3rd Quarter Results

RNS Number : 4903R

Smith & Nephew Plc

04 November 2011

 



Smith & Nephew Q3 results - continued strong revenue growth with momentum building behind new strategic priorities

4 November 2011

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the third quarter ended 1 October 2011.

	3 months* to				9 months to
	2 Oct	1 Oct	Underlying		2 Oct	1 Oct	Underlying
	2010	2011	change		2010	2011	change
	$m	$m	%		$m	$m	%
Revenue1	941	1,032	5		2,895	3,164	5
Trading profit2	215	205	(9)		691	682	(6)
Operating profit2	206	191			653	648
Trading margin (%)	22.9	19.8	(310)bps		23.9	21.5	(240)bps
EPSA (cents)3	16.1	16.2			52.1	52.6
EPS (cents)	15.4	14.9			48.8	49.6
Business Unit revenue1
Orthopaedics	510	548	3		1,611	1,726	3
Endoscopy	201	226	7		623	690	6
Advanced Wound Management	230	258	5		661	748	7

* Q3 2011 comprises 63 trading days (2010: 63 trading days).

Q3 Commentary ·    Strong reported revenue up 10% to $1,032 million, underlying growth of 5% ·    Trading profit was $205 million, a trading margin of 19.8% o  Two of the three businesses delivered strong trading margins: Endoscopy 23.7% up 90bps  and Advanced Wound Management 25.4% up 80bps o  Orthopaedics' trading margin 15.6%, due to continuing adverse sales mix, high periodic  costs, and the need to reduce costs to better reflect market conditions o  Actions taken to materially improve Orthopaedics' trading margin from Q4 onwards o  Q4 Group trading margin expected to be above 24% ·    Adjusted earnings per share increased by 0.6% to 16.2¢ ·    Trading profit-to-cash conversion ratio of 102% (2010: 95%), net debt decreased to $196 million (2010: $600 million) ·    Action plans in line with new strategic priorities to maximise growth and margins well advanced, targeting annual savings of at least $150 million

Commenting on the third quarter, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:

"We again delivered strong top-line revenue growth, up a reported 10% at $1,032 million, an underlying increase of 5%.  I am, however, disappointed with our margin performance, with Orthopaedics overshadowing excellent performances in Endoscopy and Advanced Wound Management.  We are taking the steps necessary to reduce a cost base in Orthopaedics that is too high for on-going market conditions.  I expect to see material improvements from Q4 onwards and am confident that the Group will deliver a Q4 trading profit margin above 24%.

"In August we announced our new strategic priorities to maximise growth and margins.  The new operational management teams have embraced these and together we are developing the action plans that will liberate the resources needed for re-investment and to protect our underlying margins.  With high levels of energy and determination, we are reshaping Smith & Nephew to thrive in the future."

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, Friday 4 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 http://www.smith-nephew.com/Q311.  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 [phone] in the UK or [phone] in the US, confirmation code: 7334478.  Analysts should contact Jennifer Heagney on [phone] or by email at [e-mail] for conference details.

Notes

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 non-GAAP financial measures to results reported under IFRS.

2      A reconciliation from operating profit to trading profit, a non-GAAP financial measure, is given in note 4 to the financial statements.  The underlying increase/decrease in trading profit is the increase/decrease in trading profit after adjusting for the effects of currency translation.

3      Adjusted earnings per share ("EPSA") growth is as reported, not underlying, and is stated before restructuring and rationalisation costs, amortisation of acquisition intangibles and taxation thereon.  See note 2 to the financial statements for information on this non-GAAP financial measure.

4      All numbers given are for the quarter ended 1 October 2011 unless stated otherwise.

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

Enquiries

Investors/Analysts
Phil Cowdy	[phone]
Smith & Nephew
Media
Jon Coles / Justine McIlroy	[phone]
Brunswick - London

Third Quarter Results

We again delivered strong top-line revenue growth, up a reported 10% at $1,032 million.  This represents an underlying growth of 5% on the same period last year, after adjusting for positive movements in currency of 5%.

Trading profit in the quarter was $205 million, a reported -5% decline, or a -9% decline on an underlying basis.  The trading margin was 19.8%, down 310 basis points from the prior year period. 

