Filed by Smith & Nephew plc pursuant to Rule 425
under the Securities Act of 1933
Subject Company: Centerpulse Ltd.
(Commission File No.:001-14654)
Forward-Looking Statements
The following presentations contain forward-looking statements within the
meaning of the United States Private Securities Litigation Reform Act of 1998.
Statements that are not strictly historical statements, including statements
about Smith & Nephew's and Centerpulse's beliefs and expectations, constitute
forward-looking statements. By their nature, forward-looking statements are
subject to risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. The forward-looking statements in
these presentations include, but are not limited to, statements addressing the
following subjects: expected timing of the transaction; future financial and
operating results; actions to be taken by Smith & Nephew Group plc following the
transaction; and the timing and benefits, including synergy benefits, of the
transaction. The following factors, among others, could cause results to differ
materially from those described in the forward-looking statements: inability to
obtain, or meet the conditions imposed for, regulatory approvals for the
transaction; the failure of the shareholders of Smith & Nephew to pass the
resolutions necessary to implement the transaction; the failure of the minimum
tender condition or the failure of other conditions to the offer by Smith &
Nephew Group plc for Centerpulse; the risk that the businesses will not be
integrated successfully and that the expected synergies and cost savings will
not be achieved; and other economic, business, competitive and/or regulatory
factors affecting the businesses of Smith & Nephew and Centerpulse generally.
More detailed information about such economic, business, competitive and/or
regulatory factors is set forth in Smith & Nephew's and Centerpulse's filings
with the SEC. Smith & Nephew and Centerpulse are under no obligation, and
expressly disclaim any obligation, to update or alter their forward-looking
statements, whether as a result of new information, future events or otherwise.
Additional Information
Any offer in the United States will only be made through a prospectus, which is
part of a registration statement to be filed with the SEC. Centerpulse
shareholders who are US persons or are located in the United States are urged to
carefully review the registration statement and the prospectus included therein,
the Schedule TO and other documents relating to the offer that will be filed by
Smith & Nephew with the SEC because these documents contain important
information relating to the offer. You are also urged to read the related
solicitation/recommendation statement on Schedule 14D-9 that will be filed with
the SEC by Centerpulse relating to the offer. You may obtain a free copy of
these documents after they have been filed with the SEC, and other documents
filed by Smith & Nephew and Centerpulse with the SEC, at the SEC's Web site at
www.sec.gov. Once the registration statement, as well as any documents
incorporated by reference therein, the Schedule TO and the Schedule 14D-9 have
been filed with the SEC, you will also be able to inspect and copy these
documents at the public reference room maintained by the SEC at 450 Fifth
Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information about the public reference room. YOU SHOULD READ THE
PROSPECTUS AND THE SCHEDULE 14D-9 CAREFULLY BEFORE MAKING A DECISION CONCERNING
THE OFFER.
The following are transcripts of presentations made available on the Web site of
Smith & Nephew plc.
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CCBN StreetEvents Conference Call Transcript
SNN - Smith & Nephew and Centerpulse combine to form global orthapedic
leader - Video Webcast
Event Date/Time: Mar. 20. 2003 / 4:30AM ET
Event Duration: N/A
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SNN - Smith & Nephew and Centerpulse combine to form
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CORPORATE PARTICIPANTS
Dudley Eustace
Smith & Nephew plc - Chairman
Max Link
Centerpulse AG - Chairman, CEO
Chris ODonnell
Smith & Nephew plc - CE
Peter Hooley
Smith & Nephew plc - FD
Urs Kamber
Centerpulse - CFO
CONFERENCE CALL PARTICIPANTS
Peter Cartwright
Analyst
Martin Wolf
HSBC - Analyst
Beth Meacham
UBS Warburg - Analyst
Andrew Donnage
Analyst
Max Herman
ING - Analyst
Tom Help
Analyst
Anthony Kazavitz
Deutsche Bank - Analyst
PRESENTATION
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Dudley Eustace - Smith & Nephew plc - Chairman
Good morning ladies and gentlemen. This is a tremendous day for Smith & Nephew.
[inaudible] Smith & Nephew and Centerpulse have agreed to [amalgamate] creating
a leading global orthopedic group providing questionably a powerful combination
of two highly complementary businesses [inaudible] premier league of the many
players in the orthopedic sector.
As you will all be aware, due to demographic changes, [inaudible] and advances
in surgical techniques, a sector in which we operate has seen rapid growth and
the outlook continues to be very favorable. We believe that the transaction that
we have announced today, places us in an excellent position in which to take
advantage of a very attractive opportunity in this long-term growth in the
market.
When two large organizations come together, the most vital thing to get right of
course is the integration process, in particular making sure that the cultures
fit together and the combined group operates as a single entity.
The management teams at Centerpulse and Smith and Nephew have known each other
for a very long time and over the past few months we've undertaken due diligence
on each other and we have got to know each other a lot better. I think we could
say that as a result of this experience, I think the companies will work
together extremely well going forward in the smooth process of integration.
Chris will talk to you in more detail about the fundamental strengths of the two
companies, something you always hear about a great deal when mergers are
announced. But it genuinely is the case with us. When one of the companies is
weaker whether geographically [indiscernible] or whatever the other is strong
[inaudible].
Peter will talk to you later about the short-term synergies, which will give us
significant savings. This is really important to us and gives long-term value
creation [indiscernible] two things and drive for growth.
I will let Max, Chris and Peter tell you more about how the two companies are
going to come together, but before I do first let me explain the Board and
Management structure of the new Smith & Nephew Group. In addition to myself as
Chairman, Chris ODonnell will continue as Chief Executive and Peter Hooley will
continue as Finance Director. Dr. Max Link, the Chairman of Centerpulse, will
join our board I am delighted to say as Vice Chairman and another of his
colleagues [indiscernible] will become another Executive Director. All in all,
we believe a very powerful team.
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Let me hand you over to them to tell you more. And first of all is Max Link of
Centerpulse. Thanks.
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Max Link - Centerpulse AG - Chairman, CEO
Ladies and gentlemen good morning. Yesterday evening the Board of Directors of
Centerpulse approved the transaction that provided that our shareholders
cooperate we create a combined company between Smith & Nephew and Centerpulse.
This is a historic event in the life of both companies. The headline [offer]
price for the Centerpulse shareholder is 281.80 Swiss Francs, which would value
our company at more than 3.3b Swiss Francs. Apart from the FTSE 100, a secondary
listing on the Swiss Exchange is anticipated. The new shareholders will have the
pro-forma ownership of 24% of the combined group.
Centerpulse's largest present shareholder in terms of capital holds nearly 20%
of our share capital. Smith & Nephew made a parallel offer for [Incentive] and
77% of their shareholders had already agreed to accept the offer.
Ladies and gentlemen, Centerpulse enjoys a clear number one positioning on the
European reconstructive market with a 22% market share. In the largest markets,
Germany, Italy, France, we command an even higher share. The combined company
will have an awesome presence in Europe in this.
The combination of the two entities is of particular importance in the United
States. This is where the competitive battle is won or lost. This is where one
half of the global reconstructive business is and where two third of the
industry's profits can be grabbed. For us at Centerpulse it was considered vital
to participate in that all-important market in a much more forceful way than we
could ever have done alone. To join forces with Smith & Nephew is our answer to
this imperative.
In spinal implants, we are a leader in stabilization devices. It is a very
dynamic industry with a relatively quick product cycle. After passing through a
not always easy learning curve, we are now fully up to speed and ready to launch
some of the most innovative products around. At least one of them,
[indiscernible], a real breakthrough.
Smith & Nephew's skills and experience in biologics, will be particularly
valuable in this business. Last, but in no way least, dental implants. Here we
are number four on the global market with a 13% market share.
2002 was a good year for the industry and Centerpulse in particular. All of our
businesses show growth rates in the double-digit area. An interactive
normalization of our profitability also occurred.
The fact that the stock of Centerpulse depreciated 250% in 2002, which made us a
big star in Switzerland. In fact it moved from the forty-ninth to the
twenty-sixth position in our country, shows how things changed radically for us.
The challenges for my team and the 3,500 Centerpulse people were enormous. Not
only were our legal problems in the United States [solved] in a class action
settlement. We also succeeded in financing them and maybe even more importantly,
our operations were roaring back with a vengeance.
Today here in London, of course we want to look as good as possible. Needless to
say that July 2001 was proceeded by a virtual collapse of our share price. Many
of our shareholders lost a lot of money. It is equally true that those who
joined us in our darkest moments in the summer of 2001 earned very handsomely.
And as I said, the court approval on May 8th and the funding of the [trust] in
November last year, put the product recall of December 2000 behind us for good.
Thus it was not too much of a surprise when Mr. Eustace and Mr. O'Donnell asked
me in the first meeting in New York last December, if we might do something
together. The combined company will be one of the top three global orthopedics
companies, a formidable power. With its greatly enhanced resources, people,
capital, technology, it is ideally positioned to gain significant competitive
advantage. It will be different, it will be unique. Global in its outlook but
with strong roots in Europe. [indiscernible] will remain the key-manufacturing
center in Europe. Our Centerpulse investors will share in the significant upside
of the combined group. We have identified a far reaching potential of
innovatives as the trading liquidity of the combined group's shares will be
strongly increased.
Ladies and gentlemen, combinations like the one we propose take vision and
courage on both sides. But managers fight fires and we must light fires. There
is a window of opportunity when such things can be done, as both sides have
seized this opportunity. I would like to thank my Board of Directors, but also
Mr. Eustace and Mr. O'Donnell for creating this and it will succeed. Thank for
your attention.
I would like to pass the floor on to Mr. O'Donnell now.
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Chris ODonnell - Smith & Nephew plc - CE
Well thank you very much Max, very nicely said. Well ladies and gentlemen, this
is a really green letter day, but also a red-letter day. You can see the two
colors of the logos up there for both Centerpulse and Smith & Nephew. It is an
opportunity to obviously build a much stronger and more viable company in the
long-term for Smith & Nephew and for Centerpulse, but also it is going to change
the shape of the orthopedic industry as we look at it.
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It does create a new world number three in the wider orthopedic market. In
particular, it has a material effect on our scale and share in reconstructive
implants and we will look at that in more detail. The two companies have really
complementary product strengths and geographic strengths, but share a common
technological focus. The heritage of both companies is strong in technology and
innovation as we bring our product lines to the market.
The geographic fit is not only going to help the US and Europe, it will also
help Japan, an important and very profitable market in the orthopedic and
medical technology sectors.
Also, it gives the combined group a good position in the spinal marketplace. We
will be able to enhance our position and progress there. And in addition to all
these long-term strategic benefits, there are significant synergies and margin
improvement opportunities, which will enhance our earnings in 2004 and
materially do so in 2005. So we have a very encouraging benefit of earnings
enhancement early on and a major value gain for the companies and their
shareholders going forward.
I would like to look at some of the major factors related to the marketplace and
in each of these charts, we are showing Centerpulse and Smith & Nephew
separately and then the position of the combined group. You can see that we move
up to global number three in the wider orthopedics market and to global number
four in the $6m, recon joint market. But more interestingly, essentially we are
seeing a polarization of that market. As we look forward, we could see that this
was going to happen. And here is a real opportunity for us to be in the leading
group as opposed to the followers.
If we look then at the geographical fit, the combined group becomes the European
leader and steps up to number four in the US with comparable scale then to the
other players looking specifically at reconstruction. Of course Smith & Nephew
additionally runs the trauma product line, which further enhances our position
in this leading group.
