Final Results - Year Ended 31 December 1999

Smith & Nephew Plc 23 February 2000 1999 Preliminary Results Announcement Smith & Nephew plc announces its preliminary results for the year ended 31 December 1999. 1998 1999 Sales £1,053m £1,120m +6% Profit before tax and exceptionals £152m £171m +12% EPS before exceptionals 9.58p 10.72p +12% Dividend 6.2p 6.5p +5% Highlights - Significant improvements in group performance - Three-year reshaping plan on track to deliver financial targets - Main businesses strengthened by three product acquisitions - Global leadership now achieved in two of the three core businesses Commenting on the results, Smith & Nephew's Chairman, Dudley Eustace, said: 'The three year plan to reshape Smith & Nephew is clearly delivering a step- change in performance. Smith & Nephew is now positioned as a global leader in the medical device market whose growth is supported by demographic and lifestyle trends. 'Further benefits will be delivered from the rationalisation programme now well underway and we expect to generate good growth from the acquisitions made in 1999. Smith & Nephew is well positioned to achieve its financial targets this year.' Enquiries: Chris O'Donnell, Chief Executive Tel: +44 (0) 207 401 7646 Smith & Nephew plc Fax: +44 (0) 207 930 3418 Peter Hooley, Finance Director Tel: +44 (0) 207 401 7646 Smith & Nephew plc Fax: +44 (0) 207 930 3426 David Yates/Sophie Pender-Cudlip Tel: +44 (0) 207 831 3113 Financial Dynamics Fax: +44 (0) 207 831 6341 Trading results Key points - Underlying sales growth of 8%. - Pre-tax profits before exceptional items up 12%. - Continuing margin improvement. - Cash generation ahead by 33%. - Orthopaedics business growth accelerated to 11%. - EPS growth 12%. 1999 has seen a significant improvement in performance. Underlying sales growth increased to 8% in the year, compared with 5% last year. Reported sales were 6% ahead of 1998 reflecting the effects of disposals, acquisitions and currency. Pre-tax profit before exceptional items improved to £171m, a 12% increase. Operating margins have improved nearly 1% before 0.3% of transactional currency costs. This improvement has come from the ongoing programme of cost and efficiency savings and from the management and workforce restructuring programme implemented in the last quarter of 1998. Exceptional items increased reported pre-tax profits by £11m to £182m. Earnings per share, taxation and cash flow The underlying tax charge remains at 30% such that earnings per share before exceptional items were 10.72p, 12% higher than in 1998. Tax on exceptional items amounted to a net charge of £26m. Operating cash flow was very strong at £133m and was 33% ahead of last year. During 1999, we funded £18m of rationalisation and acquisition integration costs out of operating cash flow. Net cash flow benefited from the £122m proceeds of the bracing disposal. £42m was spent on acquisitions, principally that of Exogen, and £9m was paid for further Dermagraft rights. At the year- end we closed with £22m of net cash balances compared with a net debt position last year. With no gearing, the group's financial flexibility has never been stronger. Dividends The Board recommends a final dividend of 4.0p, making a total for the year of 6.5p, an increase of 5%. The dividend will be payable on 2 June 2000 to shareholders on the register at the close of business on 8 May 2000. Shareholders may participate in the company's dividend re-investment plan. Strategic update We have made good progress in implementing the three year strategic plan announced a year ago. The product portfolio has been strengthened with three product acquisitions and the divestment of the bracing business. New products in 1999 have increased the rate of sales growth in the main businesses, particularly with the orthopaedic business' new hip ranges. We aim to improve the new product flow further in 2000. The global business unit structure has been in place since the beginning of 1999. This more effective organisation, together with expanded sales teams in major markets, has driven sales growth. We are concentrating resources on fewer but higher value R&D projects to bring real innovation to the marketplace. The margin improvement achieved during the year positions the group well for the current year with further manufacturing rationalisation benefits to come through in 2001. The group's concentration on long term growth sectors in the medical device market provides a firm basis for achieving the goal of being first choice in our chosen markets. We continue to search for acquisitions both to add new products and technologies and to increase market presence of the major businesses. With a view to improving the group's presence in the US, we listed our shares on the New York Stock Exchange in November and have received an encouraging welcome from US investors. Operating review Major businesses Following the strategy of concentrating investment in the three main businesses, we are pleased that the progress in the orthopaedics, endoscopy and wound management businesses seen in the first half has continued in the second half of the year. Each of these businesses offers high potential for growth and the opportunity for the group to develop world-leading, global businesses. The increased emphasis on moving innovation rapidly from R&D programmes to the marketplace has increased the rate of new product launches. Market share increases were achieved both in wound management and in