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Full Year 2015 Results
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 or other problems with quality management systems or failure to comply with related regulations; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; disruption to our supply chain or operations or those of our suppliers; competition for qualified personnel; 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. 2
Chief Executive Officer
Olivier Bohuon
Full year 2015 highlights
Key Comments
• Revenues +4% underlying (+0% reported) ‐ Advanced Wound Care +8% ‐ Recon +3% with Knees +5% ‐ Sports Medicine Joint Repair +7% ‐ Emerging Markets +11%
• Five technology and distribution acquisitions
• Trading profit margin 23.7% (+80bps)
• EPSA 85.1¢ (+2% reported, +9% CER)
• Full year dividend 30.8¢ (up 4%)
Full Year
2015 2014 Underlying
growth
$m $m %
Revenue 4,634 4,617 4
Trading profit 1,099 1,055 5
Trading Profit Margin 23.7% 22.9%
EPSA 85.1¢ 83.2¢
4
Progress on our Strategic Priorities in 2015
5
Sh
are
ho
lde
r V
alu
e
• Strong existing product portfolio and new models • Attractive pipeline, both internal and acquired • Creating single R&D function to focus pipeline development
• Strong double digit growth ex China • Acquisitions in Russia, Colombia, mid-tier • Emerging markets growth story remains intact
Emerging Markets
Established Markets • Strong US dynamic (AWM turn-around, Recon, Sports Med) • Europe stabilised • Increased focus on commercial excellence
Innovation
• Group optimisation plan delivering on benefits • Extending single MD model to US • Establishing Global Business Services
Simplification
Acquisitions • Success of Arthrocare and Healthpoint acquisitions • Emerging market deals strengthening position • Attractive technologies - ZUK, Blue Belt Technologies
Driving commercial excellence and pioneering innovation
6
Commercial
Regional sales organisations
Global commercial organisation
Global R&D
Global Operations
Customer-facing franchises
Business support
functions
Single MD model in all Established and
Emerging countries
Commercial strategy Upstream marketing
Market access Salesforce excellence
Pricing
Finance HR
Legal Compliance
IT
Pioneering innovative technologies and models
7
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, GYN and Trauma & Extremities portfolios
Three full years since acquisition
• Provided scale to our US wound management business
• Transaction delivered results ahead of plan
• 3-year sales CAGR >20%
• Year three ROCE exceeds WACC
Building a strong M&A track record
8
First full year since acquisition
• Integration completed
• Results tracking to plan
• Cost synergies achieved
• US Sports Medicine benefiting from sales synergies
Enterprise Value: $0.8bn Enterprise Value: $1.5bn
2%
9%
0% 5% 10% 15%
Excluding China Emerging
Est OUS
US
AWD
AWB
AWC
Hips
Knees
Arthroscopic Enabling Tech
Sports Medicine Joint Repair
Trauma & Extremities
Other Surgical
15%
16%
4%
1%
6%
13%
0%
3%
9%
0% 10% 20%
Q4 revenue growth of 5% underlying
9
Geographical growth Product franchise growth Revenue split
Underlying change (%) Underlying change (%)
Note: ‘Est OUS’ is Australia, Canada, Europe, Japan and New Zealand, ‘Other Surgical’ includes Gynaecology and ENT.
