Smith & Nephew Management Discusses Q2 2012 Results - Earnings Call Transcript

Smith & Nephew (SNN)

Q2 2012 Earnings Call

August 02, 2012 3:30 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

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Yi-Dan Wang - Deutsche Bank AG, Research Division

Edward Ridley-Day - BofA Merrill Lynch, Research Division

Martin Wales - UBS Investment Bank, Research Division

Michael K. Jungling - Morgan Stanley, Research Division

Thomas M. Jones - Berenberg Bank, Research Division

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

Presentation

Unknown Executive

[Audio Gap]

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; payers 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 dispositions; 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 attributable 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 morning, ladies and gentlemen, and welcome to the Smith & Nephew 2012 Q2 and Half Year Results. For your information, this conference is being recorded. At this time, I will turn the call over to your host today, Mr. Olivier Bohuon. Please go ahead, sir.

Olivier Bohuon

Good morning, everyone. This is Olivier Bohuon. I'm here with Adrian Hennah, and welcome to our second quarter results call. I will cover the highlights and then hand over to Adrian to take you through numbers. And when he has finished, I will update you on how we have progressed on delivering our strategic priorities. As usual, we'll take questions at the end.

This quarter, Smith & Nephew again delivered underlying top line growth and an improved trading profit margin in challenging markets, completing a good first half. We are delivering on our financial commitment and implementing our strategic priorities to Smith & Nephew to provide the right commercial model, innovation and efficiencies to win in our market today and the future. Taking into account this combination, we're pleased to announced a substantial step change in our dividend. Our Q2 revenues were up an underlying 2% to $1.029 billion. This is against challenging markets, particularly in Europe. This revenue growth is after the formation if Bioventus, which we completed in the early part of Q2, and Adrian we'll take you through the financial implications. For us, the transaction realizes value for reinvestment in near-term opportunities while retaining access to the exciting area of orthobiologics.

Trading profits increased 6% underlying, to $234 million, giving a 80 basis points improvement in our trading profit margin to 22.7%. This is evidence that the structural improvements we have made to our organization, particularly creating the Advanced Surgical Devices, are beginning to come through. Adjusted earnings per share were $0.181. Our cash generation remains excellent, and the group now has a net cash of $150 million.

We have consistently delivered revenue and earnings growth and strong cash generation in a challenging market for the last few years. This financial strength and our confidence in delivering against our strategic priorities has enabled us to announce a 50% increase in our dividend and a progressive policy for the future. Our focus on pursuing and evaluating acquisitions of a range of size to generate shareholder value and our ability to fund them is unchanged. Of course, the board will continues to keep under review the appropriate capital structure for the group, including the potential for capital returns to shareholders.

This slide captures our underlying growth in the quarter. On the left-hand side, geographically; and on the right, by-product franchise. Geographically, our revenue growth rate in Q2 were very similar to those we achieved in Q1. In the U.S., we again grew at 2%. And the rest of our Established Markets, growth was slightly slower, reflecting the volatility of the macroenvironment in Europe. The growth in our emerging industrial market was again double digit with a very strong growth in China, India and in the Middle East. On the right, across our product franchises, hip implant sales reflect the ongoing metal-on-metal headwinds. But on a more positive note, sports medicine joint repair returned to double-digit growth and trauma had a much better quarter. I will now turn to look at each of these in more detail.

First, looking at knee and hip implants. So our global knee implant growth was plus 3% tracking the overall market growth rate. This was in line with our guidance in the context of a very strong growth we achieved in the comparable period last year. As we said at our joint reconstitution seminar last month, we have now launched our LEGION hinge product. Not only that this filled a need in our portfolio, it's redefined the implication of what an inch knee should deliver for a patient. In the same seminar, we also announced the limited market release for our new next generation, the JOURNEY knee. Early feedback from both surgeon and patients have been very positive. In hips, the negative commentary on stem metal-on-metal total hips intensified, partly ahead of the hearing in June. Hence, sales of our BHR system were down globally 3%.

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