Interim Results

Smith & Nephew Plc 8 August 2000 2000 INTERIM RESULTS RESHAPING STRATEGY DELIVERS RESULTS Smith & Nephew, the global medical devices company, today announced its interim results for the half year ending 1 July 2000. Highlights include: - Group reshaping nears completion - Successful disposal of consumer business - Underlying sales growth 8% - Margin improvement continues on track - Pre-tax profit and EPS before exceptional items increase 8% - Strong cash generation Commenting, Dudley Eustace, Chairman, said: 'We are delivering the improvements in results we promised 18 months ago and are on track to continue to do so. The disposal of our consumer business has been successfully achieved. Negotiations with Beiersdorf to create a significant medical products joint venture and to purchase their advanced woundcare business are progressing well. Smith & Nephew is nearing the completion of its transformation into an advanced technology medical devices group, well positioned to achieve higher rates of sales and profit growth.' Enquiries: Chris O'Donnell, Chief Executive Tel: +44 (0) 207 401 7646 Smith & Nephew plc Fax: +44 (0) 207 930 3426 Peter Hooley, Finance Director Tel: +44 (0) 207 401 7646 Smith & Nephew plc Fax: +44 (0) 207 930 3418 David Yates Tel: +44 (0) 207 831 3113 Financial Dynamics Fax: +44 (0) 207 831 6341 CHAIRMAN'S STATEMENT The reshaping of Smith & Nephew has resulted in excellent progress for the company in the first half of 2000. Sales growth has increased, recent acquisitions are starting to contribute to growth and margin improvements are coming through. Trading results Underlying sales growth was 8%. Excluding the consumer business, sales in our continuing business of medical devices grew 7% in the first half of the year, an improvement on the same period last year. Reported sales of £592m, including the consumer business, were 3% ahead of 1999 reflecting the effect of disposals last year, partly offset by the impact of acquisitions and currency. Pre-tax profit before exceptional items was £91m, an 8% increase. Operating margins have continued to improve with a 1% increase to 15.5%. This improvement has come from the ongoing programme of cost and efficiency savings and from the manufacturing rationalisation programme implemented in April 1999. Pricing was marginally positive. Exceptional items, being principally the profit on disposal of the consumer business, increased reported pre-tax profit by £82m to £173m. Earnings per share, taxation and cash flow The underlying tax charge remains at 30% such that earnings per share before exceptional items were 5.72p, 8% higher than in 1999. Tax on exceptional items amounted to a net charge of £4m. Operating cash flow of £67m was significantly ahead of last year, and net cash flow included £185m of the proceeds from the sale of the consumer business, with £33m spent on acquisitions, principally the first stage payments on the purchase of Collagenase. At the half year, the group closed with £147m of cash balances, before payment of the £416m special dividend to be funded in part out of newly arranged medium term bank facilities. Strategy progress At the end of June, we announced major steps towards the completion of the re- shaping of our business. We have sold the consumer business, which represented 17% of sales, for £235m to concentrate on our global medical device businesses. As a result, our three main businesses of orthopaedics, endoscopy and wound management, with their superior growth rates, represent 80% of continuing group sales. As previously announced, we are also negotiating an intended joint venture with Beiersdorf into which we will transfer our traditional woundcare range together with all our casting and bandaging products to combine with Beiersdorf's casting, bandaging and compression hosiery products. Negotiations for this, and for the purchase of Beiersdorf's advanced woundcare business, are progressing well. The issues involved to complete these transactions are complex, and no further announcement should be expected until next month. Dividends We also announced in June that the group was to reorganise its capital structure through the return of £416m of cash to shareholders by way of a special dividend, together with a related consolidation of the company's share capital into nine new shares for every eleven in issue. This was approved by shareholders at an EGM held on 2 August. It was also announced that the Board intends to adopt a dividend cover, on a per share basis, in the region of 2.5 times earnings for this year. This new dividend policy is being implemented today with our announcement of an interim dividend of 1.70p per share (1999: 2.50p per share). The special dividend of 