27th Apr 2006 11:00
Smith & Nephew Plc27 April 2006 Smith & Nephew Q1 Results 27 April 2006 Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business,announces its results for the first quarter ended 1 April 2006, and for thefirst time in US dollars. Highlights • Q1 revenue up 6%* to $643m • Q1 EPSA** down by 5% to 9.7c** • Strong new product launch programme • BSN medical disposal completed Commenting on the first quarter, Sir Christopher O'Donnell, Chief Executive ofSmith & Nephew, said: "At the time of our preliminary results for 2005 we indicated that marketconditions had become tougher. This has proved to be the case in Q1 and islikely to continue during 2006. First quarter sales and earnings are slightlylower than expected and Q2 is anticipated to show only a modest improvement. However, we expect trading to improve in the second half as we roll out a numberof new products. With one of the strongest new product launch programmes we havehad for many years, we remain confident in our medium and long-term growthprospects." A conference call for analysts to discuss the Company's first quarter resultswill be held at 12.00noon BST / 7.00am EST today, Thursday 27 April. Theconference call will be broadcast live on the web and will be available ondemand shortly following the close of the meeting at http://www.smith-nephew.com/Q106. If interested parties are unable to connect to the web, a listen-onlyservice is available by calling 020 7138 0809 in the UK or 718 354 1357 in theUS. Analysts should contact Julie Allen on +44 (0) 20 7960 2254 or by email [email protected] for conference call details. * Unless otherwise specified as 'reported', all revenue increases throughoutthis document are underlying increases after adjusting for the effects ofcurrency translation. See note 3 for a reconciliation of these measures toresults reported under IFRS. ** EPSA is stated before the fair value loss made on hedging the proceedsfrom the disposal of the joint venture, taxation thereon, amortisation ofacquisition intangibles and the gain on the disposal of the joint venture. Seenote 2. Enquiries InvestorsPeter Hooley +44 (0) 20 7401 7646Finance DirectorSmith & Nephew MediaDavid Yates/Deborah Scott +44 (0) 20 7831 3113Financial Dynamics - LondonJonathan Birt +1 (212) 850 5634 Financial Dynamics - New York Introduction As indicated at the time of our 2005 preliminary results, conditions have beentougher during the first quarter, not only in the US, but also in the UK andGermany where we have been affected by healthcare budget constraints. Inaddition, we have taken a major strategic step to restructure our Orthopaedicmanagement and salesforce into separate Reconstruction and Trauma businesses andthis contributed to slower revenue growth in the quarter. This has resulted in a challenging first quarter, which has made us morecautious over our growth prospects for the year. We are responding to this bycontrolling our costs and focusing investment behind our new products. As theindividual launches of our strong new product line up occur over the course ofthe year, we expect an improved second half. This is the first quarter our results have been consolidated and reported in USdollars following the redenomination of the share capital of the Company into USdollars on 23 January 2006 so as to align the Group's capital base with itseffective functional currency. First Quarter Results Underlying revenue growth in the quarter was 6% relative to the first quarterlast year. Translational currency reduced revenue growth by 4%, resulting inreported first quarter revenue increasing by 2% to $643m. Trading profit in the quarter was $127m, a trading margin of 20%, and interestand finance income was $4m. Tax thereon amounted to $40m, an effective tax rateof 301/2%, resulting in attributable profit of $91m before the fair value loss,taxation thereon, amortisation of acquisition intangibles and the gain on thedisposal of the joint venture. The gain realised on the disposal of the joint venture, BSN medical, to MontaguPrivate Equity was $332m. Attributable profit after the fair value loss,taxation thereon, amortisation of acquisition intangibles and the gain on thedisposal of the joint venture was $419m. Earnings per share, before the fair value loss, taxation thereon, amortisationof acquisition intangibles and the gain on the disposal of the joint venture ("EPSA"), was 9.7c (48.5c per American Depositary Share, "ADS"), a 5% decrease onthe first quarter last year. Reported earnings per share was 44.5c ($2.23 perADS). A reconciliation of EPSA to reported earnings per share is given in note2 to the accounts. EPSA in sterling terms at average exchange rates was 5.55p, a 3% increase on thefirst quarter last year. Orthopaedic Reconstruction Reconstruction revenues at $221m grew by 7% relative to the first quarter lastyear, in line with the global market. We had a slow quarter in the US withrevenue growing only 2% where the timing of the introduction of our new productsand the restructuring of our Orthopaedic business inhibited