orthopaedics. The endoscopy business has maintained its position as world number one in arthroscopy. Orthopaedics Orthopaedics sales grew at an underlying 11% in the year, up from 6% in 1998. The US orthopaedics market has improved reflecting the rise in the number of hip and knee operations, particularly revision surgeries. By expanding the US sales force and accelerating the launch programmes of new hip products, we have taken advantage of improved market conditions. These products have provided surgeons with much simplified instrument sets leading to significant reductions in operating time. Globally hips grew by 23%, knees by 12% and trauma 4%. The excellence of our new hip range has been largely responsible for the very strong sales growth in this market during 1999. In 2000 we will see the benefit of a full year of sales from the new hip line in Japan and the Neer shoulder in Europe, both of which were acquired in the year. The mobile bearing option for the knee ranges will be rolled out around the world. Launch of the advanced TriGen nail system will significantly improve the group's product offering in the trauma market. We will also benefit from a full year of sales from the Exogen ultrasound bone healing device acquired in September and have now received Food & Drug Administration (FDA) approval for its use on non-union fractures. Endoscopy Endoscopy sales grew at an underlying 8% compared with 6% in 1998. Although slower in the US in the second half, the group's market leading arthroscopic systems for minimally invasive knee and shoulder surgery continued to show good growth at 13%. Sales of visualisation products were slower at 4% reflecting competitive conditions. In 2000 the flow of new products in arthroscopy will continue, and we will increase our offering in the wider field of endoscopy. Wound management Wound management increased its sales growth to an underlying 8% against 4% in 1998. Growth was again strong in the advanced woundcare range particularly for the treatment of hard to heal wounds such as venous leg ulcers and pressure sores, where sales increased 15%. Following the announcement of the interim results from the US clinical trial of Dermagraft, the human tissue diabetic foot ulcer treatment, we are working with the FDA on a plan to complete the trial. As a result of the delay in regulatory approval, we have agreed with Advanced Tissue Sciences to modify the milestone payments in respect of the joint venture. In January this year we acquired Collagenase, an enzyme which cleanses and removes dead tissue from chronic wounds and burns. As one of the three largest global woundcare products, it will provide a 20% step up in sales for the wound management business. It significantly increases the group's sales force in major markets including doubling the US sales force to make it the largest dedicated woundcare sales force. We are now clear number one in the global wound management market. The new product flow in wound management products benefits from a more focused and streamlined R&D organisation. Three new products, Sacral, Heel and LM, will be added to the Allevyn range of high performance hydrocellular dressings and will help drive further growth. Allevyn is now in the top five woundcare products worldwide. Other businesses We have targeted the other businesses with improving profitability and cash flow. Grouped together, the underlying sales growth of casting, support and ENT was up marginally, reflecting reimbursement issues in the group's rehabilitation markets. Margins and cash generation improved. The consumer healthcare business increased sales by 10% led by Nivea in the UK, Australia and Ireland where it is distributed on behalf of Beiersdorf. Geography Sales growth in Europe improved to an underlying 8% with the UK having the strongest growth for a number of years. In America, growth picked up to 7% despite US reimbursement issues for wound management and rehabilitation products. Sales growth in Africa, Asia and Australasia improved to 12% reflecting recovery in Asia and good performances in Australasia and South Africa. Manufacturing rationalisation As part of the group's commitment to improve margins, the programme to rationalise the manufacturing facilities worldwide and to concentrate production on fewer centres, is well under way. In wound management, casting & bandaging and consumer businesses, we are in the process of closing certain factories in Australia and Canada and opening a new manufacturing facility in Mexico. We have also ceased manufacture of orthopaedics products in France. We have provided £34m as an exceptional item and we expect the manufacturing rationalisation programme to produce cost and efficiency savings of £25m a year by 2002 with benefits starting to feed through already in 2000. We anticipate setting aside a further £24m over the next two years to complete the programme. Outlook We are particularly encouraged that the growth in sales and profit which we have seen in 1999 have been largely organic - a sure indication of a strong underlying business. Some key acquisitions have been made over the last 12 months and we continue to pursue acquisitions to strengthen the group's business portfolio. We are confident that we can build on the 1999 successes and achieve the targets for continued margin improvement and earnings per share growth. Dudley Eustace Chairman SMITH & NEPHEW plc 1999 PRELIMINARY RESULTS continued Group Profit and Loss Statement for the Year Ended 31 