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Smith & Nephew plc (SNN) Q3 Results - Continuing Robust Performance

11/5/2010 1:24:09 PM

5 November 2010 -- Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the third quarter ended 2 October 2010.

Commenting on the third quarter, David Illingworth, Chief Executive of Smith & Nephew, said:

“We are very pleased with the Group’s robust performance with constant currency revenues up 4%, in markets which continue to be impacted by the challenging economic environment. In particular, our Orthopaedics business delivered a good performance, sports medicine repair revenues grew by double digits and our Negative Pressure Wound Therapy franchise continued to strengthen.

Our customer led strategy is directed at delivering innovative products to address patient, surgeon and healthcare provider needs, supported by strong clinical data and medical education. Our strategy for delivering shareholder value in this challenging environment is working well and remains unchanged.”

Analyst presentation and conference call

An analyst conference call to discuss Smith & Nephew’s third quarter results will be held at 8:30am GMT/4:30am EST today, 5 November. This will be broadcast live on the company’s website and will be available on demand shortly following the close of the call at A podcast will also be available at the same address. If interested parties are unable to connect to the web, a listen-only service is available by calling +44 (0) 20 7806 1951 (passcode 2008402) in the UK or +1 (212) 444 0412 (passcode 2008402) in the US. Analysts should contact Elona Hoxha on +44 (0) 20 7960 2257 or by email at for conference details.

1 Unless otherwise specified as ‘reported’, all revenue increases/decreases throughout this document are underlying increases/decreases after adjusting for the effects of currency translation. See note 3 to the financial statements for a reconciliation of these measures to results reported under IFRS.

2 A reconciliation from operating profit to trading profit is given in note 4 to the financial statements. The underlying increase in trading profit is the increase in trading profit after adjusting for the effects of currency translation.

3 Adjusted earnings per ordinary share (“EPSA”) growth is as reported, not underlying, and is stated before restructuring and rationalisation costs, acquisition related costs, amortisation and impairment of acquisition intangibles and taxation thereon. See note 2 to the financial statements.

4 All numbers given are for the quarter ended 2 October 2010 unless stated otherwise.

5 References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.


Investors Liz Hewitt +44 (0) 20 7401 7646 Phil Cowdy Smith & Nephew

Media Jon Coles +44 (0) 20 7404 5959 Justine McIlroy Brunswick – London

Cindy Leggett-Flynn +1 (212) 333 3810 Brunswick – New York

Third Quarter Results

Smith & Nephew delivered a robust set of results this quarter in challenging markets. Our Orthopaedics business produced an improved sequential performance across most product segments and our core Endoscopy sports medicine franchise continued to deliver good growth. Advanced Wound Management achieved above estimated market growth underpinned by strong revenue growth in Negative Pressure Wound Therapy (“NPWT”) and favourable progress in patent litigation.

We generated revenues of $941 million, compared to $915 million in the same period last year. This represents an underlying growth of 4%, after adjusting for adverse currency movement of 1%.

Trading profit in the quarter was $215 million, representing underlying growth of 4%. The Group trading margin increased by 10 basis points to 22.9%, with another quarter of significant margin improvement in Advanced Wound Management balanced by additional investments in Orthopaedics and Endoscopy.

The net interest charge was $3 million.

The tax charge was at the estimated effective rate for the full year of 31.4% on profit before restructuring and rationalisation costs, acquisition related costs and amortisation of acquisition intangibles. Adjusted attributable profit of $143 million is before these items and taxation thereon.

Adjusted earnings per share was 16.1¢ (80.5 per American Depositary Share, “ADS”) compared to 16.8¢ last year. The comparable period benefited from a lower tax charge (24.1% effective rate) due to the favourable resolution of certain issues. Basic earnings per share was 15.4¢ (77.0¢ per ADS) compared with 14.5¢ (72.5¢ per ADS) in 2009.

