6 February 2014

Smith & Nephew 2013 Q4 and Full Year Results

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the Fourth Quarter and Full Year ended 31 December 2013.

For a full copy of the announcement with results please click here (PDF 525KB)

  3 Months* to    12 Months to 
  31 Dec
2013
$m 		31 Dec
2012
$m 		Underlying
change
% 		  31 Dec
2013
$m 		31 Dec
2012
$m 		Underlying
change**
%
Revenue 1 1,175 1,077 6   4,351 4,137 4
Trading profit 2 292 272 8   987 965 5
Operating profit 2 235 213     810 846  
Trading profit margin (%) 24.8 25.3 (50)bps   22.7 23.3 (60)bps
EPSA (cents) 3,4 23.4 21.4     76.9 74.8  
EPS (cents)4 18.1 15.6     61.7 80.4  
               
Segmental revenue1              
Advanced Surgical Devices global 818 797 5   3,015 3,108 1
Advanced Wound Management global 357 280 10   1,336 1,029 11

* Q4 2013 comprises 62 trading days (2012: 61).
** Underlying change includes the like-for-like growth from acquisitions and excludes impacts of the Bioventus transaction and currency translation

Financial Highlights

Q4 Strategic Highlights 

Commenting, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:

“Smith & Nephew finished the year strongly. Our Orthopaedic Reconstruction business confirmed its improved dynamic, in particular delivering 11% growth in US Knees. Sports Medicine Joint Repair and Advanced Wound Management also delivered double digit sales growth.  We had another successful quarter in the Emerging & International Markets and completed acquisitions in Turkey, India and Brazil.

“For the Full Year we generated good underlying revenue and trading profit growth and met our margin expectations. As planned we made targeted investments in research & development and the emerging markets. We also returned significant value to shareholders through increased dividends and a share buy-back programme.

“Looking to 2014, we will continue to invest where we see higher growth opportunities and focus on improving our efficiency. We built momentum across the Group through 2013 and expect to make further progress in the year ahead.”

Analyst presentation and conference call

An analyst presentation and conference call to discuss Smith & Nephew’s fourth quarter and preliminary results will be held at 9.00am GMT/4.00am EST today, Thursday 6 February. This will be broadcast live on the company’s website and will be available on demand shortly following the close of the call at http://www.smith-nephew.com/Q413. During the presentation a listen-only service will be available by calling +44 (0)20 3427 1906 in the UK or +1 646 254 3365 in the US (passcode 8030771). Analysts should contact Jennifer Heagney on +44 (0) 20 7960 2255 or by email at jennifer.heagney@smith-nephew.com for conference call details.

Notes

1  Unless otherwise specified as ‘reported’ all revenue growths throughout this document are underlying increases/decreases after adjusting for the effects of currency translation, inclusion of the comparative impact of acquisitions and exclusion of disposals.  See note 3 to the financial statements for a reconciliation.

2  A reconciliation from operating profit to trading profit is given in note 4 to the financial statements.  The underlying growth in trading profit is the growth in trading profit after adjusting for the effects of currency translation, inclusion of the comparative impact of acquisitions and exclusion of disposals.

3  Adjusted earnings per ordinary share (“EPSA”) is our reported trend measure and is stated before acquisition related costs, restructuring and rationalisation costs, amortisation of acquisition intangibles, profit on disposal of net assets held for sale and taxation thereon. See note 2 to the financial statements.

4  Earnings per share for the three month period and year ended 31 December 2012 have been restated following the adoption of the revised IAS 19 Employee Benefits standard. As a result of the restatement, basic and adjusted basic earnings per share for the three months ended 31 December 2012 were both reduced by 0.2¢ and for the year ended 31 December 2012 both reduced by 0.9¢. See note 1 to the financial statements.

5  All numbers given are for the quarter ended 31 December 2013 unless stated otherwise.

6  References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.

Enquiries

Investors 
Phil Cowdy  +44 (0) 20 7401 7646
Smith & Nephew 
 
Media 
Charles Reynolds  +44 (0) 20 7401 7646
Smith & Nephew 
 
Andrew Mitchell / Justine McIlroy +44 (0) 20 7404 5959
Brunswick 

Fourth Quarter Results

Smith & Nephew finished the year strongly. Our Orthopaedic Reconstruction business confirmed its improved dynamic, in particular delivering 11% growth in US Knees. Sports Medicine Joint Repair and Advanced Wound Management also delivered double digit sales growth.  We had another successful quarter in the Emerging & International Markets and completed acquisitions in Turkey, India and Brazil.