December 1999 1999 1998 Notes £m £m Turnover 1 Continuing operations 1,075.7 977.8 Discontinued operations 2 44.2 75.6 1,119.9 1,053.4 Operating profit 1 Continuing operations - before exceptional items 162.0 144.4 - exceptional items* 3 (51.7) (17.9) 110.3 126.5 Discontinued operations 2 5.5 9.7 115.8 136.2 Discontinued operations - net profit on disposal* 2 62.9 - Profit on ordinary activities before interest 178.7 136.2 Interest receivable/(payable) 3.4 (1.7) Profit on ordinary activities before taxation 182.1 134.5 Taxation 4 77.3 40.8 Attributable profit for the year 104.8 93.7 Dividends 5 72.5 69.2 Retained profit for the year 32.3 24.5 Basic earnings per ordinary share 6 9.39p 8.42p Diluted earnings per ordinary share 6 9.37p 8.40p Results before exceptional items (*) 7 Profit before taxation £170.9m £152.4m Adjusted basic earnings per ordinary share 10.72p 9.58p SMITH & NEPHEW plc 1999 PRELIMINARY RESULTS continued Abridged Group Balance Sheet as at 31 December 1999 1999 1998 £m £m Fixed assets Intangible fixed assets 74.0 28.3 Tangible fixed assets 270.5 291.7 Investments 16.6 14.4 361.1 334.4 Working capital Stocks 237.6 242.4 Debtors 281.1 278.6 Creditors (312.4) (289.0) 206.3 232.0 Provisions (38.0) (31.4) 529.4 535.0 Share capital and reserves (Note 8) 551.7 485.5 Net (cash)/borrowings (22.3) 49.5 529.4 535.0 Gearing nil 10% Abridged Group Cash Flow for the Year Ended 31 December 1999 1999 1998 £m £m Operating profit 115.8 136.2 Depreciation and amortisation 56.1 49.7 Exceptional asset write downs 28.6 - Working capital and provisions (2.4) (24.0) Net cash inflow from operating activities* 198.1 161.9 Capital investment net (65.1) (61.9) Operating cash flow 133.0 100.0 Interest 3.4 (1.7) Tax paid (60.1) (20.6) Dividends paid (70.3) (69.0) Acquisitions (50.9) (21.2) Disposals 121.8 4.8 Issues of ordinary share capital 4.4 3.0 Net cash flow 81.3 (4.7) Exchange adjustments (9.5) 1.8 Opening net borrowings (49.5) (46.6) Closing net cash/(borrowings) 22.3 (49.5) * After £18m (1998 - £10m) of outgoings on rationalisation programme and acquisition integration costs. SMITH & NEPHEW plc NOTES TO THE 1999 PRELIMINARY RESULTS 1. Performance Turnover Operating profit 1999 1998 1999 1998 £m £m £m £m By activity Medical devices 889.5 809.9 92.7 102.9 Consumer healthcare 186.2 167.9 17.6 23.6 1,075.7 977.8 110.3 126.5 Discontinued operations 44.2 75.6 5.5 9.7 1,119.9 1,053.4 115.8 136.2 Medical devices operating profit is stated after exceptional costs of £42.0m (1998 - £16.3m). Consumer healthcare operating profit is stated after exceptional costs of £9.7m (1998 - £1.6m). Underlying By product sales growth Orthopaedics 276.4 237.7 + 11% Endoscopy 192.8 173.9 + 8% Wound management 230.8 212.1 + 8% Casting, support and ENT 189.5 186.2 + 1% Medical devices 889.5 809.9 + 8% Consumer healthcare 186.2 167.9 + 10% 1,075.7 977.8 + 8% Discontinued operations 44.2 75.6 1,119.9 1,053.4 By geographic market United Kingdom 205.8 190.6 + 8% Continental Europe 212.4 204.7 + 8% America 459.3 414.5 + 7% Africa, Asia and Australasia 198.2 168.0 + 12% 1,075.7 977.8 + 8% Discontinued operations 44.2 75.6 1,119.9 1,053.4 SMITH & NEPHEW plc NOTES TO THE 1999 PRELIMINARY RESULTS continued 2. The discontinued operations comprise the results of the bracing business and the UK cotton wool business disposed of in 1999. 3. Operating exceptional items in 1999 comprise the cost of the manufacturing rationalisation begun in April 1999 of £34.0m, a £6.5m provision taken against the cost of intangibles relating to the Dermagraft joint arrangement, a £6.0m provision taken against the group's 8% equity investment in Advanced Tissue Sciences, and acquisition integration costs of £5.2m principally with respect to the Exogen business acquired in September 1999. The operating exceptional item in 1998 related to the programme of management and workforce restructuring implemented in that year. 4. Taxation comprises £51.3m of charge on the profit before exceptional items, an effective rate of 30% and a £26.0m charge on the net exceptional gain. The tax charge on the net exceptional gain comprises £35.5m of charge on the net gain on disposal, reduced by £9.5m as a consequence of the costs of rationalisation and acquisition integration. 5. A final dividend of 4.0 pence per 10p Ordinary Share is recommended which, together with the interim dividend of 2.5 pence per share paid on 8 December 1999, makes a total for the year of 6.5 pence. The final dividend is payable on 2 June 2000 to shareholders whose names appear on the register at the close of business on 8 May 2000. Shareholders may participate in the dividend re-investment plan. 6. The basic average number of ordinary shares in issue was 1,116m (1998 - 1,113m). The diluted average number of ordinary shares was 1,119m (1998 - 1,115m). 7. Results before exceptional items state profit before taxation before charging the operating exceptional items outlined in Note 3 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. 8. The increase in share capital and reserves comprises retained profit for the year of £32.3m, new shares issued of £4.4m and goodwill on disposals of £33.5m, offset by exchange movements of £4.0m. 9. This financial statement does not constitute statutory accounts. It has been extracted from the statutory accounts of Smith & Nephew plc on which the auditors gave an unqualified report but which have not yet been filed with the Registrar of Companies.

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