Final Results

Smith & Nephew Plc 15 February 2001 15 February 2001 2000 Preliminary Announcement Smith & Nephew plc, the global medical devices company, announces its preliminary results for the year ended 31 December 2000. Key Points * Group reshaping finalised - now focused on 4 key businesses * Very strong performance from ongoing businesses: * 9% underlying sales growth * 17% operating margin * 24% increase in reported operating profits * EPS before exceptionals grows 8%, after 7% restructuring dilution. Commenting on the results, Smith & Nephew's Chairman, Dudley Eustace said: 'Smith & Nephew has been transformed during 2000 and the reshaping of our business has resulted in a substantial re-rating of the company's shares. We are now clearly focused on higher growth advanced medical devices and have a business that we intend to develop aggressively, both through organic growth and by acquisition. We are confident that the strategy we have chosen is one that will deliver sustainable growth for our shareholders.' Enquiries Chris O'Donnell, Chief Executive Tel: +44 (0) 20 7401 7646 Smith & Nephew plc Fax: +44 (0) 20 7930 3426 Peter Hooley, Finance Director Tel: +44 (0) 20 7401 7646 Smith & Nephew plc Fax: +44 (0) 20 7930 3418 Margaret Stewart, Group Director, Corporate Affairs Tel: +44 (0) 20 7401 7646 Smith & Nephew plc Fax: +44 (0) 20 7930 2350 David Yates Tel: +44 (0) 20 7831 3113 Financial Dynamics Fax: +44 (0) 20 7831 6341 A presentation for analysts will be held at the City Presentation Centre, 4 Chiswell Street, Finsbury Square, London EC1Y 4UP at 9.30am today. A tele-conference call for analysts will be held at 3pm today: please call Mo Noonan at Financial Dynamics on 0207 831 3113 for details. The tele-conference will also be webcast at 3pm on: www.rawfinancial.com/content/corporate/smith-nephew/010215au Trading results Smith & Nephew finalised its major restructuring in 2000 to refocus its business on higher growth advanced medical devices. The restructuring included the disposal of its Consumer business, the agreement to form BSN Medical, a joint venture with Beiersdorf AG for casting, bandaging, traditional woundcare and compression hosiery products, agreement to acquire Beiersdorf's Advanced Wound Management business in April 2001, two augmenting acquisitions, and a capital restructuring. Following the formation of BSN Medical in April 2001 and the disposal of our Ear, Nose & Throat business around the middle of this year, the group will comprise four ongoing businesses: Orthopaedics, Endoscopy, Advanced Wound Management and Rehabilitation. In 2000, these businesses achieved an underlying sales growth of 9%. Including acquisitions, the sales growth was 13%. Operating profit of the ongoing businesses increased by 24% and margins increased by 1% to 17%. Reported sales were £1,135m. Profit before tax and exceptional items of the group as a whole amounted to £171m, the same as 1999 despite the loss of Consumer profits following its disposal and the interest cost of the special dividend. An exceptional gain of £106m arose on the sale of the Consumer business and £ 16m of exceptional costs were incurred on manufacturing rationalisation and acquisition integration. EPS, tax and cash flow Earnings per share, before exceptional items, were 11.61p, an increase on 1999 of 8%. The underlying tax charge remains at 30%. After adjusting for the dilutive effects of the disposals of the Bracing business in 1999 and the Consumer business in 2000, and the interest cost on the special dividend offset by the associated reduction in the effective number of ordinary shares in issue, the increase in earnings per share before exceptional items was 15%. Operating cash flow continues to be strong at 90% of operating profit before outgoings on manufacturing rationalisation, acquisition integration and divestment costs. The group invested £31m in making the initial payment for the acquisition of the Collagenase woundcare business, and £17m to acquire the shoulder arthroscopy business of Orthopaedics Biosystems Ltd Inc. Following the disposal of the Consumer business for £210m net, a special dividend of £416m was paid to ordinary shareholders in August, together with a consolidation of the ordinary share capital by way of 9 new shares for every 11 existing shares. Net debt closed at £236m and net interest of £7m was covered 25 times by operating profit before exceptional items. Dividends At the time of the announcement of the special dividend, and in keeping with a company focused on growth, we announced that we intended to adopt a dividend cover on a per share basis in the region of 21/2 times for 2000. Accordingly, the Board recommends a final dividend of 2.8p, making a total for the year of 4.5p. The dividend will be payable on 18 May to those shareholders on the register at the close of business on 20 April 2001. Shareholders may participate in the company's dividend reinvestment plan. Strategic update We have finalised the reshaping of the group to achieve our aim of becoming a higher growth company focused on advanced medical devices. The reshaping will be complete during the first half