If we look at the product line-up, in terms of hips and knees, again we see a
significant step-up. We will end up with an 18% share of the global hip market
and a 16% share of the knee market. Which gives us a very strong position,
particularly with the alternative varying technologies that the two companies
will bring to market. The [metasol], metal-on-metal surfaces from Centerpulse,
[murasol] and Smith & Nephew's cross-linked polyethylene and obviously
[oxcimiline] as the newest technology to come to the market, which is heavily
patented and unique to Smith & Nephew and now all of a sudden, we have double
the number of sales people to bring it to the market. So very strong opportunity
in the product line.
It also gives us a platform for growth in the spinal market. Which as everybody
knows is the fastest growing sector of the spinal market. We have always said we
would not try to step into this market on an organic basis, but if an
opportunity arose to acquire a significant player then that would be a good
opportunity for us, because we have other technologies that we can bring to bear
here. That opportunity has arisen through this combination, and positions us in
the $2.3b global spinal market, with an estimated forward market growth of 19%.
Spine-Tech is the leader in stabilization devices. It has got a 7% share. And
like most companies, most of the sales are in the US and it does have a very
full range of spinal implants. It has had and has a very strong position in
cages, but the product line has been rounded out during the last 18 months and
has seen a pick-up in growth in the back part, particularly of 2002. So we will
have a new spinal division within the combined group. We expect to grow that
through continued acquisition and licensing of new technologies in this area.
So what does the shape of the combined group look like? We will have five
business divisions. In order of sales magnitude, orthopedics, [will] management
endoscopy, spinal and dental, 74% of the revenues of this group come from broad
orthopedics and within that definition we include reconstruction, trauma, the
arthroscopy business, spine and dental, with the balance from [indiscernible]
management and the wider endoscopic products. Particularly cameras and other
surgical specialties.
You can see that now half the business will be from the orthopedic, implant and
trauma business, which is now a very significant part of our total group. And it
roughly doubles in scale by this transaction.
All of this is against the background of very strong market growth. We have been
encouraged and I know a lot of you have been encouraged by the strong growth,
step-up in growth, that we have seen in the orthopedic marketplace in these
various segments over the last several years. That is founded on continued
expansion of the patient pool and continued favorable demographics, particularly
for reconstructive implants in hips and knees. The combined group is very well
positioned in that market and in others as you can see here.
So it is amazing when you look at the markets in which we are positioned, how
many of them are growing in double-digits as we sit here today. The orthopedic
marketplace clearly globally growing 14%, some commentators say 15%, but it is
certainly in that ballpark. But [with] management on the other end, picking up
now to being a 12% global growth market. Dental and Spinal growing even faster
and still very good growth rates from the Trauma market, particularly in the US
but a slightly slower market in total endoscopy, which is growing at 6%. You can
see strong market positions on this chart for all these entities and this is the
new platform for the combined group to go forward on.
Now that gives you the marketplace and product perspective. We will now move in
to talking about the creation of value in this
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SNN - Smith & Nephew and Centerpulse combine to form
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transaction. Now before I pass you to Peter, to talk about some of the very
specifics, let me just describe how we see this. There are essentially three
phases to this program. First of all, we have through the due diligence and what
we have done between the two companies, identified a (pound)45m cost saving set
of synergies, which we can deliver certainly by 2005.
There is some merging of research activities in biologics as we get a unified
program. We aim to streamline manufacturing in the supply chain and we are
looking for particularly administrative savings at the corporate level and at
the country level. Smith & Nephew and Centerpulse are both big international
geographic spread companies and in virtually every major country in the world,
we have got two sets of facilities and people doing back-office work. The aim is
not to shed sales people, or research engineers. The aim is to concentrate at
facilities, streamline the supply chains, streamline the distribution and use
less real estate to deliver bottom line benefit here.
The second piece of the program then moves really into selling and marketing.
Our commitment to our customers is that we will keep the product lines they know
and use and we will keep the sales representation programs in front of them. We
are not planning to cut any sales posts in this whole program. But what we will
do, as I talked earlier, is we will look for opportunities to cross-sell the
technologies and broaden the product offering through this tremendous set of
customer relationships that both sales forces have built up over the years.
Huge strength from Centerpulse in Europe and two very strong sales forces with
completely geographically different tones in the US. Centerpulse is much
stronger in the Southern States, Smith & Nephew stronger in the rest of the US.
So even within the US, we are a very strong complementarity.
So that is really the next phase and that will then move the margin up in terms
of the group target, which you are accustomed to hearing me talk about a 21%
EBITA target for Smith & Nephew in 2005. We expect to move that up to about 23%
by 2005/2006. And that will be achieved principally by an increase in the
orthopedic margin up to 27% on the same timeframe. We consistently said that
operating at our scale, from the previous Smith & Nephew scale, we would
struggle to get north of 24% as an EBITA margin for orthopedics. Our peer group
is higher. Why? There is a scale benefit in R&D and in international selling and
marketing, which is worth about 3 percentage points of margin. We expect to
deliver that additional margin in 2005/2006.
Going on from there, we will see the real long-term benefits setting in. We will
see unified new products hitting the market, where we have spent one lot of R&D
rather than two lots in each separate company. We have more clout with big
buying organizations, which is important in the US. It is going to be
increasingly important in Germany as that market's healthcare structure changes.
And we will see transfer best practice and products between the two companies.
We are very excited about the bearing techniques. We are very excited about the
minimally invasive knee products that we are both bringing to market right now.
Smith & Nephew's [acuris] uni-compartmental knee is absolutely complemented by
the radical new [Unispacer] from Centerpulse to give us the best profile of
minimally invasive knee products in the marketplace.
So we do believe that we can set out for you here today, some very significant,
very clear targets in the short to medium-term, the two, three year time
horizon. But that is actually on the start. If you look at the history of
orthopedic mergers, you see significant value creation from year three onwards
as the real benefits start to flow through, because of the quality and the time
scale you have to put into new product developments. So a really strong value
adding transaction in both the short and in the medium-term.
What I would like to do now is to put some more quantification on that, is to
ask Peter Hooley to talk you through the specific financial numbers. Peter would
you like to come up here?
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Peter Hooley - Smith & Nephew plc - FD
Good morning everybody and thank you Chris, thank you Max. The combination of
our sales and Centerpulse creates a 1.6b sales revenue business, $2.5b in dollar
terms and these are based on 2002 numbers, of which 74% is in the widely defined
orthopedic sector of joint implants, trauma, arthroscopy, spine and dental
implants. The figures you see here are those of continuing operations and show
two businesses with similar growth and margin characteristics last year.
Centerpulse roughly contributing 30% of the combined hold.
Both businesses grew up 14% last year. Smith & Nephew particularly strong in
implants in the US and Centerpulse seeing its implant business recover growth to
above market rates in the US. Operating margins are roughly the same at 18% for
both of us with similar scope to realize benefits of scale going forward.
The strategic benefits of the merger in orthopedics as Chris has said on a
long-term coming from the scale advantages in R&D, unified product ranges and
increased presence of major customer groups. Medium term, the benefits are in
the areas of cross selling and the ability to invest in the sales and marketing
for growth.
But first, there will be some sales synergies in 2003 and 2004 as we tackle
integration. But we expect cross selling to start to mitigate this in 2004 and
overtake it in 2006. Actually there will be a net 1% synergies peaking in 2004.
Short-term, savings are primarily in the areas of elimination of duplication in
administration, manufacturing overheads, logistic support and a bit in R&D. Here
we are targeting 45m of cost savings, per annum, by 2005 out of three
distinctive project areas;
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SNN - Smith & Nephew and Centerpulse combine to form
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integrating manufacturing and logistics and some back-office functions;
combining sales, marketing and logistics offices worldwide; and rationalizing
corporate functions.
The cash costs in terms of this are estimated at 130m, to be taken as
exceptional items over three years. Thus we are looking at a respectable return
of 35% on these cash costs. Many cash costs cannot really be determined until
later on and we will give guidance on this after completing the transaction.
The financial effects in the earlier years essentially evolve around the cost
savings, which we anticipate will increase group margins by roughly 2%. Enabling
us to set a new group EBITA target of 23% by 2005/2006. As Chris has said, in
the combined orthopedics division, that is recon and trauma, the margin target
rises to 27%. This should bring us on a par with that of our industry peers.
Higher margins come through wholly as cash, I need not remind you of this. This
should give us a cash conversion ratio, an improved ratio 75% to 80% by 2005
once the non-recurring cash costs are out of the system. You will obviously see
the non-recurrings coming through in the earlier years.
The tax charge on a pre-amortization basis should be maintained at 29% going
forward. Centerpulse is about a third of its EBITA and relatively low tax
Switzerland and the new top company which I will talk about later, helps reserve
this.
Taking all of this into account, we anticipate meeting our pro-forma weighted
average cost of capital in 2005. In earnings per share terms before
amortization, we expect mid single digit accretion in 2004 and approaching
double-digit secretion in 2005. Which I think you will agree are strong returns.
Turning now to the transaction structure. The transaction has two particular
features. The first is a new UK registered holding company; tax residence in
Switzerland to preserve Centerpulse's advantageous tax status. We expect our
present listing and our FT membership to be transferred to this holding company.
Following UK court approval, at the same time as our EGM to approve the deal,
the holding company will merge with today's Smith & Nephew and then be in a
position to acquire Centerpulse. Arrangements will ensure that existing UK tax
status will be retained for shareholders outside Switzerland in respect to
dividends.
The other feature of the transaction is that a dual bid has been launched to
acquire Incentive at the same time as Centerpulse. This is at the request of
Incentive shareholders. The bid for Incentive will be done on precisely the same
terms as the main bid, adjusted only to reflect the fact that there will be cash
balances of around (pound)50m in Incentive after the realization of its other
interests.
The overall consideration of both bids is 1.1b in shares and 400m in cash with a
mix and match facility offered for Centerpulse shareholders for those who want
more or less cash. The precise exchange ratio, which is in the circular as 25.15
new group shares for each Centerpulse share, plus 73.4 Swiss Francs in cash.
That is 298m new shares representing 24% of the new group.
Needless to say a transaction of this size and the new holding company, needs
Smith & Nephew shareholder approval and the key events in this timetable are the
posting of the circular and listing particulars in mid-April, our EGM in May and
transaction closure mid-year.
Turning to financing. We have underwritten bank facilities in place for
(pound)1.3b, the fact that they are expressed in dollars as facilitated in the
circular, phased out over three and five years, so that we have at least 500m
available in years four and five. The initial and the peak requirement is for 1b
this year as you see brought up on the slide. We have inserted cash into the
transaction equation, so as to provide Centerpulse's shareholders with a choice,
utilizing the mix and match. And also to provide us with a modicum of leverage.
But as you know, the financial characteristics of our peers is that of moderate
financial leverage and we have borne this in mind. So you can see that peak debt
is moderate and about two times EBITDA and at around 20% of the new market
capitalization.
As you will expect, we have been attentive to the product recall issue, where
low levels of revisions continue. We believe that we have made sufficient
allowance in the terms and structure of the transaction and its funding for any
possible claims beyond those covered by the settlement and Centerpulse's
provisions.
Dividend policy remains unchanged, namely that of moderated increases as we
build up our financing capability and now as we pay down this debt. The first
dividend on the new shares of the new Smith & Nephew group will be the interim
dividend out of existing Smith & Nephew's first half profits. Again the final
dividend was May, the interim dividend will be paid in November, back-end of the
year.
Other financials, just to give you some guidance, because I am sure you will all
be wondering what the currency is doing. It is broadly neutral on 2002, Smith &
Nephew perhaps down at the profit level of 1%, Centerpulse we think about up 1%.
This is because the dollar has weakened from 151 last year to 158 today. Whereas
the euro has strengthened from 159 to 146. And so has the Swiss Franc from 238
to 216 and so they are basically balancing each other out.