our ability to gainnew business in the short-term. Outside the US, revenue growth continuedstrongly at 15%. Knee revenues grew 9%. Within the US 4% growth was achieved, with the LEGIONaRevision Knee making a promising start. Outside the US, OXINIUMa technology andGENESISa II knees continued to secure market share, with 18% growth. Hip revenues grew 5%. Outside the US the breadth of our range generated growthof 14%, whereas within the US hip revenues declined 1%. After launching the LEGION Revision Knee at the end of last year we launched theJOURNEYa Bi-Cruciate Stabilized Knee System in mid-March. These are twoimportant new platform products and incorporate innovative instrumentation. Inhips we launched the ANTHOLOGYa Primary Hip System with a flat stem and await adecision from the FDA on approval to market the BIRMINGHAM HIPa Resurfacingsystem in the US. Orthopaedic Trauma Trauma revenues grew by 8% relative to the first quarter last year at $108m.Growth in the US was 10% and outside the US 5%. Fixation products grew 7%, both in the US and outside the US. This is a slowerrate of revenue growth in the US than last year which benefited from the launchof PERI-LOCa Periarticular Locked Plating System. Due to changes in ourreimbursement procedures with US healthcare insurers, Clinical Therapies revenuegrowth slowed in January and February resulting in Q1 growth of 12% and has nowreturned to more usual levels. Endoscopy Endoscopy revenue grew 7% to $157m, with growth in the US of 5% and outside theUS of 10%. Repair revenues continue to drive the business with 19% growth. Resection andaccess revenues grew 3%. Spinal growth improved to 6%. Digital Operating Roomand visualisation growth was slower at 1%, but this compares with a very strongfirst quarter last year. Important product launches in the quarter were CALAXOa OsteoconductiveInterference Screw for use in knee ligament fixation, and the CONDORa ControlSystem for our Digital Operating Room. To expand our hip arthroscopy range, welaunched an innovative hip positioner and the BIORAPTORa Suture Anchor forlabral repairs. Advanced Wound Management Advanced Wound Management revenues grew 1% compared to the first quarter lastyear at $157m. This was after a 1% dilution effect from exiting fromDERMAGRAFTa dermal substitute and its related products. Correcting forDERMAGRAFT dilution, US growth was 4%. Outside the US revenue growth was 2%reflecting revenue declines of 5% and 8% respectively in the UK and Germany,consequent on significant healthcare spending constraints in these countries. The DERMAGRAFTa facility is now closed and the benefits of refocusing thesalesforce in the US are starting to come through. Our major woundcare brands, ALLEVYNa hydrocellular dressings and ACTICOATaantimicrobial silver dressings, continued to drive underlying revenues, withgrowth rates of 7% and 20% respectively. We obtained European approval forACTICOAT Moisture Control and launched it in Europe during the quarter and amajor product upgrade is scheduled later this year for ALLEVYN dressings. Outlook We have one of the strongest new product launch programmes for many years whichgives us confidence in our medium and long-term growth potential. In 2006, we have a progressive rollout of new products and see revenue growthstrengthening in the second half. For the full year we now see Reconstructionand Trauma growing in the low double digits, Endoscopy approaching double digitsand Advanced Wound Management growing in low single digits while itanniversaries the exit from the DERMAGRAFT business. These underlying revenue growth rates, together with margin expansion of around1%, are expected to result in trading profit growth in the low teens beforetranslational currency. In EPSA terms, as indicated in our 2005 preliminaryresults, this growth rate will be diluted by one-off effects of the BSNdisposal, the movement in US interest rates and the higher tax charge leading toan EPSA growth of around 4%-6% before translational currency. Interest andfinance income is expected to be around $13m. For the second quarter, underlying revenue growth is expected to increaseslightly from that of the first quarter and margin expansion of around 1/2%should result in flat EPSA before translational currency. For the second quarter and the full year, translational currency is expected toreduce revenue and EPSA growth by around 11/2%. About us Smith & Nephew is a global medical technology business, specialising inOrthopaedic Reconstruction and Trauma, Endoscopy and Advanced Wound Managementproducts. Smith & Nephew is a global leader in arthroscopy and advanced woundmanagement and is one of the leading global orthopaedics companies. Smith & Nephew is dedicated to helping improve people's lives. The Companyprides itself on the strength of its relationships with its surgeons andprofessional healthcare customers, with whom its name is synonymous with highstandards of performance, innovation and trust. The company has over 8,500employees and operates in 33 countries around the world generating annual