Smith & Nephew 2014 Q4 and Full Year Results - Group enters 2015 stronger, more efficient, and set for higher growth

Smith & Nephew plc (LSE: SN, NYSE: SNN) results for Q4 and Full Year ended 31 December 2014.

For a full copy of the announcement with results please click here (PDF 343KB)

Fourth quarter highlights¹

• Revenue grew 2% underlying and 6% reported to $1,249 million
• Strong trading profit growth, up 7% underlying and 12% reported to $325 million
• 130bps year-on-year increase in trading profit margin, EPSA 25.6¢, up 9%
• Trading cash flow of $366 million, a cash conversion ratio of 113%
• Sustained improvement in US Reconstruction
• Continued higher growth from Emerging & International Markets

Full year highlights¹

• Revenue grew 2% underlying and 6% reported to $4,617 million
• Trading profit up 3% underlying and 7% reported to $1,055 million
• Improved year-on-year trading profit margin, up 20bps to 22.9%, EPSA 83.2¢, up 8%
• ArthroCare Corporation acquisition completed for $1.7 billion, reinforcing Sports Medicine
• Proposed Final Dividend of 18.6¢, Full Year distribution of 29.6¢ per share, up 8% year-on-year

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

“Our 2014 performance reflects the choices we have made to invest in transforming the growth profile of Smith & Nephew. We improved our existing businesses, driving a sustained improvement in US Hip and Knee Implants and building rapidly in the emerging markets. We strengthened our higher growth platforms, acquiring ArthroCare to give us a broader sports medicine portfolio. We created new growth platforms with the mid-tier portfolio and Syncera, disruptive models that fulfill unmet customer needs, and Advanced Wound Bioactives again delivered double-digit growth.

“Whilst the journey to transform Smith & Nephew continues, we are now set to increasingly reap these benefits and accelerate our growth. Consequently, we are confident that the Group will deliver higher underlying revenue growth and trading profit margin in 2015. Smith & Nephew is at the start of a new and exciting phase in its 158-year history.”

Analyst presentation and conference call

An analyst presentation and conference call to discuss Smith & Nephew’s fourth quarter and full year results will be held at 9.00am GMT / 4.00am EST today, Thursday 5 February 2015. This can be watched live via webcast on the Smith & Nephew website at www.smith-nephew.com/results and will be available on the site archive shortly afterwards. For those who wish to dial in to the call, a listen-only service is available by calling +44 (0) 20 3427 1908 in the UK or +1 646 254 3366 in the US (passcode 6552000). If you would like to participate in the Q&A please dial +44 (0) 20 3427 1907 in the UK or +1 646 254 3388 in the US (passcode 6552000).

Notes

¹  Certain items included in 'Trading results', such as trading profit, trading profit margin, EPSA, trading cash flow, cash conversion ratio and underlying growth are non-IFRS financial measures. The non-IFRS financial measures reported in this announcement are explained in Note 8 and are reconciled to the most directly comparable financial measure prepared in accordance with IFRS.

²  Unless otherwise specified as 'reported' all revenue growths throughout this document are underlying increases/decreases after adjusting for the effects of currency translation and including the comparative impact of acquisitions and excluding disposals. All percentages compare to the equivalent 2013 period.

³  All numbers given are for the quarter ended 31 December 2014 unless stated otherwise.

⁴  References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.

⁵  Q4 2014 comprised 63 trading days (2013: 62 trading days).

Enquiries

Investors 
Ingeborg Øie  +44 (0) 20 7401 7646
Smith & Nephew 
 
Media 
Charles Reynolds  +44 (0) 20 7401 7646
Smith & Nephew 
 
Ben Atwell/Deborah Scott/Matthew Cole +44 (0) 20 7404 5959
FTI Strategic Communications

2014 Strategic Progress - Transforming Smith & Nephew

We are delivering on our strategy to rebalance Smith & Nephew by strengthening our higher growth platforms, which now represent more than half the business, up from just 35% in 2011. In 2014 we undertook a number of important actions to accelerate this transformation. The Group enters 2015 stronger, more efficient, and set for higher growth.

