Interim Results
Smith & Nephew Plc
8 August 2000
2000 INTERIM RESULTS
RESHAPING STRATEGY DELIVERS RESULTS
Smith & Nephew, the global medical devices company, today announced its
interim results for the half year ending 1 July 2000. Highlights include:
- Group reshaping nears completion
- Successful disposal of consumer business
- Underlying sales growth 8%
- Margin improvement continues on track
- Pre-tax profit and EPS before exceptional items increase 8%
- Strong cash generation
Commenting, Dudley Eustace, Chairman, said: 'We are delivering the
improvements in results we promised 18 months ago and are on track to continue
to do so. The disposal of our consumer business has been successfully
achieved. Negotiations with Beiersdorf to create a significant medical
products joint venture and to purchase their advanced woundcare business are
progressing well. Smith & Nephew is nearing the completion of its
transformation into an advanced technology medical devices group, well
positioned to achieve higher rates of sales and profit growth.'
Enquiries:
Chris O'Donnell, Chief Executive Tel: +44 (0) 207 401 7646
Smith & Nephew plc Fax: +44 (0) 207 930 3426
Peter Hooley, Finance Director Tel: +44 (0) 207 401 7646
Smith & Nephew plc Fax: +44 (0) 207 930 3418
David Yates Tel: +44 (0) 207 831 3113
Financial Dynamics Fax: +44 (0) 207 831 6341
CHAIRMAN'S STATEMENT
The reshaping of Smith & Nephew has resulted in excellent progress for the
company in the first half of 2000. Sales growth has increased, recent
acquisitions are starting to contribute to growth and margin improvements are
coming through.
Trading results
Underlying sales growth was 8%. Excluding the consumer business, sales in our
continuing business of medical devices grew 7% in the first half of the year,
an improvement on the same period last year.
Reported sales of £592m, including the consumer business, were 3% ahead of
1999 reflecting the effect of disposals last year, partly offset by the impact
of acquisitions and currency.
Pre-tax profit before exceptional items was £91m, an 8% increase. Operating
margins have continued to improve with a 1% increase to 15.5%. This
improvement has come from the ongoing programme of cost and efficiency savings
and from the manufacturing rationalisation programme implemented in April
1999. Pricing was marginally positive. Exceptional items, being principally
the profit on disposal of the consumer business, increased reported pre-tax
profit by £82m to £173m.
Earnings per share, taxation and cash flow
The underlying tax charge remains at 30% such that earnings per share before
exceptional items were 5.72p, 8% higher than in 1999. Tax on exceptional
items amounted to a net charge of £4m.
Operating cash flow of £67m was significantly ahead of last year, and net cash
flow included £185m of the proceeds from the sale of the consumer business,
with £33m spent on acquisitions, principally the first stage payments on the
purchase of Collagenase. At the half year, the group closed with £147m of
cash balances, before payment of the £416m special dividend to be funded in
part out of newly arranged medium term bank facilities.
Strategy progress
At the end of June, we announced major steps towards the completion of the re-
shaping of our business. We have sold the consumer business, which
represented 17% of sales, for £235m to concentrate on our global medical
device businesses. As a result, our three main businesses of orthopaedics,
endoscopy and wound management, with their superior growth rates, represent
80% of continuing group sales. As previously announced, we are also
negotiating an intended joint venture with Beiersdorf into which we will
transfer our traditional woundcare range together with all our casting and
bandaging products to combine with Beiersdorf's casting, bandaging and
compression hosiery products. Negotiations for this, and for the purchase of
Beiersdorf's advanced woundcare business, are progressing well. The issues
involved to complete these transactions are complex, and no further
announcement should be expected until next month.
Dividends
We also announced in June that the group was to reorganise its capital
structure through the return of £416m of cash to shareholders by way of a
special dividend, together with a related consolidation of the company's share
capital into nine new shares for every eleven in issue. This was approved by
shareholders at an EGM held on 2 August. It was also announced that the Board
intends to adopt a dividend cover, on a per share basis, in the region of 2.5
times earnings for this year. This new dividend policy is being implemented
today with our announcement of an interim dividend of 1.70p per share (1999:
2.50p per share).
The special dividend of 37.14p per share is to be paid on 11 August 2000 to
all shareholders on the register at the close of business on 4 August 2000.
The shares were consolidated on 7 August 2000. The interim dividend will be
paid on 6 December 2000 to shareholders on the register at the close of
business on 10 November 2000. Shareholders may participate in the company's
dividend re-investment plan for the interim dividend only.
