27th Jul 2006 11:00
Smith & Nephew Plc27 July 2006 Smith & Nephew Interim Results 27 July 2006 Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business,announces its results for the first half ended 1 July 2006. Q2 Highlights H1 Highlights • Q2 revenue up 6%* to $686 million • Group revenue up 6%* to $1,329 million• Trading profit increased 7% to $138 million • EPSA at 20.5c**• EPSA up 1% at 10.8c** • Interim dividend up 10% to 4.10c• Orthopaedic Reconstruction revenue growth at 7% - Successful new knee product launches in the US - BIRMINGHAM HIP<> Resurfacing System (BHR<>) approved in the US, with first surgery in June 2006 • Orthopaedic Trauma revenues improve with growth of 13%• Endoscopy revenue growth of 6%• Advanced Wound Management on track Commenting on the second quarter, Sir Christopher O'Donnell, Chief Executive ofSmith & Nephew, said: "Smith & Nephew has seen a progressive improvement in the second quarter despitemarket conditions remaining challenging in the US and greater than expectedhealthcare cost pressures across Europe. Under these more difficultcircumstances, we were able to maintain our sales growth consistent with thefirst quarter and earnings growth is in line with guidance. We remain confident in our growth prospects and reconfirm our earnings guidancefor the full year. We continue to expect an improved performance in the secondhalf, driven by a strong new product launch programme across all of ourbusinesses, in particular the US launch of our BHR hip resurfacing product whichwas approved in May. Techniques for treating the knee are constantly increasing, and through ourorthopaedic and endoscopic businesses we have a unique involvement in thesetreatments. We recently completed both the acquisition of OsteoBiologics, Incin the high potential field of cartilage repair, and a significant licence for asingle injection knee lubricant for osteoarthritic pain relief. Thesetransactions, together with innovative new knee product introductions in thefirst half of the year, give us an outstanding knee portfolio." An analyst presentation to discuss the Company's second quarter results will beheld at 12.00 noon BST / 7.00am EST today, Thursday 27 July. The conferencecall will be broadcast live on the web and will be available on demand shortlyfollowing the close of the meeting at http://www.smith-nephew.com/Q206. Ifinterested parties are unable to connect to the web, a listen-only service isavailable by calling 020 7138 0813 in the UK or 718 354 1359 in the US.Analysts should contact Samantha Hardy on +44 (0)20 7960 2257 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 InvestorsAdrian Hennah +44 (0) 20 7401 7646Chief Financial OfficerSmith & Nephew Deborah Scott +44 (0) 20 7960 7256Financial Dynamics MediaDavid Yates +44 (0) 20 7831 3113Financial Dynamics - London Jonathan Birt +1 (212) 850 5634Financial Dynamics - New York Introduction Smith & Nephew has seen a progressive improvement in the second quarter despitemarket conditions remaining challenging in the US and greater than expectedhealthcare cost pressures across Europe. Under these more difficultcircumstances, we were able to maintain our sales growth consistent with thefirst quarter and earnings growth is in line with guidance. During the first half we have focused on driving forward our strong new productlaunch programme across all of our businesses. In the second quarter, welaunched the BHR<> system in the US, the only hip resurfacing product to be FDAapproved. At the same time, we have maintained a strict control of costs andhave introduced a number of measures which will benefit the Group during thesecond half and beyond. Second Quarter Results Revenue in the quarter was $686 million. This represents growth of 7% asreported, and an underlying growth of 6% after adjusting for movements incurrencies, when compared to the same period last year. Trading profit in the quarter was $138 million, representing growth of 7% asreported. Trading margin was 20% and interest and finance income was $5million. A tax charge of $41 million at the amended rate for the year of 29.5%resulted in an