1st Quarter Results
Smith & Nephew Plc
27 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 the
first 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 of
Smith & Nephew, said:
'At the time of our preliminary results for 2005 we indicated that market
conditions had become tougher. This has proved to be the case in Q1 and is
likely to continue during 2006. First quarter sales and earnings are slightly
lower 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 number
of new products. With one of the strongest new product launch programmes we have
had for many years, we remain confident in our medium and long-term growth
prospects.'
A conference call for analysts to discuss the Company's first quarter results
will be held at 12.00noon BST / 7.00am EST today, Thursday 27 April. 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
/Q106. If interested parties are unable to connect to the web, a listen-only
service is available by calling 020 7138 0809 in the UK or 718 354 1357 in the
US. 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. See note 3 for a reconciliation of these measures to
results reported under IFRS.
** EPSA is stated before the fair value loss made on hedging the proceeds
from the disposal of the joint venture, taxation thereon, amortisation of
acquisition intangibles and the gain on the disposal of the joint venture. See
note 2.
Enquiries
Investors
Peter Hooley +44 (0) 20 7401 7646
Finance Director
Smith & Nephew
Media
David Yates/Deborah Scott +44 (0) 20 7831 3113
Financial Dynamics - London
Jonathan Birt +1 (212) 850 5634
Financial Dynamics - New York
Introduction
As indicated at the time of our 2005 preliminary results, conditions have been
tougher during the first quarter, not only in the US, but also in the UK and
Germany where we have been affected by healthcare budget constraints. In
addition, we have taken a major strategic step to restructure our Orthopaedic
management and salesforce into separate Reconstruction and Trauma businesses and
this contributed to slower revenue growth in the quarter.
This has resulted in a challenging first quarter, which has made us more
cautious over our growth prospects for the year. We are responding to this by
controlling our costs and focusing investment behind our new products. As the
individual launches of our strong new product line up occur over the course of
the year, we expect an improved second half.
This is the first quarter our results have been consolidated and reported in US
dollars following the redenomination of the share capital of the Company into US
dollars on 23 January 2006 so as to align the Group's capital base with its
effective functional currency.
First Quarter Results
Underlying revenue growth in the quarter was 6% relative to the first quarter
last year. Translational currency reduced revenue growth by 4%, resulting in
reported first quarter revenue increasing by 2% to $643m.
Trading profit in the quarter was $127m, a trading margin of 20%, and interest
and finance income was $4m. Tax thereon amounted to $40m, an effective tax rate
of 301/2%, resulting in attributable profit of $91m before the fair value loss,
taxation thereon, amortisation of acquisition intangibles and the gain on the
disposal of the joint venture.
The gain realised on the disposal of the joint venture, BSN medical, to Montagu
Private Equity was $332m. Attributable profit after the fair value loss,
taxation thereon, amortisation of acquisition intangibles and the gain on the
disposal of the joint venture was $419m.
Earnings per share, before the fair value loss, taxation thereon, amortisation
of 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 on
the first quarter last year. Reported earnings per share was 44.5c ($2.23 per
ADS). A reconciliation of EPSA to reported earnings per share is given in note
2 to the accounts.
EPSA in sterling terms at average exchange rates was 5.55p, a 3% increase on the
first quarter last year.
Orthopaedic Reconstruction
Reconstruction revenues at $221m grew by 7% relative to the first quarter last
year, in line with the global market. We had a slow quarter in the US with
revenue growing only 2% where the timing of the introduction of our new products
and the restructuring of our Orthopaedic business inhibited our ability to gain
new business in the short-term. Outside the US, revenue growth continued
strongly at 15%.
Knee revenues grew 9%. Within the US 4% growth was achieved, with the LEGIONa
Revision Knee making a promising start. Outside the US, OXINIUMa technology and
GENESISa II knees continued to secure market share, with 18% growth.
Hip revenues grew 5%. Outside the US the breadth of our range generated growth
of 14%, whereas within the US hip revenues declined 1%.
After launching the LEGION Revision Knee at the end of last year we launched the
JOURNEYa Bi-Cruciate Stabilized Knee System in mid-March. These are two
important new platform products and incorporate innovative instrumentation. In
hips we launched the ANTHOLOGYa Primary Hip System with a flat stem and await a
decision from the FDA on approval to market the BIRMINGHAM HIPa Resurfacing
system 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 slower
rate of revenue growth in the US than last year which benefited from the launch
of PERI-LOCa Periarticular Locked Plating System. Due to changes in our
reimbursement procedures with US healthcare insurers, Clinical Therapies revenue
growth slowed in January and February resulting in Q1 growth of 12% and has now
returned to more usual levels.
Endoscopy
Endoscopy revenue grew 7% to $157m, with growth in the US of 5% and outside the
US of 10%.
Repair revenues continue to drive the business with 19% growth. Resection and
access revenues grew 3%. Spinal growth improved to 6%. Digital Operating Room
and visualisation growth was slower at 1%, but this compares with a very strong
first quarter last year.
Important product launches in the quarter were CALAXOa Osteoconductive
Interference Screw for use in knee ligament fixation, and the CONDORa Control
System for our Digital Operating Room. To expand our hip arthroscopy range, we
launched an innovative hip positioner and the BIORAPTORa Suture Anchor for
labral repairs.
Advanced Wound Management
Advanced Wound Management revenues grew 1% compared to the first quarter last
year at $157m. This was after a 1% dilution effect from exiting from
DERMAGRAFTa dermal substitute and its related products. Correcting for
DERMAGRAFT 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 the
salesforce in the US are starting to come through.
