Smiths Medical
|
2009 |
2008 |
Reported |
Underlying |
Sales |
403 |
346 |
16% |
(3)% |
Headline operating profit |
77 |
67 |
15% |
(6)% |
Headline operating margin |
19.1% |
19.3% |
|
|
Statutory operating profit |
69 |
59 |
|
|
At reported exchange rates, Smiths Medical’s sales grew 16% while headline operating profit increased by 15%. Reported sales benefited from currency translation (£66m) and acquisitions (£2m) which, if excluded, give an underlying sales decline of 3%. Headline operating profit benefited from currency translation (£14m) and acquisitions (£1m). Operating profit margins reduced slightly, by 20 basis points.
Looking at the medical device market as a whole, the economic downturn has adversely affected hospital capital budgets, which in turn is having a dramatic impact on hospital purchases of hardware or capital items. For example, most competitors in the infusion pump sector have reported significant sales declines in the latest reporting period. In parallel, elective procedures are being delayed as health insurance coverage reduces.
Some 80% of Smiths Medical sales are generated from single-use consumable items. This disposables market is considerably more stable and, in some segments, Smiths Medical has achieved market share growth. Hardware items, such as infusion pumps, comprise the remaining 20% of sales. This sales split is reflected in the underlying performances of the three product areas. Medication Delivery (which includes infusion pumps) declined by 3.8%, Vital Care (which includes temperature management and patient monitoring hardware) declined by 4.5%, while Safety Devices grew by 1.7%.
Underlying profit for the half declined by 6%. Though cost reduction actions in the first half successfully mitigated input price increases, the profit decline reflects increased costs for the accelerated roll-out of the new ERP system as well as increased expenditure on R&D.
Smiths Medical has made good progress in addressing the supply chain problems that have held back the business over the past two years. The 24-month performance improvement programme, which began last year, is delivering results with a further reduction in customer backorders since the year end. At £1.5m, total backorders now stand at their lowest level in more than five years. To date, the North American business has benefited most from these improvements and has held sales in line with last year. However, given the contracting cycle in some of our markets, the International business is taking longer to win back business lost during the earlier supply interruptions. As a result, sales in the International business have declined by 5.7%. Europe has been worst affected, down 6.3% overall, while we have achieved double digit growth in developing markets such as China (15% organic growth) and India (55% organic growth).
The Medication Delivery business has been under pressure on two fronts. Firstly, the diabetes business has faced severe competitive pressure in the US and in other key markets. New pump sales are down significantly, partly offset by more resilient sales of the associated consumable items. Secondly, the delay in hospital capital purchases has directly impacted pump sales in our hospital and ambulatory infusion businesses. Our next generation ambulatory smart pump, CADD-Solis, has been extremely well received by prospective customers.
In Vital Care, our predominantly disposables-driven airway business was flat in the first half, with modest growth in North America offset by a small decline in the rest of the world. This product segment was the most severely affected by the supply problems in the last two years. With these issues behind us, and with a number of new products recently launched and in the pipeline, we expect to return to growth. The hardware businesses in our Vital Care segment, particularly patient monitoring and temperature management, declined in the period due partly to spending deferrals by customers as well as competitive pricing pressure.
Sales of our Safety Devices grew 1.7% in the first half. Recent new access product launches (which target the oncology market) have driven global growth in this business, and are coupled with good growth in our needle safety business. Solid growth in our US intravenous catheter business, which is almost entirely converted to safety products, was offset by a decline in our intravenous catheter business outside the US, where we are seeing competitive pressure from low featured, lower cost safety catheters.
During the period, we began a review of portfolio profitability, looking at margins by stock keeping units (SKUs), leading to decisions on the future shape of the portfolio. This analysis has already highlighted opportunities in terms of pricing, minimum order quantities, customer management and simplification. The initial focus has been on the rationalisation of our large number of SKUs, focusing particularly on our lower volume products which comprise some 13,000 SKUs from the total portfolio. We intend to eliminate at least 3,000 SKUs in an initial round. Furthermore, we have identified the opportunity for targeted price increases on our lower volume, lower margin SKUs. The next phase of the review will look at pricing opportunities across the portfolio including our spares business as well as driving improved customer profitability through enhanced key account management.