Two of our three businesses produced strong and improved trading margins.  Endoscopy delivered 23.7% (2010: 22.8%) where we enjoyed the benefits of strong cost discipline and good sales growth whilst still increasing the level of investment in biomaterial research projects.  Advanced Wound Management also performed well, delivering a trading profit margin of 25.4% (2010: 24.6%), as we continued to drive efficiencies and as revenues from our Negative Pressure Wound Therapy ("NPWT") products grew strongly.

Orthopaedics, where trading margins were 15.6% (2010: 22.2%), underperformed, due to three principal factors.

First, we continued to experience pressure on the gross margin from the sales mix, a trend seen in the first half of the year.  Top line growth was driven by products and geographies where we achieved lower margins, reducing the gross profit margin by about 200 basis points. 

Second, Orthopaedics experienced an unusually high level of periodic costs - legal, inventory and receivables - in the quarter, totalling about $10 million.  

Finally, it is clear that the modest growth and continuing pricing pressures in established markets necessitate a lower Orthopaedics cost base.  Actions were underway to address this, but these have not been adequate, resulting in a cost base which was $10 million too high in the quarter.  The new combined Orthopaedics and Endoscopy management team has instigated much tighter controls over spending and we are confident that the Orthopaedics margin will improve materially from Q4 onwards. 

The net interest charge was $2 million.

The tax rate for the quarter was 28.5%, reflecting the revised full year estimated effective rate of 30.2% on profit before restructuring and rationalisation costs and amortisation of acquisition intangibles.  This is a reduction from the previous estimate of 30.8%.  Adjusted attributable profit of $144 million is before the costs of restructuring and rationalisation and amortisation of acquisition intangibles and taxation thereon. 

Adjusted earnings per share increased by 0.6% to 16.2¢ (81.0¢ per American Depositary Share ("ADS")).  This is stronger than trading profit growth, principally due to the weaker dollar in the period, lower interest charge and the lower tax charge.  Basic earnings per share was 14.9¢ (74.5¢ per ADS) compared with 15.4¢ (77.0¢ per ADS) in the third quarter of 2010.

Trading cash flow (defined as cash generated from operations less capital expenditure but before restructuring and rationalisation costs) was $209 million in the quarter reflecting a trading profit to cash conversion ratio of 102% (2010: 95%).

Net debt decreased by $150 million in the quarter to $196 million, reflecting strong trading cash flow.

The following sections give more detail on the revenue performance by business under our current reporting structure of Orthopaedics, Endoscopy and Advanced Wound Management global business units. 

Orthopaedics

Orthopaedics (consisting of Reconstruction, Trauma and Clinical Therapies) grew revenues by 3% in the quarter to $548 million.  Geographically, Orthopaedics' revenue grew by 1% in the US and 6% outside the US. 

Within Orthopaedics, we saw a like-for-like price reduction of around 3% in the quarter, which was partially offset by mix gains.  This was slightly worse than the last quarter.

Orthopaedic Reconstruction revenues grew by 2%, ahead of the estimated global market growth rate of 1% and our fifth consecutive quarter of market outperformance.  In the US our growth was flat, while outside the US we grew sales 5%.  In Europe, growth was 2% while we delivered a strong performance in the rest of the world.

In our global knee franchise we again delivered market-leading growth, up 6%, driven by our strong portfolio of implants and instruments.  In the US our growth rate eased to 5%, partly reflecting the annualising of our new products launched last year, while outside the US we saw a 6% increase in sales. 

Our global hip business saw revenues slip by -2%.  Our BIRMINGHAM HIP# Resurfacing System ("BHR") continued to see strong headwinds in its sector. This was despite the continuing strong data on BHR, where recent registry data in Australia and NICE data in the UK demonstrated industry-leading high long-term survivability.  In traditional hips we saw double-digit growth in revenues from products featuring our proprietary OXINIUM# bearing surface. 

Orthopaedic Trauma growth was steady at 4% in the quarter, against an estimated market rate of 6%.  We saw strong growth in sales for our Limb Restoration external fixation devices and internal fixation ranges such as TRIGEN# INTERTAN# nails and PERI-LOC# Variable-Angle Locked Plating System.  Our US growth was impacted by the expiry of an agreement under which we received royalties in the trauma area.

Clinical Therapies' revenues grew 7% to $60 million over the prior year quarter, with our EXOGEN# Bone Healing System growing strongly for another quarter.

Endoscopy

Endoscopy delivered a good quarter, with revenue growing 7% to $226 million.  US revenue growth was solid at 3% while outside of the US revenues were up 10%.  Europe improved considerably and we also saw strong growth in the rest of the world.