salesof $2.6 billion. Forward-Looking Statements This press release contains certain "forward-looking statements" within themeaning of the US Private Securities Litigation Reform Act of 1995. Inparticular, statements regarding expected revenue growth and trading marginsdiscussed under "Outlook" are forward-looking statements as are discussions ofour product pipeline. These statements, as well as the phrases "aim", "plan","intend", "anticipate", "well-placed", "believe", "estimate", "expect","target", "consider" and similar expressions, are generally intended to identifyforward-looking statements. Such forward-looking statements involve known andunknown risks, uncertainties and other important factors (including, but notlimited to, the outcome of litigation, claims and regulatory approvals) thatcould cause the actual results, performance or achievements of Smith & Nephew,or industry results, to differ materially from any future results, performanceor achievements expressed or implied by such forward-looking statements. Pleaserefer to the documents that Smith & Nephew has filed with the U.S. Securitiesand Exchange Commission under the U.S. Securities Exchange Act of 1934, asamended, including Smith & Nephew's most recent annual report on Form 20F, for adiscussion of certain of these factors. All forward-looking statements in this press release are based on informationavailable to Smith & Nephew as of the date hereof. All written or oralforward-looking statements attributable to Smith & Nephew or any person actingon behalf of Smith & Nephew are expressly qualified in their entirety by theforegoing. Smith & Nephew does not undertake any obligation to update or reviseany forward-looking statement contained herein to reflect any change in Smith &Nephew's expectation with regard thereto or any change in events, conditions orcircumstances on which any such statement is based. a Trademark of Smith & Nephew. Certain names registered at the US Patent andTrademark Office. SMITH & NEPHEW plc 2006 QUARTER ONE RESULTS Unaudited Group Income Statement for the 3 months to 1 April 2006 Notes 2006 2005 A $m $m Revenue 3 643 628Cost of goods sold (164) (156)Selling, general and administrative expenses (323) (317)Research and development expenses (29) (31) _____ _____Trading profit 4 127 124Amortisation of acquisition intangibles (2) (3) _____ _____Operating Profit 4 125 121Interest receivable 7 8Interest payable (4) (5)Other finance income 1 -Loss on hedge of the sale proceeds of the joint venture (3) - _____ _____Profit before taxation 126 124Taxation 6 (39) (38) _____ _____Profit from continuing operations 87 86 Discontinued operations: Net profit on disposal of the joint venture 7 332 -Discontinued operations: Share of results of the joint venture 7 - 7 _____ _____Attributable profit 419 93 _____ _____ Earnings per share 2 Including discontinued operations: Basic 44.5c 9.9c Diluted 44.3c 9.8c Excluding discontinued operations: Basic 9.2c 9.2c Diluted 9.2c 9.1c A As restated for the change in reporting currency from Sterling to US Dollars on 1 January 2006 - see Note 1. Unaudited Group Statement of Recognised Income and Expense for the 3 months to 1April 2006 2006 2005 A $m $m Translation differences on foreign currency net investments 26 (23)Cumulative translation adjustment on disposal of the joint venture (14) -(Losses)/gains on cash flow hedges (2) 10Actuarial gains on defined benefit pension plans 37 -Taxation on items taken directly to equity (12) - _____ _____Net income/(expense) recognised directly in equity 35 (13)Attributable profit 419 93 _____ _____Total recognised income and expense 454 80 _____ _____ Unaudited Group Balance Sheet as at 1 April 2006 31 Dec Notes 1 April 2 April 2005 A 2006 2005 A $m $m $m ASSETS Non-current assets 589 Property, plant and equipment 600 565 673 Intangible assets 687 709 10 Investments 10 10 - Investment in joint venture - 221 - Non-current receivables - 2 - Non-current asset derivatives - 11 131 Deferred tax assets 131 129 _____ _____ _____ 1,403 1,428 1,647 Current assets 610 Inventories 641 593 620 Trade and other receivables 606 597 10 Current asset derivatives 3 46 151 Cash and bank 421 143 _____ _____ _____ 1,391 1,671 1,379 218 Held for sale - investment in joint venture - - _____ _____ _____ 3,012 TOTAL ASSETS 3,099 3,026 _____ _____ _____ EQUITY AND LIABILITIES Equity attributable to equity holders of the parent 197 Called up equity share capital 188 216 292 Share premium account 317 304 (4) Own shares (1) (4) 997 Accumulated profits and other reserves 1,382 908 _____ _____ _____ 1,482 Total equity 9 1,886 1,424 Non-current liabilities 211 Long-term borrowings 16 197 190 Retirement benefit obligation 157 279 16 Other payables due after one year 14 7 48 Provisions - due after one year 55 58 53 Deferred tax liabilities 26 79 _____ _____ _____ 518 268 620 Current liabilities 227 Bank overdrafts and loans due within one year 136 215 452 Trade and other payables 472 466 91 Provisions - due within one year 70 81 29 Current liability derivatives 1 4 213 Current