Our revenue was $1,175 million in the quarter, up 6% on an underlying basis (2012: $1,077 million). Growth was up 9% reported year-on-year, reflecting a -1% currency headwind and the net effect of acquisitions and disposals. There was one additional sales day to the comparator quarter in 2012, which increased underlying revenue growth by an estimated 1%.

In the US we grew revenue by 9%, including strong quarters from Advanced Wound Bioactives, Advanced Wound Devices, Sports Medicine Joint Repair and Knee Implants. Revenue growth was 1% in our Other Established Markets, where Europe remained challenging. We continued our strong performance in the Emerging and International Markets with revenue growth of 16%. 

We continued to build our platform in the Emerging and International Markets, announcing and completing the acquisition of our Brazilian Advanced Wound Management distributor. We also completed the acquisitions of our Advanced Surgical Devices distributor in Turkey and the Indian Sushrut-Adler business, adding an orthopaedic trauma portfolio for the emerging markets.   

Trading profit in the quarter was $292 million, up 8% underlying on the previous year (2012: $272 million). This resulted in a Group trading profit margin of 24.8%, in-line with our expectations (2012: 25.3%).  

The net interest income for the period was $1 million. The final tax rate for 2013 was 29.2%, resulting in a rate of 27.7% for the quarter on profit before acquisition related costs, restructuring and rationalisation costs and amortisation of acquisition intangibles. Adjusted attributable profit of $209 million is before these items and taxation thereon.

Adjusted earnings per share in the quarter was 23.4¢ (117.0¢ per American Depositary Share, “ADS”) (2012: 21.4¢ per share). Basic earnings per share was 18.1¢ (90.5¢ per ADS) (2012: 15.6¢).

Trading cash flow (defined as cash generated from operating activities less capital expenditure, but before acquisition related costs and restructuring and rationalisation costs) was $281 million, reflecting a trading profit to cash conversion ratio of 96% (2012: 95%).

Net debt was $253 million against $222 million at the end of Q3 2013 and $288 million at the end of Q4 2012. In December the Group signed a private placement agreement to borrow $325 million of long-term debt. The funds, which have an average fixed rate of 3.7% and an average maturity of just over nine years, were drawn down on 21 January 2014 and used to repay existing bank debt.

We continued to implement our $300 million share buy-back programme and had spent $226 million at the quarter end. This programme has now been suspended as a result of our agreement to acquire ArthroCare Corp. announced on 3 February 2014.

In our first year operating under the new progressive dividend policy the Board is pleased to recommend a Final Dividend of 17.0¢ per share (85.0¢ per ADS). This, together with interim dividend of 10.4¢ per share (52.0¢ per ADS), will give a Full Year distribution of 27.4¢ per share (137.0¢ per ADS), up 5% year-on-year.

Advanced Surgical Devices global (“ASD”)

ASD delivered total revenue of $818 million in the quarter, up 5% underlying on the same period last year (2012: $797 million). Market conditions improved in the US and were broadly unchanged elsewhere. Europe remained challenging. Like-for-like pricing pressure across our markets was similar to recent quarters.

Against this backdrop, ASD delivered good revenue growth of 6% in the US and flat revenue in our Other Established Markets. In the Emerging & International Markets we continue to perform strongly, with revenue up 16% in the quarter.

Trading profit was $201 million (2012: $200 million) with the trading profit margin of 24.6% (2012: 25.1%) reflecting the impact of the US medical device excise tax and the cost of our planned investments during the quarter.

In our Knee Implant franchise revenue was up 5% against a market growth rate of 7%. Our performance builds upon the improvements of the last quarter. Revenue growth was driven by the US, which was up 11%, as sales of our new JOURNEY◊ II BCS Knee System accelerated and we continued to benefit from the recent VERILAST◊ bearing surface TV advertising campaign. We are starting to introduce JOURNEY II BCS into other markets and expect to begin to release range extensions in the near future.

