increase of 10% and in line with our long-standing policy. Our cash generation continues to be strong, and we have now net debt of $346 million. As I would explain later in the presentation, we are reorganizing our internal structure. For the moment, we'll continue reporting our segment figures as we have had in the past.

Turning to look at performance of each business in turn. First, the Orthopaedic business. Again, revenues in the quarter were up 4% on Q2 last year and we achieved growth in all our geographic regions. Market conditions in orthopaedic were consistent with those we saw in the first quarter. Volumes remain subdued due to pressures from macroeconomic background. Against this market background, our trading performance is good. And Adrian will give you more specific details on the impact of price and mix.

Orthopaedic Reconstruction continues to grow at above market rates driven by our global knee franchise which grew at 7%. In particular, we grew knees by 10% in the U.S. Here, our portfolio of VERILAST VNA [ph] surface, VISIONAIRE knee calling [ph] blocks, and our long-established LEGION primary knee system is proving to be a winning combination with surgeons. We continue to reinforce this message with patients who target direct-to-consumer advertising in the U.S. For instance, we have been running TV adverts between [indiscernible] with our Smith & Nephew spokesperson. She had a successful double knee replacement last year.

Globally, sales were flat. The mid-level headwinds remain and it's holding back sales at our BIRMINGHAM HIP system. Excluding this, our traditional hips continue to grow at above the market rate. We had another good performance from the R3 cap system. In Europe we're experiencing new interest in sales of our product with [indiscernible] hip system. Finally, we have now extended the very last brand that we have been discussing marketing our knee range to our hip diagnostics [ph].

It was a good quarter. We believe our Trauma business has now established consistent traffic chord and which we can do further. We extended our SURESHOT range by adding femural [ph] nails to the existing TDO [ph] system. In clinical therapy, we grew 6% where [indiscernible] again achieved a double digit-growth rate.

Turning to the Endoscopy business. Sales in this business grew by 5%. Beyond, this was an improved performance from our U.S. sales team in a weaker Europe. We have now launched the products we highlighted Q1 and are receiving positive feedback from surgeons. For example, we launched a BIORAPTOR care of suture [ph] for shoulder instability and a range of blades designed to provide secure reception and sharpness [indiscernible] dynamics. These contributed to a solid Arthroscopy performance with continued high growth in Sports Medicine repair.

Shoulder and Hip sales again led with very strong growth, and we expect to increase some new knee products later this year, which will naturally benefit from this franchise. [indiscernible] down as we continue our strategy of focusing on the special items, most closely tied to our Sports Medicine business. In June, we acquired Tenet Medical Engineering [ph] for an initial payment of $35 million. Tenet [ph] market's leading-edge patient positioning systems. Smith & Nephew has been long-standing distributor of Tenet [ph] and this system complementary to our Sports Medicine business.

So turning to Advanced Wound Management. The Advanced Wound Management business grew revenue by 8% in the quarter much above the market rate of 3%. The market continued to be tough, particularly in Europe, where we had a strong market share. This is most noticeable in key elements of Advanced Wound care such as formal dressing. We are also seeing hospital reducing their use of products, which combat inflation, such as silver to help mitigate short-term budgetary constraints.

To meet these austerity pressures, we are making a series of target marketing investment. We launched several new products in the quarter, including ALLEVYN Gentle Border multi-site. Against background, we deliver a redeeming performance supported by with strong growth in the Negative Pressure Wound Therapy. The high point of the period for me was the launch of the new generation of Negative Pressure Wound Therapy, PICO [ph]. I attended -- this was the old one, this is the new one, you see? Very good one. I will show it later. I attended the European launch in May and I will talk to you about my sightings later on today. So with that, I will hand over to Adrian and will come back later to talk to you about the strategy.

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