Final Results

Smith & Nephew Plc 7 February 2002 7 February 2002 Strong momentum provides sustainable growth Smith & Nephew plc, the global medical devices company, announces its preliminary results for the year ended 31 December 2001. Key Points - Underlying sales growth 13% - Acquisitions add a further 6% - Ongoing operating profit up 19% before exceptional items - EPS before exceptional items up 11% - underlying EPS up 15% - BSN Medical joint venture off to successful start - Continued investment in new products and sales forces for future growth Dudley Eustace, Chairman, said: 'The benefits of the Group's strategic restructuring became clearly evident in a strong performance during 2001. Our three main businesses performed well ahead of their markets and are now demonstrating the momentum to achieve sustainable future growth. We shall continue to invest in strengthening our sales forces, developing new products and expanding our manufacturing capacity and believe that we are well placed to achieve our mid-teens underlying EPS growth target.' Enquiries Chris O'Donnell, Chief Executive Tel: +44 (0) 20 7401 7646 Smith & Nephew plc Peter Hooley, Finance Director Tel: +44 (0) 20 7401 7646 Smith & Nephew plc Margaret Stewart, Group Director, Corporate Affairs Smith & Nephew plc Tel: +44 (0) 20 7401 7646 David Yates Tel: +44 (0) 20 7831 3113 Financial Dynamics 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 +44 (0)20 7831 3113 for details. The morning meeting will be webcast as will the tele-conference at 3pm on: http://www.smith-nephew.com/prelims Trading results In 2001 the results of our strategic restructuring became clearly evident, with strong growth achieved and a firm platform established for the future. Our three major global businesses, Orthopaedics, Endoscopy and Wound Management, all accelerated their sales and profit growth. BSN Medical, our joint venture with Beiersdorf, made a successful start following its formation on 1 April. We supplemented organic growth with two acquisitions - Beiersdorf's advanced wound management business and the antimicrobial woundcare business of Westaim Biomedical Corp. In mid-year we disposed of our ear, nose and throat (ENT) business. Sales in our ongoing businesses rose 21%, a strong performance with 13% from underlying sales growth, 6% from businesses acquired during the year and 2% from currency translation. Selling price increases accounted for approximately 1% of underlying sales growth. However, due to substantial divestments this year and last, our overall sales reduced by 5% to £1,082m. Profit before tax and exceptional items amounted to £171m. This comprises £171m of operating profit from ongoing operations, £4m profit of operations contributed to BSN Medical, and £13m share of operating profit from BSN Medical, less £17m of interest costs. Operating profit includes a benefit of £1m following the early adoption of FRS 19. The operating margin of the ongoing operations was 17%, a marginal decline on 2000. Underlying margin improvement was again in excess of 1% of sales, but this year was offset by divestment dissynergies and adverse transactional currency. EPS, tax, exceptional items and cash flow Earnings per share before exceptional items were 12.83p, an increase on 2000 of 11%. The adoption of FRS 19 increased the ordinary tax rate by 1% to 31% and the 2000 tax charge and EPS have been similarly restated. Adjusting for the dilutive effects of the disposals this and last year, and forming the BSN Medical joint venture, the underlying increase in earnings per share before exceptional items was 15%. Exceptional items comprise a £49m gain on the disposal of the ENT business and £26m of rationalisation, divestment and acquisition integration costs. The net exceptional gain was therefore £23m, increasing the profit before tax to £194m. Operating cash flow was £119m after £24m of net outgoings on rationalisation, divestment and acquisition integration, which is a profit to cash conversion ratio of 82% before these items. The proceeds of divestments were £62m from ENT, £13m net was received on the formation of the joint venture, acquisitions cost £69m and net debt closed at £244m. Dividends The Board recommends a final dividend of 2.90p which, together with the interim dividend of 1.75p, makes a total for the year of 4.65p. The dividend will be paid on 17 May 2002 to shareholders on the register at the close of business on 19 April 2002. Shareholders may participate in the company's dividend reinvestment plan. Operating review Our three main businesses all performed strongly and are demonstrating a real momentum. We have invested substantially in two essential growth drivers - a strong and experienced sales