You will be on to me about cash flow because I have had lots of phone calls. I
set out the cash [audio gap] essentially use 2% for the excess of capital
expenditure over depreciation. This CAPEX is slightly higher than previous
guidance as [indiscernible] the new group invests further in surgical
instruments for sales growth. Working capital requirements we are starting about
27% of
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incremental sales growth and fall to 25% as we benefit from combined logistics.
Just to add up the number of shares for you, they will be 12 28m after the deal.
Finally, we see this transaction as a substantial value creation exercise for
both Smith & Nephew and Centerpulse shareholders. Cost savings initially from
sales and marketing synergies in the medium-term will add substantially to
profits. Cash generation will improve from higher margins and better asset
utilization. We also believe that by transforming our business into the global
number three player in the wider orthopedic sector, this should substantially
raise the profile and positioning of the company to the investment community.
More fundamentally it produces a much stronger and more competitively sized
group for the longer-term, with the capability of exploiting the sizeable
opportunities that will arise in the industry in the future.
With that I thank you, I hand you back to Chris.
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Chris ODonnell - Smith & Nephew plc - CE
Thanks very much Peter. Well here is a summary slide that almost speaks for
itself. There is significant long-term value creation here, which both companies
have thought about hard and decided that it is going to bring significant
shareholder benefits. There is earnings enhancement in 2004 and materially so in
2005. We will get accelerated margin improvement from scale and synergy
benefits. And we have talked about the very genuine and strong complementary
product, geography and technology strengths.
Simply put, this is an opportunity to create a global leader in orthopedics,
which is currently the fastest growing market in medical technology worldwide.
And which, when you look at the demographic patterns going forward, shows
absolutely no sign of altering that growth rate until about 2022. So even some
of you may need hips and knees at that point in time.
Now this is a pretty complex transaction. We have tried to pull out all the
highlights in the presentational overheads here. There are some appendices which
give you some idea at the back of the complementarity of the products and how
they fit together. Also, there are summary slides from the Centerpulse Financial
Results for 2002 which are also being simultaneously released. In terms of the
press release, clearly it is a long and complicated document and a question I
was asked earlier related to, well why do we have all these conditions to these
transactions? We should perhaps have pointed out that simultaneously we released
the statutory releases in the Swiss market and the form of those releases in
body the conditions on each transaction, which is not customary in the UK, they
are usually summarized.
So for obviously common disclosure purposes, we have actually disclosed all the
conditions, also at the back of the press release. And that is the reason for
it. So we would be very happy to now take questions and Dudley will act as
Chairman of this session. Thank you very much.
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SNN - Smith & Nephew and Centerpulse combine to form
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QUESTION AND ANSWER
-------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Thank you Chris. Well thanks to Max, Chris and Peter. We have had our 45 minutes
for you to listen to us and formulate your questions, open season. Do wait for a
microphone please and usual process of introducing yourself, so that
particularly Max gets used to some of the new faces I think. Right, who would
like to ask the first question?
-------------------------------------------------------------------------------
Peter Cartwright Analyst
Clearly, this is a great, long-term story. Can you just clarify, over the next
three years, on the analyst targets. Are the new analyst targets better or worse
than the previous Smith & Nephew mid-teens growth for three years?
--------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
They're better, Peter. Does that clarify it? The earnings enhancement that we
are talking about is over and above the previous Smith & Nephew mid-teens
earnings growth target.
-------------------------------------------------------------------------------
Unidentified Speaker
If I could ask about the terms of the deal. What happens to the incentive
capital if a higher bid is made? And if I could ask Centerpulse, have you been
in discussions with any other companies?
----------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
You'll see from the release, the Incentive, 77% of Incentive is owned by four
shareholders. Those four shareholders have given irrevocable undertakings as to
their acceptance of the Smith & Nephew offer. Additionally, we have a call
option on those shares should another offer materialize. We have a right of
first refusal going forward. So, it's a very solid set of irrevocable positions.
We're very grateful and enthusiastic about Incentive's support for this program.
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Max, the second question was about whether you've been talking to anybody else.
-------------------------------------------------------------------------------
Max Link - Centerpulse AG - Chairman, CEO
Well, we were approached in the last few months by most large players in the
orthopedic industry, and also some other companies. But we, at the Board level
at Centerpulse, reached the conclusion that the interest of our shareholders
would be served best by entering into this transaction with Smith & Nephew.
-------------------------------------------------------------------------------
Unidentified Speaker
[inaudible] from Deutsche Bank. I have several questions. In terms of the market
share position, it would be helpful if you could give us the data for Europe,
and the rest of the world together. I was wondering if you could get that out,
how the market share positions look in Europe and the rest of the world
separately. Will there be competition issues in Europe, given Centerpulse's
market leadership there? The second question is, you talked at length about the
Recon and also about the [indiscernible] businesses acquired from Centerpulse,
but not that much information on Dental. I was wondering if you could just give
us some indications of your intentions for that business. The third question is,
would Peter be able to give us a sense of costs savings and the exceptional
integration costs [indiscernible] over the next three years?
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
We'll take those first three questions now, if you don't mind.
-------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
Well, if I deal with the regulatory, perhaps Max would like to put some flesh on
the bones of where Centerpulse is strongest. But from a regulatory point of
view, once you've had a good look at this, and the view we have form our lawyers
is that we should get regulatory clearance in pretty much standard times,
certainly within the timeframe that Peter indicate to close the transaction.
The Europe/rest of the world, we're talking about primarily Europe, Japan and
Australia. Roughly speaking, each company has the same size of business in
Japan, which would be added together to improve our presence there and almost
double it. We'll get accretion to the [strongest] with the Nephew business in
Australia. But clearly, in Europe, Centerpulse is a very strong player. Perhaps
you'd like to give a word picture of that, Max.
-------------------------------------------------------------------------------
Max Link - Centerpulse AG - Chairman, CEO
Yes. As I pointed out, overall market share in Europe is 22%. As a matter of
fact, it's still growing. We had higher growth in 2002 than the industry, with
one exception, Belgium. This is exactly the conflict. This is exactly the
country where [indiscernible] is stronger than we are. So, there you see the
complementarity [across] Scandinavia. Smith & Nephew is a much stronger player
than we are. Our strength is basically in Central Europe and in
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Southern Europe. As I pointed out, in the largest markets, we are at 25% or
above. In our home market, it's actually us, as always been as [indiscernible]
research and innovation, [a big arm], Switzerland, our market share must be
between 50% and 60%, which is our [indiscernible].
-------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
In terms of dental, we quite frankly focus must of our activity on the
orthopedic business at this point in time. The dental business is a nice
business, it's self-standing, it's strong player in its field. We'll get
together and sit down with the management and look at what the sensible thing is
to do going forward. It is a very attractive market, with very fast growth. So,
we're going to take a hard look at what our options are there, but we've made no
decisions as yet.
-------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Peter, cost savings. Is there anything you can add to that?
------------------------------------------------------------------------------
Peter Hooley - Smith & Nephew plc - FD
Yes, of course I can. We'll talk about actually the phasing of the (pound)130m.
We think that we'll spend about (pound)50m this year, (pound)70m in 2004 and
about (pound)10m in 2005. These are the cash costs. Remember, we we're doing a
high level of due diligence; these things will change. So, I have to sort of
stress this. The same [indiscernible] is going to benefit. We think there'll be
a dissynergy in the first year 2003 of perhaps -5%, because there's a risk of
sales dissynergies. Benefits are [indiscernible] [(pound)15m] in 2004; that will
be plus or minus. Hopefully it will be slightly better, but that's [as safe a
number as we'll get] here today. And obviously, there will be [full] (pound)45m
in 2005.
--------------------------------------------------------------------------------
Martin Wolf - HSBC - Analyst
Two questions, if I may. Firstly, could Dr Link give us some idea on the
potential liability. You said in the statement you've received 4,300 claims,
which you think 3,700 are valid. How many hip replacements have you made? What's
the total number of hip replacements that could actually create a claim?
Secondly, on the margins, if we just look at this business on a pro forma basis
in 2003, on my calculation, it looks like the combined entity would have an
EBITA of about 20%. If you add (pound)50m on to that profitability, you end up
with an EBITA margin of 23%. Therefore, your 2003 targets don't look very
challenging. And of course, the old Smith & Nephew business was expecting to see
margin improvements by about 1 percentage point in each year in the coming
years. So, where's that gone? Thirdly, Chris, could you give us some idea about
product rationalization. One of the whole points of Smith & Nephew is the high
value-added products, particularly [articling] implants. Presumably, in this
transaction, there has got to be products within Centerpulse that you don't
actually need. So, how many products, what percentage of sales could be lost
through product rationalization? Finally, Peter, on your EPS calculation, if you
simply add in the pre-tax profit to the figures last year, allowed for the extra
shares in cash, it seems the uplift is much greater than the 5% to 10% of your
suggestion for 2004-2005. Could you give me some guidance as to what I might be
missing.
-------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Thank you very much. It seems that the pattern of the day is multi-questions. I
believe we're going to call on you, [indiscernible], if you could, to give the
numbers on [indiscernible]. I'm sorry to pull you off the floor like that, but
[indiscernible]. Chief Finical Officer of Centerpulse, [Urs Kamber].
--------------------------------------------------------------------------------
Urs Kamber - Centerpulse - CFO
Good morning, ladies and gentlemen. On that question, first of all, given the
resources of information that we have, [indiscernible] claim forms. [inaudible]
as well as the actual information that we receive, [the number of] revisions
made, that we will still be way below the 4,000 threshold mark that was
mentioned in the [inaudible]. From a number of revisions perspective, we are
currently carrying around 3,000 [plaintiffs] [inaudible] With that, we are
looking at total revision data at the end of the cut-off period, which is 5 June
for hips and 17 November for knees of approximately 3,850 to 3,870 in that
range.
-------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Chris, can I pass you the product rationalization question.
--------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
Yes. The philosophy ... and actually as we sit here today, statements are going
out to, not only all our employees and sales people, but also to all our
customers on both sides of the house, as it were, saying it is our aim to
continue to supply them with the products that they're used to using, through
the sales teams that currently support them. Product rationalization in this
industry is a relatively long-term process. The only way you can get a surgeons
to use a new product is to convince them that the product is better. Therefore,
all we will see is that coming through in the third phase I identified of
longer-term benefits, as far as the benefit stream is concerned. What we need to
do is incorporate the best features of the Smith & Nephew and the Centerpulse
products in the next phase of product introductions. Typically, that takes, for
simple things, to do simple things, like for example converting some of
Centerpulse's knee programs to Oxinian takes about 18 months to do that and test
it to the quality standards for wear and longevity that enables us to make the
right claims for the product. For more
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SNN - Smith & Nephew and Centerpulse combine to form
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complex combinations, it's a two- to three-year, maybe four-year, timeframe that
we're looking. So, what we'll then do is bring the rationalized product to them.
That's when we get the really big tickers, which actually come in probably 2006
and 2007. But we're not going to go out to the market and just drop products.
The fact is we have the factories set up to make the whole product range; maybe
the odd thing will disappear at the margin, but it will be relatively limited.
The key thing is to keep the top line driving forward at the best pace. So,
that's the philosophy we've adopted. We've already published that to our
customers, and our customers will also be receiving the manifesto document that
was also on your chair with the presentation. That also develops this theme.
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Thank you, Chris. Peter, I think your reputation for prudence is--
--------------------------------------------------------------------------------
Peter Hooley - Smith & Nephew plc - FD
I think, from what I can [derive], certainly from the first part of the
question, may be different from definition. Smith & Nephew always talks in terms
of EBITA, whereas Centerpulse talk in terms of EBITDA. In EBITA terms, we are
both 18% businesses for 2002. Centerpulse is not a 23% business in EBITA terms.