attributable profit of $102 million before amortisation ofacquisition intangibles of $2 million. Earnings per share before the amortisation of acquisition intangibles were 10.8c(54.0c per American Depository Share, "ADS"), which was 1% higher than the prioryear. This was negatively impacted by the disposal of our joint venture withBSN, and by the loss of net interest income deriving from the dollar/sterlinginterest rate differences. The total impact on EPSA growth of these one-offitems was 7.5% in the quarter. Orthopaedic Reconstruction Reconstruction revenues at $228 million grew by 7% compared to the secondquarter last year, slightly ahead of the global market. We had an improvedquarter in the US with revenue growing at 7% where we have benefited from theintroduction of our new knee products and where the separation of our twoorthopaedic businesses has begun to have a positive effect. Outside the US,growth at 7% was slower than the previous quarter, mainly due to difficultmarket conditions in Europe, including surgeon strikes in both Germany andSpain. Knee revenues grew 10%. Within the US, we are already seeing the benefit fromthe strong first half programme of new product introductions in knees withrevenue growth of 13%. The recently launched LEGION<> Revision Knee contributedstrongly and the innovative new JOURNEY<> Bi-Cruciate Stabilised Knee System madea very encouraging start. Outside the US, revenues grew by 7%. Hip revenues grew 2%. Outside the US growth was 7%, whereas within the US hiprevenues declined by 2% as indicated below. The BHR system has been a leadingproduct outside the US and the FDA approval in May within the US is a majoropportunity. The first surgery took place on 5 June conducted by a surgeon who was trained atour purpose built training centre in the UK. Training is ahead of schedule,with a total of 75 US-based surgeons having been trained to date, many of whomperformed their first surgeries in the quarter. This training is part of anoverall programme to train some 400 US surgeons by the end of 2007. On 30 June, we received a subpoena from the United States Department of Justice,Antitrust Division, requesting documents for the period beginning January 2001through to the present relating to possible violations of US antitrust laws, inrespect of the manufacture and sale of orthopaedic implant devices. Similarenquiries have been directed to a number of Smith & Nephew's US competitors. Weare co-operating fully with this request. Across the first half of the year, with slower growth in the orthopaedicreconstruction market, we have seen greater competition in the US for individualaccounts and in some cases sales representatives. At the time of thedivisionalisation of our orthopaedic business into separate Reconstruction andTrauma businesses we were clearly the focus of competitive action. Theprincipal impact of this has been seen on the sales of hips (and trauma fixationproducts) in the US in both quarters. With the divisionalisation now complete,and with our strong new product roll-out well under way, we have seenprogressive improvement in both orthopaedic businesses in the US increasing ourconfidence in our second half plans. Orthopaedic Trauma Trauma revenue growth improved to 13% relative to the same quarter last year at$123 million. Growth in the US was 14% and outside the US 10%. Notwithstanding the competitor activities mentioned above, fixation productsgrew in the US by 9% and outside the US by 10%. The quarter's improved revenuegrowth in the US benefited from the continued success of our PERI-LOC<>Periarticular Locked Plating System for lower extremity indications and weexpect to launch an upper extremity version in Q3. In July, we launched ourTRIGEN<> INTERTAN<> nail for femoral fractures, which further strengthens ourinternal fixation portfolio going forward. As expected, growth in Clinical Therapies returned to more normal levels and thesecond quarter's revenues were up 22% against the same period last year. InJune, we signed a worldwide licensing agreement with Q-Med AB in Sweden tomarket DUROLANE(R), a single-injection hyaluronic