Trading cash flow (defined as cash generated from operations less capital expenditure but before acquisition related costs and restructuring and rationalisation costs) was $205 million in the quarter reflecting a trading profit to cash conversion ratio of 95%. We continue to make steady progress on improving inventory management in Orthopaedics and this has again contributed to our strong cashflow position. Net debt decreased in the quarter to $600 million.


Orthopaedics (consisting of Reconstruction, Trauma and Clinical Therapies) grew revenues by 2% in the quarter to $510 million. Orthopaedics revenue growth was reduced by approximately 1% due to the sale of our niche pain management business and termination of our spine distribution business in Germany, announced earlier this year.

Geographically, Orthopaedics grew by 2% in the US, fell by 1% in Europe and grew by 6% in the rest of the world.

In Orthopaedic Reconstruction and Trauma like-for-like pricing trends were consistent with the previous quarter. This small like-for-like reduction continues to be broadly offset by mix benefits.

Orthopaedic Reconstruction revenues grew by 3%, outperforming the global market growth rate, which we estimate was 2% in the quarter. In the US our Reconstruction business grew at 3%. In Europe revenue growth was 1% and rest of the world achieved good growth, supported by another strong quarter in the emerging markets.

Our global hip franchise growth was flat and global knees grew by 6%. There continues to be pressure from the challenging environment on higher specification and early intervention implant systems. The superior clinical data clearly differentiates the BIRMINGHAM HIP?Resurfacing System (BHR?) from other resurfacing products and we are confident that our programme of reinforcing this, with surgeons and patients, will be effective. During the period we invested heavily in marketing the 30-year wear claim for our VERILAST?bearing technology for knee replacement (which incorporates our exclusive OXINIUM? Oxidized Zirconium material). Our marketing programme, which included significant direct-to- consumer advertising, is achieving a demonstrable benefit to US sales. The focus of our innovation is to create products differentiated by the potential for better outcomes for patients and economic benefits for healthcare payers.

Orthopaedic Trauma revenues grew by 5% to $106 million, equivalent to an estimated worldwide market growth of 5%. Our US Trauma business returned to growth at 3%, the third consecutive quarter of improved performance. This results from the actions we took to enhance this business through better sales force execution and introduction of new products.

Clinical Therapies revenues were $55 million, compared to $58 million in the comparable period. Both DUROLANE® hyaluronic acid and EXOGEN?Ultrasound Bone Healing System achieved double digit growth. We launched new labelling which expanded the range of indications for the use of EXOGEN within the European Union to include the non-invasive treatment of all bone defects, excluding vertebra and skull. We also gained approval to expand the range of indications for the use of DUROLANE in the European Union to include a number of smaller synovial joints and post arthroscopy.

The Orthopaedics trading profit margin was 22.2% compared to 23.4% last year, partly reflecting the additional direct-to-consumer marketing spend in the US this quarter.


Endoscopy revenues increased by 4% to $201 million.

Geographically, US revenue growth was down 1%, Europe grew by 6% and the rest of the world grew by 10%, with Japan and the emerging markets again producing a strong performance.

By business segment, Arthroscopy (sports medicine) grew by 8%, with our repair franchise again achieving double digit growth, despite some signs that procedure volumes may have slowed slightly. Visualisation revenues declined by 19% and this had a disproportionate impact in the US. This performance reflects our strategy to focus on those capital items which are closely aligned with our core sports medicine business.

The trading profit margin for Endoscopy increased by 40 bps on the previous year to 22.8%, benefiting from favourable product mix. As previously highlighted, we are investing further in our Endoscopy business and continue to expect some modest reduction in margin for the full year.

Advanced Wound Management

Advanced Wound Management grew revenues by 7% to $230 million, outperforming the estimated global market growth rate at 4%.

European revenues grew by 5%, despite a modest softening in overall market conditions, with a strong performance in Germany and France. US revenues grew by 8% and the rest of the world by 12%, with strong growth in Japan and across the emerging markets.

