Smith & Nephew SNATS, Inc. (SNN)

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Smith & Nephew plc (SNN)

Q4 2011 Earnings Call

February 02, 2012 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

Navid Malik - Cenkos Securities plc., Research Division

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Unknown Analyst

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Jason Wittes - Caris & Company, Inc., Research Division

Presentation

Olivier Bohuon

Good morning, everybody. So as you know, I'm Olivier Bohuon. I'm the Chief Executive Officer of Smith & Nephew, and I welcome you to our fourth quarter and my first full year result presentation. I will speak about our results for the fourth 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're making against our new strategic priorities and some thoughts for 2012. As usual, we'll take questions at the end of the formal presentation.

So we finished 2011 well. For the year, our revenues were up 8% reported and 4% underlying to nearly $4.3 billion. All our business units contributed to this growth. In Orthopaedics, we led the market in mid-growth and delivered a solid performance from our traditional hip portfolio. Trauma had a more mixed performance. I will talk more about what we're doing to change this in a few slides. Our Endoscopy business performance reinforced my belief that minimally invasive joint repair is a good market to be in and a great market to lead. It offers scope for more innovation and obvious benefits to patients and payers. For the third year in a row, Advanced Wound Management is our fastest-growing business, exceeding this year $1 billion in revenues for the first time. Our successful entry into negative pressure market is a major driver, but we should not forget that our larger advanced wound care business contributes also significantly.

We finished the year with a good margin of 22.5%, and we're now well into our action plan to increase this. The generation of cash is a clear sign of a healthy business and we generated free cash flow of over $0.5 billion.

I joined Smith & Nephew in April last year. As its full year results demonstrate, the company has strong foundations. In August, I set out our strategic priorities. These are necessary to ensure we are growing faster, better balanced on our feet and effective for the future. 2011 was a start of this journey. 2012 would be a year of balancing the delivery of these priorities while managing our more immediate operational challenges and opportunities. Later in the presentation, I will provide an update on our actions against these priorities.

Our Q4 revenue were up 4% to $1.1 billion, an underlying improvement of 3%. The overall trading environment in Q4 was roughly similar to what we have seen in Q4 -- in Q3, I'm sorry.

Our trading product margin was 25.2%, exceeding the 24% commitment we made last quarter. As I said then, we'll take the actions to ensure all areas of our business maximize their growth in margin.

Adjusted earning per share were $0.219, an increase of 1% on last year's $0.216. We have proposed a final dividend of $0.108 per share, up 10% on prior year.

In the end, we'll give you an detailed analysis of our revenue and margin performance in Q4. I was just picking out the most relevant points.

On the first slide, on the Orthopaedic business. Ortho revenue in the quarter were flat on Q4 last year. This is a solid performance against a background of a challenging market and a tough comparative period. Market conditions, including pricing trends, are very consistent with those we saw in the previous period. Overall, we think the global reconstruction package [ph] growth was, again, only marginally positive. Global knee growth was a plus 2%. This continues to be a market-leading performance, however, at a slower pace. The very strong full launches of our market-leading VERILAST and VISIONAIRE products are now annualizing.

Trauma growth declined 2%, and will have been flat excluding the U.S. royalty payment expiring. Some of this performance reflects a strong comparable. However, we believe we should do better, and during the quarter we appointed new management team charged with achieving this.

Turning to our Endoscopy business. Sales in Endo grew strongly as Europe delivered another good performance. Growth in sports medicine repairs sales was double digit. During Q3, we widened the launch of FAST-FIX 360, the next generation of our leading meniscal repair system. As anticipated, this received a positive response from surgeons and our knee franchise improved materially.

Resection of blades also had a good quarter. Our new range of DYONICS PLATINUM blades are now making a valuable contribution to the growth.

Turning now to the Advanced Wound Management. Our Advanced Wound Management business grew revenue by 8% in the quarter, more than double the market rate at around 3%. One of the most pleasing things for me about the quarter has been the continuation of our rate of product lunches, 10 in the quarter after 11 launches in Q3 for a total of 35 new launches in 2011. This rate of new product introduction and line extensions will continue into 2012. Of the launches in Q3, DURAFIBER and PICO, in particular, contributed to the European performance as well as a weak comparative.

Our negative wound therapy franchise achieved strong revenue growth across all regions. In the U.S., we saw significant conversion activity at hospitals, such as Cleveland Clinic, Kaiser, and UAB. PICO gained the 510(k) approval in December and has been commercially launched in the U.S. in January this year.

So I'm going to give the floor to Adrian. I will come back then to talk about the strategic priorities.

Adrian Hennah

Well, thank you, Olivier and good morning, ladies and gentlemen. We turn firstly to Slide 8 to 10, the income statement -- Slide 10, here is Slide 10 and income statement.

Revenue in the quarter was $1.106 billion. As Olivier mentioned, this represents 3% underlying sales growth after adjusting for exchange rates on quarter 4 last year. Trading profit in the quarter was $279 million, an underlying decline of 1%.

The reported trading margin of 25.2% was in line with the commitment that we gave last quarter and 80 basis points lower than quarter 4 last year. Restructuring cost charge in the quarter was $33 million. $26 million relate to the efficiency program announced with our last results -- with our results last -- our last results in October. Olivier will explain the goals, main content and shape of this overall program in a moment.

The legal charge of $23 million relates to the creation of the provision in connection with the previously disclosed investigation by the U.S. Securities and Exchange Commission and Department of Justice, the potential violations of the U.S. Foreign Corrupt Practices Act in the medical devices industry. Based on information currently available, the group believes that it is possible to make a reasonable estimate of the losses expected. The group has not reached final agreement on a settlement on these matters, but believes that any additional material loss is unlikely. We cannot say more on these legacy issues as there is no final agreement. We can say that we believe that we have, today, an excellent compliance program across the business and we have enhanced -- which we have enhanced as these investigations began in 2007.

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