Revenue from our Hip Implant franchise was up 2% in the quarter against the market growth rate of 4%. Our core hip business, excluding resurfacing, grew 3%. We launched our POLARSTEM◊ Cementless Stem System in the US during the quarter.

Taking Hip & Knee Implants together, our Orthopaedic Reconstruction performance sequentially improved in the second half of 2013. We have started to improve our position in the product cycle. However, the relatively high exposure to the weak European market as well as metal-on-metal headwinds continues to hold back headline performance.

Our Trauma franchise grew revenue by 5%, driven by a strong quarter in the Emerging & International Markets.  The estimated market growth rate was 7%. We saw increased benefits from the additional extremities US sales reps recruited in early 2013.

Our Sports Medicine Joint Repair franchise continued to produce strong growth, with revenue up 11% as all of our joint portfolios and geographies contributed. We extended our portfolio in the quarter with the launch of HEALICOIL◊ REGENESORB, an innovative next generation bio-composite suture anchor for shoulder repair. Revenue in Arthroscopic Enabling Technologies was -1%, consistent with the trend seen throughout the year. We have a strong pipeline of products across these two franchises with launches planned for the coming months. 

Advanced Wound Management global (“AWM”)

AWM continued its strong underlying performance delivering revenue of $357 million in the quarter, up 10% year-on-year (2012: $280 million). We grew at twice the estimated global market rate of 5%.

US revenue growth of 23% was led by another stand-out quarter from Advanced Wound Bioactives. Revenues from our Other Established Markets grew 3%. The Emerging & International Markets remain strong, delivering growth of 19%.

Trading profit was $91 million (2012: $72 million), with the trading profit margin of 25.3% (2012: 25.8%) reflecting our increased investment in sales and marketing and R&D. 

In Advanced Wound Care revenue was flat. ALLEVYN◊ continues to make good progress in Europe following recent product introductions and investment in marketing. We further strengthened our portfolio in the region with the launch of our DURAFIBER◊  Ag antimicrobial dressing during the quarter.

In Advanced Wound Devices we grew revenue by 17%. Whilst we are seeing increased market competition in Negative Pressure Wound Therapy (NPWT), we are continuing to take market share with our traditional NPWT system, as well as benefiting from our unique PICO◊ single use portable disposable product, and our recent expansion into the emerging markets. 

In Advanced Wound Bioactives we delivered revenue growth of 52%. This completes an outstanding first year for this business within the Smith & Nephew portfolio, with full year revenue growth of 47% in-line with our revised guidance. We re-launched REGRANEX◊ Gel, a platelet-derived growth factor, in the quarter.

Full Year Results

For the Full Year we generated good underlying revenue and trading profit growth and met our margin expectations. 

Revenue was $4,351 million, an underlying 4% increase (2012: $4,137 million). Trading profit was $987 million (2012: $965 million), up 5% underlying. The trading profit margin was 22.7% (2012: 23.3%).

Operating profit was $810 million (2012: $846 million), reflecting integration costs and increased amortisation of acquisition intangibles from the acquisition of Healthpoint.  

Profit before tax was $802 million. The 2012 profit before tax was $1,092 million, which included a $251 million profit on disposal of the Group’s Clinical Therapies business.  

ASD delivered $3,015 million of revenue, up 1% on an underlying basis as we gained upward momentum throughout the year (2012: $3,108 million). Our revenue was 1% ahead in the US, -3% down in our Other Established Markets and up 18% in the Emerging & International Markets. Our revenue growth by franchise was in Knee Implants flat, in Hip Implants -1%, in Trauma 4%, in Sports Medicine Joint Repair 7% and in Arthroscopic Enabling Technologies -2%. In our Other ASD franchise, which includes gynaecology, revenue growth was 14%, with the remaining Clinical Therapies geographies contributing $9 million.

AWM delivered revenue of $1,336 million in 2013, up 11% on an underlying basis (2012: $1,029 million) against a market growth rate of 4%. Our revenue growth was up 22% in the US, up 3% in our Other Established Markets and up 20% in the Emerging & International Markets. Advanced Wound Care revenue grew by 1%, Advanced Wound Devices by 20% and Advanced Wound Bioactives by 47%.