14% 2%
Sports Medicine, Trauma & OSB
• Q4 Revenue performance
‐ Sports Medicine Joint Repair +9% ($169m)
‐ Arthroscopic Enabling Technologies (AET) +3% ($159m)
‐ Trauma & Extremities +0% ($127m)
‐ Other Surgical Businesses* +13% ($56m)
• Commentary
‐ both Joint Repair and AET benefitting from ArthroCare integration
‐ very strong US Joint Repair growth (+17%) led by shoulder
‐ ENT and GYN generating good growth
10
* ‘Other Surgical Businesses’ includes Gynaecology and ENT
Comprehensive Product Offerings for Rotator Cuff Repair
• Q4 Revenue performance
‐ Knees: global +6%*, US +7%*, OUS +4%* ($248m)
‐ Hips: global +1%, US +0%, OUS +1% ($163m)
• Commentary
‐ continued strong growth in global Knees
‐ ZUK sales ahead of guidance
‐ Blue Belt Technologies acquisition completed and integration off to a good start
Reconstruction
11 * Excludes the effect of ZUK product acquisition
JOURNEY™ II BCS Bi-Cruciate Stabilised Knee System
Advanced Wound Management
• Q4 Revenue performance
‐ Advanced Wound Care +4% ($196m)
‐ Advanced Wound Bioactives +16% ($96m)
‐ Advanced Wound Devices +14% ($43m)
• Commentary
‐ sustainable improvement in AWC trend
‐ AWB strong final quarter as expected
‐ AWD benefitted from PICO growth
12
PICO◊ Single Use Negative Pressure Wound
Therapy
Chief Financial Officer
Julie Brown
14
Growth
2015 2014 Reported CER(1) Underlying(2)
Revenue $4,634m $4,617m 0% 8% 4%
Trading Profit $1,099m $1,055m 4% 10% 5%
Trading Margin 23.7% 22.9%
EPSA 85.1¢ 83.2¢ 2% 9%
Trading cash flow $936m $781m
Free cash flow $672m $308m
Full Year Financial Highlights
(1) Constant exchange rates (2) Growth at constant exchange rates, adjusted for acquisitions and disposals
FY 2015(1) Q4 2015(1)
Q4 and Full Year Revenue growth
15 (1) Q4 2015 comprises 64 trading days (2014 – 63 trading days). Full year comprises 251 days (2014 – 251 days) (2) Constant exchange rates
Growth % Growth %
Underlying Underlying
Acquisitions Acquisitions
CER(2) CER(2)
Currency Currency
Reported Reported
5%
2%
7%
-6%
1%
4%
4%
8%
-8%
0%
16
Full Year
2015 2014
$m $m
Revenue 4,634 4,617
Cost of goods sold (1,143) (1,127)
Gross profit 3,491 3,490
Gross profit margin 75.3% 75.6%
Selling, general and admin (2,170) (2,200)
Research and development (222) (235)
Trading profit 1,099 1,055
Trading profit margin 23.7% 22.9%
Full year trading income statement
17
Group trading margin 2015
Trading margin history Selected 2015 margin drivers
2013 2014 2015
22.7% 22.9%
23.7% Group optimisation
ArthroCare synergies
Price, mix and exchange
RENASYS™ hold
18
Full year IFRS profit adjusting items Full Year
2015 2014
$m $m
Trading profit 1,099 1,055
Acquisition related costs (12) (118)
Restructuring and rationalisation (65) (61)
Amortisation of acquisition intangibles (204) (129)
Legal and other items (190) 2
IFRS Operating profit 628 749
19
Metal on metal
• Majority of US metal-on-metal hip claims settled
• Insurance covered majority of settlement
• $25m net cash cost (incl. insurance receivable to date)
• Q4 accounting charge of $203m
• Represents cost of US settlement, net of insurance, and present value of all other current and anticipated claims, before insurance
• Excludes future legal charges
• Group carries considerable product liability insurance
Legal settlements
Full Year Growth
2015 2014 Reported CER
$m $m
Trading profit 1,099 1,055 4% 10%
Interest receivable 6 13
Interest payable (47) (28)
Other finance costs (13) (11)
Share of results from associate (5) (2)
Adjusted profit before tax 1,040 1,027
Taxation (279) (284) Tax rate* 26.8%
Adjusted attributable profit 761 743
