investor presentation september 2016 - smith & nephew · investor presentation july –...
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Investor Presentation July – September 2016
Forward looking statements
This document may contain 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, 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 performing due diligence, valuing and integrating acquired businesses; disruption that may result from transactions or other changes we make in our business plans or organisation to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature. Please refer to the documents that Smith & Nephew has 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 on 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.
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About Smith & Nephew
• Smith & Nephew is a diversified advanced medical technology business that supports healthcare professionals in more than 100 countries to improve the quality of life for their patients.
• We have c.15,000 employees around the world.
• Annual sales in 2015 were more than $4.6 billion.
• A constituent of the UK's FTSE100, our shares are traded in London and New York.
• Smith & Nephew has paid a dividend to shareholders on its Ordinary Shares every year since 1937.
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JOURNEY™ II XR Bi-Cruciate Retaining Knee System
Advanced Wound Bioactives
Knees
Hips
Trauma Sports Medicine Joint Repair
Other Surgical Businesses
Advanced Wound Care
Advanced Wound Devices
Arthroscopic Enabling Technologies
Our products… ALLEVYN™ Life Advanced Foam Wound Dressings
PICO™ Negative Pressure Wound Therapy
TRIGEN™ INTERTAN Intertrochanteric Antegrade Nail
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$4.6bn revenues
(2015)
Collagenase SANTYL™ Ointment Enzymatic debrider
REDAPT™ Revision Femoral System
RAPID RHINO◊ NASASTENT◊ Dissolvable Nasal Dressing
SUTUREFIX™ Ultra Suture Anchor
AMBIENT SUPER MULTIVAC™ COBLATIION™ Wand
We have a balanced global footprint
Emerging/ International Markets (15%)
Established OUS (37%)
US (48%)
2015 Split of Revenues
Our markets…
15,000 Employees
Our leading position
Sports Medicine*
Data: 2015 Estimates generated by Smith & Nephew based upon public sources and internal analysis * Representing access, resection and repair products. ** A division of Johnson & Johnson *** Segment sizes and growth rates based on 2014 estimates generated by Smith & Nephew
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Hip & Knee Implants
Advanced Wound
Management
Zimmer Biomet
35%
DePuy
Synthes**
21%
Stryker
19%
Other
15%
10%
Arthrex
30%
Zimmer
Biomet
3%
DePuy Mitek**
15% Linvatec
5%
23%
Stryker
11%
Others
13%
Acelity
21%
18%
Molnlycke
12%
Convatec
8%
Coloplast
4%
Other
37%
Segment Size: $14bn, Growth Rate: +2%
Segment Size: $5bn, Growth Rate: +5%
Segment Size: $7bn, Growth Rate: +4%
Our market growth drivers
Prevalence Lifestyle
Economics
Emerging markets
Demographics
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Technology “By 2050, the number
of people over the age of 65 around the world will have tripled to nearly 1.5
billion”
Market realities and opportunities
• Procedure demand continues to increase – demographic and disease led – fuelled by expanded access in emerging markets
• Still room for innovation – demonstrate clinical benefit or cost reduction
• Ability to pay continues to decrease in established markets – austerity, reduced prices – alternative, less costly solutions
• New business models slowly emerging, but fragmented – Syncera value solutions – pioneering model – mid-tier model to access emerging markets
• Environment Complexities
– regulatory, clinical data, manufacturing know-how, patents – customer relationships, distribution channels, capital 8
JOURNEY II ™ CR Knee System
Our performance Trading profit Revenue
$4,634m +4%* $1,099m +5%* 23.7% margin
Trading cash conversion
Net Debt
$1,361m
Adjusted earnings per share (EPSA)
85.1c +3%CAGR
85%
* Underlying growth percentage after adjusting for the effect of currency translation, acquisitions and disposals.
