Final Results

RNS Number : 8997B
Surgical Innovations Group PLC
24 April 2012
 



24 April 2012

Surgical Innovations Group plc

("SI" or the "Group")

 

Preliminary Results

 

Surgical Innovations Group plc (AIM: SUN), the designer and manufacturer of creative solutions for Minimally Invasive Surgery ('MIS'), announces preliminary results for the 12 months ended 31 December 2011, which show continued strong growth in SI branded products and OEM sales, the core MIS business.

 

Financial highlights

·     Group Revenue increased 7.9% to £7.602m (2010: £7.045m)

·     Core MIS business revenue up 18.5% to £7.532m (2010: £6.358m)

·     Gross margins in core MIS business increased to 47% (2010: 45%)

·     Operating profit increased 11.9% to £1.767m (2010: £1.579m)

·     Operating margins increased to 23% (2010:22%)

·     Pre-tax profit increased 10% to £1.705m (2010: £1.549m)

·     Net cash of £1.775m generated from operating activities

·     Basic earnings per share of 0.44p (2010: 0.48p)

 

Operational highlights

·     Revenues from SI branded products up 22.7% to £4.725m (2010: £3.852m); driven by flagship Resposable® products

·     Revenues from OEM products up by 12.0% to £2.807m (2010: £2.506m); driven by expanded portfolio of OEM customers

·     Strong sales of Resposable® instruments with consumable pull through expected in 2012

·     Single use consumable products now represent 52% of total MIS sales (2010: 46%)

·     OEM agreement with Advanced Medical Solutions  (AMS) for a novel adhesive deployment device

·     Continued major investment in research and development, plant and manufacturing

 

Commenting on Outlook, Doug Liversidge, Chairman, said: 

 

Enquiries:

 

Surgical Innovations Group plc

www.sigroupplc.com

Doug Liversidge, Non-Executive Chairman

 

Graham Bowland, Chief Executive Officer

Tel: +44 (0) 113 230 7597

graham.bowland@surginno.co.uk

 

www.seymourpierce.com

Freddy Crossley / Sarah Jacobs (Corporate Finance)

Tel: +44 (0) 20 7107 8000

Tel: +44 (0) 20 7933 8780

Mob: 07980 541 893 or paul.mcmanus@walbrookpr.com

Mob: 07886 335 992 or fiona.henson@walbrookpr.com

 

Chairman's statement

 

Results

Cash flow and investment

 

Dividend

 

Acquisitions

 

Clinical Advisory Board

 

Outlook

Chairman

 

 

 

 

 

 



 

Operating review

 

Operationally, we divide the Group into three segments:

 

SI Brand - our own branded minimally invasive devices. These include our port access systems: Yelloport® and YelloPort+plus™; our laparoscopic instrument ranges:  Logi® Range, Logic® Reusable, Quick® Range; as well as our retraction systems: FastClamp™ and Pretzel-Flex®.

 

OEM - original equipment manufacturercontracts with third party medical device companies to supply minimally invasive technology products through either own label or co-branding.

 

Industrial - provides minimally invasive technology for industrial applications. This remains a non-core element of our business.

 

SI Brand

 

Revenues from SI branded products increased over the period by 22.7% to £4.725 million (2010: £3.852 million).  This growth was driven by SI's flagship Resposable® products YelloPort+plus™ and Logi®Range as well as a large order in the second half from one of our master distributors to bolster their inventory for distribution across the Far East and Indian Sub Continent.

 

Strong demand for Resposable® instruments, where some elements are disposable and others reusable, reflects a culture change within the medical device industry and provides cost-effective solutions within an increasingly cost-conscious environment. As our Resposable® products gain traction, we will benefit from the on-going sales of consumables. To give an illustration, unit sales of our YelloPort+plus™ valves and swingtops (the higher margin disposable elements) rose an impressive 48.3% on the previous year, primarily as a result of the commissioning of the cannula units (the reusable element) sold during 2010. Importantly we despatched a total of 5,272 YelloPort+plus™ cannula units in 2011, an increase of 64% on the previous year (2010: 3,213 units) and so we expect consumable revenues to continue to rise in 2012. This "razor / razor blade" model provides us with good visibility for future earnings as well as a demonstration of the scalability of our business.

