1st Quarter Results
Smith & Nephew Plc
06 May 2004
6 May 2004
Smith & Nephew Delivers Strong First Quarter Results
Smith & Nephew plc (LSE: SN, NYSE:SNN) announces results for the first quarter
ended 3 April 2004.
Key Points
• Sales increased an underlying 12% to £302m
• Orthopaedics delivered accelerated underlying sales growth of 17%
• Endoscopy regained sales momentum, rising an underlying 8%
• Operating margin* improved to 18.6% from 16.3% in Q1 2003
• Earnings per share* increased 24% to 4.74p
* Before goodwill amortisation and exceptional items
Commenting on the first quarter and on the outlook for the year, Sir Christopher
O'Donnell, Chief Executive, said: 'I'm very pleased with our strong first
quarter results, with an acceleration in Orthopaedics sales growth, a return of
momentum in Endoscopy, and good underlying growth in Advanced Wound Management.
'We have already introduced a number of innovative new products this year as
well as made important technology acquisitions within each of our businesses. As
a result of our growth momentum we are in good shape to meet our targets going
forward.'
A conference call for global analysts to discuss the company's first quarter
results will be held at 3.30 pm BST/10.30am EST today. 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/Q1. Analysts should
contact Zehra Sinmaz on +44 (0) 20 7401 7646 for conference call details.
Enquiries
Investors
Peter Hooley Tel: +44 (0) 20 7401 7646
Smith & Nephew Finance Director
Investors/Media
Angie Craig UK Tel: +44 (0) 20 7401 7646
Smith & Nephew Vice President US Corporate Affairs US Tel: +1 212 850 5756
Financial Dynamics-London
David Yates Tel: +44 (0) 20 7831 3113
Financial Dynamics-New York
Jonathan Birt US Tel: +1 212 850 5634
First Quarter Results
Smith & Nephew had a strong first quarter, delivering underlying sales growth of
12%. Sales growth in the quarter benefited by five percentage points from extra
sales days, but was negatively affected by currency by eight percentage points,
leaving first quarter sales up 9% to £302m. In order to provide a consistent
measure of sales growth, all references that follow refer to underlying sales
growth, which excludes the effects of currency translation, the acquisition of
Midland Medical Technologies ('MMT') and the extra sales days.
Profit before goodwill amortisation, exceptional items and tax amounted to £62m,
a 25% increase over the first quarter of 2003. The operating profit margin
improved to 18.6% from 16.3% as a result of sales volume and operational
efficiencies compared to plant start-up inefficiencies in the first quarter of
last year. Profit before taxation and after goodwill amortisation and
exceptional items was £58m, compared to £40m in the first quarter of 2003.
After an ordinary tax charge of 29%, earnings per share before goodwill
amortisation and exceptional items ('EPSA') were 4.74p (23.70p per American
Depositary Share, 'ADS'), an increase of 24%. Basic unadjusted earnings per
share were 4.28p (21.40p per ADS).
Operating Divisions
Orthopaedics sales grew 17% compared to last year, again demonstrating share
gains in a market growing at an estimated 13% (excluding spine). Sales growth
in the US was 23% and outside the US sales grew 9%. Sales pricing contributed
approximately four percentage points to US growth.
Knee sales grew 24% (27% within the US, 20% outside the US) and hip sales grew
18% (19% within the US, 17% outside the US). Trauma sales grew by 10% in the
quarter (18% within the US and flat outside the US). Clinical Therapies, which
comprises the EXOGENa and SUPARTZa products, principally sold in the US, grew
sales by 31%.
The number of reported revisions of the macrotextured knee product withdrawn
from the market in August 2003 was 295 on 30 April 2004. We are working closely
with our surgeons and their patients where revisions are required and continue
to believe the withdrawal remains manageable.
Endoscopy, with sales 8% up on a year ago, is returning to its former growth
momentum. Within the US, sales grew 6% as blades, access and visualisation
products returned to growth. Sales growth outside the US was 11%.
Repair products grew 19%, radio frequency 7% and blades 5%, the latter led by
sales of our new lightweight and more powerful hand piece, POWERMAXa, for use in
arthroscopic resection.
Advanced Wound Management sales grew 7% over last year. Outside the US sales
growth remained strong at 11%. As anticipated, sales in the US declined by 5%
as we commenced the switch to a new wound enzyme debrider product.
The ALLEVYN* dressings range continued to grow sales strongly at 19%, ACTICOATa
silver dressings further accelerated to 70% sales growth and DERMAGRAFTa dermal
replacement grew 61%.
Acquisitions
During the quarter our Orthopaedics Division acquired MMT, the market leader in
metal-on-metal hip resurfacing with annual sales of £20m and further growth
potential. We also acquired Reed Medical Designs Inc., an audio-visual
technology provider, to augment Endoscopy's visualisation capabilities and a
unique water-jet wound debridement system for Advanced Wound Management.