acid therapy for the treatmentof osteoarthritis of the knee and hip. This licence will further broaden ourproduct offering in this area. The initial consideration was $10 million withup to $59.5 million of further milestones payable depending on regulatoryapprovals and sales milestones. Endoscopy Endoscopy revenue grew 6% to $160 million, with growth in the US of 5% andoutside the US of 7%, compared with a year ago. The flow of capital purchasesfor Digital Operating Room and visualisation was slower than anticipated,principally due to healthcare funding uncertainties in major markets. Takentogether, these two sectors grew 3%. Nonetheless, we have received positivefeedback on our CONDOR<> Control System which has attracted significant interestfor the future and we have a strong order book for those sectors going into thesecond half. Repair revenues continued to grow strongly with the successful launches of theCALAXO<> Osteoconductive Interference Screw and the BIORAPTOR<> Suture Anchor,contributing to its 18% growth. Resection and access revenues were flat,consistent with the prior year. The expansion of our hip arthroscopy range during the quarter nearly doubled ourrevenues from a small base in this new market sector. Hip arthroscopy is anexciting area for the company and we are establishing a leadership position in amarket where we expect excellent growth opportunities. In July, the Endoscopy business acquired OsteoBiologics, Inc ("OBI"), for $72million in cash, which markets innovative bioabsorbable bone graft substitutes("BGS") in Europe to repair cartilage defects in the knee and offers the TRUFIT<> BGS Plugs in the US as a bone void filler. OBI's products potentially offer a step change in cartilage repair and are an important addition to Smith &Nephew's existing comprehensive arthroscopy portfolio. On 21 June, Michael Frazzette was appointed President of the Endoscopy business.Michael brings extensive senior executive experience in the healthcareindustry to this post. Advanced Wound Management Advanced Wound Management revenues were flat at $175 million, compared to thesecond quarter of last year. This was after a 4% dilution effect as a result ofthe exit from DERMAGRAFT<> and its related products. After adjusting for theDERMAGRAFT dilution, which principally affects US sales, the strong US growth of14% in the quarter compensated for tougher market conditions outside the USwhere revenue was 1% up overall, due to flat growth in the UK and a decline of5% in Germany, where healthcare cost pressures are greatest. Our major woundcare brands, ALLEVYN<> dressings and ACTICOAT<> antimicrobialsilver dressings, continued their strong growth record with 9% and 12% revenuegrowth respectively. Revenues benefited from a number of new product launchesin the quarter, including the European launch of new and improved versions ofALLEVYN Adhesive and ALLEVYN Sacrum, the launch of ACTICOAT Moisture Control inEurope and FDA approval of expanded labelling for our VERSAJET<> hydrosurgicalwound debrider to include burns indications. The new ALLEVYN products have beenwell received and we are making strong headway in driving our competitiveadvantage in this area. These dressings promote faster healing as a result oftheir more breathable top film and improved speed of absorption. Half Year Results Reported revenues increased by 5% to $1,329 million compared to the same periodlast year, with underlying growth at 6%. Trading profit in the half year was up 5% to $265 million. Trading margin wasthe same as a year ago at 20%, in line with expectations. Interest and financeincome was $9 million. A tax charge of $81 million at the amended rate for theyear of 29.5% resulted in an adjusted attributable profit of $193 million beforefair value loss, taxation thereon, the amortisation of acquisition intangiblesof $4 million, and the gain on the disposal of the joint venture. Earnings per share before the gain on disposal of the joint venture, fair valueloss, taxation thereon, and the amortisation of acquisition intangibles was 20.5c (102.5c per American Depository Share, "ADS"), 2% lower