LONDON, Oct. 26 /PRNewswire-FirstCall/ -- Smith & Nephew plc , , the global medical technology business, announced today its results for the third quarter ended 1 October 2005.
Q3 Highlights * Group revenue up 10%* to pounds Sterling 341m * Orthopaedics revenue up 15%*, U.S. up 16%* * Endoscopy revenue up 8%* * Wound Management revenue up 3%* * Trading profit up 11%, margin achieved of 19% * EPSA up 10%** to 5.41p * BSN Medical realisation underway * Decision to exit DERMAGRAFT(TM) * Dollar reporting in 2006
Commenting on the third quarter and the outlook for the year, Sir Christopher O’Donnell, Chief Executive of Smith & Nephew, said:
“Although our growth in revenue and profits slowed slightly in the third quarter, Orthopaedics continued to grow at a market leading rate. We are confirming our guidance of EPSA growth for the year of 12% - 13% as our businesses continue to introduce outstanding new products and to invest in their sales channels.
We have decided to exit DERMAGRAFT(TM) and related products and are announcing this to affected employees today, and have therefore brought the timing of this announcement forward. The decision to exit DERMAGRAFT(TM), along with that to realise our investment in BSN Medical, will improve the growth profile of the Group. Additionally we are looking to align our reporting currency with the main trading currency of our business and accordingly are moving to U.S. dollar reporting in 2006.”
A presentation and conference call for analysts to discuss the company’s third quarter results will be held at 12:00 noon BST / 7:00 a.m. EST tomorrow, Thursday 27 October. The conference call will be broadcast live on the web and will be available on demand shortly following the close of the meeting at http://www.smith-nephew.com/Q305. If interested parties are unable to connect to the web, a listen-only service is available by calling 020-7365-1834 in the UK or 718-354-1158 in the U.S. Analysts should contact Julie Allen on +44-0-20-7960-2254 or by email at julie.allen@smith-nephew.com for conference call details.
* Unless otherwise specified as ‘reported,’ all revenue increases throughout this document are underlying increases after adjusting for the effects of currency translation, the acquisition of MMT in Q1 last year and the effect of one less sales day in the first half of the year. See note 3.
** EPSA is stated before restructuring and rationalisation costs, taxation thereon and amortisation of acquisition intangibles. See note 2.
Introduction
As announced in our trading update on 13 September, trading conditions this quarter have been tighter. Orthopaedics achieved 15% sales growth in the quarter, ahead of the market in all areas except knees in the U.S., despite tighter market conditions and the impact of Hurricane Katrina. Endoscopy has continued its momentum and generated 8% sales growth in the quarter, driven by shoulder and knee repair revenues. Advanced Wound Management revenues grew 3% as it continued to experience distributor de-stocking in the U.S. Encouragingly we have seen no change in the overall pricing trends of our products and the fundamental drivers of our markets remain strong.
During the quarter we announced our intention to divest BSN Medical, our joint venture with Beiersdorf AG. This is progressing well, with strong interest expressed by a large number of potential buyers, and we anticipate completing the sale in the early part of 2006.
We are also announcing today that we have received a “non-approvable” letter from the FDA in relation to the marketing of DERMAGRAFT(TM) in the U.S. for the treatment of venous leg ulcers, as a result of which we have taken the decision to exit from DERMAGRAFT(TM) and related products. This is expected to benefit trading profits in 2006 by approximately pounds 7m.
Third Quarter Results
Underlying revenue growth in the quarter was 10% relative to the third quarter last year. Translational currency added 1% to revenue growth, resulting in reported third quarter revenue increasing by 11% to pounds 341m.
Trading profit in the quarter was pounds 651/2m, a trading margin of 19%. Tax thereon amounted to pounds 191/2m, an effective tax rate of 30%, and the share of after tax results of the BSN joint venture was pounds 5m; resulting in attributable profit before restructuring and rationalisation costs, taxation thereon and amortisation of acquisition intangibles of pounds 51m. Attributable profit after restructuring and rationalisation costs and related tax relief, and the amortisation of acquisition intangibles was pounds 35m.
Earnings per share, before restructuring and rationalisation costs, taxation thereon and amortisation of acquisition intangibles (“EPSA”), was 5.41p (27.05p per American Depositary Share, “ADS”), a 10% increase on the third quarter last year. A reconciliation of EPSA to reported earnings per share is given in note 2 to the accounts.
Restructuring and rationalisation costs in the quarter comprise pounds 81/2m for the rationalisation of manufacturing facilities at Endoscopy announced with the results for the second quarter, and pounds 151/2m of asset impairment following the decision to exit from DERMAGRAFT(TM) and related products.