In Established Markets we drove a much improved performance in US Hip and Knee Implants, and maintained our momentum in Sports Medicine Joint Repair and Trauma & Extremities. We launched Syncera^◊, a new commercial solution that offers clinically proven primary hip and knee implants combined with cutting-edge technology with the potential to generate significant savings for customers.

In Emerging & International Markets we again performed strongly, delivering 17% revenue growth in 2014. We integrated our recent acquisitions, enhancing our portfolio and bringing us closer to our customers. We established a new commercial structure to market and expand our mid-tier value product ranges for these markets. We developed our Latin America businesses. 

We continued to invest to innovate for value, maintaining our R&D spend at more than 5% of revenue.  We launched many exciting products across the year, including a cruciate retaining version of our JOURNEY^◊ II natural-motion knee and the HAT-TRICK^◊ Lesser Toe Repair System. We have a strong pipeline for 2015 and beyond. 

We further increased our agility and efficiency by simplifying and improving our operating model. Since 2011 we have achieved annualised savings of $146 million, enabling investment in the emerging markets, R&D and other growth opportunities. In 2014 we began work to realise at least another $120 million of annual savings that will start to benefit the bottom line from 2015. This programme is progressing well.

We have supplemented our organic growth through acquisitions. Since 2011 we have completed 15 acquisitions for a total value of $2.8 billion. ArthroCare, Smith & Nephew’s largest acquisition to date, strengthened our Sports Medicine business and we expect the synergies to add $85 million to annual trading profit by 2017. We continue to seek further opportunities to add businesses or technologies that support our higher growth ambitions.

Fourth Quarter Trading Results

Our fourth quarter revenue was $1,249 million, an increase of 2% on an underlying basis and 6% on a reported basis (2013: $1,175 million). Acquisitions added 8% to the reported growth rate, while there was a currency headwind of -4%. There was one more trading day against the comparator quarter in 2013, but given that this fell during the holiday period the effect was immaterial as stated last quarter.

We delivered a strong increase in trading profit in Q4, up 7% underlying and 12% on a reported basis to $325 million (Q4 2013: $292 million). The trading profit margin was 26.1% (Q4 2013: 24.8%), a 130bps year-on-year improvement, which included the benefit of an insurance claim settlement arising from a flood at our Hull manufacturing site in December 2013.

Our performance was led by the sustained improvement in US Reconstruction, with another stand-out performance in US Hips in the quarter, up 8%, as well as revenue growth of 16% from Advanced Wound Bioactives and 8% from Sports Medicine Joint Repair. Advanced Wound Management growth continued to be held back by US Negative Pressure Wound Therapy (‘NPWT’).

Revenue growth from our Established Markets was flat, with the US in-line with the previous year and Other Established Markets declining -1%. Our Emerging & International Markets business delivered strong revenue growth of 18%, completing another excellent year.

The Group reported Q4 operating profit was $226 million (Q4 2013: $235 million), reflecting acquisition costs largely relating to ArthroCare, as well as restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred in the quarter.

We continued to make progress reducing the corporate tax rate.  For the full year this was 27.7% on Trading results, a 150bps reduction year-on-year (2013: 29.2%).

Adjusted earnings per share was 25.6¢ (51.2¢ per American Depositary Share, ‘ADS’) compared to 23.4¢ last year. Basic earnings per share was 17.9¢ (35.8¢ per ADS) (2013: 18.1¢).

Trading cash flow (defined as cash generated from operating activities less capital expenditure, but before acquisition related costs and restructuring and rationalisation costs) was $366 million in the quarter. The trading profit to cash conversion ratio was 113%.

The net interest charge and other finance costs for the period were $14 million. Net debt was $1,613 million, down from $1,880 million at the end of Q3 2014. This represents a reported net debt/EBITDA ratio of 1.2x at the year end.