Operating review
Major businesses
Orthopaedic sales grew at an underlying 10%. Acquisitions augmented this to
17%. The strength of our new hip range combined with our successful knee
lines produced a 14% increase in sales performance of our implant range. We
believe that we are again leading growth and gaining share in this market.
Trauma sales grew at 3%. Growth in the second half is expected to improve
with the increased pace of the worldwide roll-out of TriGen, our major new
trauma nail range. Future growth will also be supported by our global
marketing agreement with eTrauma.com, a new web-based imaging and diagnostic
service for orthopaedic surgeons, and the extension of the Exogen ultrasound
treatment to hard to heal bone fractures.
Endoscopy sales grew at an underlying 7%. The promotion of our new Dyonics
Power shaver system affected sales of resection blades as we offered to swap
customers' old shaver blades for the new blades that are unique to the system,
leading to a reduction in first quarter sales. This programme is now
completed and we expect sales to increase in the second half. New product
launches will add further sales growth in the second half of the year; these
include added features for our camera and video systems and TriVex, our
innovative system for the surgical removal of varicose veins.
Wound management sales had an underlying 7% increase, despite a slower start
due to pre-Millennium stock-building in hospitals. Collagenase, the world
leading wound debriding product, was acquired in January this year and has
boosted sales growth by a further 6% for the wound management business in the
first half. The expanded sales force will benefit from Collagenase and line
extensions to the Allevyn range and underlying sales growth is expected to
improve in the second half. Enrolment in the pivotal clinical trial for
Dermagraft, for diabetic foot ulcer treatment, is now complete, and a Pre-
Market Approval application to the Food & Drug Administration in the US is
expected to be submitted by the end of the summer.
Other businesses
Rehabilitation sales grew by an underlying 6%, the business having
successfully overcome the effect of last year's reimbursement issues in the
US. Our casting and bandaging business had a solid start to the year with
sales growing at 4%. Ear, nose and throat products had a weaker start than in
1999 with sales down 7%.
Consumer closed with sales of £100m, an 11% underlying growth driven again by
Nivea. Profit margins were 13%.
E-commerce
We continue to use e-commerce to look for new, innovative and profitable ways
to grow our business. We have joined the Global Healthcare Exchange, an
important industry initiative to provide customers with a 'shop window' of
medical device products and simplify purchasing and contact with the company.
It will be available in the US later this year with a worldwide roll-out
starting in 2001.
Through the agreement with eTrauma.com we will market exclusively a new
facility to surgeons to diagnose and recommend treatment of orthopaedic
conditions whilst they are away from the hospital, through the use of remote
imaging technology for x-rays and other scans. This will enable patients to
be treated faster and more effectively.
eFast, our innovative web-based financing facilitation package, provides
hospitals with third party financing alternatives to purchase our endoscopy
visualisation equipment.
Outlook
The group is now wholly dedicated to medical devices which offer higher growth
opportunities. We remain on track to achieve our underlying EPS growth and
margin improvement goals by 2001. The disposal of the consumer business and
the accompanying capital restructuring is expected to cause a small dilution
to EPS in the first full year, and be accretive from 2002 onwards.
The capital restructuring improves the free cash flow of the group and is
intended to increase its combined debt and equity capabilities and set a
platform for accelerated growth.
We remain confident that improving sales trends will continue, product
launches will affect the second half favourably and the acquisitions of the
last twelve months will increase the sales growth 3% over the underlying rate
this year.
A successful completion of the negotiations with Beiersdorf will further
clarify our focus as an advanced technology medical devices group and increase
EPS growth potential into the future.