Dividend per share
30.8c +15%CAGR
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Adjusted earnings per share (EPSA) Dividend per share
4,270
4,137
4,351
4,617 4,634
2011 2012 2013 2014 2015
961 965 987
1,055
1,099
2011 2012 2013 2014 2015
74.5 75.7 76.9
83.2 85.1
2011 2012 2013 2014 2015
17.4
26.1 27.4 29.6 30.8
2011 2012 2013 2014 2015
138 288 253
1,613 1,361
2011 2012 2013 2014 2015
87%
104% 89%
74% 85%
2011 2012 2013 2014 2015
Our customers…
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Nurses, Nurse
specialists
Retail consumers,
Patients
Payers, Administrators
Physicians, GPs
Surgeons
Healthcare systems,
Procurement groups
Strategic priorities
• Winning in Established Markets
• Accelerating development in Emerging Markets
• Innovating for value
• Simplifying and improving our operating model
• Supplement organic growth through acquisitions
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Capital allocation framework
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Reinvest for organic growth
Progressive dividend policy
Acquisitions in line with strategy
Return excess to shareholders
Maintain strong balance sheet to ensure solid investment grade credit
metrics
1 2 3 4
Future – a rebalanced Smith & Nephew
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* Excluding Clinical Therapies
2011* Future
Lower Growth
65%
Higher Growth: Sports Medicine Joint Repair, ArthroCare, Trauma & Extremities, Advanced Wound Bioactives and Devices, Emerging markets (all franchises) Lower Growth: Arthroscopic Enabling Technologies, Reconstruction and Advanced Wound Care (all Established markets)
Higher Growth
35%
Higher Growth
67%
Lower Growth
33%
Proportion of Revenue
Improving Strengthening
Creating
Simplify our management structure
Drive savings and capability investments Driving
Procurement Savings
Optimising Functions
Develop best in class global support functions
Simplifying Operating Model
• Increasing overall efficiency
• Liberating resources to re-invest in critical areas to drive growth
Rationalise property portfolio Optimising Locations
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Group optimisation plan – four levers
• Benefits
– generate annual savings of at least $120 million by the end of 2017
– a four year plan, now ahead of schedule, with annualised benefits of $110m (as at June 2016)
• Restructuring costs
– about $150 million costs over four years
– As at June 2016, $139m has been incurred thus far
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Group optimisation plan – financial implications
Q2 and H1 2016 Performance
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Emerging
Est OUS
US
AWD AWB
AWC
Hips
Knees
Arthroscopic Enabling Tech
Sports Medicine Joint Repair
Trauma & Extremities
Other Surgical
6%
1%
-4%
2%
7%
16%
-6%
4%
10%
-10% 0% 10% 20%
H1 2016 revenue growth of 3% underlying
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Geographical growth Product franchise growth Revenue split
Underlying change (%) Underlying change (%)
Note: ‘Est OUS’ is Australia, Canada, Europe, Japan and New Zealand
-4%
2%
6%
-8% -4% 0% 4% 8%
Emerging
Est OUS
US
AWD
AWB
AWC
Hips
Knees
Arthroscopic Enabling Tech
Sports Medicine Joint Repair
Trauma & Extremities
Other Surgical
4%
-7%
0%
5%
14%
-6%
4%
10%
-10% 0% 10% 20%
Q2 revenue growth of 2% underlying
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Geographical growth Product franchise growth Revenue split
Underlying change (%) Underlying change (%)
Note: ‘Est OUS’ is Australia, Canada, Europe, Japan and New Zealand
1%
-2%
1%
4%
-4% -2% 0% 2% 4% 6%
Updated outlook
• H2 sales
‐ H1 trends continue in Sports Medicine and Reconstruction
‐ partial improvements in China; Gulf States remain challenging
‐ four fewer sales days in H2
• Translational foreign exchange revenue impact of 0% in H2 and -1% in FY
• Full year margin
‐ Guidance relating to transactional foreign exchange and BlueBelt unchanged (-180 bps)
‐ We expect the slower than anticipated sales growth, mainly in the Emerging Markets, to impact H2 margin, as will the divestment of GYN
‐ H2 trading margin will be stronger than H1
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Guidance
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Strategic Updates: Recent M&A Update, Syncera, Innovation, Recon, and Emerging Markets
ArthroCare – two year update
strengthened Sports Medicine business
integration completed ahead of time
$65m cost synergies delivered
accelerated growth in Established Markets
successful product launches ‐ such as our Rotator Cuff Repair Solutions
strong and exciting combined pipeline
‐ including WEREWOLF◊ and LENS◊
sales synergies coming through ‐ e.g. faster Shoulder growth than in standalone businesses
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Blue Belt – six month update
6 months post acquisition:
successful integration
strong operational performance
expansion of indications: approval of Total Knee
first Total Knee case on NAVIO
full commercial launch of Total Knee on-track for 2017
Expecting >50% sales growth for full year
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Complementary products and pipeline
Navio System
STRIDE™ Uni Knee
Current offering
R&D programme
Medium-term opportunities
Total knee arthroplasty
Revision knee
Bi-cruciate retaining knee
Total hip arthroplasty Sports medicine
Most successful partner
JOURNEY Uni, ZUK
Global reach
Established compatible products
Clinical and marketing strength
JOURNEY II for BCR in development
Deep customer base and expertise
Blue Belt Technologies What Smith & Nephew brings
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The Syncera solution
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Hip/Knee implant solutions for progressive customers
Products from Smith & Nephew addressing the vast majority of primary joint procedures
Customer interfaces using innovative technology to reduce cost while improving efficiency
High levels of service and support
Transparent prices driving substantial benefit for providers Attractive economics
Value
Clinically proven
Automation
Full support
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2
3
4
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Syncera
• Interest in Syncera continues to exceed expectations
‐ CJR is stimulating additional interest
‐ but conservative market segment
• Good engagement with providers on future models of healthcare
• Broadening remit of Syncera team
‐ pure Syncera solutions
‐ unique supporting technologies, risk-sharing models, consultancy
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Not all Models are Different. Most are the same. One is unique.