Outlook
The markets in which we operate have continued to grow strongly and we expect to
continue to expand our sales force and product offerings both internally and
through acquisitions. Our first quarter results leave us on track to meet our
full-year aims of high-teens sales growth for Orthopaedics and high single
digits for Endoscopy and Wound Management and at least a 1% increase in
operating margin. We believe we are well placed to sustain our underlying
mid-teens EPSA growth target going forward.
About us
Smith & Nephew is one of the world's leading medical device companies,
specialising in Orthopaedics, Endoscopy and Advanced Wound Management products.
Smith & Nephew ranks as the global leader in arthroscopy and advanced wound
management and is one of the fastest growing orthopaedics companies in the
world.
Smith & Nephew is dedicated to helping improve people's lives. The company
prides itself on the strength of its relationships with its surgeon and
professional healthcare customers, with whom its name is synonymous with the
high standards of performance, innovation and trust. The company has over 7,000
employees and operates in 32 countries around the world, generating sales of
nearly £1.2 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 planned growth in our business and in our
operating margins discussed under 'Outlook' are forward-looking statements.
These statements, as well as the phrases 'aim', 'plan', 'intend', 'anticipate',
'well-placed', 'believe', 'estimate', 'expect', '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 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.
* Trademark of Smith & Nephew. Certain names registered at the US Patent and
Trademark Office.
Unaudited Group Profit and Loss Account
For the 3 Months to 3 April 2004
Notes 2004 2003
£m £m
Turnover including share of joint venture 341.0 316.3
Share of joint venture (39.0) (39.1)
_____ _____
Group turnover from continuing operations 1 302.0 277.2
Cost of sales (82.8) (83.1)
Selling, general and administrative expenses (146.9) (132.8)
Research and development expenses (16.0) (16.2)
_____ _____
Operating profit before goodwill amortisation and exceptional items 56.3 45.1
Goodwill amortisation * (4.3) (4.7)
Exceptional items* 2 - (4.3)
_____ _____
Group operating profit from continuing operations 1 52.0 36.1
Share of operating profit of the joint venture before exceptional items 4.9 4.7
Share of joint venture exceptional items* 3 - (0.4)
_____ _____
56.9 40.4
Share of operating profit of associated undertaking - 1.8
_____ _____
Profit on ordinary activities before interest 56.9 42.2
Interest 4 1.2 (1.8)
_____ _____
Profit on ordinary activities before taxation 58.1 40.4
Taxation 5 (18.1) (13.3)
_____ _____
Retained profit 40.0 27.1
_____ _____
Basic earnings per ordinary share 7 4.28p 2.92p
Diluted earnings per ordinary share 7 4.26p 2.90p
*Results before goodwill amortisation and exceptional items
Profit before taxation 8 £62.4m £49.8m
Adjusted basic earnings per ordinary share 8 4.74p 3.83p
Adjusted diluted earnings per ordinary share 8 4.71p 3.80p
Unaudited Abridged Group Balance Sheet as at 3 April 2004
3 April 29 March 2003
2004
£m £m
Fixed assets
Intangible assets 341.3 321.4
Tangible assets 258.1 263.4
Investment in joint ventureA 114.0 121.2
Investment in associated undertaking - 9.2
Investments 4.9 5.1
_____ _____
718.3 720.3
_____ _____
Stock 243.6 246.5
Debtors 345.6 297.6
Cash 26.8 30.0
Creditors (335.7) (303.7)
_____ _____
280.3 270.4
Borrowings (227.3) (355.7)
Provisions
- deferred tax (63.3) (58.3)
- other (26.2) (33.4)
_____ _____
Shareholders' funds 681.8 543.3
_____ _____
A Investment in joint venture comprises goodwill £68.3 million, share of
gross assets of £113.5 million less share of gross liabilities £67.8 million.
Unaudited Abridged Movement in Shareholders' Funds
for the 3 Months to 3 April 2004
2004 2003
£m £m
Opening shareholders' funds as at 1 January 640.8 516.9
Retained profit * 40.0 27.1
Exchange adjustments * 0.1 (1.8)
Share based expense recognised in the profit and loss account 0.4 0.4
Cost of own shares purchased (2.4) -
Issue of shares 2.9 0.7
_____ _____
Closing shareholders' funds at the end of quarter one 681.8 543.3
_____ _____
* These items are the only components of the statement of total recognised
gains and losses.