I think that may well answer a lot of your questions. Honestly, if you just add
(pound)45m to 2002's profit, you're going to get a much better margin return
than if you add (pound)45m to 2005's profit. You've got 2003, 2004 and 2005.
You've got three years' sales growth. That makes a huge difference, obviously,
to margin. We put these numbers together -- let's call it -- carefully, and by
using outside consultants as well to bring implementation planning, in terms of
the [propagation] of synergies. So, I am confident that [these are the numbers
we're dealing with].
--------------------------------------------------------------------------------
Beth Meacham - UBS Warburg - Analyst
On the debt side, you say total debt raised of (pound)145m. Could you say what
sort of funding costs you're expecting on that, so we know what sort interest
cost [indiscernible]? Also, in terms of the EPS enhancement you're talking about
of almost double digits in 2005, what sort of funding costs should we be
including in that? How quickly can you pay down that big chunk of debt? Also,
could you possibly comment on trading so far this year, or give us some color on
the numbers?
-------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Peter, do you want to handle cost of funds?
--------------------------------------------------------------------------------
Peter Hooley - Smith & Nephew plc - FD
Our basic margin over LIBOR is about [150] basis points [indiscernible] perhaps
if you use about three-quarters of a percent over LIBOR. Obviously, because we
run our interest rate shorts, we'll be taking advantage, certainly in the next
three years, of the short-term rates. We'll be locking in a large chunk of that.
If you just go to the forward rates and add on about 0.75% and you'll be there.
I'll try to give quite explicit guidance on ... I don't think I'm able to give
you a debt forecast going forward -- I've been told I'm not -- for the next
three years. You've been given quite a good steer on the conversion ratio. And
you've got the transaction costs, you've got the phasing costs, and you have an
idea of what the cash costs look like in 2003 from that slide. So, you've got to
start at the [indiscernible] and then [look at] cash flows. I've been told I
cannot give you guidance on debt.
------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Max, current trading conditions.
-------------------------------------------------------------------------------
Max Link - Centerpulse AG - Chairman, CEO
The first few months, we have seen that [inaudible] of the last quarter of 2002
in the first two months of 2003. [inaudible] growth that we have [inaudible]
continue at about the same rate, the 18%+. Orthopedics, again [inaudible]
exchange rate [inaudible]. We are looking at around 18% in dental, around
[inaudible] in spine. We're looking at about [inaudible]--
-------------------------------------------------------------------------------
Andrew Donnage Analyst
Can I just direct a question primarily at Dr Link. I guess I'm surprised I
haven't heard this from any Centerpulse shareholders here this morning. Given
the fact it's been no secret that Centerpulse has been looking for some kind of
exit, or management looking for some sort of exit, the terms of the deal
announced this morning, at first site, looked quite modest. If I had been a
long-term shareholder, both in both in [indiscernible] since the IPO, and now
latterly of Centerpulse, I note your share price chart twice conveniently missed
out the fall from, sort of, SFr580 down to SFr50. I'd rather take the view that
you were selling the family silver for not very much. And your sort of
off-the-cuff remark about this is the best deal that we can do, could you
elaborate on that and sort of justify the transaction on behalf of the minority
shareholders in Centerpulse?
-------------------------------------------------------------------------------
Max Link - Centerpulse AG - Chairman, CEO
Well, the rationale for this transaction for Alberto Actos(ph.) was actually
quite simple. There were basically two reasons. The first is that the [state to
compete]will vastly improve especially in the United States, and again it's
one-half of the global market, two-
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SNN - Smith & Nephew and Centerpulse combine to form
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thirds of the regular profits in the orthopedic market. This deal will allow us
to go overnight from the state of a niche player right into the first league. We
have now a market share, Centerpulse alone, in the United States of about 7%.
The combined company would have a market share of anywhere between 15% to 17%.
And this is the most profitable market in the world. So, we are much closer now
to an optimal size than when we were on our own.
The second issue was, of course, the possibility to create now much more
shareholder value, much faster than we could have done on our own. Again, the
first reason for that is that they do compete. We are have now a nearly optimal
size in the company. We have identified on both sides, independently of each
other, synergies in the order of magnitude of Sfr100m. And last but not least,
our stock will be much more liquid in the combined company than it was for
either Smith & Nephew or in particular Centerpulse.
Now, with respect to the premiums, the transaction was really conceived as a
[indiscernible]-premium merger. The reason, both sides bring considerable
strength and offer assets to the table. But clearly, if you are looking for a
premium, just look at the average price of Centerpulse in the last six months,
and you will see that there would be a premium of close to 20%. But the key
reason is that our shareholders will become shareholders of the new company, and
there they will have a significant upside potential.
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Thank you very much, Max.
--------------------------------------------------------------------------------
Max Herman - ING - Analyst
Firstly, a quick question on the synergies. It's rare to be given the synergy
number for a merger. Usually, that is left out or is not talked about. Could you
explain a little bit more why you felt the need to give a figure on that?
Secondly, in terms of the -- I think it's called the incentive purchase of that
bid -- you mentioned that there would be (pound)50m that would be acquired as
part of that. Is that going to go into the new vehicle to reduce some of the
debt within Centerpulse and Smith & Nephew?
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Synergies, Peter.
--------------------------------------------------------------------------------
Peter Hooley - Smith & Nephew plc - FD
I think the issue of synergies is-- I mean, we have put a very substantial
program together to evaluate this combination. We used both our own people, and
we obviously do study all the markets we operate in, including orthopedics
pretty carefully. And we've also used external consultants, both in reviewing
the market trend, the opportunity to profile both companies, and the ways these
can be put together. It is clear that, at the margin, when you put two
orthopedic companies together, given the structure of the sales force, that you
are going to lose some sales people, however hard you try. Because of the strong
sales relationship with the surgeons, I think there will be some friction at the
interface. There have been a few case studies, which we studies elaborately,
which are the Johnson and Johnson [indiscernible] take-over and the
Striker-Hermetica(ph.) take-over. They adopted different strategies and
different timetables to get their integration and implementation plans put
together, and you can see what actually happened to their business both in units
and volume. And basically, therefore, it is clear that there is a risk, which we
will do our best to eliminate, of dissynergies, driven by the sales-to-surgeon
interface at the time of putting this type of business together. It's a view
that we have developed and tested, and we believe that we've got a sensible
estimate of that in there. And quite frankly, it's an important part of the
transaction. If we didn't disclose this now, we would not be doing the right
thing by our investors. We do try and be honest and straightforward, and this is
a part of it. Sometimes, it's-- This is very good news, but there is an element
that we need to recognize as we move forward, that particular element.
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Incentive--
--------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
Incentive has 19% of the (pound)1m, plus the (pound)50m because they've got
that cash on the balance sheet. When we buy the company, we get that cash. So,
it's a wash. There's a timing issue. Obviously, there will be a week or so
because we [indiscernible] the check before we can snap up the money. But it
comes back again.
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Alright, you look puzzled, but we get the money. "It'll be alright on the
night", I think they say. Can I have a call from the back please?
--------------------------------------------------------------------------------
Tom Help Analyst
Good morning. Tom Help(ph) from Investech. Some quick questions. Centerpulse
has never had the chance before. Can you give us some color on the reasons
behind the product recall a few years ago? What did you learn then? What
confidence do we really have that it won't be repeated again? I know it's a
recurring nightmare for players in this industry.
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Dudley Eustace - Smith & Nephew plc - Chairman
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SNN - Smith & Nephew and Centerpulse combine to form
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It's a very good question. I think I'll ask Max to keep it very brief otherwise
we'll be here all morning.
--------------------------------------------------------------------------------
Max Link - Centerpulse AG - Chairman, CEO
Well the product recall that happened in December 2000, so it happened nearly
2.5 years ago. The reaction we had, of course, was immediate. We called in
several outside consultants. I think no stone was left unturned to find out what
had happened. We went through a quality-assurance analysis in all our
manufacturing plants around the world, and took the necessary measures which
could be implemented to prevent any such thing to happen. As a matter of fact,
nothing else has happened before. But it really showed to us very clearly the
importance of quality assurance in [indiscernible].
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Thank you, Max. Another question please. Yes.
--------------------------------------------------------------------------------
Unidentified Speaker
[Indiscernible] from [indiscernible] International. It's a question on the
composition of shares and cash [indiscernible]. You refer to the leverage of the
combined group afterwards, and the leverage of some peers. But it seems that you
could have been a bit more aggressive on the use of debt, given that your
[indiscernible] cover is easily [indiscernible] along times with CMs going up
quite quickly.
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
[Peter, would you answer that?]
--------------------------------------------------------------------------------
Peter Hooley - Smith & Nephew plc - FD
[The way] deals unfold, that-- we took a quite firm view-- we are two things
here. One is we are creating an industrial combine. The other thing is that we
have an eye on shareholder value.
It is my judgment, and the board's judgment, that our share rating will start to
be impacted if we start to take that much above 20% of market cap or start to
take it--. We're nicely in investment grade. It doesn't take much. Bear in mind
that, from a banking point of view, the medical device industry tends to have
lower ratings than industry generally. So when you're putting that together you
have to take into account how the banks will look at you, and what you don't
want to do is come on in a fringe rating. And secondly, we are very conscious
that one of our peers has significant debt on the balance sheet and we all know
that Striker can very well in paying it down-- is a very sky-high rating
accordingly. So we will not hang ourselves out on the debt wire.
From an industry point of view, from a rating point of view, or a
[indiscernible] rating point of view-- and frankly there's been too many
companies who have blown it by shelling out too much cash. [Indiscernible].
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Fair enough. Thank you Peter. Next question. Come back to you again.
--------------------------------------------------------------------------------
Tom Help Analyst
Just a quick question, follow up on the actual scale that you're talking about.
Obviously [indiscernible]Smith & Nephew's history scale hasn't really been a big
drawback. It seems to have been an advantage, in fact, to be smaller, maybe more
nimble than big players. And therefore you've been gaining market share quite
rapidly against them.
I wondered if you could explain exactly what you've seen out there, in future,
that makes you feel now is the right time to build or expand that sales force by
a giant leap rather than by the organic growth that you've been experiencing in
the last few years.
--------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
Well the organic growth has certainly been very good and we could continue on
in that way. But there is a real opportunity here to step the scale up and take
advantage of the additional margin which brings additional cash flow.
Actually, it is clear if you look at the orthopedic and the med-tech top
quartile groups, they have several characteristics. They have high sales growth,
they have high margins, and they have high cash generation. If we want to step
up to that top quartile, and we do, then actually we need to find ways of
getting there. Could we get there organically? Sure. But it would take a lot
longer.
The opportunity here is to take a much bigger step forward and improve the
investment characteristics of our business, because we still do trade at a
significant discount from the orthopedic peer group. And we're now firmly up in
that top league.
Therefore, coming back to you previous question, Peter, is very, very clear--
we're looking hard at the investment comparators across that group. And we
believe that we will be able to demonstrate the same kinds of characteristics on
a consistent basis going forward. It's a holistic approach to the whole program
and enables us to move into that level much earlier than we could otherwise so
do.
--------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
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SNN - Smith & Nephew and Centerpulse combine to form
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Thank you, Chris. [Indiscernible].
-------------------------------------------------------------------------------
Tom Help Analyst
Thank you. Yes I think the point of my first question on the litigations
missed. I understand the numbers on the statement, but what I was trying to get
at is the 4,300 claims that have been received out of a total number of
reconstructive surgery cases of 4,500, 5,000, 20,000, i.e. how many more claims
could come in? What's the potential maximum?
Also, secondly, a question for Chris. Chris, you've suggested this is quite the
ideal case for you. I know it's very hypothetical, but let's just say one of
your competitors came in and topped the offer quite significantly and you missed
out on Centerpulse. Where would that leave you, longer term, in the
reconstruction market?