Unaudited Group Profit and Loss Account
for the Half Year Ended 1 July 2000
Year
1999 2000 1999
£m Notes £m £m
Turnover 1
Continuing and acquired
889.5 operations 492.1 444.8
230.4 Discontinued operations 2 100.1 131.2
_____ _____ _____
1,119.9 592.2 576.0
_____ _____ _____
Operating profit 1
Continuing and acquired
operations
- before exceptional
134.7 items 79.0 67.4
(42.0) - exceptional items* 3 (6.2) (14.3)
_____ _____ _____
92.7 72.8 53.1
Discontinued operations
- before exceptional
32.8 items 2 13.0 16.7
(9.7) - exceptional items* 3 - (2.9)
_____
115.8 85.8 66.9
Discontinued operations 88.3 63.6
62.9 - net profit on disposals* 2 _____ _____
_____
Profit on ordinary
activities before
178.7 interest 174.1 130.5
3.4 Interest (0.7) 0.6
_____ _____ _____
Profit on ordinary
activities before
182.1 taxation 173.4 131.1
77.3 Taxation 4 31.2 58.1
_____ _____ _____
104.8 Attributable profit 142.2 73.0
_____ _____ _____
Basic earnings per
9.39p ordinary share 7 12.72p 6.55p
Diluted earnings per
9.37p ordinary share 7 12.70p 6.54p
Results before
exceptional items (*) 8
£170.9m Profit before taxation £91.3m £84.7m
Adjusted basic earnings
10.72p per ordinary share 7 5.72p 5.32p
Cost of dividends
£72.5m Interim/final 6 £15.6m £27.8m
- Special dividend 5 £415.6m -
Abridged Group Balance Sheet as at 1 July 2000
Year
1999 2000 1999
£m £m £m
Fixed assets
74.0 Intangible assets 148.4 39.7
270.5 Tangible assets 240.8 284.9
16.6 Investments 15.4 25.2
_____ _____ _____
361.1 404.6 349.8
_____ _____ _____
Working capital
237.6 Stocks 244.2 251.2
281.1 Debtors 312.9 287.2
Creditors
- - special dividend (415.6) -
- - acquisition consideration (42.9) -
(312.4) - other (312.4) (311.9)
_____ _____ _____
206.3 (213.8) 226.5
_____ _____ _____
(38.0) Provisions (48.8) (43.5)
_____ _____ ______
529.4 142.0 532.8
_____
551.7 Share capital and reserves 288.5 561.7
(22.3) Net cash (146.5) (28.9)
_____ _____ ______
529.4 142.0 532.8
_____ _____ ______
Abridged Movement in Shareholders' Funds
for the Half Year Ended 1 July 2000
Year
1999 2000 1999
£m £m £m
485.5 Opening shareholders' funds 551.7 485.5
104.8 Attributable profit 142.2 73.0
Dividend
(72.5) - interim/final (15.6) (27.8)
- - special dividend (415.6) -
(4.0) Exchange adjustments (7.4) (4.1)
4.4 Issue of shares 1.4 1.6
33.5 Goodwill on disposals 31.8 33.5
_____ _____ _____
Closing shareholders'
551.7 funds 288.5 561.7
_____ _____ _____
Abridged Group Cash Flow for the Half Year Ended 1 July 2000
Year
1999 2000 1999
£m £m £m
115.8 Operating profit 85.8 66.9
56.1 Depreciation and amortisation 30.4 30.8
28.6 Exceptional asset write downs 1.1 -
(2.4) Working capital and provisions (30.0) (35.7)
_____ _____ _____
Net cash inflow from
198.1 operating activities* 87.3 62.0
Capital expenditure and
(65.1) financial investment (20.4) (28.9)
_____ _____ _____
133.0 Operating cash flow 66.9 33.1
3.4 Interest (paid)/received (0.7) 0.6
(60.1) Tax paid (21.4) (10.5)
(70.3) Equity dividends paid (44.7) (42.4)
(50.9) Acquisitions (32.6) (9.4)
121.8 Disposals 185.2 123.7
Issue of ordinary share
4.4 capital 1.4 1.6
______ ______ ______
81.3 Net cash inflow 154.1 96.7
______
(9.5) Exchange adjustments (29.9) (18.3)
(49.5) Opening net cash/(borrowings) 22.3 (49.5)
______ _____ _____
22.3 Closing net cash 146.5 28.9
______ _____ _____
* After £6.1m (1999 - £7.1m at the half year and £18.5m in the full year) of
outgoings on rationalisation programme and acquisition integration costs.
1. Segmental performance for the half year ended 1 July 2000 was as follows:
Year
1999 2000 1999
£m £m £m
Turnover by activity
889.5 Medical devices 492.1 444.8
230.4 Discontinued operations 100.1 131.2
_____ _____ _____
1,119.9 592.2 576.0
______ _____ _____
Operating profit by activity
92.7 Medical devices 72.8 53.1
23.1 Discontinued operations 13.0 13.8
_____ _____ _____
115.8 85.8 66.9
_____ _____ _____
Exceptional costs have been charged £6.2m to medical devices (1999 - £14.3m at
the half year and £42.0m in the full year). In 1999, £2.9m was charged to
discontinued operations at the half year and £9.7m in the full year.