Unaudited Abridged Group Cash Flow for the 3 months to 3 April 2004
2004 2003
£m £m
Operating profit 52.0 36.1
Depreciation and amortisation 18.4 18.8
Working capital and provisions (30.6) (44.7)
_____ _____
Net cash inflow from operating activitiesB 39.8 10.2
Capital expenditure and financial investment (19.1) (15.5)
_____ _____
Operating cash flow 20.7 (5.3)
Joint venture dividend 5.9 -
Interest 1.6 (1.2)
Taxation (6.2) (5.2)
Acquisitions (70.2) (3.0)
Issue of shares 2.9 0.7
_____ _____
Net cash outflow (45.3) (14.0)
Exchange adjustments 21.6 (27.7)
Opening net borrowings as at 1 January (127.1) (276.9)
_____ _____
Closing net borrowings at the end of quarter one (150.8) (318.6)
_____ _____
Gearing 22% 59%
B After £1.1 million of outgoings on rationalisation, acquisition
integration and divestment costs (2003 - £2.1 million) and in 2003 £3.4
million on Centerpulse transaction costs.
Net borrowings includes £49.7 million of net currency swap assets (2003 - £7.1
million net currency swap assets).
NOTES TO THE 2004 QUARTER ONE RESULTS
1. Segmental performance for the 3 months to 3 April 2004 was as follows:
Underlying
growth in
sales
2004 2003
£m £m %
Group turnover by business segment
Orthopaedics 142.4 126.4 17
Endoscopy 74.7 71.9 8
Advanced Wound Management 84.9 78.9 7
_____ _____ _____
302.0 277.2 12
_____ _____ _____
Group operating profit by business segment
Orthopaedics 32.5 27.5
Endoscopy 14.2 12.4
Advanced Wound Management 9.6 5.2
_____ _____
56.3 45.1
Goodwill amortisation (4.3) (4.7)
Exceptional items - (4.3)
_____ _____
52.0 36.1
_____ _____
Group turnover by geographic market
Europe* 101.7 88.6 9
America 155.8 150.3 14
Africa, Asia and Australasia 44.5 38.3 11
_____ _____ _____
302.0 277.2 12
_____ _____ _____
* Includes United Kingdom sales of £29.4 million (2003 - £22.2 million).
Underlying sales growth is calculated by eliminating the effects of
translational currency, acquisitions and extra sales days compared to Quarter 1
2003. Reported growth in sales by business segment reconciles to underlying
growth in sales as follows:
Reported Foreign Acquisitions Sales days Underlying
growth in currency effect effect growth in
sales translation sales
effect
% % % % %
Orthopaedics 13 10 (1) (5) 17
Endoscopy 4 9 - (5) 8
Advanced Wound Management 8 4 - (5) 7
_____ _____ _____ _____ _____
9 8 - (5) 12
_____ _____ _____ _____ _____
2. Operating exceptional items in 2003 related to acquisition integration
costs.
3. The group's share of exceptional items of the joint venture in 2003
related to manufacturing rationalisation costs of BSN Medical.
4. Interest of £1.2 million receivable (2003 - £1.8 million payable)
includes £0.3 million (2003 - £0.4 million) in respect of the group's share
of the net interest charge of BSN Medical and in 2003 £0.2 million in
respect of the group's share of the net interest charge of AbilityOne.
5. Taxation of £18.1 million (2003 - £14.3 million) on the profit before
goodwill amortisation and exceptional items, is at the full year estimated
effective rate of 29% (2003 - 29%). £1.2 million (2003 - £1.3 million)
arises in BSN Medical and in 2003 £0.6 million arose in AbilityOne. Tax
relief of £1.0 million arose in 2003 as a consequence of the net
exceptional items. Of the total, £18.1 million (2003 - £14.2 million)
relates to overseas taxation.
6. No dividends were declared in the quarter.
7. The basic average number of ordinary shares in issue was 934 million
(2003 - 928 million). The diluted average number of ordinary shares in
issue was 940 million (2003 - 934 million).
8. Profit before taxation, goodwill amortisation and exceptional items and
adjusted earnings per ordinary share are calculated as follows:
3 Months 3 Months
2004 2003
£m £m
Profit on ordinary activities before taxation 58.1 40.4
Adjustments:
Goodwill amortisation 4.3 4.7
Exceptional items - 4.3
Share of joint venture exceptional items - 0.4
_____ _____
Profit before taxation, goodwill amortisation and exceptional items 62.4 49.8
Taxation on profit before goodwill amortisation and exceptional items (18.1) (14.3)
_____ _____
Earnings before goodwill amortisation and exceptional items 44.3 35.5
_____ _____
Adjusted basic earnings per ordinary share 4.74p 3.83p
Adjusted diluted earnings per ordinary share 4.71p 3.80p
9. Quarter one 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 2003.
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 3 April 2004 which comprises the Group Profit and Loss
Account, Abridged Group Balance Sheet, Abridged Movement in Shareholders' Funds,
Abridged Group Cash Flow Statement and the related notes 1 to 9. 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 the 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 report results 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 enquires
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 United
Kingdom 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.
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 3 April 2004.
Ernst & Young LLP
London 6 May 2004
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