-------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Can we tackle the first question while it's fresh.
-------------------------------------------------------------------------------
Peter Hooley - Smith & Nephew plc - FD
The whole product line [indiscernible] the whole product, [indiscernible]
product [indiscernible], were about [20] [indiscernible] [7,000] roughly. Of
that, we currently, also I mentioned before, we currently have around 3,700,
roughly 3,750, revision surgeries filed with us as we know. Those are the
numbers of revision surgeries that the hospitals have indicated to us that they
have done.
The orange forms that had been filed with the claims administrator, you
mentioned about 4,300 that is [indiscernible]. Obviously, a whole lot of orange,
white, green, yellow, and red forms have been sent [out to] manufacturers. A
total of 21,000 of those forms have been sent out into [indiscernible].
A lot of people are sending in typed forms that have nothing to do with the
either the product that we have or the revision surgery that they had
[indiscernible]. That's why you have the number of likely, or what the
[indiscernible] industry calls it likely, [indiscernible]. And if I take again
the likely [indiscernible] in the face of this [indiscernible], the number of
revision surgeries that were indicated to us by the hospitals and the surgeons,
and the actuary calculations that we've made, we come to a total number of
possible revision surgeries by the end of the cutoff date that would be June 5th
for the hips this year and November [17th]for the knees. If you take the
revision surgeons that we have, which is a very low single digit numbers,
[indiscernible] The latest numbers I have are zero to one revision per week.
[Indiscernible] number of revision surgeries that will happen based on the
recall [indiscernible].
-------------------------------------------------------------------------------
Dudley Eustace - Smith & Nephew plc - Chairman
Chris, your hypothetical question.
-------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
[indiscernible] something towards [indiscernible] was said. Obviously we have
done, as we said, extensive due diligence on this.
It's perhaps worthwhile, maybe an answer to the earlier question as well, to say
it's very important to understand the medical reason and what actually happens
to these implants. What actually happened, and in manufacturing, there was a
slight residue from the processing left on the surface of the implant which was
the shell primarily that goes into the pelvis to house the hip socket. And such
that the bone couldn't bond to the shell. Now that shows up pretty much straight
away in 99.something number of cases and causes--.
We met with a number of people who have worked with this whole program, and one
of them actually said to me, "[indiscernible], you are talking about
excruciating pain here. The patient cannot live with the pain because the bone
hasn't met the cup. There's no doubt about whether he or she needs a revision or
not." Therefore if you look at the incidence of revisions, these products were
all implanted before the end of 2000. Therefore, actually there had been a big
spike in revisions and it's come all the way back down and is running at a very,
very low level.
So what we're actually seeing, in that sharp issue, that this is an early find
issue; it's not a delayed onset. So, therefore, that is what gives us all
confidence that we're pretty much at the end run of these revisions, which are
running at a very, very low level. And we've looked at these numbers in detail
and absolutely confirm that.
Moving on to your other question, the issue of Centerpulse and Smith & Nephew, I
think is a good description to say it's an ideal case to put two companies
together. We hope, believe and expect that this will go through without a hitch,
because it is a compelling case for both sets of shareholders, we believe. If
somebody else is interested to do something, well, you'll have to really ask
them about it. But we believe this is the right thing to do for both our
companies. And we think it is a significant step forward for the industry. We do
have some very strong protections built into this transaction, not least the
enthusiastic support manifested in very concrete terms from incentives. We do
have the very important fact that, whilst all the three major, historical
mergers that have taken place in the orthopedic industry have generated
significant shareholder value. There has never been a hostile takeover because
of the nature of the sales force. If you lose the sales force, you lose the
top-line growth and you lose the benefits. So, in this industry -- and quite
clearly, we've studied it in great detail -- a hostile take-
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SNN - Smith & Nephew and Centerpulse combine to form
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over is a very, very risky maneuver, leaving aside that the nature of the
climates in the markets around the world today, from a financial point of view
and a geopolitical point of view, the actual issue of implementing something on
a hostile basis is extremely difficult. Therefore, we believe that this is the
ideal case for us to take forward. We're very happy to present it to all of you.
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Dudley Eustace - Smith & Nephew plc - Chairman
Thank you, Chris.
-------------------------------------------------------------------------------
Unidentified Speaker
This is a question to Dr Link. What percentage of shareholding is required for
a blocking minority vote at Centerpulse, according to your--?
-------------------------------------------------------------------------------
Max Link - Centerpulse AG - Chairman, CEO
So that the transaction can't take place?
-------------------------------------------------------------------------------
Unidentified Speaker
To prevent someone else from entering a bid, making it difficult for them to
come in and conclude a deal?
-------------------------------------------------------------------------------
Max Link - Centerpulse AG - Chairman, CEO
67%, two-thirds.
-------------------------------------------------------------------------------
Unidentified Speaker
And a blocking minority vote?
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Max Link - Centerpulse AG - Chairman, CEO
34%.
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Unidentified Speaker
This is a question for Chris. You indicated that you studies the merger of
Johnson and Johnson and [indiscernible] extensively. I was wondering if you
could share some of the things that they did very well, so that you could
benefit from their experience. And also the challenges in integrating the two
businesses.
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Chris ODonnell - Smith & Nephew plc - CE
Right. Thank you. Well, interestingly enough, the two companies pursued
different strategies. J&J went for a very early integration of sales forces on a
very clear basis. They also faced a particular problem which we don't face,
which is that their biggest single product line was under-priced. So at the same
that they were trying to put the two sales forces together, they were also
trying to deal with getting the prices up on J&J Knee, which was significantly
below the market average. What actually happened is that those two factors
together caused them to lose-- They retained the majority of the sales force,
they lost some volume, but they made it up on price. So, they actually showed a
growth that was about 5% below the industry average for a significant period of
time. They basically handed the international sector over to the [indiscernible]
business and let them get on with the integration there.
In terms of Striker-Hermetica(ph.), they kept the organization separate and
independent for some considerable while in the US, and longer internationally.
That actually caused them more problems than the J&J integration because people
tended to harden up their attitudes. Therefore, they actually saw an accelerated
loss of people, particularly in the international marketplace. It was around
about a year or so after the acquisition. And you could see the dip in their
growth rate. They still grew, but you could see the dip in their growth rate.
Our integration plan, which we will be rolling out and getting in place prior to
the close of the transaction, will cover a smooth integration, particularly of
the orthopedic sales force, and a planned integration of the supply chain, so we
get the purchasing leverage in place particularly. The sales force is really
helped by the fact that the boundaries are very clear. Centerpulse is very big
and strong in Europe. In the US, Smith & Nephew is stronger, but with geographic
balance that is quite remarkable. In Florida, Texas and California, with
exception of east Florida, where we are very strong, Centerpulse is strong. So,
essentially a no-brainer, virtually, to work out what needs to be done there and
to integrate it smoothly. Where we do have issues, we will also use the
opportunity to redeploy more sales people between the trauma and reconstruction
divisions, which we've set up within our orthopedic business, to give a stronger
presence in trauma and recon. We talked about this at our results sequence, and
in actual fact, we expect this to pick up the growth of our trauma business
going forward, which has only really been growing just above market rates, as
opposed to recon growing significantly above. This will enable us to have a
dedicated trauma sales force in all major metropolitan areas much faster. Again,
we're going to make value gains much faster. So, they are the main things we're
taking into the integration planning, and will be rolling that out with our
employees across the those business between now and the period of the close, so
that we hit the ground running the date the transaction is complete.
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Chris ODonnell - Smith & Nephew plc - CE
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SNN - Smith & Nephew and Centerpulse combine to form
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Thank you. We have time for one or maybe two more questions.
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Anthony Kazavitz - Deutsche Bank - Analyst
Anthony [Kazavitz], Deutsche Bank. Three points, if I could, just to clarify.
First one, could tell us whether there is any due diligence outstanding, or have
you done everything you wish to do? Secondly, I'd like to follow up on the
Incentive side of things. Are the [acceptances] that you have irrevocable in all
circumstances, or are there exceptions? And the second part to that, maybe you
could give us details of your right of first refusal, when it comes to the
Incentive stake in Centerpulse. My third point is to do with those four large
shareholders in Incentive. Do you know if they plan to take stock in the mix &
match to gain greater exposure to the new company? Or will they take the stock
and cash?
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Chris ODonnell - Smith & Nephew plc - CE
We have no significant matters outstanding in terms of due diligence. We've
done very thorough due diligence on a public company basis.
With regard to incentive, I'm just looking at what it actually says in the
statement, which is really the best summary. The 77% of Incentive shareholders,
of which I am number 4, have given us relative undertakings with respect to our
offer, with regard to Centerpulse shares, until such period as our offer is
complete. The right of first refusal we have is to match any price of anyone
else coming in there. That's basically what it boils down to. So, we feel like
it is a very solid and supportive position.
--------------------------------------------------------------------------------
Anthony Kazavitz - Deutsche Bank - Analyst
And the four shareholders are [indiscernible]?
--------------------------------------------------------------------------------
Chris ODonnell - Smith & Nephew plc - CE
The four shareholders, we believe they will take roughly the same mix of shares
and cash. They are subject to the mix & match. There's a common pool of mix &
match. We have some idea as to individual preferences, but they have not made a
formal action. It is their rate to make any election they wish within the mix &
match pool. Further, they'll take the same fixed cash sum. If they want to elect
the mix & match in either direction, then they're welcome and free to do so.
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Dudley Eustace - Smith & Nephew plc - Chairman
We've got time for one last question, or not at all. If that's it, thank you
very much for your attendance and your questions. We look forward to completing
this transaction in due course. Thank you.
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Final Transcript
CCBN StreetEvents
CCBN StreetEvents Conference Call Transcript
CEP - Centerpulse and Smith & Nephew Conference Call
Event Date/Time: Mar. 20. 2003 / 10:30AM ET
Event Duration: N/A
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CEP - Centerpulse and Smith & Nephew Conference Call
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CORPORATE PARTICIPANTS
Chris O'Donnell
Smith & Nephew plc - CE
Dr. Max Link
Centerpulse AG - Chairman & CEO
Peter Hooley
Smith & Nephew plc - FD
CONFERENCE CALL PARTICIPANTS
Katherine Martinelli(ph)
Merrill Lynch - Analyst
Harvey Morris(ph)
J. P. Morgan - Analyst
Milton Shue(ph)
Bear Stearns - Analyst
Scott Davidson
Piper Jaffray - Analyst
Rotwith Deliria(ph)
Lehman Brothers - Analyst
William Plavoni(ph)
First Albany Corporation - Analyst
Brian Lawrence
Analyst
Steve Hammell
RBC Capital Markets - Analyst
Transcript
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Editor
Transcript contains several audio breaks due to audio difficulties during
conference call itself.
--------------------------------------------------------------------------------
Operator
Good day everyone and welcome to today's teleconference regarding Smith &
Nephew's acquisition of Centerpulse. Today's call is being recorded. Hosting the
call today will be Mr. Chris O'Donnell, Smith & Nephew's Chief Executive Officer
and Dr. Max Link, Chairman Chief Executive of Centerpulse. Mr. O'Donnell, I
would now like to turn the conference over to you.
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Chris O'Donnell - Smith & Nephew plc - CE
Thank you very much. Good afternoon to everybody in the U.K. and good morning to
everybody in the U.S. I am very pleased to be here today with Dr. Max Link and
Urs Kamber, the Financial Director from Centerpulse and also Peter Hooley, the
Finance Director from Smith & Nephew to talk to you about the very exciting news
we announced this morning of the combination of Centerpulse and Smith & Nephew
to form new global orthopedic leading company.
Hopefully you have all got the webcast presentation. We have a variety of ways
of dealing with that. Hopefully you have all got access to it.