37.14p per share is to be paid on 11 August 2000 to all shareholders on the register at the close of business on 4 August 2000. The shares were consolidated on 7 August 2000. The interim dividend will be paid on 6 December 2000 to shareholders on the register at the close of business on 10 November 2000. Shareholders may participate in the company's dividend re-investment plan for the interim dividend only. Operating review Major businesses Orthopaedic sales grew at an underlying 10%. Acquisitions augmented this to 17%. The strength of our new hip range combined with our successful knee lines produced a 14% increase in sales performance of our implant range. We believe that we are again leading growth and gaining share in this market. Trauma sales grew at 3%. Growth in the second half is expected to improve with the increased pace of the worldwide roll-out of TriGen, our major new trauma nail range. Future growth will also be supported by our global marketing agreement with eTrauma.com, a new web-based imaging and diagnostic service for orthopaedic surgeons, and the extension of the Exogen ultrasound treatment to hard to heal bone fractures. Endoscopy sales grew at an underlying 7%. The promotion of our new Dyonics Power shaver system affected sales of resection blades as we offered to swap customers' old shaver blades for the new blades that are unique to the system, leading to a reduction in first quarter sales. This programme is now completed and we expect sales to increase in the second half. New product launches will add further sales growth in the second half of the year; these include added features for our camera and video systems and TriVex, our innovative system for the surgical removal of varicose veins. Wound management sales had an underlying 7% increase, despite a slower start due to pre-Millennium stock-building in hospitals. Collagenase, the world leading wound debriding product, was acquired in January this year and has boosted sales growth by a further 6% for the wound management business in the first half. The expanded sales force will benefit from Collagenase and line extensions to the Allevyn range and underlying sales growth is expected to improve in the second half. Enrolment in the pivotal clinical trial for Dermagraft, for diabetic foot ulcer treatment, is now complete, and a Pre- Market Approval application to the Food & Drug Administration in the US is expected to be submitted by the end of the summer. Other businesses Rehabilitation sales grew by an underlying 6%, the business having successfully overcome the effect of last year's reimbursement issues in the US. Our casting and bandaging business had a solid start to the year with sales growing at 4%. Ear, nose and throat products had a weaker start than in 1999 with sales down 7%. Consumer closed with sales of £100m, an 11% underlying growth driven again by Nivea. Profit margins were 13%. E-commerce We continue to use e-commerce to look for new, innovative and profitable ways to grow our business. We have joined the Global Healthcare Exchange, an important industry initiative to provide customers with a 'shop window' of medical device products and simplify purchasing and contact with the company. It will be available in the US later this year with a worldwide roll-out starting in 2001. Through the agreement with eTrauma.com we will market exclusively a new facility to surgeons to diagnose and recommend treatment of orthopaedic conditions whilst they are away from the hospital, through the use of remote imaging technology for x-rays and other scans. This will enable patients to be treated faster and more effectively. eFast, our innovative web-based financing facilitation package, provides hospitals with third party financing alternatives to purchase our endoscopy visualisation equipment. Outlook The group is now wholly dedicated to medical devices which offer higher growth opportunities. We remain on track to achieve our underlying EPS growth and margin improvement goals by 2001. The disposal of the consumer business and the accompanying capital restructuring is expected to cause a small dilution to EPS in the first full year, and be accretive from 2002 onwards. The capital restructuring improves the free cash flow of the group and is intended to increase its combined debt and equity capabilities and set a platform for accelerated growth. We remain confident that improving sales trends will continue, product launches will affect the second half favourably and the acquisitions of the last twelve months will increase the sales growth 3% over the underlying rate this year. A successful completion of the negotiations with Beiersdorf will further clarify our focus as an advanced technology medical devices