Our major woundcare brands, ALLEVYNa hydrocellular dressings and ACTICOATa
antimicrobial silver dressings, continued to drive underlying revenues, with
growth rates of 7% and 20% respectively. We obtained European approval for
ACTICOAT Moisture Control and launched it in Europe during the quarter and a
major product upgrade is scheduled later this year for ALLEVYN dressings.
Outlook
We have one of the strongest new product launch programmes for many years which
gives us confidence in our medium and long-term growth potential.
In 2006, we have a progressive rollout of new products and see revenue growth
strengthening in the second half. For the full year we now see Reconstruction
and Trauma growing in the low double digits, Endoscopy approaching double digits
and Advanced Wound Management growing in low single digits while it
anniversaries the exit from the DERMAGRAFT business.
These underlying revenue growth rates, together with margin expansion of around
1%, are expected to result in trading profit growth in the low teens before
translational currency. In EPSA terms, as indicated in our 2005 preliminary
results, this growth rate will be diluted by one-off effects of the BSN
disposal, the movement in US interest rates and the higher tax charge leading to
an EPSA growth of around 4%-6% before translational currency. Interest and
finance income is expected to be around $13m.
For the second quarter, underlying revenue growth is expected to increase
slightly 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 to
reduce revenue and EPSA growth by around 11/2%.
About us
Smith & Nephew is a global medical technology business, specialising in
Orthopaedic Reconstruction and Trauma, Endoscopy and Advanced Wound Management
products. 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 over 8,500
employees and operates in 33 countries around the world generating annual sales
of $2.6 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 trading 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.
a Trademark of Smith & Nephew. Certain names registered at the US Patent and
Trademark 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 3 643 628
Cost of goods sold (164) (156)
Selling, general and administrative expenses (323) (317)
Research and development expenses (29) (31)
_____ _____
Trading profit 4 127 124
Amortisation of acquisition intangibles (2) (3)
_____ _____
Operating Profit 4 125 121
Interest receivable 7 8
Interest payable (4) (5)
Other finance income 1 -
Loss on hedge of the sale proceeds of the joint venture (3) -
_____ _____
Profit before taxation 126 124
Taxation 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 1
April 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) 10
Actuarial 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 the
majority of its operations are conducted in US Dollars, the Group changed its
reporting currency from Pounds Sterling to US Dollars with effect from 1 January
2006. This will lower the Group's exposure to currency translation risk on its
revenue, profits and equity. The Company redenominated its share capital into
US Dollars on 23 January 2006 and will retain distributable reserves and declare
dividends in US Dollars. Consequently, its functional currency became the US
Dollar. Financial information for prior periods has been restated from Pounds
Sterling into US Dollars in accordance with IAS 21.
The financial information contained in this document does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The
auditors have issued an unqualified opinion on the Group's statutory financial
statements for the year ended 31 December 2005, which will be delivered to the
Registrar 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 may
distort comparability. Such items arise from events or transactions that fall
within the ordinary activities of the Group but which management believes should
be separately identified to help explain trends as they are exceptional in
nature or derive from specific accounting treatments.
Adjusted earnings per share ('EPSA') has been calculated by dividing adjusted
attributable profit by the weighted (basic) average number of ordinary shares in
issue of 941 million (2005 - 937 million). The diluted weighted average number
of 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 of
translational currency. Reported growth reconciles to underlying growth as
follows:
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 was
969 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 respect
of 816 revisions (31 December 2005 - 771 settlements). Costs of $87 million are
in dispute with insurers and are provided for in full. $67 million of provision
remains to cover future settlement costs.
6. Taxation of $40 million (2005 - $38 million) on the profit before
amortisation of acquisition intangibles, the loss on hedge of the sale proceeds
of the joint venture and discontinued operations is at the full year estimated
effective 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 joint
venture for cash consideration of $562 million. The net profit of $332 million
on the disposal of the joint venture is after a credit of $14 million for
cumulative translation adjustments and $26 million of transaction costs. In
2005 the share of results of the joint venture is after interest payable of $1
million and taxation of $3 million. The Group's discontinued operations
earnings 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 second
interim dividend for 2005 of 6.1 US cents per ordinary share was declared by the
Board on 9 February 2006. UK shareholders will receive 3.5 pence per ordinary
share. This is payable on 12 May 2006 to shareholders whose names appear on the
register at the close of business on 21 April 2006. Shareholders may
participate 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 for
the three months ended 1 April 2006 which comprises Group Income Statement,
Group Statement of Recognised Income and Expense, Group Balance Sheet, Condensed
Group Cash Flow Statement and the related notes 1 to 10. We have read the other
information contained in the interim report for quarter one and considered
whether it contains any apparent misstatements or material inconsistencies with
the financial information.
This report is made solely to the company in accordance with guidance contained
in Bulletin 1999/4 'Review of interim financial information' 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 report for quarter one, including the financial information
contained therein, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the interim report for
quarter one in accordance with the Listing Rules of the Financial Services
Authority which require that the accounting policies and presentation applied to
the interim figures should be consistent with those applied in preparing the
preceding 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 Board
for use in the United Kingdom. A review consists principally of making
enquiries of group management and applying analytical procedures to the
financial information and underlying financial data, and based thereon assessing
whether the accounting policies and presentation have been applied. A review
excludes audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) 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 that
should be made to the financial information as presented for the three months
ended 1 April 2006.
Ernst & Young LLP
London
27 April 2006
This information is provided by RNS
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