We will try and move through this fairly quickly so we will have some time for
the end. And we will share this between the team here.
[indecipherable] on the slide numbers 5, but just to say that the combined group
going forward is a very powerful combination of two complementary businesses. It
joins this global leading group in orthopedics. Clearly orthopedics itself is a
very attractive growth market at the present time. [telephone audio break] not
just because of their common European heritage, but also because of their common
high standards and thought process about science, engineering and technology.
We regard these strengths and we will talk about them some more as very
complimentary. And we cannot only bring significant long-term value creation to
our shareholders we could also drive some significant near term benefits from
this transaction to the benefit of both Centerpuls and Smith & Nephews
shareholders.
Going forward, the management and board of the company are Dudley Eustace, who
will take the post of Chairman of the
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CEP - Centerpulse and Smith & Nephew Conference Call
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combined company; I will be the Chief Executive and Peter Hooley will be the
Finance Director. Dr Max Link will be appointed Vice Chairman of the Smith &
Nephew Board [inaudible] and Rene Braginsky, a non Executive Director of
Centerpulse, will also join our board as a non-Executive. So we are looking to
run this very much as a business combination going forward and to derive the
benefits from merging two great companies.
I would like now to turn it over to Dr. Max Link to give you his view and the
view of Centerpulse of the benefits of this transaction.
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Dr. Max Link - Centerpulse AG - Chairman & CEO
Chris, thank you very much. Good morning and good afternoon. Let us proceed on
page 8 with the transaction details first. The Headline Offer price for
Centerpulse shareholders is CHF 282, which represents a value of Centerpulse
[telephone conference audio break].
The Centerpulse and InCentive shareholders' have the pro forma ownership of 24%
of the combined group.
We anticipate a secondary listing on the Swiss Exchange. [telephone conference
audio break] And the incentives have hold has risen over 90% of the share
capital. [inaudible] Capital AG was made by Smith & Nephew. And shareholders
owning 77% of InCentive have already undertaken to accept InCentive's offer.
Now let us describe briefly who and what Centerpulse stands for page 9.
Centerpulse is the leading reconstructive implant company. We are the No. 1 by
far in Europe with 22% market share and actually still growing. We are however,
number 5 globally and No. 6 in the U.S. [inaudible] merger combination does is
that it catapults the combined company from -Centerpulse- a niche company into
the much more profitable [first league] in the United States.
Since the acquisition of Spine-Tech in 1999, Centerpulse has had a solid global
position No. 5 in spine with a 7% market share. We also [indecipherable] our
Dental division which is the global No. 4 in Dental with a 12% market share.
On page 10, we briefly review the results of Centerpulse in the year 2002. As
you can see we have in local currencies for the continuing businesses
[inaudible]. For the continuing businesses, sales growth of 14%, again local
currencies.
[inaudible] Spine, we came up with a remarkable growth rate of 10%, but this was
a little bit below market the performance of Spine has again recovered in the
first quarter of this year.
[inaudible] in 2002 was back to 18.4
Page 11, how did the share price develop? As you can see, by July 01, we had a
steady appreciation of our share price. [telephone conference audio break]
....preceded by a collapse of the share price, because of the litigation, which
we had in the United States. Just looking at 2002, the share price depreciated
by 250% by far the highest rate in Switzerland which really puts us in the No. 1
position. [inaudible] from the forty-ninth position to the twenty-sixth
position.
Page 12 what are the benefits of this transaction of Centerpulse investment?
First of all the combined group has the financial capacity [telephone conference
audio break] ...is much better than each one of us could have done this by
themselves. Together we are now the third largest global orthopedics company in
the world. We have the scale to compete now and we have a diversified product
portfolio.
Centerpulse [inaudible] we now share is the upside of the combined group. Again,
if were up at the end of the road and the prospects for Centerpulse alone would
be quite good, but not as promising as the up side of the combined group of the
size and scale we have now.
Last but not least, the stock of the new Swiss [indecipherable] will be much
more liquid than either the stock of Smith & Nephew or Centerpulse would have
been [telephone conference audio break].
The Swiss heritage is maintained. We do plan a secondary listing in Zurich. Also
Winterthur will remain the key-manufacturing center in Europe. Centerpulse, the
shareholders will be represented on the [new goal] of the Smith and Nephew Group
with two seats.
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Chris O'Donnell - Smith & Nephew plc - CE
Max. Thank you very much for that very clear analysis of the transaction and
the benefits of it. On page 14, we start to look at the benefits in a more
quantified way. The combined business is the world No. 3 in the wider 14b
orthopedics market. It transforms the scale of the two companies in
reconstructive implants in particular. As we'll see, complimentary product
strengths and technological focus and a complimentary geographic fit.
Additionally, the spinal segment is the fastest growing segment of the
orthopedic market and this gives a combined group an enhanced position in that
market and there are significant synergies and margin improvements that flow
from this.
[telephone conference audio break] materially so by 2005. I will take you
through most of these elements in the next few pages. [telephone conference
audio break]
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Operator
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Gentlemen, please go ahead.
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Chris O'Donnell - Smith & Nephew plc - CE
Okay. The scale comparison in the global orthopedic sales and the
reconstructive sales sees the group jump up the competitive table very rapidly
into a pretty close third place behind J & J and Stryker in the top league of
orthopedic companies worldwide. This is not just a transaction, which is
important to Smith & Nephew and Centerpulse, it is an important transaction for
the industry. It is going to change the face of the orthopedic industry.
In reconstructive similarly, a very positive step up, very, very close to Zimmer
and just behind Stryker and J & J.
If we look at the geographic bit on the next page, the European position becomes
a clear leader across Europe, mainly based on the strengths of Centerpulse with
some trauma products and some knees added in there from Smith & Nephew.
[telephone conference audio break] ...some three or four places to get close to
what we regard as pretty much of a magic number as a long-term stability in the
marketplace of about 15%.
Products - global No. 3 in hips and No. 4 in knees and some great technologies
embodied in those, particularly related to [tribology] where we have the full
range of options available to surgeons. And you can see a big step up
particularly in hips in the market share positioning. Again we are up in the
critical territory of north of 15%.
Spinal - a very interesting entry for us into this market. Smith & Nephew, we
have said it is too late for us to develop our way into this market. We would be
interested in acquiring a business if it were available to give us a platform
for growth in spine. And we are delighted that as part of this business
combination, Spine-Tech, which has a 7% share, most of it being in the U.S., has
come across into our business. We are looking forward to continuing to develop
that through existing product lines and some of its planned new product
introductions and to continue to look for new products through acquisition and
licensing.
Slide 19 gives you a picture piece of the shape of the combined group. You can
see that over 50% is [telephone conference audio break] ...and the balance up to
75% is in the wider orthopedics. We can see continued strong positions for the
rest of our Endoscopy business and Wound Management as we go forward.
Market growth, I know as analysts and investors you will be very familiar with
the market growth position in orthopedics. We have also added advanced Wound and
Endoscopy and Dental onto this chart. This is a tremendous position to be in, to
see so many global marketplaces growing in double-digits. This gives the group
tremendous forward growth potential. You can also see that we have some very
strong combined market positions going forward. We look forward to improving
that over the years, as time goes on.
On page 21, we tried for the first time in this conversation to give you a
picture of where the benefits are going to arise in this transaction. In the
short-term, we will drive (pound)45m of annual cost savings, largely focused on
administrative savings, manufacturing, supply chain streamlining and generally
back-office and corporate cost reduction.
The next stage is really at the selling level. Opportunities for the broader
product offering and introducing the products through the standard sales force,
getting on to twice the size and making appropriate investments behind that
sales force. This should move our group margin up to 23% by 2005/6. As against
the previous Smith & Nephew target of 21%.
Then we are into the field where the real long-term value is driven in
orthopedic acquisitions, where you bring on unified new products out of a single
R&D pipeline which you can afford to deploy on a wider front and the benefits
transfer best practice across the business and opening of new accounts with the
combined strength of the two businesses. So we do expect to see superior
long-term growth as a result of combining these two businesses.
I will now ask Peter Hooley to talk you through some of the very specific
financials that are associated with the transaction and the nearer term
benefits. Peter.
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Peter Hooley - Smith & Nephew plc - FD
Thank you Chris. Hello and good morning everyone or good afternoon if you are
still in the U.K. [telephone conference audio break] ...The combination of
ourselves and Centerpulse creates a (pound)1.6b sales revenue business that is
in sterling terms, in dollars that is $2.5b. It is based on 2002 numbers. Of
this 74% is engaged in the wider defined orthopedic sector of joint implants,
trauma, arthroscopy, spine and dental implants.
The figures [telephone conference audio break] ...with similar growth and margin
characteristics last year. With Centerpulse contributing roughly 30% of the
combined hold. [telephone conference audio break] ...with Smith & Nephew
particularly strong in implants in the U.S. and Centerpulse seeing its U.S.
implant business growth to recover to above market rates.
Operating margins in the same at 18% for both of us. With similar scope to
realize benefits of scale going forward.
Looking now at cost savings. The strategic benefits of a merger in orthopedics
are long-term coming from the scale advantages in R&D, unified product ranges
and increased presence of major customer groups. Medium term, the benefits are
in the areas of
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cross selling and the ability to invest in the sales and marketing for growth.
But first, there will be some sales synergies [telephone conference audio
break]. ...But we expect cross selling to start to mitigate this in 2004 and
overtake it in 2006. [telephone conference audio break]
Short-term, savings are primarily in the areas of elimination of duplication in
administration, manufacturing overheads, logistics and R&D. Here we are
targeting (pound)45m of cost savings, per annum, by 2005, out of three
distinctive project areas; integrating manufacturing and associated back-office
functions; combining sales, marketing and logistics offices worldwide; and
rationalizing corporate functions.
The cash costs in terms of this are estimated at (pound)130m, to be taken as
exceptional items over three years. Whilst we are looking at a respectable
return of 35% on cash costs. Many cash costs really cannot be determined until
later on and we will give guidance on this after completing the transaction.
Let's look at the financial effects. In the early years, these essentially
evolve around the cost savings, which we anticipate will increase group margins
by roughly 2%. Enabling us to set a new group EBITA target of 23% by 2005/6.
Within the combined orthopedics division, that is reconstructive and trauma, the
margin target rises to 27%, which brings us on a par with that of our industry
peers.
Higher margins come through wholly as cash and should give us a cash conversion
ratio of between 75% and 80% by 2005 once the non-recurring cash costs are out
of the system.
The tax charge on a pre-amortization basis should be maintained at 29% going
forward. Centerpulse has a third of its EBITA in relatively low tax Switzerland
and the new top company, which I will describe later, helps preserve this.
Taking all of this into account, we anticipate meeting our pro forma weighted
average cost of capital in 2005. In EPSA terms, we expect mid single digit
accretion in 2004 and approaching double-digit secretion in 2005. Which are
strong returns.
Turning now to the transaction structure. This contains two particular features.
The first is a new UK registered holding company; tax resident in Switzerland to
preserve Centerpulse's advantageous tax status there. We expect Smith & Nephew's
present listing and FT 100 membership to be transferred to this holding company.
Following the UK Court approval, at the same time as our annual general meeting
to approve the transaction, the holding company will merge with today's Smith &
Nephew and then be in a position to acquire Centerpulse. Arrangements that exist
in UK tax status will be retained for shareholders outside Switzerland in
respect of dividends.
The other feature of the transaction is that a dual bid has been launched to
acquire InCentive at the same time as Centerpulse. This is at the request of
InCentive. The bid for InCentive will be done on precisely the same terms as the
main bid, adjusted only to reflect the fact that there will be cash balances of
around (pound)50m in InCentive after the realization of its other interests.