force, and new product development. During the year, we increased the sales force overall by 15% and launched significant new products in each business, many offering innovative features - new and longer lasting materials, faster healing rates, or less invasive procedures. Products launched or acquired in the past three years account for some 15% of our sales. To meet future sales growth, we commenced two significant projects to expand our manufacturing capacity. Orthopaedics is enlarging its manufacturing space in Memphis, Tennessee by around one third, and Endoscopy is increasing manufacturing space in two factories and moving its headquarters to new premises close to its facility in Andover, Massachusetts. We improved underlying margins, at the same time as we continued to invest in the sales force and product development. We aim to raise margins further through operational performance and product mix going forward. Our longer term research strategy focuses on key areas which we expect to benefit all of our businesses: these include bioresorbable materials to facilitate healing and surgical reconstruction; tissue engineering to help replace, repair and regenerate damaged tissue; and non-invasive devices to stimulate tissue repair. Orthopaedics Orthopaedic sales rose by an underlying 18%, significantly higher than the market average. Reconstructive implant sales grew 22%, boosted by surgeons' very positive response to our new oxidised zirconium knees, helping us maintain our position as the fastest-growing orthopaedic implant company. Trauma grew 12%, revitalised by the new TriGen nailing system. We obtained US reimbursement coding for Supartz, an injection to relieve joint pain. Endoscopy Endoscopy sales grew at an underlying 11%. The previous year's acquisition of shoulder specialist Orthopaedic Biosystems Ltd, Inc., brought total sales growth to 14%. Knee ligament repair was a key growth area, with sales up 15%. Some 15% of revenue came from new products. Significant innovations included a suture repair system for damaged meniscus, a radio frequency surgical cutting system and the first in a range of digital cameras to meet growing demand for information capture in the operating room. Advanced Wound Management In a year of significant change for the division, Wound Management became the world leader in advanced treatments for hard-to-heal wounds. Underlying sales growth was 11%. The sales base improved a further 18% from two acquisitions made in the year, Beiersdorf's advanced woundcare business and the Acticoat silver product for burns from Westaim. The more traditional woundcare business was transferred to the new BSN Medical joint venture with Beiersdorf. With our partner Advanced Tissue Sciences, we received FDA approval in the US for Dermagraft, our diabetic foot ulcer treatment, and a preliminary reimbursement coding which will become effective in 2002. Rehabilitation We set out a year ago to establish if our Rehabilitation business could be re-positioned to achieve the global status and higher sales growth expected of the businesses that form Smith & Nephew. Sales grew by an underlying 6% and progress was made in the newly targeted physiotherapy market. However, it is clear that we are not going to be able to grow this business at the pace and to the size required by the Group. The rehabilitation industry is consolidating, and we have received approaches expressing an interest in the business. We are therefore taking time to reconsider the future of Rehabilitation within the Smith & Nephew group. BSN Medical BSN Medical, our 50-50 joint venture with Beiersdorf came into operation in April 2001. Based in Hamburg, it is run independently of its parents. It has made a successful start, delivering sales of £247m and operating profits before exceptional items of £26m in 2001, and its rationalisation programme proceeds to plan. The divestment of some £8m of annualised sales to comply with EU competition conditions was agreed in January 2002 and is almost complete. Outlook Our chosen markets are strong and growing robustly. People are living longer and remaining more active and there is a growing demand for products that repair bone, dermal and soft tissue better and faster. We are well positioned to benefit from this demand by developing easier to use, more efficient products that bring noticeable benefits to patients and healthcare providers. We continue to invest in our businesses by increasing sales force strength, adding manufacturing capacity and enhancing new product development to generate vigorous organic growth. We will also acquire businesses or technologies which strengthen our long term prospects. We intend to maintain the momentum we have