Smith & Nephew SNATS, Inc. (SNN)

SNN 
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Smith & Nephew plc (SNN)

Q3 2011 Earnings Call

November 04, 2011 4:30 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

David Adlington - JP Morgan Chase & Co, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Martin Wales - UBS Investment Bank, Research Division

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

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

Ed Ridley-Day - Lehman Brothers

Charles Weston - Numis Securities Ltd., Research Division

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

Michael K. Jungling - Morgan Stanley, Research Division

Thomas M. Jones - Berenberg Bank, Research Division

Presentation

Olivier Bohuon

Good morning, everyone. I'm Olivier Bohuon, and I'm the Chief Executive Officer of Smith & Nephew, and I welcome you to our third quarter results presentation. I will speak about our results for the third quarter and then hand over to Adrian to take you through the numbers. When Adrian is finished, I will come back and update you on the progress we are making against our new strategic priorities and the programs we are issuing to generate efficiencies and revert resources for investment to drive future growth. As usual, we'll take questions at the end of the formal presentation.

The trending environment in the established market continues to be difficult. Despite this, Smith & Nephew has another strong quarter of revenue growth, and regained market share in many of our product franchises and geographies.

Overall, our revenues were up 10% to just over $1 billion, an underlying improvement of 5%. Orthopaedic Reconstruction generated revenue growth above the market rate for the straight fifth quarter in a row. Endoscopy grew 7%, with a strong improved performance in Europe. Advanced Wound Management grew at more than double the market rate. This was driven by our Negative Pressure Wound Therapy franchise, and a steady flow of new products across our wound care range.

Our trading profit -- and trading margin was 19.8%. Endoscopy and Advanced Wound Management delivered strong margin, and both achieved improvement year-on-year. The Orthopaedic margin was disappointing at 15.6%. Some of this was due to the continuing negative sales mix we highlighted in the first half, some is due to an unusually high level of periodic expenses on which Adrian will give more detail. However, a significant amount is due to Orthopaedic having a close base which is structurally too high, given the challenges and changes in the established markets.

Let me explain my rationale for our new strategic priority last quarter. I highlighted these dynamics in the established market, lower growth credit pricing pressure has been a fundamental backdrop to our strategy. Actions have been underway for some time to address this issue, but to date this has been inadequate, ultimately resulting in the $10 million overspend this quarter.

I have worked with new combined Orthopaedic Endoscopy management team to instigate tighter cost controls, as well as addressing the necessary structural cost-based changes required for the future. Hence, we expect to deliver material improvement in the Orthopaedic margin from Q4, and that the Q4 group trading margin would be above 24%.

As the management team, we have not and will not shy away from taking the actions necessary to ensure that all of our businesses maximize their growth and margin. Adjusted earning per share were $0.162, essentially flat on last year $0.161. Our cash generation continued to be strong, and we now have net debt of $196 million.

Turning to look at the performance of each business in turn. The first slide on the Ortho business, the Orthopaedic revenue in the quarter were up 3% on Q3 last year. In the U.S., our business was slightly softer against stronger comparables. This was balanced by another strong performance in the emerging markets. Market conditions in Orthopaedic were broadly consistent with what we saw during the first half of the year. We believe that the U.S. reconstructive market was again flat to slightly negative in dollar terms, that the European market was flat to slightly positive, and that the emerging markets collectively grew in the double digits. Adrian will give you more specifics on Smith & Nephew pricing mix trends.

Against this market background, I'm pleased with our revenue performance. As I said, Orthopaedic Reconstruction grew at above the market rate for the fifth quarter in a row, driving our global knee franchise which grew at 6%. In our knee and knee franchise, we saw similar trends in the last few quarters. In the U.S., we grew knee at 5%. This continues to be a market-leading performance, albeit a slower pace, as we analyze the full launch of our VERILAST and VISIONAIRE products in Q3 last year. Our global hip sales declined 2%. Sales of the BIRMINGHAM HIP system continue to be disappointing, and declined at a similar rate to previous quarter. In our traditional hip range, we're seeing double-digit growth from our OXINIUM bearing surface. This is supported by strong registry data, as well as association with the VERILAST brand we have for knees. Trauma grew at 4%, the same as the previous quarter. Within this, our Limb Restoration of x fixed franchise, where we have a strong market position had a better quarter. In clinical therapy, we grew at 7%, and EXOGEN again achieved a good growth rate.

Turning to our Endoscopy business. Sales in Endoscopy grew by 7%, up from 5% in the previous quarter as Europe delivered an improved performance. Our repair sales continue to be led by very strong growth from our shoulder and hip product ranges. In our knee franchise, we have now widened the launch of FAST-FIX 360, which has led to the generation of our market-leading Meniscal Repair System. We expect this to materially benefit this franchise. In resection of blades, we had a better quarter, particularly outside the U.S. where we won a couple of our standards. We anticipate our new range of DYONICS PLATINUM blades to make an increasing contribution going forward.

Visualisation revenues declined marginally, a marked improvement from the last few quarters. Last week, we completed the disposal of our remaining Digital Operating Room systems -- sorry, Digital Operating Room systems business to Steris [ph] corporation. We have now delivered on our strategy to optimize the size of our Visualisation business so that they directly support our sports medicine franchise. Visualisation now represents about 10% of the Endoscopy.

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