Exudate Management grew by 3% and Infection Management by 5%. In total, we launched eight new products and line extensions during the period, including ALLEVYN? Gentle Border Lite.

NPWT had another strong quarter of revenue growth in all geographies, driven in part by four new system enhancing line extensions released during the period. We saw continued good progress in patent litigation over recent months, particularly in Germany and in the US in October.

Advanced Wound Management achieved another strong trading margin improvement with a 280 bps increase to 24.6%, as we continue to deliver on our efficiency programmes.

Year to Date Results

Reported revenues were $2,895 million, with underlying growth at 5% compared to the same period last year.

Reported trading profit for the year to date was up 12% on an underlying basis to $691 million, with trading profit margin improving by 160 basis points to 23.9%. The settlement with the vendors of BlueSky Medical Group Inc, which occurred in the first quarter of 2010, increased the Group trading profit by $25 million.

The net interest charge was $10 million. The tax charge of $204 million reflects the estimated effective rate for the year of 31.4%. Adjusted attributable profit was $462 million and attributable profit was $433 million.

EPSA rose by 15% to 52.1¢ (260.5¢ per ADS). Reported basic earnings per share was 48.8¢ (244.0¢ per ADS).

Trading cash flow was $595 million compared with $491 million a year ago. This is a trading profit to cash conversion ratio of 86% compared with 81% a year ago.


We delivered a robust performance across our Group this quarter with some notable improvements in our individual business segments. Our guidance for the full year is unchanged from the last quarter.

In the final quarter we will have four less trading days, which we estimate will reduce the Group’s reported growth rate by about 6%.

The efficiencies we have achieved to date across the Group are enabling us to make material investments in new products and geographies to drive future growth. Longer term we continue to see many areas in our business which offer further efficiencies. These will help fund the increasing number of investment opportunities that we also see, as well as balancing market pressures.

Our customer led strategy is directed at delivering innovative products to address patient, surgeon and healthcare provider needs, supported by strong clinical data and medical education. Our strategy for delivering shareholder value in this challenging environment is working well and remains unchanged.

About Us

Smith & Nephew is a global medical technology business with global leadership positions in Orthopaedics; including Reconstruction, Trauma and Clinical Therapies; Endoscopy; including Sports Medicine; and Advanced Wound Management. Smith & Nephew is a global leader in arthroscopy and advanced wound management and is one of the leading global orthopaedics companies.

Smith & Nephew is dedicated to helping improve people's lives. The Company prides itself on the strength of its relationships with its surgeons and professional healthcare customers, with whom its name is synonymous with high standards of performance, innovation and trust. The Company has distribution channels, purchasing agents and buying entities in over 90 countries worldwide. Annual sales in 2009 were nearly $3.8 billion.

Introduction We have been engaged by the Company to review the interim financial information in the interim financial report for the three and nine months ended 2 October 2010 which comprises the Group Income Statement, Condensed Group Statement of Comprehensive Income, Group Balance Sheet, Condensed Group Cash Flow Statement, Group Statement of Changes in Equity and the related notes 1 to 10. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the interim financial statements.

This report is made solely to the Company in accordance with guidance contained in ISRE 2410 (UK and Ireland) “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept 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 financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with International Accounting Standards 34, “Interim Financial Reporting,” as adopted by the European Union.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The financial information included in this interim financial report has been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting”, as adopted by the European Union.

Our Responsibility Our responsibility is to express to the Company a conclusion on the interim financial information for the three and nine months ended 2 October 2010 based on our review.

Scope of Review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly we do not express an audit opinion.

Review Conclusion Based on our review, nothing has come to our attention that causes us to believe that the interim financial information for the three and nine months ended 2 October 2010 is not prepared, in all material aspects, in accordance with International Accounting Standard 34 as adopted by the European Union.

Ernst & Young LLP London

4 November 2010

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