tax payable 266 216 _____ _____ _____ 1,012 945 982 _____ _____ _____ 1,530 Total liabilities 1,213 1,602 _____ _____ _____ 3,012 TOTAL EQUITY AND LIABILITIES 3,099 3,026 _____ _____ _____ A As restated for the change in reporting currency from Sterling to US Dollars on 1 January - see Note 1. Unaudited Condensed Group Cash Flow Statement for the 3 months to 1 April 2006 2006 2005 A $m $m Net cash inflow from operating activities Operating profit 125 121 Depreciation and amortisation 36 35 Share based payment expense 4 4 Movement in working capital and provisions B (76) (88) _____ _____Cash generated from operations 89 72 Net interest received 3 3 Income taxes paid (27) (18) _____ _____Net cash inflow from operating activities 65 57 Cash flows from investing activities Acquisitions (4) (3) Disposal of joint venture C 551 - Dividends received from the joint venture C - 11 Capital expenditure (58) (49) _____ _____Net cash used in investing activities 489 (41) _____ _____ Cash flow before financing activities 554 16 Cash flows from financing activities Proceeds from issue of ordinary share capital 3 2 Cash movements in borrowings (270) (10) Settlement of currency swaps 2 4 _____ _____Net cash used in financing activities (265) (4) Net increase in cash and cash equivalents 289 12 Cash and cash equivalents at beginning of period 65 44 Exchange adjustments 6 (3) _____ _____Cash and cash equivalents at end of period D 360 53 _____ _____ A As restated for the change in reporting currency from Sterling to US Dollars on 1 January - see Note 1. B After $8 million (2005 - $15 million) unreimbursed by insurers relating to macrotextured knee revisions and $8 million (2005 - $1 million) of outgoings on rationalisation, acquisition and divestment costs. C Discontinued operations accounted for $551 million (2005 - $11 million) of net cash flow from investing activities. D Cash and cash equivalents at the end of the period are net of overdrafts of $61 million (2005 - $90 million). NOTES 1. As the Group's principal assets and operations are in the US and themajority of its operations are conducted in US Dollars, the Group changed itsreporting currency from Pounds Sterling to US Dollars with effect from 1 January2006. This will lower the Group's exposure to currency translation risk on itsrevenue, profits and equity. The Company redenominated its share capital intoUS Dollars on 23 January 2006 and will retain distributable reserves and declaredividends in US Dollars. Consequently, its functional currency became the USDollar. Financial information for prior periods has been restated from PoundsSterling into US Dollars in accordance with IAS 21. The financial information contained in this document does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. Theauditors have issued an unqualified opinion on the Group's statutory financialstatements for the year ended 31 December 2005, which will be delivered to theRegistrar of Companies after approval by shareholders on 27 April 2006. 2. In order to provide a trend measure of underlying performance,attributable profit is adjusted to exclude items which management consider maydistort comparability. Such items arise from events or transactions that fallwithin the ordinary activities of the Group but which management believes shouldbe separately identified to help explain trends as they are exceptional innature or derive from specific accounting treatments. Adjusted earnings per share ("EPSA") has been calculated by dividing adjustedattributable profit by the weighted (basic) average number of ordinary shares inissue of 941 million (2005 - 937 million). The diluted weighted average numberof ordinary shares in issue is 945 million (2005 - 943 million). 2006 2005 $m $m Attributable profit 419 93 Adjustments: Amortisation of acquisition intangibles 2 3 Net profit on disposal of the joint venture (332) - Loss on hedge of the sale proceeds of the joint venture 3 - Taxation on excluded items (1) - Adjusted attributable profit 91 96 Adjusted basic earnings per share 9.7c 10.2c Adjusted diluted earnings per share 9.6c 10.2c 3. Revenue by segment for the 3 months to 1 April 2006 was as follows: 2006 2005 Underlying growth in revenue $m $m % Revenue by business segment Orthopaedic Reconstruction 221 211 7 Orthopaedic Trauma 108 102 8 Endoscopy 157 151 7 Advanced Wound Management 157 164 1 _____ _____ _____ 643 628 6 _____ _____ _____ Revenue by geographic market United States 319 307 4 Europe E 203 207 6 Africa, Asia, Australasia and Other America 121 114 10 _____ _____ _____ 643 628 6 _____ _____ _____ E Includes United Kingdom revenue of $54 million (2005 - $60 million). Underlying revenue growth is calculated by eliminating the effects oftranslational currency. Reported growth reconciles to underlying growth asfollows: Reported Foreign Underlying growth in currency growth in revenue translation revenue effect % % % Orthopaedic Reconstruction 5 2 7 Orthopaedic Trauma 6 2 8 Endoscopy 4 3 7 Advanced Wound Management (4) 5 1 _____ _____ _____ 2 4 6 _____ _____ _____ 4. Trading