The net interest income for the period was $4 million. The tax charge of $246 million is based upon a rate for the full year of 29.2% on profit before restructuring and rationalisation costs, acquisition related costs and amortisation of acquisition intangibles. Adjusted attributable profit before these items and taxation thereon was $693 million and attributable profit was $556 million.

EPSA was 76.9¢ (384.5¢ per ADS) (2012: 74.8¢). Reported basic earnings per share was 61.7¢ (308.5¢ per ADS)(2012: 80.4¢).

Trading cash flow was $877 million (2012: $999 million), reflecting a trading profit to cash conversion ratio of 89% (2012: 104%).

Progress Delivering Strategic Priorities

Smith & Nephew is focused on five strategic priorities. In delivering these we are reshaping the Group to be fit and effective for the future.

In 2013 we made significant progress against these priorities, expanding our product portfolio and pipeline, building our platform, growing in the emerging markets, driving greater efficiency and delivering and successfully integrating acquisitions.

In our Established Markets our work to drive efficiency and invest in targeted areas of higher growth resulted in the improved performance seen in the second half of 2013.  We delivered 23 new Advanced Wound Management products, including ACTICOAT◊  Flex for PICO, extending our nanocrystalline silver technology to surgical incisions that would benefit from both NPWT and antimicrobial barrier protection.  The most important product launch of the year for the Group was the natural-motion knee replacement platform JOURNEY II BCS.  This has been well-received by surgeons in the US and we are excited by its prospects here and in other markets as we extend the launch in 2014.

In our Emerging and International Markets we have built upon our leading position generating double-digit revenue growth. China, now our sixth largest global market, delivered revenue growth of more than 30% in 2013. Our success here is the model for what we can achieve in other countries.  During the year we invested in the sales force and infrastructure in growth markets such as Mexico and the Middle East, with good results. We launched many existing products into new markets, such as traditional NPWT and PICO. We also acquired distributors in Turkey and Brazil, moving us closer to our customers to ensure we are able to anticipate their needs and offer a fuller range of products.

We maintained a high rate of innovation and have a strong product pipeline for 2014, particularly in Trauma and Sports Medicine, where we will bring many exciting new products to market. We see a major opportunity to create portfolios for patients in the economic mid-tier across the emerging markets, and launched our first products in 2013. Our HP802 venous leg ulcer treatment entered Phase III trials during the year. Overall we increased R&D investment to $231 million in 2013, representing 5.3% of revenue, and are committed to maintaining these high levels of investment and innovation going forward.

These significant investments and many other initiatives have been made possible through our continued drive to be more efficient and reduce cost. In 2011 we announced a programme to generate annual savings of $150 million. By 31 December 2013 we had achieved annualised savings of $131 million.

During the year we also made good progress on our acquisitions programme. Healthpoint Biotherapeutics has given us a leading position in Advanced Wound Bioactives, the fastest growing segment of Advanced Wound Management. This business out-performed our expectations, increasing revenue by 47% in 2013. The integration is proceeding very well and, with its unique portfolio, excellent sales execution and expertise in product research and development, it is proving to be an outstanding addition to the Group. We acquired the Sushrut-Adler orthopaedics business in India in the fourth quarter, giving us a mid-tier trauma portfolio and additional development and manufacturing capability from which we will expand our offering for the emerging markets.  

Outlook

We anticipate the market conditions seen in the second half of 2013 to continue in 2014.  We expect the US to be stable with some signs of improvement, Europe to remain challenging, and the emerging markets to continue to offer opportunities for higher growth.

In terms of revenue growth by franchise, we expect:

In terms of trading profit margin, we expect to exceed our 2013 performance. 

In 2014 we will continue to invest where we see higher growth opportunities and focus on improving our efficiency. We built momentum across the Group through 2013 and expect to make further progress in the year ahead.

About Us

Smith & Nephew is a global medical technology business dedicated to helping healthcare professionals improve people's lives. With leadership positions in Orthopaedic Reconstruction, Advanced Wound Management, Sports Medicine and Trauma & Extremities, Smith & Nephew has around 11,000 employees and a presence in more than 90 countries. Annual sales in 2013 were more than $4.3 billion. Smith & Nephew is a member of the FTSE100 (LSE: SN, NYSE: SNN).

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.  

◊  Trademark of Smith & Nephew. Certain marks registered US Patent and Trademark Office.

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