The Board is pleased to recommend a Final Dividend of 18.6¢ per share (37.2¢ per ADS). This, together with interim dividend of 11.0¢ per share (22.0¢ per ADS), will give a Full Year distribution of 29.6¢ per share (59.2¢ per ADS), up 8% year-on-year.

Advanced Surgical Devices global (“ASD”)

ASD delivered revenue of $914 million in the quarter, up 4% underlying (2013: $818 million).

Revenue growth in the US was up 3% and flat in our Other Established Markets. Our Emerging & International Markets business continues to deliver strong results, with revenue up 17%. The like-for-like pricing pressure in the quarter remained unchanged across our markets. 

We delivered a trading profit for the quarter of $258 million (2013: $201 million), and the Q4 trading profit margin increased 370bps to 28.3% (2013: 24.6%). This improvement reflects early cost synergies from the acquisition of ArthroCare and benefits from our efficiency programmes offset by continued investment in the roll-out of new products.

We grew revenue by 2% across our Orthopaedic Reconstruction franchises in the quarter. In the US this was our third consecutive quarter of above market growth.

Our Knee Implant franchise revenue was up 3% in the quarter, ahead of the global market growth rate of 1%. In the US, knee revenue growth was above market as we maintained sales at last year’s unusually high level. We continue to generate strong demand for the JOURNEY^◊ II Total Knee System and the RT-PLUS^◊ knee has returned to market in Europe.

We grew revenue in our global Hip Implant franchise by 2% in the quarter, in-line with the market growth rate of 2%. In the US our hip growth again stood out, up 8%, as sales in VERILAST^◊ hips and our direct anterior approach portfolio continued to perform strongly. This performance was partly off-set by a softer quarter outside the US.

Syncera, the innovative commercial solution for Orthopaedic Reconstruction announced in August, is making good progress, and we are encouraged by the contracts signed and prospective customers.

Our Sports Medicine Joint Repair franchise delivered good 8% revenue growth as we continued to benefit from the success of a number of product launches earlier this year. In the complementary Arthroscopic Enabling Technologies franchise, which includes COBLATION^◊, revenue growth was 2%, driven by a strong quarter in the Emerging & International Markets.  

In Trauma & Extremities we delivered revenue growth of 3%. Performance was strongest in the Emerging & International Markets.  Extremities continued to benefit from recent product launches such as the HAT-TRICK^◊ Lesser Toe Repair System, as well as our investments in the sales force. 

In the Other ASD segment, which includes Ear, Nose & Throat (‘ENT’) and Gynaecology, we grew revenue by 6% in the quarter.

Advanced Wound Management global (“AWM”)

The AWM fourth quarter performance continued to reflect the impact of the US RENASYS^◊ distribution hold announced in June 2014. As a result global revenue declined -2% to $335 million (2013: $357 million) and US revenue was down -9%. Elsewhere, revenue declined -2% in Other Established Markets and grew strongly, up 22%, in the Emerging & International Markets. The estimated global market growth rate was 4%.

We delivered a Q4 trading profit of $67 million (2013: $91 million), with the trading profit margin of 19.9% including the Hull insurance claim settlement (2013: 25.3%).

In Advanced Wound Care Q4 revenue was down -1%. The new management team is beginning to implement its strategy to return this franchise to sustainable growth in the Established Markets. Growth in the Emerging Markets remained strong in the quarter.

In Advanced Wound Devices Q4 revenue was down -27%, due to the US RENASYS^◊ hold, an important focus for management. In addition, competitive pressures in traditional canister-based NPWT continue in Europe. Sales of our single-use, canister-free PICO^à system remained very strong as we continued to increase the evidence supporting its use on a wider variety of conditions.