Orthopaedics
Orthopaedics revenues grew by 15% relative to the third quarter last year to pounds 168m. Revenue growth in the U.S. was 16% and outside the U.S. 13%.
In the U.S. our knee products experienced competition ahead of the launch of two new OXINIUM(TM) products; a revision knee (LEGION(TM)) in the fourth quarter and an anatomic knee (JOURNEY(TM)) in 2006. Knee revenues grew 13%, 10% in the U.S. and 18% outside the U.S.
Hip revenues grew by 10% both in and outside the U.S., ahead of the market, with the BHR(TM) product continuing to provide momentum to revenues outside the U.S. The FDA Advisory Panel review during the quarter of our BHR(TM) product recommended conditional approval to the FDA for use in the U.S.
Trauma revenue growth was 15%. Within the U.S., trauma revenues increased by 19%, ahead of the market, and continued to benefit from the establishment of a dedicated sales force and the launch of the PERI-LOC(TM) locking compression plate system earlier this year. Outside the U.S., trauma growth improved to 10%.
Clinical Therapy revenues, comprising the EXOGEN(TM) ultrasound bone healing and SUPARTZ(TM) joint fluid therapy products, continued to benefit from previous sales force investment and grew 35% compared with the same quarter last year.
Endoscopy
Endoscopy revenue growth was 8% to pounds 79m; with U.S. growth of 5% and growth outside the U.S. of 12%.
Knee and shoulder repair revenues continued strongly with growth of 23%, benefiting from new product introductions. Blade revenues grew 6% and visualisation and digital operating room revenues grew 2%, as did radio frequency, including spine.
Our patent dispute with ArthroCare was settled during the quarter enabling us to market again a full range of arthroscopic radiofrequency products. These, together with our new camera, pump and hip arthroscopy products, provide added momentum for growth next year.
In order to improve our competitive position and lower the overall costs of production we announced with our second quarter results the closure of one of Endoscopy’s U.S. manufacturing facilities. A rationalisation charge of pounds 81/2m has been taken in this quarter and the project is progressing on schedule.
Advanced Wound Management
Advanced Wound Management revenues grew 3%, compared to the third quarter last year, to pounds 94m. Our leading products ALLEVYN(TM) and ACTICOAT(TM) revenues grew by 12% and 25% respectively in the quarter. Revenues in the U.S. declined by 6%, reflecting lower intermediate products sales and a continued contraction of distributors’ inventories. Clearer supply chain visibility leads us to believe that this inventory contraction is nearing completion but not sufficiently to completely reverse the decline in the fourth quarter. Encouragingly end user traced sales improved to 8% in the quarter. Outside the U.S. revenue growth was 6% reflecting healthcare spending pressures holding back market growth in parts of Europe.
We recently received a “non-approvable” letter from the FDA relating to our Pre Marketing Approval supplement for the use of DERMAGRAFT(TM) for venous leg ulcers which would require further clinical work for re-submission. This work would delay approval for 18-24 months, with a consequent delay in achieving economic viability. On a global basis the lack of clear regulatory frameworks for tissue engineered products has resulted in delays that have become commercially unacceptable. After careful consideration we have now decided to exit the manufacture and sale of DERMAGRAFT(TM) and related products. We have therefore taken a pounds 151/2m asset impairment charge this quarter and will take a pounds 25m charge in the fourth quarter to cover the cash cost of exit; both charges to be taken as restructuring costs. Revenues and trading profit of Advanced Wound Management will be largely unaffected in 2005. In 2006 we expect revenues will be adversely affected by around pounds 14m, whereas we expect trading profits will benefit by approximately pounds 7m from cost elimination.
Year to Date Results
Underlying revenue growth for the year to date was 11%. Reported revenue growth was 12%, after adjusting for the benefit of the acquisition of MMT in the first quarter last year offset by one less sales day in the first half of the year, and the benefit of 1% positive translational currency in the year to date.
Trading profit for the year to date was pounds 201m, with margins 0.7% ahead of a year ago at 19.7% and interest income and finance costs net to pounds 3m positive. Taxation thereon amounted to pounds 601/2m and the share of the after tax results of the BSN joint venture was pounds 121/2m, resulting in attributable profit before restructuring and rationalisation costs, taxation thereon and amortisation of acquisition intangibles of pounds 156m. Attributable profit after restructuring and rationalisation costs, and related tax relief thereon, and the amortisation of acquisition intangibles was pounds 137m.
EPSA was 16.63p (83.15p per ADS) for the year to date, an increase of 14% compared to the same period last year. Reported earnings per share, including discontinued operations, was 14.56p (72.80p per ADS). A reconciliation of reported earnings per share to EPSA is provided in note 2 to the accounts.