 

In terms of new products, we launched our advanced laparoscopic retractor, PretzelFlex® in Europe during the final quarter of the year and have already shipped a substantial number of instruments to date. We also launched our 3mm Instrument Range at the end of 2011. This range has been developed in response to the increasing focus on safer surgery and cosmesis (the cosmetic aspect of surgery), where there is a drive for smaller and even less invasive surgery. Initial feedback has been very positive, particularly because the products maintain rigidity despite being a smaller size. Revenues from these new products have had a minimal impact on the 2011 results and we expect them to make a growing contribution from the current year onwards.

 

OEM

 

Revenues from OEM increased 12.0% to £2.807m (2010: £2.506m) as a result of our strategy to encourage and expand OEM relationships. Interest from OEM partners often results from the improving clinical awareness and acceptability of the SI Branded products. The two segments complement each other and help stimulate interest and opportunity in our product offerings.

 

As part of our OEM contracts we license our intellectual property over fixed periods and manufacture the products on their behalf, either as their own label or with co-branding. The contracts include minimum values and volume which provide helpful visibility for future sales, although we still remain reliant on our partners to drive business on our behalf and it can, on occasion, be unpredictable in terms of initial product launches, supply chain inventory requirements and clinical adoption of new device technology.

 

With all OEM agreements the Group retains the full intellectual property rights for any devices it develops in return for providing exclusive worldwide distribution rights to the OEM customer over a fixed period of time. We do not offer contract manufacturing or a long-term assignment of a licence, with the exception of revenues that are generated from royalties.  The ownership of all intellectual property enables the Group to take back distribution rights at the end of any distribution agreement or if sales targets are not met. 

 

An SI branded PretzelFlex® has already been successfully launched in Europe, receiving positive clinical feedback from surgeons and distributors. In the US we intend to sell the PretzelFlex® through an OEM partnership with CareFusion, replacing the existing licensing agreement for the Diamond-Flex® which is due to end in 2012. The PretzelFlex® generated significant interest from US surgeons at the recent SAGES congress (Society of American Gastrointestinal and Endoscopic Surgeons) in San Diego, and having received 510(k) clearance from the US Food and Drug Administration ('FDA') last month this ensures continuous revenue streams in an already established market.

 

Industrial

 

Total revenues for the Industrial segment during the year were £70,000 (2010: £687,000). As previously stated, the 2010 revenues were flattered by the delivery of a £616,000 order in May 2010 and as predicted, sales for the year have returned to historic levels. Whilst this part of the business is non-core, we continue to seek opportunities where our intellectual property can be adapted to industrial applications and the Group continues to engage with major industrial partners. 

 

Product Development & New Product Pipeline

 

New product development and product enhancement for the SI Brand continues apace and is driven by the R&D team's close working relationship with the Clinical Advisory Board.

 

We have continued to invest significantly in new products with a total investment of £2.498m relating to product development (2010: £1.674m). Our aims are to generate a regular flow of innovative products, to work closely with our OEM customers and to widen our reputation with major medical devices companies as an innovative R&D partner.

 

The Concept and Development teams have been working on a number of new products which will launch under the SI brand during 2012. One product that we will launch in May is the Optical Trocar, part of the YelloPort+plus™ range. The launch has been delayed slightly because of CE mark regulatory issues but approval was finally received early April. The development of the L Hook, a device for electro-surgical cutting, has been given lower priority and so the expected launch has been moved from December 2011 into 2012.

 

As I mentioned above, we launched our laparoscopic retractor, PretzelFlex®, in Europe during the final quarter of the year. Our teams are already working on developing disposable and Resposable® versions and we expect single use, as well as 3mm designs, to be available before the end of the year.

 

Development continues on several variants of laparoscopic scissors and handles to support the OEM customer base. We expect to launch all of these devices during 2012. As mentioned above, the team is also developing a device for internal application of adhesives and sealants with AMS and this is expected to be ready for launch in 2013.