Pioneering innovative technologies and models
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Sports Medicine
• Leading knee , hip
and shoulder portfolios
• COBLATION™ & DYONICS™
• Rotator Cuff Solution
• WEREWOLF™ • Regenerative e.g.
BST-CarGel
Segment-leading
growth
Hip & Knee
• VERILAST™ technology
• JOURNEY™ II family • ZUK uni knee
• Syncera™ model • NAVIO™ system • REDAPT™ revision
hip
Segment-leading
growth
Wound
• ALLEVYN™ Life • PICO™ • SANTYL™
• RENASYS™ TOUCH • Solutions based
models
Segment-leading growth
TODAY: Drive growth with
differentiated products
FUTURE: Accelerate growth with disruptive innovations
and solutions
Note: excludes mid-tier, ENT, and Trauma & Extremities portfolios
Advanced Wound Management: Disease lens is driving our view of innovation
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Treatment Prevention Diagnosis
& Detection
Care Coordination & Monitoring
• Point of care diagnostics
• Risk stratification tools
• Biosensors
• Deep tissue injury detection
• Healing technologies
• Bioactive debridement
• Anti-infectives
• Next Generation negative pressure
Data Driven Healthcare
• Clinical algorithms
• Outcomes tracking
• Products designed for patient transition
• Best-in-class medical education
• Data-driven best practices
• Real-world cost effectiveness models
Reconstruction – focused on areas of growth
• Pioneering products – VERILAST◊ is a unique bearing surface – JOURNEY◊ II is designed to provide higher levels of
patient satisfaction
• Differentiated marketing – speaking to surgeons and their patients – US marketing campaigns with measurable returns
• Widening access – strong Established Market business supporting
Emerging Markets
• Disruptive model – Syncera
JOURNEY◊ II
Active Knee Solutions
Growing above the market in the US last 12 months 28
0%
5%
10%
15%
20%
25%
30%
Accelerating development in Emerging Markets
Quarterly revenue development
SUPPORTIVE MARKET CONTEXT: • economic growth • higher healthcare spending OUR ACTIONS: • expansion of premium product
range • mid-tier strategy • medical education • further acquisitions
8%
15%
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Re
ven
ue
as
pro
po
rtio
n o
f gro
up
(%
)
2010 2011 2012 2013 2014 2015
FY 2015
Q1 2010
China – improvements expected in H2
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Smith & Nephew sales trajectory in China
2014 2015 2016
FY Q1 Q2 Q3 Q4 Q1 Q2 H2e
Reconstruction
Sports Medicine
Trauma
Advanced Wound
Management
Mid-tier – new emerging markets business model
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Independent Mid-tier sales organisation
Dedicated leadership
Different business model
Separate sales channels
Collaboration with premium-tier organisation
Different brand
Common shared
services
Mid-tier commercial model
Good quality products at lower prices
Manufacturing & design efficiency
Streamlined sales & marketing
Different service model
Appendices
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Q2 2016(1) H1 2016(1)
H1 and Q2 Revenue growth
33 (1) H1 comprises 128 days (2015 – 124 days) Q2 2016 comprises 64 trading days (2015 – 63 trading days) (2) Constant exchange rates
Growth % Growth %
Underlying Underlying
Acquisitions Acquisitions
CER(2) CER(2)
Currency Currency
Reported Reported
3%
1%
4%
-2%
2%
2%
1%
3%
-1%
2%
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H1 Trading margin drivers
H1 Trading margin history Selected H1 2016 margin drivers
2014 2015 2016
21.8% 22.5%
20.8%
Transactional exchange ~190 bps in Gross Profit
Margin impact of sales decline in China & Gulf States
Blue Belt investment
Group Optimisation & acquisition benefits
Franchise revenue analysis
35 All revenue growth rates are on an underlying basis * ‘Other Surgical Businesses’ includes ENT, Gynaecology and robotics sales (excluding implant sales)
2015 2016
Q1 Q2 Q3 Q4 Full Year
Q1 Q2
Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % $m %
Sports Medicine, Trauma & OSB
5 4 2 5 4 5 487 4
Sports Medicine Joint Repair 9 7 4 9 7 11 147 10
Arthroscopic Enabling Technologies
(2) 1 (2) 3 - 4 160 4
Trauma & Extremities 5 2 2 - 2 (7) 119 (6)
Other Surgical Businesses* 11 7 10 13 10 19 61 14
Reconstruction 1 4 3 4 3 7 391 3
Knee Implants 2 7 6 6 5 9 238 5
Hip Implants (1) 1 (2) 1 - 4 153 -
Advanced Wound Management
1 7 6 8 6 - 313 (3)