developed since completing our strategic restructuring and believe we are well placed to achieve our mid-teens underlying EPS growth target. Group Profit and Loss Account for the Year Ended 31 December 2001 2001 2000 Restated£ Notes £m £m Turnover 1 Ongoing operations 1,012.5 835.4 Operations contributed to the joint venture 2 35.3 138.6 _____ _____ Continuing operations 1,047.8 974.0 Discontinued operations 33.9 160.7 3 _____ _____ Group turnover 1,081.7 1,134.7 Share of joint venture 123.6 - _____ _____ 1,205.3 1,134.7 _____ _____ Operating profit 1 Ongoing operations - before exceptional items 171.0 143.9 - exceptional items* 4 (19.3) (7.7) _____ _____ 151.7 136.2 Operations contributed to the joint venture - before exceptional items 3.6 16.2 - exceptional items* 4 (1.8) (8.6) _____ _____ Continuing operations 153.5 143.8 Discontinued operations 3 0.5 18.9 _____ _____ 154.0 162.7 Share of operating profit of the joint venture - before exceptional items 12.8 - - exceptional items* 5 (5.0) - _____ _____ 161.8 162.7 Discontinued operations - net profit on disposals* 3 49.2 109.5 _____ _____ Profit on ordinary activities before interest 211.0 272.2 Interest payable 6 (17.4) (7.0) _____ _____ Profit on ordinary activities before taxation 193.6 265.2 Taxation 7 64.0 57.7 _____ _____ Attributable profit for the year 129.6 207.5 Dividends - ordinary 8 42.9 41.3 - special 9 - 415.6 _____ _____ Retained profit/(deficit) for the year 86.7 (249.4) _____ _____ Basic earnings per ordinary share 10 14.07p 20.07p Diluted earnings per ordinary share 10 13.95p 19.95p Results before exceptional items (*) 11 Profit before taxation £170.5m £172.0m Adjusted basic earnings per ordinary share 12.83p 11.52p Adjusted diluted earnings per ordinary share 12.72p 11.45p £ See Note 12 Abridged Group Balance Sheet as at 31 December 2001 Notes 2001 2000 Restated£ £m £m Fixed assets Intangible fixed assets 187.8 153.8 Tangible fixed assets 245.0 251.1 Investment in joint venture * 114.0 - _____ Investments 25.7 24.0 _____ _____ 572.5 428.9 _____ _____ Working capital Stocks 232.2 228.2 Debtors 263.2 281.0 Creditors - acquisition consideration (21.7) (40.6) - other (302.8) (289.7) _____ _____ 170.9 178.9 Provisions (95.3) (103.5) _____ _____ 648.1 504.3 _____ _____ Share capital and reserves 13 404.6 268.0 Net borrowings 243.5 236.3 _____ _____ 648.1 504.3 _____ _____ Gearing 60% 88% * Investment in joint venture comprises share of gross assets of £103.9m, goodwill £70.6m and loans £5.1m less share of gross liabilities £65.6m. Abridged Group Cash Flow for the Year Ended 31 December 2001 2000 2001 Restated£ £m £m Operating profit 154.0 162.7 Depreciation and amortisation ** 60.3 62.3 Working capital and provisions (22.4) (21.0) _____ _____ Net cash inflow from operating activities* 191.9 204.0 Capital investment net (72.6) (66.7) _____ _____ Operating cash flow 119.3 137.3 Interest (16.5) (7.0) Taxation (76.2) (46.5) Dividends (42.0) (475.9) Acquisitions (69.3) (51.1) Disposals 61.7 209.8 Joint venture formation 12.6 - Issues of ordinary share capital 9.0 7.7 _____ ____ Net cash outflow (1.4) (225.7) Exchange adjustments (5.8) (32.9) Opening net (borrowings)/cash (236.3) 22.3 _____ _____ Closing net borrowings (243.5) (236.3) _____ _____ ** Includes goodwill amortisation of £10.4m (2000 - £6.9m). * After £23.5m (2000 - £23.1m) of outgoings on rationalisation, acquisition integration and divestment costs. £ See Note 12. NOTES TO THE 2001 PRELIMINARY RESULTS 1. Performance Group Turnover Group Operating profit 2000 2000 2001 Restated 2001 Restated £m £m £m £m By activity Ongoing operations 1,012.5 835.4 151.7 136.2 Operations contributed to the joint venture 35.3 138.6 1.8 7.6 _____ _____ _____ _____ Continuing operations 1,047.8 974.0 153.5 143.8 Discontinued operations 33.9 160.7 0.5 18.9 _____ _____ _____ _____ 1,081.7 1,134.7 154.0 162.7 _____ _____ _____ _____ Group Turnover Underlying sales growth By product 2001 2000 £m Restated £m Orthopaedics 398.8 329.3 +18% Endoscopy 252.8 216.4 +11% Advanced Wound Management 285.6 221.5 +11% Rehabilitation 75.3 68.2 +6% _____ _____ _____ Ongoing operations 1,012.5 835.4 +13% ______ _____ _____ By geographic market Europe* 289.2 230.4 +12% America 580.6 460.6 +13% Africa, Asia and Australasia 142.7 144.4 +17% _____ _____ _____ Ongoing operations 1,012.5 835.4 +13% ______ ______ _____ * Includes United Kingdom sales of £91.2m (2000 - £73.4m) Turnover and profits for the year 2000 have been restated for FRS 19 (Note 12) and to reflect the final outcome of the Joint Venture Agreement whereby Smith & Nephew retained distribution of BSN Medical products in certain countries. Underlying sales growth is sales growth adjusted to eliminate the effect of translational currency, acquisitions and disposals. 