Restructuring and rationalisation costs comprise pounds 81/2m for the rationalisation of manufacturing facilities at Endoscopy and pounds 151/2m of asset impairment following the decision to exit from DERMAGRAFT(TM) and related products.
Operating cash flow, defined as cash generated from operations less capital expenditure, was pounds 74m. This is a trading profit to cash conversion ratio of 47%, before rationalisation and integration expenditure of pounds 2m and pounds 19m of funding of settlement payments to patients in respect of macrotextured revisions which are not being reimbursed by insurers, and compares with 47% a year ago.
Had our results been reported in U.S. dollars translated at average rates of exchange, reported revenues and adjusted earnings per ADS would have been as follows:
Third Quarter Year to Date Reported revenues $612m +10% $1882m +13% Adjusted earnings per ADS $0.48 +9% $1.53 +15% Dollar reporting
The international spread of the Group’s businesses, with approximately 50% of revenues, trading profits and operating assets in U.S. dollars, substantially exposes the Group to currency movements relative to its sterling capital base. We have decided therefore to redenominate the functional currency of the parent company into U.S. dollars and produce group accounts in U.S. dollars from the beginning of 2006.
Appendix C contains a restatement of this year’s and last year’s quarterly results as if they had been consolidated in U.S. dollars at the average exchange rates then prevailing. An extraordinary general meeting will be convened in December to redenominate the share capital of the parent company into U.S. dollars. Future dividends will be declared in U.S. dollars, but paid to UK residents in sterling. The Group’s shares will continue to be listed on the London Stock Exchange, priced in sterling, and on the NYSE, priced in dollars.
Outlook
For the full year we expect Orthopaedics to achieve revenue growth of around 17%, driven by sales force investment and our new product pipeline. We expect Endoscopy to achieve full year revenue growth of around 8% as new products continue to drive revenues. We expect revenue growth of around 5% for Advanced Wound Management as some of the adverse factors that have affected revenues in the U.S. abate. Translational currency should add 11/2% to revenue and we expect a trading margin of 201/2% for the full year. As previously indicated EPSA growth for the year before restructuring and rationalisation costs is expected to be in the range of 12% - 13%.
The fundamentals for each of our businesses remain strong and we anticipate continuing growth in the orthopaedic market, particularly in the U.S. We view 2006 positively with continued strong revenue growth in Orthopaedics and improved revenue growth in Endoscopy. In Advanced Wound Management the exit from DERMAGRAFT(TM) will reduce the revenue growth rate, but will contribute to an expected Group margin enhancement of around 11/2% for 2006. Underlying EPSA growth for 2006 is expected to be around mid-teens, before any dilution arising from the realisation of our investment in BSN Medical and the change to dollar reporting.
About us
Smith & Nephew is a global medical technology business, specialising in Orthopaedics, Endoscopy and Advanced Wound Management products. Smith & Nephew is a global leader in arthroscopy and advanced wound management and is one of the fastest growing 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 over 8,500 employees and operates in 33 countries around the world generating annual sales of pounds 1.25 billion.
Forward-Looking Statements
This press release contains certain “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding expected revenue growth and operating margins discussed under “Outlook” are forward-looking statements as are discussions of our 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 identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors (including, but not limited to, the outcome of litigation, claims and regulatory approvals) that could cause the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward- looking statements. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew’s most recent annual report on Form 20F, for a discussion of certain of these factors.
All forward-looking statements in this press release are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew’s expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
(TM) Trademark of Smith & Nephew. Certain names registered at the U.S. Patent and Trademark Office.
SMITH & NEPHEW plc 2005 QUARTER THREE RESULTS Unaudited Group Income Statement for the 3 months and 9 months to 1 October 2005 3 3 9 9 Months Months Notes Months Months 2004(A) 2005 2005 2004(A) pounds m pounds m pounds m pounds m 307.1 341.2 Revenue 3 1,022.3 916.3 (81.1) (89.4) Cost of goods sold (262.8) (246.4) (150.1) (171.1) Selling, general and administrative expenses (511.1) (446.1) (16.8) (15.3) Research and development expenses (47.4) (49.4) 59.1 65.4 Trading profit 3 201.0 174.4 - (23.8) Restructuring and rationalisation costs 5 (23.8) - (1.5) (1.4) Amortisation of acquisition intangibles 6 (4.6) (3.1) 57.6 40.2 Profit before tax, financing & share of results of the joint venture 172.6 171.3 5.1 6.0 Interest receivable 13.9 15.0 (4.8) (4.4) Interest payable (9.8) (12.5) (0.4) (1.5) Other finance costs (1.0) (1.3) 57.5 40.3 Profit before tax and share of results of the joint venture 175.7 172.5 (16.8) (10.4) Taxation 7 (51.7) (50.4) 40.7 29.9 Profit before share of results of the joint venture 124.0 122.1 3.9 4.8 Discontinued operations -- Share of results of the joint venture 8 12.6 11.4 44.6 34.7 Attributable profit 136.6 133.5 Earnings per share 2 Including discontinued operations: 4.76p 3.68p Basic 14.56p 14.28p 4.73p 3.68p Diluted 14.47p 14.19p Excluding discontinued operations: 4.34p 3.18p Basic 13.22p 13.06p 4.32p 3.17p Diluted 13.14p 12.98p (A) As restated for the effect of the transition to International Financial Reporting Standards (“IFRS”) -- see Note 1.