 

An important strategic move for SI is to diversify our product portfolio from Laparoscopy (operations performed in the abdomen using MIS). Our first step in this strategy has been to focus on the hip arthroscopy market. A dedicated team within our R&D department is currently developing our port and flex technology for this rapidly growing market and working closely with our arthroscopy specialists; Mr Siôn Glyn Jones (CAB member since January 2012) and Mr. Jon Conroy, who joined our Clinical Advisory Board last year. Our focus at the moment is to have pre production products available in the third quarter of 2012 and associated revenues from 2013.

 

We expect to continue our high level of investment in R&D as part of an ongoing strategy to ensure a regular stream of new products and continual product improvement across several areas of surgery, all encompassed within the umbrella of MIS.

 

Manufacturing

 

2011 saw us continue our investment in our facilities to ensure the continued growth and optimisation of our manufacturing arm. In the last quarter of the year £877,000, was invested in tooling, plant and machinery out of a total of £1.239m for the full year (2010: £628,000). The new machinery will allow us to increase throughput of YelloPort+plus™ cannula units, multiple reusable jaw styles and manufacture the segment elements for the new PretzelFlex®.  With this new machinery now in place we are unlikely to require such significant investment in the current financial year.

 

 

Post Period End Events

 

 

Outlook

 

We continue to be well placed to drive further growth in the business and to capitalise particularly on the opportunities that are presented to us in the US, which is our largest target market. Our strategy is to continue to focus on product development and to ensure that we have a continuous pipeline of innovative products targeting our existing markets as well as new therapeutic markets all within the MIS field.

 

We will continue to work with our partners to bring our technology to market, be it through OEM agreements with major medical devices companies, or through our extensive distribution network across the world that promotes our own SI branded products.

 

I am confident that given we have continued interest from new OEM customers, a strong pipeline of new products, growing traction with our SI branded products and the expected pull through of higher margin consumable sales, we can deliver strong growth in the business and continue to hold a strong position as a world leading innovator in MIS.

 

Finally, I would like to thank all of our staff and management for their support and hard work over the last year and for helping to make our business the success it is.

 

Graham Bowland

Chief Executive Officer

 

24 April 2012



 

Financial review

 

Revenue

 

Revenue increased 7.9% to £7.602 million (2010: £7.045 million). A segmental analysis of revenue is provided below which illustrates the strong growth performance from both SI branded and OEM products. The 2010 Industrial results benefited from a one-off sale in May 2010 of £616,000 and sales have now returned to normal levels.

 


2011

£'000

2010

£'000

% change

SI Brand

4,725

3,852

+22.7%

OEM

2,807

2,506

+12.0%

Industrials

70

687

-89.8%

Total

7,602

7,045

+7.9%

 

Gross margin

 

Gross margin from the core MIS business increased to 47% (2010: 45%). This improvement is as a consequence of increasing MIS product revenues which benefited from a 48% rise in unit sales of YelloPort+plus™ valves and SwingTop® which have relatively higher margins. 

 

Operating expenses

 

Operating expenses decreased during the period to £1.828 million (2010:  £1.932 million) despite further investment in the R&D team and total headcount (excluding non-executive directors) increasing to 121 (2010: 78).

 

The Group remains comfortable with these staffing levels which ensure it is both able to deliver product on schedule for its customers and continue to invest in future product design and development.

 

Notwithstanding this investment in personnel, the Group continues to rigorously control costs and is always acutely aware of the need to generate cash to fund future product development.

 

Finance income and costs

 

Finance income fluctuates depending on where we hold our bank deposits and for much of the year it was advantageous to hold our cash in a different facility from our debt providers which meant we were unable to offset our debt interest charges with cash interest income.

 

Finance least costs have also increased in line with the investment in new plant and machinery resulting in an overall increase in net finance expense of £0.06 million (2010: £0.03 million).

 

We continue to finance assets used in the manufacturing processes of the business as this continues to be a cost effective method of obtaining finance. This also ensures funds remain within the Group for both internal product development and for our working capital needs.

 

Profitability and operating margins

 

Operating profit for the year increased to £1.767 million (2010: £1.579 million). We believe this represents a strong signal to our shareholders that we are managing costs well whilst retaining the ability to grow revenues.