In Advanced Wound Bioactives we delivered Q4 revenue growth of 16%, meeting our mid-teens revenue growth guidance for 2014 and completing a second year of strong performance since we acquired the business. The re-launched REGRANEX^à Gel continues to perform well, as did SANTYL^◊. We have taken the decision to stop the HP802-247 Phase 3 programme following a review of the trial data announced in October, resulting in a one-off cost of $28 million in the quarter. We remain committed to investing in developing pioneering Advanced Wound Bioactive treatments.  

Full Year Results

2014 revenue was $4,617 million, an increase of 2% on an underlying basis and 6% on a reported basis (2013: $4,351 million). Acquisitions added 5% to the reported growth rate, while currency was a -1% headwind.

Trading profit was $1,055 million (2013: $987 million), up 3% underlying and 7% on a reported basis. The trading profit margin was 22.9% (2013: 22.7%), a 20bps improvement year-on-year.

ASD delivered 2014 revenue of $3,298 million, up 3% (2013: $3,015 million). Revenue was 2% up in the US, flat in our Other Established Markets and up 17% in the Emerging & International Markets. All franchises contributed to this performance with revenue growth in Knee Implants of 2%, in Hip Implants 1%, in Trauma & Extremities 4%, in Sports Medicine Joint Repair 8%, in Arthroscopic Enabling Technologies 1% and in Other ASD (including ENT and Gynaecology) 10%.

AWM delivered 2014 revenue of $1,319 million, down -1% on an underlying basis (2013: $1,336 million). Our revenue growth was down -4% in the US and -2% in our Other Established Markets, and up 14% in the Emerging & International Markets.  Advanced Wound Care revenue was down -4%, Advanced Wound Devices was down -9%, impacted by the US RENASYS hold, and Advanced Wound Bioactives delivered strong growth, up 15%.

Operating profit for 2014 was $749 million (2013: $810 million), reflecting acquisition costs largely relating to ArthroCare, as well as restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred. The net interest charge and other financing costs for 2014 were $33 million (2013: $7 million). Profit before tax was $714 million (2013: $802 million). 

The tax charge of $213 million reflects an effective tax rate of 27.7% for the full year (2013: 29.2%) on Trading results.

EPSA was 83.2¢ (166.4¢ per ADS) (2013: 76.9¢). Reported basic earnings per share was 56.1¢ (112.2¢ per ADS) (2013: 61.7¢).

Trading cash flow was $781 million (2013: $877 million), reflecting a trading profit to cash conversion ratio of 74% (2013: 89%).

Q1 & Q3 Quarterly Reporting

Following recent developments to the requirements for interim reporting and after careful consideration, the Board has taken the decision to change interim financial reporting for the first and third quarters. From 2015 the Group will issue abbreviated Quarterly Trading Reports (‘QTRs’) in April and October each year, rather than the historical reporting of full interim financial statements. The QTRs will give revenue analysis by product franchise and region, along with narrative commentary on the overall performance of the business. The Group will continue to publish its full year and half year results in-line with current practice.

Outlook

We have made material progress in reshaping Smith & Nephew for higher growth since 2011. Whilst the journey to transform Smith & Nephew continues, increasingly we expect to  reap the benefits of the actions and investments we have made.

As a result we expect the Group to deliver higher underlying revenue growth in 2015 than in 2014.

We also expect to deliver a further improvement in trading profit margin in 2015.

Additionally, we expect the effective corporate tax rate to reduce to slightly above 27% in 2015, absent any changes to tax legislation. This is incremental to the 220bps reduction achieved in the last two years.

Smith & Nephew is at the start of a new and exciting phase in its 158-year history.

About Smith & Nephew

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 14,000 employees and a presence in more than 100 countries. Annual sales in 2014 were more than $4.6 billion. Smith & Nephew is a member of the FTSE100 (LSE: SN, NYSE: SNN).

For more information about Smith & Nephew, please visit our corporate website www.smith-nephew.com, follow @SmithNephewplc on Twitter or visit SmithNephewplc on Facebook.com.

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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