Arthroscopy (sports medicine) grew by 7%, with notable contributions from our new products such as the BIORAPTOR# CURVED suture anchors for shoulder repair and DYONICS# PLATINUM range of specialty blades.  We have also started to widen the distribution of our FAST-FIX 360# Meniscal Repair System, the new version of our best-selling product, which we expect to drive greater revenues from our knee repair franchise.

Visualisation revenues declined marginally, a marked improvement on last quarter, as we delivered on our strategy to optimise the size of this business so that it more closely complements our sports medicine franchise.  We launched the HD1200 Autoclavable Camera System in the quarter and signed an agreement to sell our small Digital Operating Room service business.  Visualisation now accounts for little more than 10% of total revenues within Endoscopy. 

Advanced Wound Management

Advanced Wound Management grew revenues by 5% to $258 million, more than double the estimated global market rate of 2%.  US revenues grew by 7% and outside of the US 5%.  Europe remains weak, whilst we saw good growth in the rest of the world.

NPWT had a strong quarter across the board.  PICO#, the first canister-free disposable NPWT product, was well received in all of its launch markets across Europe, Canada, Australia and New Zealand.  UK Drug Tariff and other national reimbursements were achieved and we look forward to completing the US registration and launch soon.  We are also continuing to innovate in our traditional NPWT product range, with the launch in Germany of the RENASYS# Soft Port, a simplified interface for the application and use of the RENASYS# NPWT system.

Our Exudate Management revenues grew 2% and Infection Management improved to grow 5%.  Across our portfolio we launched eleven new products including the VERSAJET# II Hydrosurgery System and extensions to our ALLEVYN# and ACTICOAT# product ranges, as well as re-introducing the DURAFIBER# Gelling Fibre Dressing.

Nine Months to 1 October 2011

For the period, reported revenues were $3,164 million, with underlying growth at 5% compared to the same period last year.

Reported trading profit for the year to date was $682 million, -6% lower year-on-year on an underlying basis.  Trading margin decreased by 240 basis points to 21.5%.  The decrease was 150 basis points after deducting the one-off benefit gained last year from the settlement of the BlueSky acquisition agreement.

The net interest charge was $6 million. 

The tax charge of $196 million reflects the revised estimated effective rate for the year of 30.2%.  Adjusted attributable profit of $469 million is before the costs of restructuring and rationalisation, amortisation of acquisition intangibles and taxation thereon.  Attributable profit was $442 million.

EPSA was 52.6¢ (263.0¢ per ADS).  Reported basic earnings per share was 49.6¢ (248.0¢ per ADS).

Trading cash flow was $657 million compared with $595 million a year ago.  This is a trading profit to cash conversion ratio of 96% compared with 86% a year ago.

Progress Delivering New Strategic Priorities

In August 2011 we announced five new strategic priorities to drive Smith & Nephew's future success: 

·     established markets

·     emerging markets

·     innovate for value

·     simplify and improve our operating model

·     supplement the organic growth through acquisitions

Much work has been done in the quarter.  Since August we have established the leadership team for the new Advanced Surgical Devices division and have started to re-organise its structure and operating model to meet the requirements of the established markets. 

Furthermore, the leadership teams of all of our businesses - the Advanced Surgical Devices and Advanced Wound Management divisions and the Emerging Markets and International Markets organisations - have embraced the new strategic priorities.  They, together with the strengthened global functions, such as Human Resources, Quality & Regulatory Affairs and Operations, are working to develop the action plans that will liberate the resources needed for re-investment and to protect our underlying margins.

These action plans will target savings of at least $150 million per annum.  We will provide the detail and expected cost when we report our full year results in February 2012.  In particular, our plans are addressing the opportunities we see in the following areas:

·     Cost of goods - We believe that we can improve our cost of goods to combat the persistent pricing pressures in our established markets.   We are reviewing the best configuration of our manufacturing portfolio to support our growth strategy.  We are also looking at opportunities to accelerate the rationalisation of our product portfolio and improve our field-based inventory management.  

·     Sales force productivity - We are working to identify opportunities to improve our sales force effectiveness, whilst maintaining the existing customer specific sales channels.

·     General & administrative expenses - The work done by the new Advanced Surgical Devices management team is confirming the significant scope to simplify our operating model and achieve material savings, and reinforces our decision to combine Orthopaedics and Endoscopy.

