Smith & Nephew SNATS, Inc. (SNN)

SNN 
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Smith & Nephew (SNN)

Q3 2012 Earnings Call

November 01, 2012 8:30 am ET

Executives

Olivier Bohuon - Chief Executive Officer, Director, Chairman of Disclosures Committee, Chairman of Executive Risk Committee and Member of Nominations Committee

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

Analysts

Charles Weston - Numis Securities Ltd., Research Division

Edward Ridley-Day - BofA Merrill Lynch, Research Division

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

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

Thomas M. Jones - Berenberg Bank, Research Division

Michael K. Jungling - Morgan Stanley, Research Division

Julien Dormois - Exane BNP Paribas, Research Division

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

Presentation

Unknown Executive

This document contains certain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as aim, plan, intend, anticipate, well-placed, believe, estimate, expect, target, consider and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements.

For Smith & Nephew, these factors include economic and financial conditions in the markets we serve, especially those affecting health care providers, payors and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliance risks; and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and depositions; our success in integrating acquired businesses and disruption that may result from changes we make in our business plans or organization to adapt to market developments; and numerous other matters that affect our markets, including those of a political, economic, business or competitive nature. Please refer to the documents that Smith & Nephew have filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934 as amended, including Smith & Nephew's most recent annual report Form 20-F for a discussion of certain of these factors.

Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attribute to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.

Operator

Good day, ladies and gentlemen, and welcome to the Smith & Nephew plc Q3 2012 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, sir.

Olivier Bohuon

Good morning, everyone. This is Olivier Bohuon, and I'm here with Adrian Hennah. Welcome to our third quarter result call. I will cover the highlights, and then hand over to Adrian to take you through the numbers. As usual, we'll take questions at the end.

Smith & Nephew have delivered another strong quarter, particularly given the pressure of market deterioration in important regions to us, such as Europe. Once again, the strongest performing business was Advanced Wound Management. Here you see that our investments in growth areas, like Negative Pressure Wound Therapy and the emerging markets, are driving significant market outperformance.

Our Q3 revenues were up an underlying 1% to $952 million, and I will give more details on this in the next few slides. This revenue growth is after adjusting for the Bioventus transaction. Adrian will talk you through the adjustment.

Trading profit increased 10% underlying to $207 million, giving a strong 190 basis points improvement in our trading profit margin to 21.7%. You will remember that the comparative quarter 3 last year was weak. The important thing for me about our margin performance this quarter is that clearly demonstrates that the structural improvements we have made to our organization are delivering benefits. In particular, the restructuring program in ASD, which is well-advanced in the U.S. and is also fully underway in Europe. The program has allowed to both improve our margin and invest more in the areas which would drive future growth.

Adjusted earnings per share were $16.06, an increase of 2% in the prior year. I am pleased that our cash generation remains excellent, a clear sign of healthy business and the group now has net cash of $379 million.

This slide captures our underlying growth in the quarter on the left-hand side and geographically and on the right, by product franchise. In the U.S., we again grew at 2%. In the rest of our established markets, performance reflected a weaker macro environment, most notably in Europe. Growth in our emerging and international market was 6%. The underlying markets are strong and its performance is within our expectations of quarterly volatility. Growth in China, our largest market, continued at above 20%. On the right, across our product franchise, Joint Repair, Enabling Technologies, Trauma and Advanced Wound Management all delivered similar growth rate to previous quarter.

I will now turn to the next slide to look at our Hip and Knee franchise, which together represent just over 1/3 of our sales. Our global Knee franchise declined by 1% compared to a market growth rate of 2%. This performance is a result of 2 trends. Firstly, we have seen a weakening of the overall knee market in Europe, where we have a proportionally larger market position compared with U.S. Secondly, as we have said before, this performance reflects where we are in our Knee product cycle. During 2012, 2010 and 2011, when we materially outperformed the knee market, we benefited from the launch of our VISIONAIRE and VERILAST products. This benefit now has annualized.

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