An early outcome from this portfolio review concerns our Diabetes business. A considerable amount of intellectual property in the diabetes segment makes the development of next-generation products very costly and risky in terms of the potential for future patent disputes. In addition, this market has evolved rapidly from a familiar hardware plus disposables model to an integrated diabetes disease management model requiring significant investments in continuous glucose monitoring electronically linked to insulin delivery systems. We have concluded that our modest share, in the face of two large well-resourced players, including the market leader in insulin-pump therapy, would result in a declining and increasingly less profitable business. As our only direct-to-consumer enterprise, this business also requires a significant and dedicated infrastructure. Therefore, we have decided to effect an early exit, which is now in the process of implementation. Throughout our involvement in the diabetes market, we have put customer care first, provided excellent customer support and maintained the integrity of our four-year warranty. We have been rewarded with a core group of very loyal customers, and we will continue to support this installed base although we will not sell any new pumps.
Our ongoing efforts to drive efficiency improvements and cost reduction are aimed at protecting business performance during the current downturn and positioning the business for greater margin growth as conditions improve. Overall, we have removed 300 posts since the year end. The North American restructuring programme, announced at the last full year results, is making good progress. The three former operational units in the US and Canada are now managed under a single management team. Though primarily intended to ensure a single face to the customer, we have been able simultaneously to drive business efficiencies, including the centralisation of complaints handling and the transition to a single US shared services centre.
The implementation of our ERP business systems continues to hit all the milestones. Business unit go-live dates are being achieved as planned, while total project costs are tightly controlled and running slightly favourable to expectations. Benelux, Japan, Spain and our manufacturing site at Southington, Connecticut, have gone live in the period. More than 60% of sales and sites are now operating with the new system, and over 90% of the products we make flow through the ERP at some point in the supply chain. The project, due for completion in March 2010, will improve the quality of management information and support inventory reductions, global sourcing and deliver savings. The total budget is £32m, of which £22m has been spent to date. Once complete, the project is expected to deliver annual cost savings of £15m.
Business developments
In November, we extended our presence and capabilities in China through the acquisition of Zhejiang Zheda Medical Instrument Co. Ltd (“ZDMI”). ZDMI manufactures syringe pumps and enteral feeding devices primarily for the Chinese healthcare market which is growing as the population ages and increases in prosperity. ZDMI has around 110 staff based in Hangzhou and posted sales of RMB 72.7m in the last calendar year. Integration is well underway. This acquisition consolidates our presence in a large and rapidly growing market and provides a low cost R&D base for the development of hospital infusion products for other international markets.
Research and development
Total R&D investment represented 3.4% of sales. We are now focusing our investment more tightly on product areas and segments which will deliver higher growth and improved profitability.
In our Vital Care segment, we launched several new products including the first wireless blood pressure monitoring device, SmartX; our percutaneous tracheostomy range, Uniperc, a range of silicone airway devices as well as some lower cost intubation devices.
During the first half of the year, we focused on the global rollout of new products with our CADD-Solis ambulatory smart pump now available in all English speaking markets and a multi language variant due to be launched in 2010. Our highly successful new products for our Access business are now available globally. We also introduced a 250ml cassette for our ambulatory infusion range which enables the pumps to be used for a wider range of therapies.
Outlook
Smiths Medical will continue to improve customer service and deliver on its performance improvement programme. The division will strive for growth in developing markets and globally through the launch of new products. The priority in the short term will be on margin improvement through restructuring and operating efficiencies. The review of portfolio profitability and the decision to exit the diabetes business will affect revenue growth in the near term but will support margin improvement.