2. On 1 April 2001, the casting and bandaging and traditional woundcare businesses were contributed to a joint venture with Beiersdorf AG called BSN Medical in return for a 50% equity interest. The transaction has been accounted for in accordance with UITF 31. The results of these businesses prior to contribution represent operations contributed to the joint venture. 3. Discontinued operations comprise the results and net profit on disposal of the ear, nose and throat business disposed of in June 2001 for net proceeds of £61.7m. Discontinued operations in 2000 represent the results and net profit on disposal of the Consumer business. 4. Operating exceptional items within ongoing operations comprise the costs of manufacturing rationalisation, £2.9m; rationalisation consequent on the contribution of businesses to BSN Medical, £7.5m; and integration in connection with the acquisition of the Advanced Woundcare business from Beiersdorf AG, £8.9m. The items in 2000 comprised expenditure on the manufacturing rationalisation programme of £4.3m and acquisition integration expenditure of £3.4m. Operating exceptional items within operations contributed to the joint venture represent manufacturing rationalisation costs of operations subsequently contributed to BSN Medical. 5. The group's share of exceptional items of the joint venture relates to manufacturing rationalisation costs of BSN Medical. 6. Interest includes £0.9m (2000 - nil) in respect of the group's share of the net interest charge of BSN Medical. 7. Taxation of £52.3m (2000 restated - £52.9m) arises on the profit before exceptional items, an effective rate of 31% (2000 restated - 31%) of which £3.9m arises in BSN Medical. Taxation on the net gain on disposal is £17.7m (2000 restated - £8.0m) and tax relief of £6.0m (2000 restated - £3.2m) arises as a consequence of the exceptional costs of rationalisation and acquisition integration of which £1.4m is in BSN Medical. 8. A final dividend of 2.9 pence per ordinary share is recommended (2000 - 2.8 pence per ordinary share) which, together with the interim dividend of 1.75 pence per share (2000 - 1.7 pence) paid on 5 December 2001, makes a total for the year of 4.65 pence (2000 - 4.5 pence). The final dividend is payable on 17 May 2002 to shareholders whose names appear on the register at the close of business on 19 April 2002. Shareholders may participate in the dividend re-investment plan. 9. In 2000, the company changed its capital structure through the return of £415.6m of cash to shareholders by way of a special dividend of 37.14 pence per share together with a related consolidation of ordinary share capital by conversion into 9 new shares of 122/9p for every 11 old 10p shares in issue. No adjustment has been made to comparative data in respect of the share consolidation as, together with the special dividend payment, the overall effect was that of a share repurchase at fair value. 10. The basic weighted average number of ordinary shares in issue was 921m (2000 -1,034m). The diluted weighted average number of ordinary shares was 929m (2000 - 1,040m). 11. Results before exceptional items state profit before taxation before charging the cost of exceptional items 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 accounting for these items and associated taxation thereon. 12. FRS 19 has been adopted in the 2001 results and comparative figures have been restated accordingly. As a result of the restatement, 2000 operating profits increased by £0.6m due to lower goodwill amortisation, the ordinary taxation charge increased by £1.5m and the net profit on disposal increased by £3.2m. Basic earnings per share increased by 0.22 pence and adjusted basic earnings per share decreased by 0.09 pence. As a result of the restatement in the 2000 balance sheet reserves are lower by £61.6m, goodwill is lower by £9.2m and the net deferred tax liability is higher by £52.4m. Debtors are £3.2m and provisions £55.6m higher respectively as a result of the deferred tax restatement. 13. Abridged Movement in Shareholders' Funds 2000 2001 Restated £m £m Opening shareholders' funds 268.0 551.7 FRS 19 adjustments as at 1 January 2000 - (60.9) Retained profit/(deficit) for the year 86.7 (249.4) Exchange adjustments (8.8) (12.9) Issue of shares 9.0 7.7 Joint venture formation 49.7 - Goodwill on disposals - 31.8 _____ _____ Closing shareholders' funds 404.6 268.0 _____ _____ 14. This financial statement does not constitute the 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. 7 February 2002 This information is provided by RNS The company news service from the London Stock Exchange

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