of 2001. In June, we sold our Consumer products business for £210m net. In November, we announced a 50/50 joint venture with Beiersdorf AG of Germany to create BSN Medical, a new and independent company providing medical products to hospitals and healthcare providers throughout the world. The company will combine both parents' Traditional Woundcare, Casting, Bandaging and Compression Hosiery businesses, involving sales of £300m. Competition clearance was received in January 2001, and the joint venture will start operation in April. We have also started the process to dispose of our Ear, Nose and Throat business and expect this to be achieved around the middle of 2001. We confirmed that our Rehabilitation business has the potential to grow into a more substantial global business and it becomes the fourth global business unit of the group, alongside Orthopaedics, Endoscopy and Advanced Wound Management. We made further augmenting acquisitions to our ongoing businesses. We acquired the Collagenase wound debriding business in January, making us the world leader in advanced wound management. In November, we announced the acquisition of Orthopaedic Biosystems Ltd Inc, an arthroscopy business specialising in shoulder repair, and the proposed acquisition of the advanced woundcare business of Beiersdorf, scheduled for completion this April. A more efficient and cash generative capital structure was achieved in August by our capital restructuring. We have also widened the Board's international experience with the appointment of two non-executive directors from the USA. Warren Knowlton is Chief Executive Officer of Pilkington's US operations, and worldwide President of its automotive and aerospace activities. Richard De Schutter is Chairman & Chief Executive of DuPont Pharmaceuticals. Operating review The increase in underlying sales growth in our four ongoing global business units reflects the strength of our product range and the benefits achieved from expanding our sales force, particularly in Orthopaedics and Advanced Wound Management. We will maintain the momentum of sales force expansion in 2001 and launch a number of significant new products, notably knee implants made from oxidised zirconium, a new material for orthopaedic use, which is expected to allow more knee replacement surgery for younger, more active patients. We also continued to focus on improving the efficiency of our business. Our margin improvement was the result of continued manufacturing efficiencies and rationalisation, and the development of a more performance-oriented culture. As previously announced, we closed our factories in Australia and Canada, and opened a new manufacturing facility in Mexico. The remainder of the rationalisation programme, which is continuing on schedule, largely relates to BSN Medical. Other significant cost reduction activity included a group purchasing initiative and the closure of regional offices in Birmingham and Milan. Orthopaedics Our Orthopaedics business had another excellent year, with an underlying sales growth of 10%. Acquisitions in the previous year added another 5% to sales. Our knee and hip implant ranges continue to be very successful, increasing underlying sales by 17%, more than twice the average market rate. The popularity of the Genesis total knee replacement system helped it become Orthopaedic's first $100m per annum product. Sales of our established trauma range improved by an underlying 6% and sales of Exogen, our ultrasound system for healing fresh and delayed healing bone fractures, grew by 20%. Endoscopy Endoscopy increased sales by an underlying 8%, and we remained market leader in arthroscopy (minimally invasive knee and shoulder surgery), where we have a global share of 31%. We launched a series of new products in our Dyonics range, including blades for specialist aspects of knee and shoulder surgery, a new power control unit and an improved camera system which was well accepted by the market. Our fastest growing arthroscopy products are those for ligament repair in the knee and the shoulder where sales grew 18%. Our more traditional resection blades business grew 5%. Building on our procedure skills in arthroscopy, we are developing a number of endosurgery products. TriVex, our revolutionary new procedure for the minimally invasive removal of varicose veins, has been well received since its launch, with some 250 surgeons already trained in its use. Advanced Wound Management Advanced Wound Management, which on an ongoing basis excludes the traditional woundcare products to be taken over by BSN Medical, achieved underlying sales growth of 10%. The acquisition of Collagenase made us world leader in advanced wound management. Collagenase helps clean decaying matter from difficult wounds, and radically improves the healing process. Linked to our existing products, it enables us to pioneer the concept of wound bed preparation and opens the market for significant new products. The Collagenase sales force is now integrated with our existing sales team, significantly increasing our presence throughout the world, particularly in key markets in the US and Germany. Sales