 

We believe further gross margin improvement is possible through product mix, in particular the disposable elements of the YelloPort+plus™ valves and SwingTop®, and through process improvements at our Leeds manufacturing facility.

 

Capitalised development costs

 

As in previous years, we have continued our investment in product development across both SI Brand and OEM partner devices.  The Board is confident with this investment strategy and, accordingly, £2.498 million (2010: £1.674 million) of costs have been capitalised during the year, increasing the total amount of capitalised costs to £6.482 million (2010: £3.984 million).

 

The amortisation charge against capitalised costs increased significantly to £550,000 (2010: £184,000) reflecting that products developed in recent years are now launched and selling to customers. No impairments have been identified at 31 December 2011 following review by the Board (2010: £334,000).

 

Foreign currency

 

The Group maintains foreign currency bank accounts and, wherever possible, supplier payments are made in Euros or Dollars to utilise currency receipts. The Group has used forward exchange contracts and will continue to monitor the need for such contracts depending upon the level of natural hedging achievable.

 

Taxation

 

The Group recognised a tax credit of £33,000 (2010: £239,000) resulting from deferred tax, reflecting the extent to which recoverability of tax losses can be foreseen with reasonable certainty. The Group holds deferred tax assets on the balance sheet of £465,000 (2010: £432,000). 

 

Earnings per share (EPS)

 

The Group achieved 0.44p (2010: 0.48p) underlying basic EPS in 2011. There were shares issued during the year and full details of all the EPS calculations are set out in note 6 of this preliminary announcement.

 

Cash, net funds and working capital

 

At 31 December the group had cash and cash equivalents of £3.183 million (2010: £2.622 million). Net debt, which is defined as cash and cash equivalents less bank overdraft and obligations under finance leases, stood at £1.111 million (2010: net funds of £442,000).

 

Cash flows generated from operations before working capital movements were strong at £2.827 million (2010: £2.553 million). We have continued to invest in working capital, our manufacturing facility and research and development which reduced cash reserves by £1.245 million (2010: increase of £60,000). The manufacturing facility is now well established and unlikely to require significant investment in the current financial year.

 

Working capital increased to £4.641 million (2010: £3.942 million) as a result of an increase in inventory (£825,000) associated with the growth of the business and the investment in manufacturing and an increase in trade debtors (£1.143 million) due to the phasing of year-end sales. These increases were offset by an increase in trade and other payables of £1.252 million.

Consolidated statement of comprehensive income

for the year ended 31 December 2011

 


2011

2010


£'000

£'000

Revenue

7,602

7,045

Cost of sales

(4,005)

(3,526)

Gross profit

3,597

3,519

Other operating expenses

(1,828)

(1,932)

Share‑based payments

(2)

(8)

Operating profit

1,767

1,579

Finance costs

(73)

(39)

Finance income

11

9

Profit before taxation

1,705

1,549

Taxation

33

239

Profit and total comprehensive income for the period



attributable to the owners of the parent

1,738

1,788

Earnings per share, total and continuing



Basic

0.44p

0.48p

Diluted

0.42p

0.45p

 

 

The Consolidated statement of comprehensive income above relates to continuing operations.

 

The Group has no recognised gains or losses other than the results for the year as set out above.

 



 

Consolidated balance sheet

as at 31 December 2011

 


2011

2010


£'000

£'000

Assets



Non‑current assets



Property, plant and equipment

3,378

2,477

Intangible assets

5,243

3,295

Deferred tax asset

465

432


9,086

6,204

Current assets



Inventories

2,858

2,033

Trade receivables

3,311

2,168

Other current assets

511

513

Cash and cash equivalents

3,183

2,622


9,863

7,336

Total assets

18,949

13,540

Equity and liabilities



Equity attributable to equity holders of the parent company



Share capital

3,952

3,815

Share premium account

226

75

Capital reserve

329

329

Retained earnings

8,109

6,369

Total equity

12,616

10,588

Non‑current liabilities



bligations under finance leases

926

653


926

653

Current liabilities



Bank overdraft

2,983

1,177

Trade and other payables

1,859

607

Obligations under finance leases

385

350

Accruals

180

165


5,407

2,299

Total liabilities

6,333

2,952

Total equity and liabilities

18,949

13,540

 