The overall consideration of both bids is (pound)1.1b in shares and (pound)400m
in cash with a mix and match facility offered to Centerpulse shareholders for
those who want more or less cash. The precise exchange ratio is 25.15 new Smith
& Nephew group shares for each Centerpulse share, plus CHF 73.4 in cash for each
share. This will involve issuing 298m new shares representing 24% of the new
group.
Turning to the timetable, needless to say the transaction will need Smith &
Nephew shareholder approval and the key events in the timetable are the circular
and listing particulars to be posted in April, our extraordinary general meeting
in May and the transaction closure of around mid-year.
Looking now at financing. We have underwritten bank facilities in place for
(pound)1.3b, faced out over 3 and 5 years. So that we have at least (pound)500m
available in years 4 and 5. The initial on peak requirement is for around
(pound)1b this year, as built up on the slide. We have inserted cash into the
equation, so as to provide Centerpulse's shareholders with a choice, utilizing
the mix and match and also to provide us with a modicum of leverage.
But as you know, the financial characteristics of our industry peers is that for
moderate financial leverage and we have borne this in mind in structuring the
transaction. Peak debt is moderate and around two times EBITDA and at around 20%
of the new market capitalization.
As you will expect, we have been attentive to the product recall issue, where
low levels of revisions continue. We believe that we have made sufficient
allowance in the terms and structure of the transaction and it's funding for any
possible claims beyond those covered by the settlement and Centerpulse's
provisions.
Dividend policy remains unchanged, namely that of moderated increases as we
build up our financing capability and now as we pay down this debt. The first
dividend on the new shares of Smith & Nephew group will be the interim dividend
out of existing Smith & Nephew's first half profits.
Just looking now at a few other bits of financial information. This slide is
designed to give you guidance on the matters that you normally request,
particularly in the sector of currency and cash flow. Translation currency today
is broadly neutral relative to 2002. On the one hand, the dollar has weakened
from an average
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of $1.51 last year to $1.58 today whereas the euro has strengthened from
(euro)1.59 to (euro)1.46. And the Swiss Franc has strengthened from CHF 2.38 to
2.16. These basically net each other off, Smith & Nephew with a small minus and
Centerpulse we reckon with a small positive at the profit level.
I set out the cash flow drivers. Essentially use 2% for the excess of capital
expenditure over depreciation. CAPEX is slightly higher than previous guidance
as we invest further in surgical instruments for sales growth. Working capital
requirements of incremental sales will start at about 27% of sales growth and
should fall to 25% as we benefit from combined logistics. Finally, the number of
shares that will be in issue after the deal will be 12 28m.
We see this transaction as a substantial value creation exercise for both Smith
& Nephew and Centerpulse shareholders. Cost savings initially from sales and
marketing synergies in the medium-term will add substantially to profits. Cash
generation will improve from higher margins and better asset utilization. We
also believe that by transforming our business into the global No. 3 player in
wider orthopaedics, that this should substantially raise the profile and
positioning of the company to the investment community.
More fundamentally it produces a much stronger and more competitively sized
group for the longer-term, with the capability of exploiting the sizeable
opportunities that will arise in the industry in the future.
With that I am delighted to hand you back to Chris.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Thank you Peter. I have a summary slide here, which really echoes many of the
things we have talked about. Significant long-term value creation from this
major business combination. It is earnings enhancement in 2004 and materially so
in 2005. We will see accelerated margin improvement from scale and synergy
benefits. And it truly is remarkable that the two businesses have such
complementary product and technology strengths.
Simply put, this is an opportunity to create a global orthopaedics leader in a
fast growing market. Now in the slide pack, which is on the web, there is
additional information on product line-up, product portfolio and also
information on the Centerpulse Financial Results for 2002, which are also
released today. One thing I should point out because this caused a little bit of
confusion is that unusually for a U.K. or U.S. release, it has all the major
conditions of the two transactions on the back.
The reason for that is parallel releases were made to the Swiss market in the
form requested and specified which are of a much more legalistic structure and
which do include all the conditions to the transaction. That is in fact added to
the bulk of the note and just means that all investors have access to the same
information, which is obviously what we are seeking from either company's points
of view to do.
So with that and on any of these topics, I am happy to turn the session over to
sessions. As usual I am sure the Operator will request that you identify
yourself and your company before asking the question. Operator, could you do
that for us please?
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QUESTION AND ANSWER
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Operator
Thank you. Ladies and gentlemen, if you would like to ask a question at this
time, you may do so by pressing the star key, followed by the digit one on your
touchtone telephone. Once again, that was star, one. If you are on a
speakerphone, please make sure your mute function is turned off to allow your
signal to reach our equipment. We will proceed in the order that you signal us
and will take as many questions as time permits. Once again, that was star, one.
We will take our first question from Katherine Martinelli(ph) with Merrill
Lynch.
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Katherine Martinelli(ph) - Merrill Lynch - Analyst
Good morning and good afternoon to whoever is in London. A quick question just
first on the mechanics. In the press release, it does mention that Smith &
Nephew retains the right of first refusal in the case of a competitive bid. Can
you just give us a sense of how firm the deal is and just to give investors some
confidence we are not going to go into a bidding war, or what your kind of
limits in terms of where the valuation could get pushed here? And in that case,
is there any type of a break-up fee?
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Chris O'Donnell - Smith & Nephew plc - CE
Katherine, let me have a shot at that. The way we look at this, the structure
of this transaction gives a very fair price for shareholders of both companies
who have made a parallel offer for InCentive, who is the biggest single
shareholder in Centerpulse. And as part of that, we have requested and may have
agreed very hard irrevocables to support their position. The Board of Directors
of Centerpulse and the Board of Directors of InCentive have recommended this
transaction and 77% being the four main shareholders in InCentive have agreed to
irrevocables, which include a right of first refusal option.
That just makes it a very hard irrevocable. That's the impact of that. It's not
a signal that we either anticipate or are looking for a "bidding war". It really
means that Smith & Nephew has the right to acquire 20% of tentacles under any
circumstances. That is a very significant deterrent to any further transaction,
any further interlope.
Now while we are on that topic, I think the other issues are that we do see
obviously as Max said earlier, that [inaudible] of course Centerpulse's shares
have moved against the market over the last several months. So if you will,
there is a slightly more hidden premium here. But this does represent very good
value, we believe, for shareholders, both in terms of today and opportunities
for sharing in the forward growth tomorrow.
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Katherine Martinelli(ph) - Merrill Lynch - Analyst
Okay that's very fair and helpful. And if I could just ask one more question in
terms of, and it probably goes back to the de-synergies. Could you just help us
get a sense for the strategy going forward and maybe it relates to geographic
mix in terms of how you are going to attack hospitals that maybe are selling
both Smith & Nephew and Centerpulse products. Are you going to be doing this
merging product lines, keeping most of the sales force in place and offering
both products? Or is there going to be pretty significant re-cut of the sales
force out there?
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Chris O'Donnell - Smith & Nephew plc - CE
We put out today, in addition to the public communications to our sales forces
on both sides [inaudible], our policy going forward here. And our policy here is
that the customer comes first and we will support the customers with the
products that they are used to receiving. In principle, we will support them
through the sales network and sales skills that we have build up on behalf of
both companies.
We have some real opportunities to tackle this going forward, in that one of the
things that Smith & Nephew announced earlier this year is the de-visionalization
of our orthopaedics business into reconstructive and trauma. And there is an
opportunity to look at in a creative way, looking at the coverage patterns to
make sure that we maximize the benefits and the skills of the Centerpulse and
Smith & Nephew sales forces in markets across the world.
It so happens that Centerpulse is extremely [inaudible] in certain European
countries and mainly the big countries of the Central European mainland, where
Smith & Nephew is stronger in the periphery [inaudible] and Belgium, countries
like that. Whereas France, Germany, Italy and Switzerland are really very strong
countries for Centerpulse. So there will be some really [indecipherable] things
happening there. Where we can add the strength together and combine the cost
base.
In the U.S. Centerpulse is very strong in the Southern States and Smith & Nephew
has much more strength in the rest of the country. We will have to work our way
through all of these on a go-forward basis. But it is our aim to keep the
produce base and the sales structure in place to continue to serve our customers
best. And we have said to the people in our business, it's business as normal
for the next 6 to 12 months while we study the opportunities and work with you
to deliver the best market position to our customers.
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Katherine Martinelli(ph) - Merrill Lynch - Analyst
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CEP - Centerpulse and Smith & Nephew Conference Call
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So as of right now, the (pound)45m in cost savings by 2005, that is not going
to be primarily coming from sales force and main changes to the sales force?
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Chris O'Donnell - Smith & Nephew plc - CE
There are no savings coming from sales force and there is almost no savings
coming from R&D. The savings will come from manufacturing, supply chain and
back-office administration. And we have today, through Centerpulse, notified the
work force at the Zurich Head Office of Centerpulse, that office will be closed
and we will work out with them what their individual futures are. Some may have
opportunities in [inaudible]. Okay?
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Katherine Martinelli(ph) - Merrill Lynch - Analyst
Great, thank you.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Thank you Katherine.
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Operator
We will take our next question from Harvey Morris(ph) with J. P. Morgan.
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Harvey Morris(ph) - J. P. Morgan - Analyst
Good morning guys and congratulations. Just first following up on Katherine's
questions. If you look at the combined sales force right now, do you have a
sense of what percentage of the sales force that there is actually an overlap? I
know that you are going to try and keep both sales forces relatively intact over
the next 6 to 12 months. But just trying to get a better understanding of what
your strategy is going to be where there is a significant amount of overlap
between the two?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
That is something we have got to work on in some detail. This is a business
combination of two public companies. We have done due diligence in both
directions obviously. But we have not got down to individual sales territories
to be able to answer that question fairly Harvey. We do think, however,
[inaudible] if you look forward on independent reconstructive and trauma
businesses, which are very successful where we see the independent sales
resources, probably the separate sales resources coming through. This is a real
opportunity for us to exploit in this area. And [inaudible] hello, is anybody on
the line there?
--------------------------------------------------------------------------------
Harvey Morris(ph) - J. P. Morgan - Analyst
Yes, actually-
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Operator, we seem to have lost the connection?
--------------------------------------------------------------------------------
Operator
Mr. O'Donnell?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Hello Operator?
--------------------------------------------------------------------------------
Operator
Hi, can you hear me?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Harvey is that you there?
--------------------------------------------------------------------------------
Harvey Morris(ph) - J. P. Morgan - Analyst
Yes, I can hear you now.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Okay, fine, the call shut out for a minute or two.
--------------------------------------------------------------------------------
Harvey Morris(ph) - J. P. Morgan - Analyst
Okay. And what I would also love to hear is really your thoughts on the
relative importance of scale in the reconstructive implant market? If you think
about the last 5 to 7 years, the fastest growing companies in hips and knees
have actually been the smaller players like yourselves and Biomet and Zimmer and
so forth. Can you talk about how you think the next couple of years could play
out? Being that you are now one of these larger players and a top 3 or 4 player
in orthopaedics?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
The very clear two strategic benefits are that operating at a higher scale, you
can move your margin up by roughly 3 percentage points by comparison with being
a player of the size of Smith & Nephew or Centerpulse separately. The second
thing that I think is
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CEP - Centerpulse and Smith & Nephew Conference Call
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extremely important is to stay very focused on the customer and on the
technology and development. And I think the other strategic benefit is the
ability to focus R&D resource on the marketplace and to particularly as the
technology is now moving upstream into things like sophisticated non-invasive
stimulation, also biologicals, more advanced varying technology and computerated
surgery to have the money to place the best necessary to drive the business in
the future. I do think that focus is extremely important and we will retain this
focus in our business by our philosophy of strong, strategic independent
business units. Okay?