Advanced Wound Care 9 12 6 4 8 - 177 (7)
Advanced Wound Bioactives 5 6 2 16 7 (4) 93 4
Advanced Wound Devices (27) (9) 17 14 (3) 11 43 1
Group 3 5 4 5 4 4 1,191 2
Regional revenue analysis
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‘Other Established Markets’ is Australia, Canada, Europe, Japan and New Zealand. All revenue growth rates are on an underlying basis
2015 2016
Q1 Q2 Q3 Q4 Full Year
Q1 Q2
Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % $m %
Geographic regions
US 1 4 4 9 5 8 582 4
Other Established Markets (2) 3 1 2 1 4 429 1
Established Markets - 3 3 6 3 6 1,011 3
Emerging Markets 22 14 8 2 11 (6) 180 (2)
Group 3 5 4 5 4 4 1,191 2
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2016 2015
$m $m
Revenue 2,328 2,272
Cost of goods sold (632) (566)
Gross profit 1,696 1,706
Gross profit margin* 72.8% 75.1%
Selling, general and admin (1,100) (1,084)
Research and development (113) (110)
Trading profit 483 512
Trading profit margin 20.8% 22.5%
H1 Trading income statement
* includes the effect of transactional exchange impacting year-on-year margin by around 190bps
Growth
2016 2015 Reported CER Underlying
$m $m
Trading profit 483 512 -6% -4% -3%
Net interest payable (24) (21)
Other finance costs (6) (7)
Share of results from associate - (3)
Adjusted profit before tax 453 481
Taxation (119) (131) Tax rate 26.3%
Adjusted attributable profit 334 350
Number of shares – million 894 894
Adjusted earnings per share ("EPSA")
37.4¢ 39.1¢ -4% -2%
Earnings per share ("EPS") 27.0¢ 33.0¢
38
H1 EPSA and EPS
H1 Free cash flow
39
2016 2015
$m $m
Trading profit 483 512
Share based payment 14 13
Depreciation and amortisation 147 148
Capital expenditure (174) (161)
Movements in working capital and provisions (215) (130)
Trading cash flow 255 382
Trading cash conversion 53% 75%
2015 includes $99m cash receipt on Arthrex legal claim
Restructuring, rationalisation, acquisition & other (49) 36
Operating cash flow 206 418
Net interest paid (24) (17)
Taxation paid (87) (72)
Free cash flow 95 329
2016 Technical guidance (unchanged)
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Guidance Full year
Restructuring costs c. $50m
Acquisition and integration costs c. $10m
Amortisation of acquisition intangibles c. $140m
Income from associates Slightly negative
Net interest payable c. $45m
Other finance costs c. $10m
Tax rate on Trading result 26.5% or slightly lower
Management
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Olivier Bohuon Chief Executive Officer Olivier joined the Board and was appointed Chief Executive Officer in April 2011. Olivier has had extensive international experience within a number of pharmaceutical and healthcare companies. Prior to joining Smith & Nephew, he was President of Abbott Pharmaceuticals, a division of Abbott Laboratories based in the US, where he was responsible for the entire business, including R&D, Global Manufacturing and global support functions. Olivier has extensive international healthcare leadership experience within a number of significant pharmaceutical and healthcare companies. His global experience provides the skillset required to innovate a FTSE100 company with a deep heritage and provide inspiring leadership. He is a Non-executive Director of Virbac group and Shire plc.
Julie Brown Chief Financial Officer Julie joined the Board as Chief Financial Officer in February 2013. Julie is a Chartered Accountant and Fellow of the Institute of Taxation with international experience and a deep understanding of the healthcare sector. She trained with KPMG and then worked for AstraZeneca plc, where she served as Vice President Group Finance and more recently, as Interim Chief Financial Officer. She has previously held positions of Regional Vice President Latin America, Marketing Company President AstraZeneca Portugal and Vice President Corporate Strategy and Research and Development Chief Financial Officer. She is nominated for election as a new member of the Board of Directors of Roche Holding Ltd and Chair of the Audit Committee at the Annual General Meeting on 1 March 2016.
Investor Relations Contacts
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Ingeborg Øie
VP, Investor Relations
T: +44 (0) 207 960 2285
Smith & Nephew plc
15 Adam Street
London
WC2N 6LA
T: +44 (0) 207 401 7646
Kate Gibbon
Investor Relations Manager
T: +44 (0) 207 960 2339