Outlook

Our revenue guidance for 2011 is unchanged.  We expect revenues in Orthopaedic Reconstruction, Arthroscopy (sports medicine) and Advanced Wound Management to grow at above the market rate.  In Orthopaedic Trauma we expect to sustain our improved performance.

We expect that the Group trading profit margin in Q4 will be above 24%.

It remains our intention to deliver a sustainable trading profit margin of around 24% per annum in the medium term.  Although we will give formal guidance for 2012 with our full year results, our current expectation is that the efficiency improvements we achieve in 2012 will modestly exceed the effects of the investments we will make to drive growth and the effects of continued modest pricing pressure.

With high levels of energy and determination, we are reshaping Smith & Nephew to thrive in the future.

About Us

Smith & Nephew is a global medical technology business with global leadership positions in Orthopaedic Reconstruction, Advanced Wound Management, Sports Medicine, Trauma and Clinical Therapies.  The Company has distribution channels, purchasing agents and buying entities in over 90 countries worldwide.  Annual sales in 2010 were nearly $4.0 billion.

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.

Forward-looking Statements

This document may contain forward-looking statements that may or may not prove accurate.  For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements.  Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements.  Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payors and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and dispositions, our success in integrating acquired businesses, and disruption that may result from changes we make in our business plans or organisation to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business or competitive nature.  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 20-F, for a discussion of certain of these factors.

Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution.  Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.

# Trademark of Smith & Nephew.  Certain marks registered US Patent and Trademark Office.

SMITH & NEPHEW plc

2011 QUARTER THREE RESULTS

Unaudited Group Income Statement for the three months and nine months to 1 October 2011

3 Months	3 Months			9 Months	9 Months
2010	2011		Notes	2011	2010
$m	$m			$m	$m
941	1,032	Revenue	3	3,164	2,895
(245)	(281)	Cost of goods sold		(844)	(746)
696	751	Gross profit		2,320	2,149
(452)	(517)	Selling, general and administrative expenses		(1,546)	(1,384)
(38)	(43)	Research and development expenses		(126)	(112)
206	191	Operating profit	4	648	653
1	1	Interest receivable		3	2
(4)	(3)	Interest payable		(9)	(12)
(2)	(1)	Other finance costs		(4)	(6)
201	188	Profit before taxation		638	637
(64)	(55)	Taxation	7	(196)	(204)
137	133	Attributable profit (A)		442	433
		Earnings per share (A)	2
15.4¢	14.9¢	Basic		49.6¢	48.8¢
15.4¢	14.9¢	Diluted		49.4¢	48.7¢

Unaudited Group Statement of Comprehensive Income for the three months and nine months to 1 October 2011

3 Months	3 Months			9 Months	9 Months
2010	2011			2011	2010
$m	$m			$m	$m
137	133	Attributable profit (A)		442	433
		Other comprehensive income:
103	(108)	Translation adjustments		(4)	32
(17)	15	Net gains/(losses) on cash flow hedges		14	(1)
(17)	(95)	Actuarial losses on defined benefit pension plans		(82)	(88)
8	28	Taxation on items taken directly to equity		25	28
77	(160)	Other comprehensive income for the period, net of tax		(47)	(29)
214	(27)	Total comprehensive income for the period (A)		395	404

A	Attributable to the equity holders of the parent and wholly derived from continuing operations.

Unaudited Group Balance Sheet as at 1 October 2011

31 Dec			1 Oct	2 Oct
2010			2011	2010
$m			$m	$m
	ASSETS
	Non-current assets
787	Property, plant and equipment		787	774
1,101	Goodwill		1,151	1,094
426	Intangible assets		402	406
28	Other financial assets		5	30
13	Investment in associates		13	12
224	Deferred tax assets		243	212
2,579			2,601	2,528
	Current assets
923	Inventories		904	953
1,024	Trade and other receivables		1,024	907
207	Cash and bank		292	490
2,154			2,220	2,350
4,733	TOTAL ASSETS		4,821	4,878
	EQUITY AND LIABILITIES
	Equity attributable to equity holders of the parent:
191	Share capital		191	190
396	Share premium		410	390
(778)	Treasury shares		(771)	(785)
116	Other reserves		126	94
2,848	Retained earnings		3,101	2,589
2,773	Total equity		3,057	2,478
	Non-current liabilities
642	Long-term borrowings		16	1,054
262	Retirement benefit obligations		304	383
-	Other payables due after one year		11	-
73	Provisions due after one year		70	77
69	Deferred tax liabilities		77	23
1,046			478	1,537
	Current liabilities
57	Bank overdrafts and loans due within one year		473	35
617	Trade and other payables due within one year		622	600
37	Provisions due within one year		33	42
203	Current tax payable		158	186
914			1,286	863
1,960	Total liabilities		1,764	2,400
4,733	TOTAL EQUITY AND LIABILITIES		4,821	4,878