Number of shares – million 894 893
Adjusted earnings per share ("EPSA") 85.1¢ 83.2¢ 2% 9%
Earnings per share ("EPS") 45.9¢ 56.1¢ 20
Full year EPSA and EPS
* Full year rate on Trading results
Full year free cash flow
21
Full Year
2015 2014
$m $m
Trading profit 1,099 1,055
Share based payment 29 32
Depreciation and amortisation 307 310
Capital expenditure (358) (375)
Movements in working capital (141) (241)
Trading cash flow 936 781
Trading cash conversion 85% 74%
Restructuring, rationalisation, acquisition & other (91) (195)
Operating cashflow after capital expenditure 845 586
Net interest paid (36) (33)
Taxation paid (137) (245)
Free cash flow 672 308
(1,613) (1,361)
1,030
-
(358)
(272) (71)
(77)
(1,800)
(1,600)
(1,400)
(1,200)
(1,000)
(800)
(600)
(400)
(200)
0
Dec-14
Net Debt
FCF pre
capex
Capex Dividends Acquisitions Share buy
back
Other Dec-15
Net Debt
Cash flow and capital allocation
22
$m
Reinvest for organic growth
Progressive dividend policy
Acquisition in line with strategy
Return excess to share-holders 1 2 3 4
EPSA growth at CER
Trading margin development
Established Markets
Revenue growth
23
Emerging Markets
Innovation
Simplification
Acquisitions
Optimising Cash
Delivering returns through capital
allocation framework
Our 2016 guidance
Maintain good underlying growth
Continued tax rate improvement
Continued margin improvement; more than offset by FX and Blue Belt
Chief Executive Officer
Olivier Bohuon
Summary
• 2015 delivered acceleration in sales and improvement in profitability
‐ sustained improvement in franchises and regions
‐ strong execution of efficiency programmes
‐ further strengthening through acquisitions
• Outlook
‐ continue the positive underlying revenue growth trend
‐ in the medium term, we anticipate increasingly outperforming our markets
‐ strategy continues to transform the profile of Smith & Nephew
25
Questions
Appendices
2016 Technical guidance
28
Guidance Full year
Restructuring costs c. $50m
Acquisition and integration costs c. $10m
Amortisation of acquisition intangibles c. $140m
Income from associates Slightly negative
Interest payable(1) ~ 3%
Other finance costs c. $10m
Tax rate on Trading result 26.5% or slightly lower
(1) Long term borrowings were $1,434m at the end of 2015, pre Blue Belt.
29
H1 H2 Full Year
2015 2014 2015 2014 2015 2014
$m $m $m $m $m $m
Revenue 2,272 2,220 2,362 2,397 4,634 4,617
Cost of goods sold (566) (538) (577) (589) (1,143) (1,127)
Gross profit 1,706 1,682 1,785 1,808 3,491 3,490
Gross profit margin 75.1% 75.8% 75.6% 75.4% 75.3% 75.6%
Selling, general and admin (1,084) (1,078) (1,086) (1,122) (2,170) (2,200)
Research and development (110) (120) (112) (115) (222) (235)
Trading profit 512 484 587 571 1,099 1,055
Trading profit margin 22.5% 21.8% 24.9% 23.8% 23.7% 22.9%
Trading income statement - half and full year
30
IFRS profit adjusting items – half and full year
H1 H2 Full Year
2015 2014 2015 2014 2015 2014
$m $m $m $m $m $m
Trading profit 512 484 587 571 1,099 1,055
Acquisition related costs (13) (58) 1 (60) (12) (118)
Restructuring and rationalisation (19) (19) (46) (42) (65) (61)
Amortisation of acquisition intangibles (78) (54) (126) (75) (204) (129)
Legal and other items 37 10 (227) (8) (190) 2
IFRS Operating profit 439 363 189 386 628 749
H1 H2 Full Year
2015 2014 2015 2014 2015 2014
$m $m $m $m $m $m
Trading profit 512 484 587 571 1,099 1,055
Interest receivable 2 7 4 6 6 13
Interest payable (23) (11) (24) (17) (47) (28)
Other finance costs (7) (5) (5) (6) (13) (11)
Share of results from associate (3) (2) (2) - (5) (2)
Adjusted profit before tax 481 473 559 554 1,040 1,027