than last year'scomparator having been negatively impacted by the disposal of our joint venturewith BSN and by the loss of net interest income deriving from the dollar/sterling interest rate differences. The total impact on EPSA growth of theseone-off items was 7.5% in the half year. Reported earnings per share were 55.2c(276.0c per ADS). A reconciliation of EPSA to reported earnings per share isprovided in note 2 to the accounts. Operating cash flow, defined as cash generated from operations less capitalexpenditure, was $100 million. This is a trading profit to cash conversionratio of 49%, before rationalisation and integration expenditure of $13 millionand $16 million of funding of settlement payments to patients in respect ofmacrotextured revisions which are not being reimbursed by insurers, and compareswith 38% a year ago. A first interim dividend of 4.10c per share (20.5c per ADS) will be paid on 10November 2006 to shareholders on the register at the close of business on 20October 2006. This represents a 10% increase on the dollar equivalent of the2005 sterling interim dividend in line with our current dividend policy. For UKresident shareholders and those other shareholders who have elected to receivetheir dividends in sterling, the sterling amount payable for the first interimdividend will be 2.21 pence per share. Board At the Annual General Meeting in April, John Buchanan was appointed as Chairmanof Smith & Nephew, succeeding Dudley Eustace after his retirement. In June, theformer Chief Financial Officer of Invensys plc, Adrian Hennah, joined thecompany as Chief Financial Officer on Peter Hooley's retirement. Outlook We remain confident in the medium and long-term growth potential of all of ourbusinesses, and are encouraged by the impact of the new products that have beenlaunched in the first half of 2006. Looking ahead to the rest of 2006, we confirm the earnings guidance given at thetime of our Q1 results in April. In Orthopaedics, we expect the success of ournew product programme to enable us, on a combined basis, to grow in low doubledigits for the full year. We expect stronger growth in Endoscopy during thesecond half, with growth in high single digits for the full year. We expectAdvanced Wound Management growth in low single digits. We also reconfirm our EPSA growth guidance given in the first quarter, exceptthat, as announced on 11 July, the OBI acquisition will reduce earnings for theyear by approximately 1%. For the full year this is after a negative impact onEPSA growth of approximately 7.5% as a result of the BSN JV disposal and theloss of net interest income from interest rate differentials. The success of our recent product launches, especially the LEGION<> andJOURNEY<> knees and the BHR<> hip in the US, continue to give us confidence forprogressively stronger growth in the second half of the year and into 2007. About us Smith & Nephew is a global medical technology business, specialising inOrthopaedic Reconstruction, Orthopaedic Trauma, Endoscopy and Advanced WoundManagement products. Smith & Nephew is a global leader in arthroscopy andadvanced wound management and is one of the leading global orthopaedicscompanies. 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 salesin excess of $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. <> Trademark of Smith & Nephew. Certain names registered at the US Patent andTrademark Office. SMITH & NEPHEW plc 2006 QUARTER TWO AND HALF YEAR RESULTS Unaudited Group Income Statement for the 3 months and 6 months to 1 July 2006 3 Months 3 Months Notes 6 Months 6 Months 2005 A 2006 2006 2005 A $m $m $m $m 642 686 Revenue 3 1,329 1,270 (167) (172) Cost of goods sold (336) (323) (317) (346) Selling, general and administrative expenses (669) (634) (29) (30) Research and development expenses (59) (60) _____ _____ _____ _____ 129 138 Trading profit 4 265 253 (3) (2) Amortisation of acquisition intangibles (4) (6) _____ _____ _____ _____ 126 136 Operating profit 4 261 247 7 4 Interest receivable 11 15 (5) (1) Interest payable (5) (10) - 2 Other finance income 3 - - - Loss on hedge of the sale proceeds of