group and increase EPS growth potential into the future. Unaudited Group Profit and Loss Account for the Half Year Ended 1 July 2000 Year 1999 2000 1999 £m Notes £m £m Turnover 1 Continuing and acquired 889.5 operations 492.1 444.8 230.4 Discontinued operations 2 100.1 131.2 _____ _____ _____ 1,119.9 592.2 576.0 _____ _____ _____ Operating profit 1 Continuing and acquired operations - before exceptional 134.7 items 79.0 67.4 (42.0) - exceptional items* 3 (6.2) (14.3) _____ _____ _____ 92.7 72.8 53.1 Discontinued operations - before exceptional 32.8 items 2 13.0 16.7 (9.7) - exceptional items* 3 - (2.9) _____ 115.8 85.8 66.9 Discontinued operations 88.3 63.6 62.9 - net profit on disposals* 2 _____ _____ _____ Profit on ordinary activities before 178.7 interest 174.1 130.5 3.4 Interest (0.7) 0.6 _____ _____ _____ Profit on ordinary activities before 182.1 taxation 173.4 131.1 77.3 Taxation 4 31.2 58.1 _____ _____ _____ 104.8 Attributable profit 142.2 73.0 _____ _____ _____ Basic earnings per 9.39p ordinary share 7 12.72p 6.55p Diluted earnings per 9.37p ordinary share 7 12.70p 6.54p Results before exceptional items (*) 8 £170.9m Profit before taxation £91.3m £84.7m Adjusted basic earnings 10.72p per ordinary share 7 5.72p 5.32p Cost of dividends £72.5m Interim/final 6 £15.6m £27.8m - Special dividend 5 £415.6m - Abridged Group Balance Sheet as at 1 July 2000 Year 1999 2000 1999 £m £m £m Fixed assets 74.0 Intangible assets 148.4 39.7 270.5 Tangible assets 240.8 284.9 16.6 Investments 15.4 25.2 _____ _____ _____ 361.1 404.6 349.8 _____ _____ _____ Working capital 237.6 Stocks 244.2 251.2 281.1 Debtors 312.9 287.2 Creditors - - special dividend (415.6) - - - acquisition consideration (42.9) - (312.4) - other (312.4) (311.9) _____ _____ _____ 206.3 (213.8) 226.5 _____ _____ _____ (38.0) Provisions (48.8) (43.5) _____ _____ ______ 529.4 142.0 532.8 _____ 551.7 Share capital and reserves 288.5 561.7 (22.3) Net cash (146.5) (28.9) _____ _____ ______ 529.4 142.0 532.8 _____ _____ ______ Abridged Movement in Shareholders' Funds for the Half Year Ended 1 July 2000 Year 1999 2000 1999 £m £m £m 485.5 Opening shareholders' funds 551.7 485.5 104.8 Attributable profit 142.2 73.0 Dividend (72.5) - interim/final (15.6) (27.8) - - special dividend (415.6) - (4.0) Exchange adjustments (7.4) (4.1) 4.4 Issue of shares 1.4 1.6 33.5 Goodwill on disposals 31.8 33.5 _____ _____ _____ Closing shareholders' 551.7 funds 288.5 561.7 _____ _____ _____ Abridged Group Cash Flow for the Half Year Ended 1 July 2000 Year 1999 2000 1999 £m £m £m 115.8 Operating profit 85.8 66.9 56.1 Depreciation and amortisation 30.4 30.8 28.6 Exceptional asset write downs 1.1 - (2.4) Working capital and provisions (30.0) (35.7) _____ _____ _____ Net cash inflow from 198.1 operating activities* 87.3 62.0 Capital expenditure and (65.1) financial investment (20.4) (28.9) _____ _____ _____ 133.0 Operating cash flow 66.9 33.1 3.4 Interest (paid)/received (0.7) 0.6 (60.1) Tax paid (21.4) (10.5) (70.3) Equity dividends paid (44.7) (42.4) (50.9) Acquisitions (32.6) (9.4) 121.8 Disposals 185.2 123.7 Issue of ordinary share 4.4 capital 1.4 1.6 ______ ______ ______ 81.3 Net cash inflow 154.1 96.7 ______ (9.5) Exchange adjustments (29.9) (18.3) (49.5) Opening net cash/(borrowings) 22.3 (49.5) ______ _____ _____ 22.3 Closing net cash 146.5 28.9 ______ _____ _____ * After £6.1m (1999 - £7.1m at the half year and £18.5m in the full year) of outgoings on rationalisation programme and acquisition integration costs. 1. Segmental performance for the half year ended 1 July 2000 was as follows: Year 1999 2000 1999 £m £m £m Turnover by activity 889.5 Medical devices 492.1 444.8 230.4 Discontinued operations 100.1 131.2 _____ _____ _____ 1,119.9 592.2 576.0 ______ _____ _____ Operating profit by activity 92.7 Medical devices 72.8 53.1 23.1 Discontinued operations 13.0 13.8 _____ _____ _____ 115.8 85.8 66.9 _____ _____ _____ Exceptional costs have been charged £6.2m to medical devices (1999 - £14.3m at the half year and £42.0m in the full year). In 1999, £2.9m was charged to discontinued operations at the half year and £9.7m in the full year. Turnover by product Year Underlying 1999 2000 1999 sales £m £m £m growth 276.4 Orthopaedics 161.9 137.0 +10% 192.8 Endoscopy 104.8 98.0 +7% 230.8 Wound management 125.7 113.4 +7% 189.5 Casting, support and ENT 99.7 96.4 +3% _____ _____ _____ _____ 889.5 Medical devices 492.1 444.8 +7% _____ 230.4 Discontinued operations 100.1 131.2 _____ _____ _____ 1,119.9 592.2 576.0 _____ _____ _____ Turnover by geographic market Underlying Year 2000 1999 Sales 1999 £m £m growth £m 92.5 United Kingdom 44.7 43.8 +2% 202.4 Continental Europe 107.0 106.4 +9% 444.0 America 258.8 221.2 +8% Africa, Asia and 150.6 Australasia 81.6 