Unaudited Group Statement of Recognised Income & Expense for the 3 months and 9 months to 1 October 2005
3 3 9 9 Months Months Notes Months Months 2004(A) 2005 2005 2004(A) pounds m pounds m pounds m pounds m 44.6 34.7 Attributable profit 136.6 133.5 (0.1) 2.5 Translation differences on foreign currency net investments 4.9 (0.3) - (1.8) Gains/(losses) on cash flow hedges 8.2 - - 20.2 Actuarial (losses)/gains on defined benefit plans (1.4) - - (6.5) Taxation on items taken directly to equity 0.7 - (0.1) 14.4 Net income/(expense) recognised directly in equity 12.4 (0.3) - - Restatement for the effects of IAS 32 and 39(B) (5.5) - 44.5 49.1 Total recognised income and expense 143.5 133.2 (B) As detailed in Note 1, on 1 January 2005 the balance sheet was restated for the effects of IAS 32 and 39. SMITH & NEPHEW plc 2005 QUARTER THREE RESULTS continued Unaudited Group Balance Sheet as at 1 October 2005 31 Dec 1 2 2004(A)(B), Notes October October pounds m 2005 2004(A) pounds m pounds m ASSETS Non-current assets 290.3 Property, plant and equipment 327.4 285.8 375.3 Intangible assets 380.6 383.5 4.9 Investments 5.7 5.3 120.7 Available for sale -- investment in joint venture 128.6 124.8 25.6 Non-current receivables 0.7 15.9 67.6 Deferred tax assets 77.9 59.2 884.4 920.9 874.5 Current assets 284.9 Inventories 357.5 291.6 320.2 Trade and other receivables 337.0 306.8 32.6 Cash and bank 67.8 39.3 637.7 762.3 637.7 1,522.1 TOTAL ASSETS 1,683.2 1,512.2 EQUITY AND LIABILITIES Equity attributable to equity holders of the parent 114.5 Called up equity share capital 114.8 114.4 159.6 Share premium account 165.6 157.1 (4.2)Own shares (1.7) (2.5) 1.4 Other reserves 7.3 1.0 430.7 Retained earnings 521.8 434.5 702.0 Total equity 10 807.8 704.5 Non-current liabilities 152.6 Long-term borrowings 105.3 186.6 146.8 Retirement benefit obligation 144.6 136.9 15.8 Other payables due after one year 3.7 23.3 31.8 Provisions -- due after one year 28.1 - 40.9 Deferred tax liabilities 32.1 74.6 387.9 313.8 421.4 Current liabilities 244.2 Trade and other payables 278.5 243.3 32.3 Bank overdrafts and loans due within one year 117.7 39.1 49.9 Provisions -- due within one year 37.9 15.9 105.8 Current tax payable 127.5 88.0 432.2 561.6 386.3 820.1 Total liabilities 875.4 807.7 1,522.1 TOTAL EQUITY AND LIABILITIES 1,683.2 1,512.2 (A) As restated for the effect of the transition to IFRS. (B) Before adjustment for the effects of IAS 32 and 39. (C) Net currency swap assets of £1.4 million (2004 - pounds 16.0 million) are included in the balance sheet as follows: nil (2004 - pounds 14.7 million) in non-current receivables, pounds 13.7 million (2004 - pounds 15.0 million) in trade and other receivables, nil (2004 - pounds 8.4 million) in other payables due after one year and pounds 12.3 million (2004 - pounds 5.3 million) in trade and other payables. SMITH & NEPHEW plc 2005 QUARTER THREE RESULTS continued Unaudited Condensed Group Cash Flow Statement for the 3 months and 9 months to 1 October 2005 3 3 9 9 Months Months Months Months 2004(A) 2005 2005 2004 A pounds m pounds m pounds m pounds m Net cash inflow from operating activities 57.6 40.2 Profit before tax, financing & share of results of the joint venture 172.6 171.3 16.7 38.0 Depreciation, amortisation and impairment 76.8 46.5 1.7 1.9 Share based payment expense 5.9 4.6 (16.9) (20.1) Movement in working capital and provisions(D) (97.7) (74.5) 59.1 60.0 Cash generated from operations 157.6 147.9 0.3 1.6 Net interest received 4.1 2.5 (9.2) (10.7) Income taxes paid (43.0) (24.9) 50.2 50.9 Net cash inflow from operating activities 118.7 125.5 Cash flows from investing activities (0.9) (0.7) Acquisitions (9.8) (29.3) - - Cash acquired on acquisition - 1.8 - 0.5 Dividends received from the joint venture(F) 6.2 5.9 (24.1) (24.5) Capital expenditure (83.2) (67.9) (25.0) (24.7) Net cash used in investing activities (86.8) (89.5) 25.2 26.2 Cash flow before financing activities 31.9 36.0 Cash flows from financing activities 