the joint (3) - venture _____ _____ _____ _____ 128 141 Profit before taxation 267 252 (39) (41) Taxation 6 (80) (77) _____ _____ 89 100 Profit from continuing operations 187 175 Discontinued operations: - - Net profit on disposal of the joint venture 7 332 - 8 - Share of results of the joint venture 7 - 15 _____ _____ _____ _____ 97 100 Attributable profit 519 190 _____ _____ _____ _____ Earnings per share Including discontinued operations: 10.4c 10.7c Basic 55.2c 20.3c 10.3c 10.6c Diluted 54.9c 20.1c Excluding discontinued operations: 9.5c 10.7c Basic 19.9c 18.7c 9.4c 10.6c Diluted 19.8c 18.5c A As restated for the change in reporting currency from Sterling to USDollars on 1 January 2006 - see Note 1. Unaudited Group Statement of Recognised Income & Expense for the 3 months and 6months to 1 July 2006 3 Months 3 Months 6 Months 6 Months 2005 A 2006 2006 2005 A $m $m $m $m (71) 19 Translation differences on foreign currency net investments 45 (94) - - Cumulative translation adjustment on disposal of the joint (14) - venture 9 (4) (Losses)/gains on cash flow hedges (6) 19 (40) 6 Actuarial gains/(losses) on defined benefit pension plans 43 (40) 13 (1) Taxation on items taken directly to equity (13) 13 _____ _____ _____ _____ (89) 20 Net income/(expense) recognised directly in equity 55 (102) 97 100 Attributable profit 519 190 _____ _____ _____ _____ 8 120 Total recognised income and expense 574 88 _____ _____ _____ _____ Unaudited Group Balance Sheet as at 1 July 2006 31 Dec Notes 1 July 2 July 2005 A 2006 2005 A $m $m $m ASSETS Non-current assets 589 Property, plant and equipment 627 578 673 Intangible assets 723 695 10 Investments 10 10 - Investment in joint venture - 218 - Non-current receivables - 1 131 Deferred tax assets 108 143 _____ _____ _____ 1,403 1,468 1,645 Current assets 610 Inventories 680 611 620 Trade and other receivables 638 583 10 Current asset derivatives - 10 151 Cash and bank 377 96 _____ _____ _____ 1,391 1,695 1,300 218 Held for sale - investment in joint venture - - _____ _____ _____ 3,012 TOTAL ASSETS 3,163 2,945 _____ _____ _____ EQUITY AND LIABILITIES Equity attributable to equity holders of the parent 203 Called up equity share capital 189 203 299 Share premium account 318 290 (4) Own shares (1) (4) 984 Accumulated profits and other reserves 1,507 884 _____ _____ _____ 1,482 Total equity 9 2,013 1,373 Non-current liabilities 211 Long-term borrowings 16 207 190 Retirement benefit obligation 156 292 16 Other payables due after one year 4 7 48 Provisions - due after one year 53 47 53 Deferred tax liabilities 33 74 _____ _____ _____ 518 262 627 Current liabilities 227 Bank overdrafts and loans due within one year 131 206 452 Trade and other payables 440 447 91 Provisions - due within one year 59 78 29 Current liability derivatives 1 12 213 Current tax payable 257 202 _____ _____ _____ 1,012 888 945 _____ _____ _____ 1,530 Total liabilities 1,150 1,572 _____ _____ _____ 3,012 TOTAL EQUITY AND LIABILITIES 3,163 2,945 _____ _____ _____ A As restated for the change in reporting currency from Sterling to USDollars on 1 January - see Note 1. Unaudited Condensed Group Cash Flow Statement for the 3 months and 6 months to 1July 2006 3 Months 3 Months 6 Months 6 Months 2005 A 2006 2006 2005 A $m $m $m $m Net cash inflow from operating activities 126 136 Operating profit 261 247 37 41 Depreciation and amortisation 77 72 3 5 Share based payment expense 9 7 (57) (41) Movement in working capital and provisions B (117) (145) _____ _____ _____ _____ 109 141 Cash generated from operations 230 181 2 3 Net interest received 6 5 (42) (36) Income taxes paid (63) (60) _____ _____ _____ _____ 69 108 Net cash inflow from operating activities 173 126 Cash flows from investing activities (14) (3) Acquisitions (7) (17) - (8) Disposal of joint venture C 543 - - - Dividends received from the joint venture C - 11 (60) (72) Capital expenditure (130) (109) _____ _____ _____ _____ (74) (83) Net cash used in investing activities 406 (115) (5) 25 Cash flow before financing activities 579 11 Cash flows from financing activities 7 2 Proceeds from issue of ordinary share