 

Consolidated cash flow statement

for the year ended 31 December 2011

 








2011

2010


£'000

£'000

Cash flows from operating activities



Operating profit

1,767

1,579

Adjustments for:



Depreciation of property, plant and equipment

508

448

Amortisation of intangible assets

550

518

Share‑based payment

2

8

Operating cash flows before movement in working capital

2,827

2,553

(Increase) / decrease in inventories

(825)

14

Increase  in receivables

(1,141)

(86)

Increase / (decrease) in payables

987

(240)

Cash generated from operations

1,848

2,241

Interest paid

(73)

(39)

Net cash generated from operating activities

1,775

2,202

Cash flows from investing activities



Interest received

11

9

Payments to acquire property, plant and equipment

(349)

(370)

Acquisition of intangible assets

(2,498)

(1,674)

Net cash used in investment activities

(2,836)

(2,035)

Cash flows from financing activities



Cash received from issue of shares

288

152

Repayment of obligations under finance leases

(472)

(259)

Net cash used in financing activities

(184)

(107)

Net (decrease) / increase in cash and cash equivalents

(1,245)

60

Cash and equivalents at beginning of period

1,445

1,385

Cash and cash equivalents at end of period

200

1,445

Cash and cash equivalents

3,183

2,622

Bank overdraft

(2,983)

(1,177)

Cash and cash equivalents at end of period

200

1,445

 



 

Consolidated statement of changes in equity

for the year ended 31 December 2011

 


Share

Share

Capital

Retained



capital

premium

reserve

earnings

Total


£'000

£'000

£'000

£'000

£'000

Balance as at 1 January 2010

3,738

18,809

329

(14,236)

8,640

Employee share‑based payment options

-

-

-

8

8

Reorganisation

-

(18,809)

-

18,809

-

Transactions with owners - exercise of share options

77

75

-

-

152

Profit and total comprehensive income for the period

-

-

-

1,788

1,788

Balance as at 31 December 2010

3,815

75

329

6,369

10,588

Employee share‑based payment options

-

-

-

2

2

Transactions with owners - exercise of share options

137

151

-

-

288

Profit and total comprehensive income for the period

-

-

-

1,738

1,738

Balance as at 31 December 2011

3,952

226

329

8,109

12,616

 



 

Notes to the financial statements

 

1. Reporting Entity

 

Surgical Innovations Group plc ('the Company') is a public limited company incorporated and domiciled in England and Wales (registration number 2298163). The Company's registered address is Clayton Wood House, 6 Clayton Wood Bank, Leeds LS16 6QZ.

 

The Company's ordinary shares are traded on the AIM market of the London Stock Exchange. The financial statements of the Company for the twelve months ended 31 December 2011 comprise the Company and its subsidiaries (together referred to as the 'Group').

 

The Group is primarily involved in the design, development and manufacture of devices for use in Minimally Invasive Surgery (MIS) and industrial markets. Surgical devices are targeted at the operating theatre environment in both public and private hospitals. In international markets, the Group sells through independent healthcare distributors, through Original Equipment Manufacture (OEM) and licensing contracts with major suppliers of medical equipment.

 

2. Basis of Preparation

 

This preliminary announcement has been prepared in accordance with the accounting policies set out in the annual report for the year ended 31 December 2011 and those to be adopted at 31 December 2011 (see note 3).

 

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), as adopted for use in the EU, this announcement does not itself contain sufficient information to comply with IFRSs. The Group expects to publish full financial statements that comply with IFRSs in May 2012.

 

3. Accounting policies

 

The same accounting policies, presentations and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements. The annual financial statements of Surgical Innovations Group plc are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

 

4. Publication of non-statutory financial statements

 

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Sections 434 and 435 of the Companies Act 2006.

 

The consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated balance sheet at 31 December 2011 and the consolidated cash flow statement have been extracted from the Group's financial statements upon which the auditor's opinion is unqualified and does not include any statement under section 498(2) or 498(3) of the Companies Act 2006. Those financial statements have not yet been delivered to the Registrar.