and operating profit by segment for the 3 months to 1 April 2006 was as follows: 2006 2005 $m $m Trading Profit by business segment Orthopaedic Reconstruction 57 57 Orthopaedic Trauma 19 18 Endoscopy 30 30 Advanced Wound Management 21 19 _____ _____ 127 124 _____ _____ Operating Profit by business segment Orthopaedic Reconstruction 55 54 Orthopaedic Trauma 19 18 Endoscopy 30 30 Advanced Wound Management 21 19 _____ _____ 125 121 _____ _____ 5. The cumulative number of revisions of the macrotextured knee product was969 on 1 April 2006 compared with 955 at 31 December 2005. This represents 33%of the total implanted. Settlements with patients have been achieved in respectof 816 revisions (31 December 2005 - 771 settlements). Costs of $87 million arein dispute with insurers and are provided for in full. $67 million of provisionremains to cover future settlement costs. 6. Taxation of $40 million (2005 - $38 million) on the profit beforeamortisation of acquisition intangibles, the loss on hedge of the sale proceedsof the joint venture and discontinued operations is at the full year estimatedeffective rate of 30.5% (2005 - 29.9%). Of the $39 million (2005 - $38 million)taxation charge $27 million (2005 - $32 million) relates to overseas taxation. 7. On 23 February 2006 the Group sold its 50% interest in the BSN jointventure for cash consideration of $562 million. The net profit of $332 millionon the disposal of the joint venture is after a credit of $14 million forcumulative translation adjustments and $26 million of transaction costs. In2005 the share of results of the joint venture is after interest payable of $1million and taxation of $3 million. The Group's discontinued operationsearnings per share for the year is: basic 35.3c (2005 - 0.7c) and diluted 35.1c(2005 - 0.7c). 8. No dividends were paid in the quarter in 2006 or 2005. The secondinterim dividend for 2005 of 6.1 US cents per ordinary share was declared by theBoard on 9 February 2006. UK shareholders will receive 3.5 pence per ordinaryshare. This is payable on 12 May 2006 to shareholders whose names appear on theregister at the close of business on 21 April 2006. Shareholders mayparticipate in the dividend re-investment plan. 9. The movement in total equity for the 3 months to 1 April 2006 was as follows: 2006 2005 $m $m Opening equity as at 1 January 1,482 1,338 Attributable profit 419 93 Equity dividends accrued (57) - Exchange adjustments 12 (23) (Losses)/gains on cash flow hedges (2) 10 Actuarial gains on defined benefit pension plans 37 - Share based payment recognised in the income statement 4 4 Taxation on items taken directly to equity (12) - Issue of ordinary share capital 3 2 _____ _____ Closing equity 1,886 1,424 _____ _____ 10. Net cash/(net debt) as at 1 April 2006 comprises: 2006 2005 $m $m Cash and bank 421 143 Long-term borrowings (16) (197) Bank overdrafts and loans due within one year (136) (215) Net currency swap assets 2 53 _____ _____ 271 (216) _____ _____ The movements were as follows: Opening net debt as at 1 January (306) (232) Cash flow before financing activities 554 16 Proceeds from issue of ordinary share capital 3 2 Exchange adjustments 20 (2) _____ _____ Closing net cash/(net debt) 271 (216) _____ _____ INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc Introduction We have been instructed by the company to review the financial information forthe three months ended 1 April 2006 which comprises Group Income Statement,Group Statement of Recognised Income and Expense, Group Balance Sheet, CondensedGroup Cash Flow Statement and the related notes 1 to 10. We have read the otherinformation contained in the interim report for quarter one and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the company, for our work,for this report, or for the conclusions we have formed. Directors' Responsibilities The interim report for quarter one, including the financial informationcontained therein, is the responsibility of, and has been approved by, thedirectors. The directors are responsible for preparing the interim report forquarter one in accordance with the Listing Rules of the Financial ServicesAuthority which require that the accounting policies and presentation applied tothe interim figures should be consistent with those applied in preparing thepreceding annual accounts except where any changes, and the reasons for them,are disclosed. Review Work Performed We conducted our review in accordance with guidance contained in Bulletin 1999/4'Review of interim financial information' issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data, and based thereon assessingwhether the accounting policies and presentation have been applied. A reviewexcludes audit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly we do not express an audit opinion on the financial information. Review Conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the three monthsended 1 April 2006. Ernst & Young LLP London 27 April 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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