capital 5 9 (56) (57) Equity dividends paid (57) (56) 23 7 Cash movements in borrowings (263) 13 1 (5) Settlement of currency swaps (3) 5 _____ _____ _____ _____ (25) (53) Net cash used in financing activities (318) (29) (30) (28) Net increase in cash and cash equivalents 261 (18) 53 360 Cash and cash equivalents at beginning of period 65 44 (2) (3) Exchange adjustments 3 (5) _____ _____ _____ _____ 21 329 Cash and cash equivalents at end of period D 329 21 _____ _____ _____ _____ A As restated for the change in reporting currency from Sterling to USDollars on 1 January - see Note 1. B After $16 million (2005 - $22 million) unreimbursed by insurers relatingto macrotextured knee revisions and $13 million (2005 - $3 million) of outgoingson rationalisation, acquisition and divestment costs. C Discontinued operations accounted for $543 million (2005 - $11million) of net cash flow from investing activities. D Cash and cash equivalents at the end of the period are net ofoverdrafts of $48 million (2005 - $75 million). NOTES 1. Except as detailed below, the financial information for the three monthsand six months has been prepared on the basis of the accounting policies set outin the full annual accounts of the Group for the year ended 31 December 2005. As the Group's principal assets and operations are in the US and the majority ofits operations are conducted in US Dollars, the Group changed its reportingcurrency from Pounds Sterling to US Dollars with effect from 1 January 2006.This lowers the Group's exposure to currency translation risk on its revenue,profits and equity. The Company redenominated its share capital into US Dollarson 23 January 2006 and will retain distributable reserves and declare dividendsin US Dollars. Consequently, its functional currency became the US Dollar.Financial information for prior periods has been restated from Pounds Sterlinginto 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 have been delivered to theRegistrar of Companies. 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 - 944 million). 3 Months 3 Months 6 Months 6 Months 2005 2006 2006 2005 $m $m $m $m 97 100 Attributable profit 519 190 Adjustments: 3 2 Amortisation of acquisition intangibles 4 6 - - 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) - _____ _____ _____ _____ 100 102 Adjusted attributable profit 193 196 _____ _____ _____ _____ 10.7c 10.8c Adjusted earnings per share 20.5c 20.9c 10.6c 10.8c Adjusted diluted earnings per share 20.4c 20.8c 3. Revenue by segment for the three months and six months to 1 July 2006was as follows: 3 Months 3 Months 6 Months 6 Months Underlying growth 2005 2006 2006 2005 in revenue $m $m $m $m % 3 Months 6 Months Revenue by business segment 212 228 Orthopaedic Reconstruction 449 423 7 7 108 123 Orthopaedic Trauma 231 210 13 11 150 160 Endoscopy 317 301 6 7 172 175 Advanced Wound Management 332 336 - 1 _____ _____ _____ _____ _____ _____ 642 686 1,329 1,270 6 6 _____ _____ _____ _____ _____ _____ Revenue by geographic market 311 335 United States 654 618 7 6 205 217 Europe E 420 412 3 4 126 134 Africa, Asia, Australasia & Other 255 240 8 9 America _____ _____ _____ _____ _____ _____ 642 686 1,329 1,270 6 6 _____ _____ _____ _____ _____ _____ E Includes United Kingdom six months revenue of $118 million (2005 -$120 million) and three months revenue of $64 million (2005 - $60 million). The Orthopaedics segment, that was reported in the full annual accounts of theGroup for the year ended 31 December 2005, has been split into two segments:Orthopaedic Reconstruction and Orthopaedic Trauma. 