Unaudited Condensed Group Cash Flow Statement for the three months and nine months to 1 October 2011

3 Months	3 Months			9 Months	9 Months
2010	2011			2011	2010
$m	$m			$m	$m
		Net cash inflow from operating activities
201	188	Profit before taxation		638	637
3	2	Net interest payable		6	10
71	82	Depreciation and amortisation		228	202
6	7	Share based payment expense		23	17
(4)	(8)	Movement in working capital and provisions		(47)	(78)
277	271	Cash generated from operations (B)		848	788
(3)	(2)	Net interest paid		(6)	(12)
(55)	(64)	Income taxes paid		(229)	(174)
219	205	Net cash inflow from operating activities		613	602
		Cash flows from investing activities
-	-	Acquisitions (net of $2m of cash acquired)		(33)	-
(75)	(67)	Capital expenditure		(200)	(208)
8	-	Cash received on disposal of fixed assets		-	8
(67)	(67)	Net cash used in investing activities		(233)	(200)
152	138	Cash flow before financing activities		380	402
		Cash flows from financing activities
-	2	Proceeds from issue of ordinary share capital		14	8
1	-	Proceeds from own shares		4	6
-	-	Purchase of own shares		(6)	(5)
-	-	Equity dividends paid		(88)	(79)
(44)	(77)	Cash movements in borrowings		(231)	(37)
1	(2)	Settlement of currency swaps		-	(2)
(42)	(77)	Net cash used in financing activities		(307)	(109)
110	61	Net increase in cash and cash equivalents		73	293
347	215	Cash and cash equivalents at beginning of period		195	174
21	(11)	Exchange adjustments		(3)	11
478	265	Cash and cash equivalents at end of period (C)		265	478

B	Including cash outflows in the nine month period to 1 October 2011 of $6 million (2010 - $12 million) relating to restructuring and rationalisation costs. Including cash outflows in the three month period to 1 October 2011 of $4 million (2010 - $2 million) relating to restructuring and rationalisation costs.
C	Cash and cash equivalents at the end of the period are net of overdrafts of $27 million (2 October 2010 - $12 million, 31 December 2010 - $12 million).

Unaudited Group Statement of Changes in Equity for the nine months to 1 October 2011

	Share	Share	Treasury	Other	Retained	Total
	capital	premium	shares*	reserves**	earnings	equity
	$m	$m	$m	$m	$m	$m
At 1 January 2011 (audited)	191	396	(778)	116	2,848	2,773
Total comprehensive income (A)	-	-	-	10	385	395
Equity dividends paid/accrued	-	-	-	-	(146)	(146)
Purchase of own shares	-	-	(6)	-	-	(6)
Share based payments recognised	-	-	-	-	23	23
Cost of shares transferred to beneficiaries	-	-	13	-	(9)	4
Issue of ordinary share capital	-	14	-	-	-	14
At 1 October 2011	191	410	(771)	126	3,101	3,057
	Share	Share	Treasury	Other	Retained	Total
	capital	premium	shares*	reserves**	earnings	equity
	$m	$m	$m	$m	$m	$m
At 1 January 2010 (audited)	190	382	(794)	63	2,338	2,179
Total comprehensive income (A)	-	-	-	31	373	404
Equity dividends paid/accrued	-	-	-	-	(132)	(132)
Purchase of own shares	-	-	(5)	-	-	(5)
Share based payments recognised	-	-	-	-	17	17
Deferred tax on share based payments	-	-	-	-	1	1
Cost of shares transferred to beneficiaries	-	-	14	-	(8)	6
Issue of ordinary share capital	-	8	-	-	-	8
At 2 October 2010	190	390	(785)	94	2,589	2,478

*	Treasury shares include shares held by the Smith & Nephew Employees' Share Trust.
**	Other reserves comprise gains and losses on cash flow hedges, exchange differences on translation of foreign operations and the difference arising as a result of translating share capital and share premium at the rate on the date of redenomination instead of the rate at the balance sheet date.
A	Attributable to the equity holders of the parent and wholly derived from continuing operations.