Taxation (131) (133) (148) (151) (279) (284)
Adjusted attributable profit 350 340 411 403 761 743
Number of shares – million 894 893 894 893 894 893
Adjusted earnings per share ("EPSA") 39.1¢ 38.1¢ 46.0¢ 45.1¢ 85.1¢ 83.2¢
Earnings per share ("EPS") 33.0¢ 26.8¢ 12.9¢ 29.3¢ 45.9¢ 56.1¢ 31
EPSA and EPS – half and full year
Free cash flow – half and full year
32
H1 H2 Full Year
2015 2014 2015 2014 2015 2014
$m $m $m $m $m $m
Trading profit 512 484 587 571 1,099 1,055
Share based payment 13 16 16 16 29 32
Depreciation and amortisation 148 140 159 170 307 310
Capital expenditure (161) (161) (197) (214) (358) (375)
Movements in working capital (130) (222) (11) (19) (141) (241)
Trading cash flow 382 257 554 524 936 781
Trading cash conversion 75% 53% 94% 92% 85% 74%
Restructuring, rationalisation, acquisition & other
36 (37) (127) (158) (91) (195)
Operating cash flow 418 220 427 366 845 586
Net interest paid (17) (12) (19) (21) (36) (33)
Taxation paid (72) (136) (65) (109) (137) (245)
Free cash flow 329 72 343 236 672 308
Franchise revenue analysis
33 All revenue growth rates are on an underlying basis * ‘Other Surgical Businesses’ includes Gynaecology and ENT
2014 2015
Q1 Q2 Q3 Q4 Full Year
Q1 Q2 Q3 Q4 Full year
Growth Growth Growth Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % % % % $m %
Sports Medicine, Trauma & OSB
2 6 7 5 5 5 4 2 5 1,881 4
Sports Medicine Joint Repair 5 9 11 8 8 9 7 4 9 606 7
Arthroscopic Enabling Technologies
(2) (1) 3 2 1 (2) 1 (2) 3 573 -
Trauma & Extremities (1) 7 8 3 4 5 2 2 - 497 2
Other Surgical Businesses* 23 18 6 6 10 11 7 10 13 205 10
Reconstruction - 3 1 2 2 1 4 3 4 1,487 3
Knee Implants - 2 1 3 2 2 7 6 6 883 5
Hip Implants - 3 1 2 1 (1) 1 (2) 1 604 -
Advanced Wound Management - - (1) (2) (1) 1 7 6 8 1,266 6
Advanced Wound Care (6) (8) (3) (1) (4) 9 12 6 4 755 8
Advanced Wound Bioactives 8 21 14 16 15 5 6 2 16 344 7
Advanced Wound Devices 13 1 (17) (27) (9) (27) (9) 17 14 167 (3)
Group 1 3 3 2 2 3 5 4 5 4,634 4
Regional revenue analysis
34
‘Other Established Markets’ is Australia, Canada, Europe, Japan and New Zealand. All revenue growth rates are on an underlying basis
2014 2015
Q1 Q2 Q3 Q4 Full Year
Q1 Q2 Q3 Q4 Full year
Growth Growth Growth Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % % % % $m %
Geographic regions
US (2) 4 2 - 1 1 4 4 9 2,217 5
Other Established Markets 1 (3) (2) (1) (1) (2) 3 1 2 1,702 1
Established Markets (1) 1 - - - - 3 3 6 3,919 3
Emerging Markets 9 17 20 18 17 22 14 8 2 715 11
Group 1 3 3 2 2 3 5 4 5 4,634 4
Analysis of restructuring costs
35
Of the $57m total charged in the full year, all $57m are reflected in ‘selling, general and administrative expenses’ and nothing in ‘cost of goods sold’ in the Group Income Statement.
Structural Efficiency target of $160m cash costs and $40m asset write-offs.
Group Optimisation target of $150m total costs.
P&L Charge Cash Spend
Previous
Total to Date FY Total to date
Previous Total to Date
FY Total to date
Group Optimisation Plan
$m $m $m $m $m $m
Cash costs 48 57 105 39 45 84
Asset w/offs - - - n/a n/a n/a
Total 48 57 105 39 45 84
Structural Efficiency Programme
$m $m $m $m $m $m
Cash costs 141 8 149 139 7 146
Asset w/offs 21 - 21 n/a n/a n/a
Total 162 8 170 139 7 146
Business days per quarter
36
Q1 Q2 Q3 Q4 Full Year
2014 62 63 63 63 251
2015 61 63 63 64 251
2016 64 64 63 60 251
Exchange rates
37
Q4/14 FY/14 Q1/15 Q2/15 Q3/15 Q4/1
5 FY/15
$:€
Period end 1.21 1.21 1.09 1.12 1.12 1.09 1.09
Average 1.25 1.33 1.13 1.11 1.11 1.10 1.11
$:£
Period end 1.56 1.56 1.49 1.57 1.52 1.48 1.48
Average 1.58 1.65 1.51 1.53 1.55 1.52 1.53