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 % % %6 MonthsOrthopaedic Reconstruction 6 1 7Orthopaedic Trauma 10 1 11Endoscopy 5 2 7Advanced Wound Management (1) 2 1 _____ _____ _____ 5 1 6 _____ _____ _____3 MonthsOrthopaedic Reconstruction 8 (1) 7Orthopaedic Trauma 14 (1) 13Endoscopy 7 (1) 6Advanced Wound Management 2 (2) - _____ _____ _____ 7 (1) 6 _____ _____ _____ 4. Trading and operating profit by segment for the three months and sixmonths to 1 July 2006 was as follows: 3 Months 3 Months 6 Months 6 Months 2005 2006 2006 2005 $m $m $m $m Trading Profit by business segment 54 61 Orthopaedic Reconstruction 118 111 23 24 Orthopaedic Trauma 43 41 30 28 Endoscopy 58 60 22 25 Advanced Wound Management 46 41 _____ _____ _____ _____ 129 138 265 253 _____ _____ _____ _____ Operating Profit by business segment 52 59 Orthopaedic Reconstruction 114 106 23 24 Orthopaedic Trauma 43 41 29 28 Endoscopy 58 59 22 25 Advanced Wound Management 46 41 _____ _____ _____ _____ 126 136 261 247 _____ ______ _____ _____ 5. The cumulative number of revisions of the macrotextured knee productwas 978 on 1 July 2006 compared with 969 at the end of Quarter One 2006. Thisrepresents 33% of the total implanted. Settlements with patients have beenachieved in respect of 843 revisions (Quarter One 2006 - 816 settlements).Costs of $95 million are in dispute with insurers and are provided for in full.$59 million of provision remains to cover future settlement costs. 6. Taxation of $81 million (2005 - $77 million) for the six months onthe profit before amortisation of acquisition intangibles, the loss on hedge ofthe sale proceeds of the joint venture and discontinued operations is based onthe full year estimated effective tax rate. Of the $80 million (2005 - $77million) taxation charge for the six months $62 million (2005 - $60 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 for the six months is afterinterest payable of $1 million and taxation of $7 million. The Group'sdiscontinued operations earnings per share for the year is: basic 35.3c (2005 -1.6c) and diluted 35.1c (2005 - 1.6c). 8. The 2005 second interim dividend of $57 million was paid on 12 May2006. The first interim dividend for 2006 of 4.10 US cents per ordinary sharewas declared by the Board on 27 July 2006. UK shareholders will receive 2.21pence per ordinary share. This is payable on 10 November 2006 to shareholderswhose names appear on the register at the close of business on 20 October 2006.Shareholders may participate in the dividend re-investment plan. 9. The movement in total equity for the six months to 1 July 2006 was asfollows: 2006 2005 $m $m Opening equity as at 1 January 1,482 1,338Attributable profit 519 190Equity dividends paid (57) (56)Exchange adjustments 31 (107)(Losses)/gains on cash flow hedges (6) 19Actuarial gains/(losses) on defined benefit pension plans 43 (40)Share based payment recognised in the income statement 9 7Taxation on items taken directly to equity (13) 13Issue of ordinary share capital 5 9 _____ _____Closing equity 2,013 1,373 _____ _____ 10. Net cash/(net debt) as at 1 July 2006 comprises: 2006 2005 $m $m Cash and bank 377 96Long-term borrowings (16) (207)Bank overdrafts and loans due within one year (131) (206)Net currency swap liabilities (1) (2) _____ _____ 229 (319) _____ _____The movements in the six months were as follows:Opening net debt as at 1 January (306) (232)Cash flow before financing activities 579 11Proceeds from issue of ordinary share capital 5 9Equity dividends paid (57) (56)Exchange adjustments 8 (51) _____ _____Closing net cash/(net debt) 229 (319) _____ _____ INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc Introduction We have been instructed by the company to review the financial information forthe three months and six months ended 1 July 2006 which comprises Group IncomeStatement, Group Statement of Recognised Income and Expense, Group BalanceSheet, Condensed Group Cash Flow Statement and the related notes 1 to 10. Wehave read the other information contained in the interim report for quarter twoand considered whether it contains any apparent misstatements or materialinconsistencies with the 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 two, 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 two 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. The accounting policies are consistent with those that thedirectors intend to use in the next annual accounts. 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 monthsand six months ended 1 July 2006. Ernst & Young LLPLondon 27 July 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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