of TransCyte, our tissue engineered dressing for burns from our joint venture with Advanced Tissue Sciences, and Allevyn, our hydrocellular foam dressing range, performed strongly. Allevyn is our most successful wound management product, with new presentations enhancing growth. Dermagraft awaits approval from the Food and Drug Administration in the US, and more information is expected in the first half of this year. Rehabilitation Our Rehabilitation business provides technology-led products for the post-surgical orthopaedic and active rehabilitation markets. This business has the potential for growth on a worldwide basis, and it now forms a new fourth global business unit. In our segments of the market we are world leader, with a market share of 10%. Our leading product line is the Kinetec range of continuous passive motion machines which apply mechanical force to help patients mobilise their joints after surgery. A new Kinetec shoulder unit was launched in 2000. Underlying sales growth in our Rehabilitation business was 4%. There was a strong recovery in the US with 7% growth, but the UK proved a difficult market and we are in the process of restructuring this aspect of our operations. Other Operations During 2000, we announced that our Casting and Bandaging and Traditional Woundcare businesses would join the BSN Medical joint venture and that we intend to dispose of ENT. The underlying sales growth of these businesses was 2% in 2000. The Consumer business was sold in June 2000. Outlook Smith & Nephew has been transformed during 2000 and the reshaping of our business has resulted in a substantial re-rating of the company's shares. We are now clearly focused on higher growth advanced medical devices and have a business that we intend to develop aggressively, both through organic growth and by acquisition. Our prospects for organic growth are excellent, supported by innovative new products and a global and increasingly specialised sales capability. Our refocused R&D is delivering a stream of commercially-oriented products and we will continue to broaden our product and service offering by strategic alliances and acquisitions. Our first 3 year programme to deliver high single digit underlying EPS growth continues well on track, and we announced in September a new target to deliver an annual percentage increase in underlying EPS in the mid-teens for the three years from 2002. We are confident that the strategy we have chosen is one that will deliver sustainable growth for our shareholders. Group Profit and Loss Statement for the Year Ended 31 December 2000 2000 1999 Notes £m £m Turnover 1 Ongoing operations 824.8 709.9 Other operations 2 180.6 179.6 _____ _____ Continuing operations 1,005.4 889.5 Discontinued operations 3 129.3 230.4 _____ _____ 1,134.7 1,119.9 _____ _____ Operating profit 1 Continuing operations before exceptional items - ongoing operations 142.5 114.6 - other operations 22.0 20.1 _____ _____ 164.5 134.7 - exceptional items* 4 (16.3) (42.0) _____ _____ 148.2 92.7 Discontinued operations before exceptional items 3 13.9 32.8 - exceptional items* 3 - (9.7) _____ _____ 162.1 115.8 Discontinued operations - net profit on disposals * 3 106.3 62.9 _____ _____ Profit on ordinary activities before interest 268.4 178.7 Interest (payable)/receivable (7.0) 3.4 _____ _____ Profit on ordinary activities before taxation 261.4 182.1 Taxation 5 56.2 77.3 _____ _____ Attributable profit for the year 205.2 104.8 Dividends 6 41.3 72.5 - ordinary 6 41.3 72.5 - special 7 415.6 - _____ _____ Retained (deficit)/profit for the year (251.7) 32.3 _____ _____ Basic earnings per ordinary share 8 19.85p 9.39p Diluted earnings per ordinary share 8 19.73p 9.37p Results before exceptional items (*) 9 Profit before taxation £171.4m £170.9m Adjusted basic earnings per ordinary share 11.61p 10.72p Adjusted diluted earnings per ordinary share 11.54p 10.69p Abridged Group Balance Sheet as at 31 December 2000 Notes 2000 1999 £m £m Fixed assets Intangible fixed assets 163.0 74.0 Tangible fixed assets 251.1 270.5 Investments 24.0 16.6 _____ _____ 438.1 361.1 _____ _____ Working capital Stocks 228.2 237.6 Debtors 277.8 281.1 Creditors (330.3) (312.4) _____ _____ 175.7 206.3 Provisions (47.9) (38.0) _____ _____ 565.9 529.4 _____ _____ Share capital and reserves 10 329.6 551.7 Net borrowings/(cash) 236.3 (22.3) _____ _____ 565.9 529.4 _____ _____ Gearing 72% nil Abridged Group Cash Flow for the Year Ended 31 December 2000 2000 1999 £m £m Operating profit 162.1 115.8 Depreciation and amortisation 62.9 56.1 Exceptional asset write downs - 28.6 Working capital and provisions (21.0) (2.4) _____ _____ Net cash inflow from operating activities* 204.0 198.1 Capital investment net (66.7) (65.1) _____ _____ Operating cash flow 137.3 133.0 Interest (7.0) 3.4 Tax paid (46.5) (60.1) Dividends paid (475.9) (70.3) Acquisitions (51.1) (50.9) Disposals 209.8 121.8 Issues of ordinary share capital 7.7 4.4 _____ _____ Net cash (outflow)/inflow (225.7) 81.3 Exchange adjustments (32.9) (9.5) Opening net cash/(borrowings) 22.3 (49.5) _____ _____ Closing net (borrowings)/cash (236.3) 22.3 _____ _____ * After £23.1m (1999 - £18.5m) of outgoings on rationalisation, acquisition integration and divestment costs. NOTES TO THE 2000 PRELIMINARY RESULTS 1. Performance Turnover Operating profit 2000 1999 2000 1999 £m £m £m £m By activity Ongoing operations 824.8 709.9 134.8 82.7 Other operations 180.6 179.6 13.4 10.0 _____ _____ _____ _____ Continuing operations 1,005.4 889.5 148.2 92.7 Discontinued operations 129.3 230.4 13.9 23.1 _____ _____ _____ _____ 1,134.7 1,119.9 162.1 115.8 _____ ______ _____ _____ Operating profit is stated after exceptional costs of manufacturing rationalisation and acquisition integration of £16.3m (1999 - £51.7m). These have been charged as follows: ongoing operations £7.7m, (1999 - £31.9m); other operations £8.6m (1999 - £10.1m) and discontinued operations nil (1999 - £ 9.7m). Underlying Turnover sales growth By product 2000 1999 £m £m Orthopaedics 329.3 276.4 +10% Endoscopy 216.4 192.8 +8% Advanced Wound Management 210.9 176.9 +10% Rehabilitation 68.2 63.8 +4% _____ _____ _____ Ongoing operations 824.8 709.9 +9% Other operations 180.6 179.6 +2% _____ _____ _____ Continuing operations 1,005.4 889.5 +8% _____ Discontinued operations 129.3 230.4 _____ _____ 1,134.7 1,119.9 _____ _____ By geographic market United Kingdom 92.7 93.2 -1% Continental Europe 211.8 201.7 +11% America 535.2 444.0 +8% Africa, Asia and Australasia 165.7 150.6 +7% _____ _____ _____ Continuing operations 1,005.4 889.5 +8% _____ Discontinued operations 129.3 230.4 _____ _____ 1,134.7 1,119.9 _____ _____ 2. Other operations comprise the Casting & Bandaging and Traditional Woundcare businesses, which will be contributed to the joint venture with Beiersdorf AG on 1 April 2001, and the Ear, Nose and Throat business, the intended disposal of which was announced on 2 November 2000. The joint venture will be accounted for under the gross equity method. 3. Discontinued operations comprise the results of the Consumer business and the first half year results of the Bracing business in 1999. Exceptional items of £9.7m in 1999 represent that element of manufacturing rationalisation costs which related to the Consumer business. Net profit on disposal represents the gain on sale of Consumer in 2000 and Bracing in 1999. 4. Operating exceptional items for continuing operations comprise costs of the manufacturing rationalisation programme begun in April 1999 of £12.9m (1999 - £24.3m) and acquisition integration costs of £3.4m (1999 £5.2m). In 1999 £6.5m was written off intangible assets relating to the Dermagraft joint arrangement and a £6.0m provision was taken against the group's equity investment in Advanced Tissue Sciences. 5. Taxation of £51.4m (1999 - £51.3m) arises on the profit before exceptional items, an effective rate of 30% (1999 - 30%). Taxation on the net gain on disposal is £8.0m (1999 - £35.5m) and tax relief of £3.2m (1999 - £9.5m) arises as a consequence of the exceptional costs of rationalisation and acquisition integration. 6. A final dividend of 2.8 pence per 122/9p ordinary share is recommended (1999 - 4.0 pence per 10p ordinary share) which, together with the interim dividend of 1.7 pence per share (1999 - 2.5 pence) paid on 6 December 2000, makes a total for the year of 4.5 pence (1999 - 6.5 pence). The final dividend is payable on 18 May 2001 to shareholders whose names appear on the register at the close of business on 20 April 2001. Shareholders may participate in the dividend re-investment plan. 7. The company reduced its capital structure through the return of £ 416 million of cash to shareholders by way of a special dividend of 37.14 pence per share together with a related consolidation of share capital, approved by shareholders at an extraordinary general meeting on 2 August 2000 whereby the company's ordinary share capital was consolidated into nine new ordinary shares of 122/9p for every eleven ordinary shares of 10p in issue. The special dividend was paid on 11 August 2000. At 31 December 2000, there were 919 million shares in issue. 8. The basic weighted average number of ordinary shares in issue was 1,034m (1999 -1,116m). The diluted weighted average number of ordinary shares was 1,040m (1999 - 1,119m). 9. Results before exceptional items state profit before taxation before charging the operating exceptional items outlined in Notes 1, 3 and 4 and the net profit on the disposal of discontinued operations. Adjusted basic earnings per ordinary share is based on the attributable profit for the year before charging these items and associated taxation thereon. 10. The movement in share capital and reserves comprises retained deficit for the year of £251.7m (1999 - profit of £32.3m), negative exchange movements of £9.9m (1999 - £4.0m) offset by new shares issued for options of £7.7m (1999 - £4.4m) and goodwill written back on disposals of £31.8m (1999 - £33.5m). 11. This financial statement does not constitute statutory accounts. It has been extracted from the statutory accounts of Smith & Nephew plc on which the auditors have given an unqualified report but which have not yet been filed with the Registrar of Companies. 15 February 2001

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