 

The audited accounts will be posted to all shareholders in due course and will be available on request by contacting the Company Secretary at the Company's Registered Office.

 

5. Segmental reporting

 

Information reported to the board and for the purpose of assessing performance and making investment decisions is organised into three operating segments. The Group's operating segments under IFRS 8 are as follows:

 

SI Brand- the research, development, manufacture and distribution of SI branded minimally invasive devices.

 

OEM - the research, development, manufacture and distribution of minimally invasive devices for third party medical device companies through either own label or co-branding.

 

Industrial - the research, development, manufacture and sale of minimally invasive technology products for industrial application.

 

The measure of profit or loss for each reportable segment is gross margin.

 

Assets and working capital are monitored on a Group basis, with no separate disclosure of asset by segment made in the management accounts, and hence no separate asset disclosure is provided here.

 

The following segmental analysis has been produced to provide a reconciliation between the information used by the key decision maker within the business and the information as it is presented under IFRS.

 


SI Brand

OEM

Industrial

Total

Year ended 31 December 2011

£'000

£'000

£'000

£'000

Revenue

4,725

2,807

70

7,602

Result





Segment result

1,950

1,047

49

3,046

Unallocated expenses




(1,279)

Profit from operations




1,767

Finance income




11

Finance costs




(73)

Profit before taxation




1,705

Tax




33

Profit for the year




1,738

 

Included within the segment/operating results are the following significant non-cash items:

 


SI Brand

OEM

Industrial

Total


£'000

£'000

£'000

£'000

Amortisation of intangible assets

386

143

21

550

 



 

 


SI Brand

OEM

Industrial

Total

Year ended 31 December 2010

£'000

£'000

£'000

£'000

Revenue

3,852

2,506

687

 7,045

Result





Segment result

1,151

930

390

2,471

Unallocated expenses

-

-

-

(892)

Profit from operations

-

-

-

1,579

Finance income

-

-

-

9

Finance costs

-

-

-

(39)

Profit before taxation

-

-

-

1,549

Tax

-

-

-

239

Profit for the year

-

-

-

1,788

 

Included within the segment/operating results are the following significant non-cash items:

 


SI Brand

OEM

Industrial

Unallocated

Total


£'000

£'000

£'000

£'000

£'000

Amortisation of intangible assets

134

50

-

-

184

Impairment of intangible assets

63

4

267

-

334

 

Unallocated expenses include those costs that cannot be split between segments and which are not separately analysed in the management accounts including concept department, sales and marketing, and head office overheads.

 

 

Geographical analysis of revenues


2011

2010


£'000

£'000

United Kingdom

1,548

2,119

Europe

3,014

2,908

US

1,763

1,410

Rest of World

1,277

608


7,602

7,045

 

Revenues are allocated geographically on the basis of where revenues were received from and not from the ultimate final destination of use.

 

During 2011, £1,050,000 (14%) of the Group's revenue depended on a single customer in the OEM segment (2010: £1,110,000 (16%)).

 



 

6. Earnings per ordinary share

 

Basic earnings per ordinary share

The calculation of basic earnings per ordinary share for the year ended 31 December 2011 was based upon the profit attributable to ordinary shareholders of £1,704,000 (2010: £1,788,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2011 of 392,716,121 (2010: 375,812,587).

 

Diluted earnings per ordinary share

The calculation of diluted earnings per ordinary share for the year ended 31 December 2011 was based upon the profit attributable to ordinary shareholders of £1,738,000 (2010: £1,788,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2011 of 392,716,121 (2010: 410,691,902). All share options at the financial year end were anti‑dilutive.

 


2011

2010

Earnings

£'000

£'000

Earnings for the purpose of basic and diluted earnings per ordinary share

1,738

1,788

 

7. Share capital


2011

2010


£'000

£'000

Authorised 600,000,000



(2010: 600,000,000) ordinary shares of 1p each

6,000

6,000

Allotted, called up and fully paid 395,202,902



(2010: 381,491,902) ordinary shares of 1p each

3,952

3,815

 

 

8. Annual General Meeting

 

 

 


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