73.4 +5% _____ _____ _____ _____ 889.5 492.1 444.8 +7% _____ 230.4 Discontinued operations 100.1 131.2 _____ _____ _____ 1,119.9 592.2 576.0 _____ _____ _____ Underlying growth is sales growth adjusted to eliminate the effect of translational currency, acquisitions, disposals and the number of sales days relative to those last year. 2. Discontinued operations comprise the results of the consumer business disposed of in June 2000, for proceeds of £185m, and the bracing business and the UK cotton wool business disposed of in 1999. A further £50m is expected to be received in the remainder of the year (including released working capital) in respect of the consumer business disposed of but for which completion had not occurred at the half year. The profit on disposal of the consumer business of £88m is stated after deducting £32m of goodwill previously written off to reserves on acquisition. A further £20m of gain on disposal is expected in the second half of the year in respect of the disposal of the consumer business. 3. The operating exceptional item costs in the first half of 2000 comprise £5m of costs of the manufacturing rationalisation programme that commenced in April 1999 and £1m of integration costs relating to the acquisition of Collagenase. The costs in the corresponding period of 1999 related to the manufacturing rationalisation programme only. The operating exceptional costs in the 1999 full year comprise expenditure on the manufacturing rationalisation programme of £34m, £13m of provisions taken against fixed asset investments and acquisition integration costs of £5m. The discontinued exceptional items in the prior year represent the cost of the manufacturing rationalisation programme relating to the consumer business. 4. The tax charge is based on an estimated effective rate of 30% on the full year's results before exceptional items and includes £4m in respect of the exceptional items. Of the total, £18m relates to overseas taxation. 5. The company is changing its capital structure through the return of £416m of cash to shareholders by way of a special dividend of 37.14 pence per share together with a related consolidation of share capital. The special dividend is to be paid on 11 August 2000 to all shareholders on the register at the close of business of 4 August 2000. On 2 August 2000 the shareholders approved in an extraordinary general meeting to consolidate the company's ordinary share capital by converting into nine new shares of every 11 in issue. 6. An interim dividend of 1.70 pence per ordinary share (1999 - 2.50 pence per ordinary share) will be paid on 6 December 2000 to all shareholders on the register at the close of business on 10 November 2000. Shareholders may participate in the dividend reinvestment plan for the interim dividend only. 7. The basic average number of ordinary shares in issue was 1,118m (1999 - 1,115m). The diluted average number of ordinary shares in issue was 1,120m (1999 - 1,117m). Following the consolidation of shares outlined in Note 5, there will be 915m shares in issue, with the projected average number of shares in issue for the full year being some 1,034m. 8. Results before exceptional items state profit before taxation before charging the cost of operating and discontinued exceptional items outlined in Note 3 and the net profit on the disposal of discontinued operations. Adjusted earnings per ordinary share is based on the attributable profit before charging these items and associated taxation thereon. 9. No statement of total recognised gains and losses has been presented as there are no items of significance to be reported other than those in the profit and loss account. 10.The interim financial information has been prepared on the basis of the accounting policies set out in the full annual accounts of the group for the year ended 31 December 1999. 11.The financial information for the year ended 31 December 1999 has been extracted from the full annual accounts of the group which have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified. Independent Review Report to Smith & Nephew plc We have been instructed by the company to review the financial information set out on pages 5 to 10 and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority 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. We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. 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 consistently applied unless otherwise disclosed. 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 Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. 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 half year ended 1 July 2000. Ernst & Young London

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