1.2 1.6 Proceeds from issue of ordinary share capital 6.3 5.4 - - Own shares purchased - (2.4) - - Equity dividends paid (30.0) (28.9) (29.6) (11.5) Decrease in borrowings and finance leases (4.3) (31.3) 7.9 (5.0) Settlement of net currency swaps (2.3) 31.3 (20.5) (14.9) Net cash used in financing activities (30.3) (25.9) 4.7 11.3 Net increase in cash and cash equivalents 1.6 10.1 19.1 12.1 Cash and cash equivalents at beginning of period 22.3 14.4 0.6 0.2 Exchange adjustments (0.3) (0.1) 24.4 23.6 Cash and cash equivalents at end of period(E) 23.6 24.4 (A) As restated for the effect of the transition to IFRS. (D) After pounds 18.6 million (2004 - nil) unreimbursed by insurers relating to macrotextured knee revisions and pounds 2.0 million (2004 - pounds 2.0 million) of outgoings on rationalisation and acquisition integration costs in the 9 months. (E) Cash and cash equivalents at the end of the period are net of overdrafts of pounds 44.2 million (2004 - pounds 14.9 million). (F) Discontinued operations accounted for pounds 6.2 million (2004 - pounds 5.9 million) of net cash flow from investing activities. SMITH & NEPHEW plc 2005 QUARTER THREE RESULTS continued NOTES 1. Smith & Nephew plc has previously prepared its primary financial statements under UK generally accepted accounting principles (“UK GAAP”). From 2005 the Group is required to prepare its consolidated financial statements in accordance with IFRS as adopted by the European Union (“EU”). For the purposes of this document the term IFRS includes International Accounting Standards (“IAS”). The results for Quarter 3 2005 represent the third interim financial statements the Group has prepared in accordance with its accounting policies under IFRS. The first annual report under IFRS will be for the year ended 31 December 2005. A description of how the Group’s reported performance and financial position are affected by this change, including reconciliations from UK GAAP to IFRS for prior year results and the revised summary of significant accounting policies under IFRS, is published under Report and Results in the Investors section of the corporate website at http://www.smith-nephew.com/investors/reports_results.html. If required, printed copies are available from the Company Secretary. The Group is required to apply all relevant standards in force at the first reporting date: for the Group this is at 31 December 2005. As a consequence, these results have been prepared on the basis that all IFRSs and International Financial Reporting Interpretation Committee (“IFRIC”) interpretations, in particular the recently amended versions of IAS 19, Employee Benefits and IAS 39, Financial Instruments: Recognition and Measurement, will be adopted by the European Commission. The failure of the European Commission to adopt these amended standards in time for full year financial reporting in 2005, the issue of further interpretations by IFRIC in advance of the reporting date, or the development of other accepted practice, could result in the need to change the basis of accounting or presentation of certain financial information from that presented in this document. As permitted under IFRS 1, First Time Adoption of International Financial Reporting Standards, management has elected not to restate comparative information for the Financial Instrument standards IAS 32 and IAS 39. A restatement of the opening balance sheet at 1 January 2005 to present the Group’s 2005 opening position under IAS 32 and 39 was included within the interim financial statements for Quarter 1 2005. Appendix A reconciles attributable profit for the three months and nine months to 2 October 2004, as previously reported under UK GAAP to IFRS. Appendix B reconciles the balance sheet and equity, for the 9 months to 2 October 2004, as previously reported under UK GAAP to IFRS. The financial information contained in this document does not constitute statutory accounts as defined in section 240 of the Companies Act 1985