--------------------------------------------------------------------------------
Harvey Morris(ph) - J. P. Morgan - Analyst
Great. Thanks Chris. And if I just ask Peter one question about the accretion
analysis going forward? How much of the accretion in 2004 and beyond or 2005 for
that matter is coming from your move to Swiss tax status?
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Peter Hooley - Smith & Nephew plc - FD
Basically, we are managing to let's call it hold both companies' tax rate going
forward. The threat is, if you can call it a threat, yes I suppose you can, is
that the U.K. legislation actually is [inaudible] and that on profits on low-tax
environments [inaudible] U.K. rate, so what we would effectively be doing is
that we will be losing the Swiss tax advantage. So it is not so much, you could
call it a gain, it's preventing a loss. There is some gain in it, but the main
thing is preventing a loss.
--------------------------------------------------------------------------------
Harvey Morris(ph) - J. P. Morgan - Analyst
Great, that's helpful. Thank you guys, I appreciate it.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
The benefits largely are slightly further out than 2005 because as Peter
pointed out, it is a long-term benefit.
--------------------------------------------------------------------------------
Harvey Morris(ph) - J. P. Morgan - Analyst
Thank you and congratulations.
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Operator
We will take our next question from Milton Shue(ph) of Bear Stearns.
--------------------------------------------------------------------------------
Milton Shue(ph) - Bear Stearns - Analyst
Good afternoon and congratulations from me as well. Chris, I know you discussed
this in the last five minutes, but could you just go over again the factors that
you think will sort of successfully drive this integration? This is a relatively
large sized acquisition for you guys. I mean have you looked at what Stryker
did, obviously you probably have looked at the Stryker acquisition and J & J in
the past, their debt pay-down, manufacturing facility shutdowns. Are you guys
moving to Memphis where you guys have already expanded the facilities there? Or
debt pay down issues?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
We are going to work through all of that. We have a very clear philosophy at
this stage. And what our next step is, having got the transaction announced is
now to sit down with the management of the two businesses and work our way
through each of the businesses, orthopaedic, spine and dental and work out the
plans going forward to maximize the benefits. We will be using some consultant
help and we have already done that to look at the learning points [inaudible]
and clearly we will roll out a game plan over the next two or three months, so
that we are in a position to implement very smoothly and effectively when the
transaction closes.
I think the market has moved on since those two transactions were done and the
prizes now are actually for strong representation, strong sales representation
and advanced technology that helps both the surgeon and the hospital do their
jobs. And we have got to maximize that in the orthopedics and the spine
[inaudible] slightly different model. And we are going to work hard to do that.
We will put some very serious resources and programs into it.
--------------------------------------------------------------------------------
Milton Shue(ph) - Bear Stearns - Analyst
Okay.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
I can't be more specific than that at this point in time.
--------------------------------------------------------------------------------
Milton Shue(ph) - Bear Stearns - Analyst
Okay. And turning to the U.S. reconstructive market, market share shifts have
been incremental just maybe 1% or 2% at the most every year. Even although you
are a larger combined entity going forward, what makes you sure or more certain
that you can leapfrog or takeover a couple of percentage points of market share
from Stryker and J & J?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Well it will certainly take some time. But we do believe that both companies
have very strong technology, a very long-term
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CEP - Centerpulse and Smith & Nephew Conference Call
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commitment to this marketplace and some talented and experienced management in
place, which are the ingredients that we think can continue to bring the
surgeons across to Smith & Nephew and Centerpulse and actually continue and
accelerate that trend. Our Oxinium products with Smith & Nephew, the Unispacer
from Centerpulse, the [indecipherable] from Smith & Nephew are all going to be
great bits for the two sales forces to work on as we work through the
integration plans. And obviously computerated surgery, we all believe is going
to be a major driver in the future. And we will have one of the best in the
field.
I think what is interesting as a reflection is, 10 years ago Smith & Nephew was
No. 6 in [indecipherable]. Today we are No. 1 and we did that by focus, by
investment in sales force and in R&D and we are going to work away in
orthopaedics at that level of focus and dedication, because we believe there is
a wonderful opportunity here to both serve the patient and medical community and
also to generate superior returns to our shareholders.
--------------------------------------------------------------------------------
Milton Shue(ph) - Bear Stearns - Analyst
Okay. Last question, as you transition to just integrating the two businesses,
any potential lumps in the road you might see over the short-term? Have you
figured in any sales force [nutrition] especially in Europe? Thanks.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
We have done that and I think Peter referred to the fact that we do expect to
see some de-synergies and the [inaudible] okay thanks.
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Operator
We will take our next question from Scott Davidson with Piper Jaffray.
--------------------------------------------------------------------------------
Scott Davidson - Piper Jaffray - Analyst
Hi good afternoon.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Hi Scott.
--------------------------------------------------------------------------------
Scott Davidson - Piper Jaffray - Analyst
Chris, I wondered both Centerpulse and Smith & Nephew have done a lot of
rationalization of their individual business portfolios over the course of the
last several years or so. Can you talk maybe just in general terms, I know that
you are early in the process, but as you look out over the portfolio of the
combined business, would you expect to make any more divestitures over the next
couple of years or so?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
The answer is very simple. At this point no. We have worked up a more advanced
thought process with regard to orthopedics and the opportunities there. We have
looked pretty hard at spinal, we really haven't spent too much time on dental.
We need to spend more time in spinal and dental than we have to look at where
the opportunities are for taking these businesses forward in the best way. There
are very exciting opportunities in both areas, we need to find the best way of
dealing with them.
--------------------------------------------------------------------------------
Scott Davidson - Piper Jaffray - Analyst
Okay great. And then I think you had referenced surgical navigation in response
to one of the prior questions. Can you talk about any changes that you might see
there? Obviously that was an area that both companies had been pursuing
independently. Any change relative to your relationship with [Mantronic] and the
[Ion] system? Can you just flash that out a little bit?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Well Smith & Nephew's position is that we want to work with multiple partners.
We currently have relationships with [Mantronic], with BrainLAB and most
recently with GE. We look forward also to working with the [indecipherable]
system from [indecipherable]. We believe that the way forward is to offer the
hospital and the surgeon the choice of system for the opportunity to work with
advanced products. That fits very well into our overall strategy.
--------------------------------------------------------------------------------
Scott Davidson - Piper Jaffray - Analyst
Very good, thank you very much.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Thanks Scott.
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Operator
We will go next to Rotwith Deliria(ph) with Lehman Brothers.
--------------------------------------------------------------------------------
Rotwith Deliria(ph) - Lehman Brothers - Analyst
Hi, good morning everyone. I believe Milton asked this question, but the line
dropped on us and we could not get the answer you gave. So the question is Peter
talked about the sales de-synergies,
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CEP - Centerpulse and Smith & Nephew Conference Call
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Chris if you could add a little bit more color on what are the reasons for
intermittent sales disruption and what you are doing to turn that around?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
[inaudible] was basically at the margin where territories come together,
sometimes a sales guy will not be happy with the profile of the territory or the
role or the products he is assigned and he will leave the company. And that then
is a requirement to re-train, re-orient, re-appoint, re-direct some sales
resource. When that happens, because of the very close relationship with the
surgeons, there are times when he may go to the competition. At which point,
there is a battle over who keeps the business and who gains the business.
So we have factored into our calculations some numbers which we did derive some
learning experience from the previous orthopaedic acquisitions of DePuy and J &
J and Stryker and [indecipherable] and we believe we can contain this to within
a relatively small number. But it is a fact of life, when you put of these two
sizeable businesses together [inaudible]. It peaks at around 1% of combined
orthopaedic sales in 2004.
--------------------------------------------------------------------------------
Rotwith Deliria(ph) - Lehman Brothers - Analyst
Thank you.
--------------------------------------------------------------------------------
Operator
We will take our next question from William Plavoni(ph) of First Albany
Corporation.
--------------------------------------------------------------------------------
William Plavoni(ph) - First Albany Corporation - Analyst
Great, thank you. Most of my questions have been answered. But just one kind of
follow-on on the sales force. Can you give us any color and maybe this is a bit
too much detail I am asking for, but what are your strategies for plans to
retain these sales people through this whole process?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
We look forward to continue to working with the sales force through their
management groups. And we will be working on ways to keep the sales forces
motivated. That will range from looking at how we can best utilize the
best-combined product range of the group to individual things that relate to
individual sales people. More than that, I can't say at the moment William.
--------------------------------------------------------------------------------
William Plavoni(ph) - First Albany Corporation - Analyst
Okay, thank you, great. Congratulations.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Okay, I'll take two more quick questions, then I think we should probably try
and close the call Operator.
--------------------------------------------------------------------------------
Operator
We will go next to Brian Lawrence with [indecipherable] Partners.
--------------------------------------------------------------------------------
Brian Lawrence Analyst
Hi, I was wondering if you could just clarify something that was said on the
call earlier today? Just about having additional expressions of interest over
the last few months. I really just wanted to make sure that those expressions of
interest were explored and that you really are maximizing value here?
--------------------------------------------------------------------------------
Dr. Max Link - Centerpulse AG - Chairman & CEO
Well as was pointed out earlier today, there was no explicit auction for our
company. But most of our large competitors came to us over the past few months.
We explored all possible avenues, but the deal that originally materialized
obviously as the discussions which led to the [indecipherable] were with Smith &
Nephew.
--------------------------------------------------------------------------------
Brian Lawrence Analyst
Okay, then your opinion was then the deal out there that really maximizes value
best for your shareholders?
--------------------------------------------------------------------------------
Dr. Max Link - Centerpulse AG - Chairman & CEO
Absolutely.
--------------------------------------------------------------------------------
Brian Lawrence Analyst
Okay great thank you.
--------------------------------------------------------------------------------
Operator
We will take our final question from Steve Hammell with RBC Capital Markets.
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Steve Hammell - RBC Capital Markets - Analyst
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Final Transcript
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CEP - Centerpulse and Smith & Nephew Conference Call
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Good afternoon and good morning here. The last question I had was with regard to
residual liability risk and your judgment as to whether or not there are any
other contingencies that Smith & Nephew shareholders should be concerned about
with regard to the [inter-op] hip recall and subsequent law suits?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Well I think the answer is that we have obviously looked at this pretty hard in
due diligence. And the settlement trust is extremely well constructed to manage
the recall issues. Our view is that I am sure you know there was a tremendous
spike in revisions early on in this process, they have come down to a very low
level of continuing revisions [inaudible] so between the monies in the trust
there are some specific provisions in Centerpulse's year-end accounts and any
fundings that the [indecipherable] has available, then I am sure that we will
actually have the whole position covered. So no, I don't think there is a
significant issue at all for Smith & Nephew shareholders. If we believed there
was a significant issue, quite frankly, we wouldn't have proceeded.
--------------------------------------------------------------------------------
Steve Hammell - RBC Capital Markets - Analyst
Do you expect at all that the residual risk with regard to these cases could
have at all pushed away some of the other bidders for Centerpulse? Or do you not
think that was a major issue when it came to looking at this acquisition?
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
I have got absolutely no idea. You would have to ask them.
--------------------------------------------------------------------------------
Steve Hammell - RBC Capital Markets - Analyst
Fair enough, thank you.
--------------------------------------------------------------------------------
Chris O'Donnell - Smith & Nephew plc - CE
Okay. Sorry I can't be more helpful. Okay. Right, Operator, I think we will
close the call now. So thank you all for joining us on this call. It is a very
exciting day for Smith & Nephew and Centerpulse. We look forward to taking these
two great companies forward together in the future. Thank you.
--------------------------------------------------------------------------------
Operator
Once again ladies and gentlemen, that does conclude today's conference. Thank
you for your participation. You may now disconnect at this time.
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