NOTES

1.	These interim financial statements have been prepared in conformity with IAS 34 Interim Financial Reporting.  The financial information herein has been prepared on the basis of the accounting policies set out in the annual accounts of the Group for the year ended 31 December 2010.  Smith & Nephew prepares its annual accounts on the basis of International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), IFRS as adopted by the European Union ("EU") and in accordance with the provisions of the Companies Act 2006.  IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB.  However, the differences have no impact for the periods presented.
	The Group has adequate financial resources and its customers and suppliers are diversified across different geographic areas.  The directors believe that the Group is well placed to manage its business risk successfully.  The directors have a reasonable expectation that the Group has sufficient resources to continue in operational existence for the foreseeable future.  Thus they continue to adopt the going concern basis for accounting in preparing the interim financial statements.
	The financial information contained in this document does not constitute statutory accounts as defined in section 434 and 435 of the Companies Act 2006.  The auditors issued an unqualified opinion and did not contain a statement under section 498 of the Companies Act 2006 on the Group's statutory financial statements for the year ended 31 December 2010, which have been delivered to the Registrar of Companies.
2.	Adjusted earnings per ordinary share ("EPSA") is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affect the Group's short-term profitability.  The Group presents this measure to assist investors in their understanding of trends.  Adjusted attributable profit is the numerator used for this measure.
	EPSA has been calculated by dividing adjusted attributable profit by the weighted (basic) average number of ordinary shares in issue of 891 million (2010 - 887 million).  The diluted weighted average number of ordinary shares in issue is 895 million (2010 - 889 million).

	3 Months	3 Months			9 Months	9 Months
	2010	2011		Notes	2011	2010
	$m	$m			$m	$m
	137	133	Attributable profit		442	433
			Adjustments:
	1	5	Restructuring and rationalisation costs	6	7	13
	8	9	Amortisation of acquisition intangibles		27	25
	(3)	(3)	Taxation on excluded items	7	(7)	(9)
	143	144	Adjusted attributable profit		469	462
	16.1¢	16.2¢	Adjusted earnings per share		52.6¢	52.1¢
	16.1¢	16.1¢	Adjusted diluted earnings per share		52.4¢	52.0¢

3.	Revenue by segment for the three months and nine months to 1 October 2011 was as follows:

	3 Months	3 Months	9 Months		9 Months	Underlying growth
	2010	2011	2011		2010	in revenue
	$m	$m	$m		$m	%
						3 Months	9 Months
			Revenue by business segment
	510	548	Orthopaedics	1,726	1,611	3	3
	201	226	Endoscopy	690	623	7	6
	230	258	Advanced Wound Management	748	661	5	7
	941	1,032		3,164	2,895	5	5
			Revenue by geographic market
	413	421	United States	1,295	1,248	2	4
	293	327	Europe (D)	1,054	965	3	2
			Africa, Asia, Australasia
	235	284	and Other America	815	682	11	10
	941	1,032		3,164	2,895	5	5

D

Includes United Kingdom nine months revenue of $211 million (2010 - $209 million) and three months revenue of $71 million (2010 - $70 million).

	Underlying revenue growth by business segment is calculated by eliminating the effects of translational currency.  Reported growth reconciles to underlying growth as follows:
			Constant
		Reported	currency	Underlying
		growth in	exchange	growth in
		revenue	effect	revenue
		%	%	%
	9 Months
	Orthopaedics	7	(4)	3
	Endoscopy	11	(5)	6
	Advanced Wound Management	13	(6)	7
		9	(4)	5
	3 Months
	Orthopaedics	7	(4)	3
	Endoscopy	12	(5)	7
	Advanced Wound Management	12	(7)	5
		10	(5)	5

4.

Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affect the Group's short-term profitability.  The Group presents this measure to assist investors in their understanding of trends.  Operating profit reconciles to trading profit as follows:

	3 Months	3 Months			9 Months	9 Months
	2010	2011		Notes	2011	2010
	$m	$m			$m	$m
	206	191	Operating profit		648	653
	1	5	Restructuring and rationalisation costs	6	7	13
	8	9	Amortisation of acquisition intangibles		27	25
	215	205	Trading profit		682	691

Operating and trading profit by segment for the three months and nine months to 1 October 2011 were as follows:

			Operating Profit by business segment
	107	74	Orthopaedics	331	365
	45	54	Endoscopy	153	135
	54	63	Advanced Wound Management	164	153
	206	191		648	653
			Trading Profit by business segment
	113	85	Orthopaedics	357	389
	45	54	Endoscopy	153	138
	57	66	Advanced Wound Management	172	164
	215	205		682	691

5.	Total assets by business segment as at 1 October 2011 were as follows:

	31 Dec  2010  $m			1 Oct  2011  $m	2 Oct  2010  $m
	2,778	Orthopaedics		2,662	2,687
	769	Endoscopy		833	749
	755	Advanced Wound Management		791	740
	4,302	Operating assets by business segment		4,286	4,176
	431	Unallocated corporate assets (E)		535	702
	4,733	Total assets		4,821	4,878

	E	Consisting of deferred tax assets and cash at bank.
6.	Restructuring and rationalisation costs of $7 million (2010 - $13 million) were incurred in the nine month period to 1 October 2011.  The charge in the three month period to 1 October 2011 was $5 million (2010 - $1 million).  These relate to the earnings improvement programme and mainly comprise of costs associated with the rationalisation of operational sites.

7.		Taxation of $203 million (2010 - $213 million) for the nine months on the profit before restructuring and rationalisation costs and amortisation of acquisition intangibles is at the full year effective rate.  In 2011, a taxation benefit of $7 million (2010 - $9 million) arose on restructuring and rationalisation costs and amortisation of acquisition intangibles.  Of the $196 million (2010 - $204 million) taxation charge for the nine months, $156 million (2010 - $161 million) relates to overseas taxation. In 2011, the UK Government enacted legislation that will set the UK tax rate for periods starting on or after 1 April 2012 to be 25%, from the currently enacted rate of 26%.  The deferred tax impact of this change results in a credit to the effective tax rate for the year ending 31 December 2011.
8.		The 2010 final dividend of $88 million was paid on 19 May 2011.  The first interim dividend of 2011 of 6.60 US cents per ordinary share was declared by the Board on 4 August 2011.  This was paid on 1 November 2011 to shareholders whose names appeared on the register at the close of business 14 October 2011.  The sterling equivalent per ordinary share was set at 4.175 pence.
9.		On 23 June 2011, Smith & Nephew acquired Tenet Medical Engineering, Inc. for an initial payment of $35 million, a further payment of $2.5 million, deferred for 18 months, and up to $14.5 million based on the achievement of future revenue milestones.  The cost is assessed as $46 million, being the fair value of the probable consideration.  Of the $46 million, $44 million has been provisionally allocated to goodwill.  The remaining $2 million has been provisionally allocated to working capital and fixed assets.
10.	Net debt as at 1 October 2011 comprises:

				1 Oct  2011  $m	2 Oct  2010  $m
	Cash and bank			292	490
	Long-term borrowings			(16)	(1,054)
	Bank overdrafts and loans due within one year			(473)	(35)
	Net currency swap assets/(liabilities) (F)			1	(1)
				(196)	(600)
	The movements in the period were as follows:
	Opening net debt as at 1 January			(492)	(943)
	Cash flow before financing activities			380	402
	Proceeds from issue of ordinary share capital			14	8
	Proceeds from own shares			4	6
	Purchase of own shares			(6)	(5)
	Equity dividends paid			(88)	(79)
	Exchange adjustments			(8)	11
	Closing net debt			(196)	(600)

F

Net currency swap assets of $1 million (2010 - $1 million net currency swap liabilities) comprise $1 million (2010 - $1 million) of current liability derivatives within trade and other payables and $2 million (2010 - $nil million) of current assets derivatives within trade and other receivables.

INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc

Introduction

We have been engaged by the Company to review the interim financial statements in the interim financial report for the three and nine months ended 1 October 2011 which comprises the Group Income Statement, 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 International Standard on Review Engagements 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 the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

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 interim financial statements included in this interim financial report have 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 statements in the interim financial report for the three and nine months ended 1 October 2011 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 statements in the interim financial report for the three and nine months ended 1 October 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Ernst & Young LLP

London

3 November 2011

 

END

 

 

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