Turnover by product
Year Underlying
1999 2000 1999 sales
£m £m £m growth
276.4 Orthopaedics 161.9 137.0 +10%
192.8 Endoscopy 104.8 98.0 +7%
230.8 Wound management 125.7 113.4 +7%
189.5 Casting, support and ENT 99.7 96.4 +3%
_____ _____ _____ _____
889.5 Medical devices 492.1 444.8 +7%
_____
230.4 Discontinued operations 100.1 131.2
_____ _____ _____
1,119.9 592.2 576.0
_____ _____ _____
Turnover by geographic market
Underlying
Year 2000 1999 Sales
1999 £m £m growth
£m
92.5 United Kingdom 44.7 43.8 +2%
202.4 Continental Europe 107.0 106.4 +9%
444.0 America 258.8 221.2 +8%
Africa, Asia and
150.6 Australasia 81.6 73.4 +5%
_____ _____ _____ _____
889.5 492.1 444.8 +7%
_____
230.4 Discontinued operations 100.1 131.2
_____ _____ _____
1,119.9 592.2 576.0
_____ _____ _____
Underlying growth is sales growth adjusted to eliminate the effect of
translational currency, acquisitions, disposals and the number of sales days
relative to those last year.
2. Discontinued operations comprise the results of the consumer business
disposed of in June 2000, for proceeds of £185m, and the bracing business
and the UK cotton wool business disposed of in 1999. A further £50m is
expected to be received in the remainder of the year (including released
working capital) in respect of the consumer business disposed of but for
which completion had not occurred at the half year. The profit on disposal
of the consumer business of £88m is stated after deducting £32m of goodwill
previously written off to reserves on acquisition. A further £20m of gain
on disposal is expected in the second half of the year in respect of the
disposal of the consumer business.
3. The operating exceptional item costs in the first half of 2000 comprise £5m
of costs of the manufacturing rationalisation programme that commenced in
April 1999 and £1m of integration costs relating to the acquisition of
Collagenase. The costs in the corresponding period of 1999 related to the
manufacturing rationalisation programme only. The operating exceptional
costs in the 1999 full year comprise expenditure on the manufacturing
rationalisation programme of £34m, £13m of provisions taken against fixed
asset investments and acquisition integration costs of £5m. The
discontinued exceptional items in the prior year represent the cost of the
manufacturing rationalisation programme relating to the consumer business.
4. The tax charge is based on an estimated effective rate of 30% on the full
year's results before exceptional items and includes £4m in respect of the
exceptional items. Of the total, £18m relates to overseas taxation.
5. The company is changing its capital structure through the return of £416m
of cash to shareholders by way of a special dividend of 37.14 pence per
share together with a related consolidation of share capital. The special
dividend is to be paid on 11 August 2000 to all shareholders on the
register at the close of business of 4 August 2000. On 2 August 2000 the
shareholders approved in an extraordinary general meeting to consolidate
the company's ordinary share capital by converting into nine new shares of
every 11 in issue.
6. An interim dividend of 1.70 pence per ordinary share (1999 - 2.50 pence per
ordinary share) will be paid on 6 December 2000 to all shareholders on the
register at the close of business on 10 November 2000. Shareholders may
participate in the dividend reinvestment plan for the interim dividend
only.
7. The basic average number of ordinary shares in issue was 1,118m (1999 -
1,115m). The diluted average number of ordinary shares in issue was 1,120m
(1999 - 1,117m). Following the consolidation of shares outlined in Note 5,
there will be 915m shares in issue, with the projected average number of
shares in issue for the full year being some 1,034m.
8. Results before exceptional items state profit before taxation before
charging the cost of operating and discontinued exceptional items outlined
in Note 3 and the net profit on the disposal of discontinued operations.
Adjusted earnings per ordinary share is based on the attributable profit
before charging these items and associated taxation thereon.
9. No statement of total recognised gains and losses has been presented as
there are no items of significance to be reported other than those in the
profit and loss account.
10.The interim financial information has been prepared on the basis of the
accounting policies set out in the full annual accounts of the group for
the year ended 31 December 1999.
11.The financial information for the year ended 31 December 1999 has been
extracted from the full annual accounts of the group which have been filed
with the Registrar of Companies. The auditors' report on those accounts
was unqualified.
Independent Review Report to Smith & Nephew plc
We have been instructed by the company to review the financial information set
out on pages 5 to 10 and we have read the other information contained in the
interim report and considered whether it contains any apparent misstatements
or material inconsistencies with the financial information.
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The Listing
Rules of the Financial Services Authority require that the accounting
policies and presentation applied to the interim figures should be
consistent with those applied in preparing the preceding annual accounts
except where any changes, and the reasons for them, are disclosed.
We conducted our review in accordance with guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board. A review consists principally
of making enquiries of group management and applying analytical
procedures to the financial information and underlying financial data and
based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an
audit performed in accordance with Auditing Standards and therefore
provides a lower level of assurance than an audit. Accordingly we do not
express an audit opinion on the financial information.
On the basis of our review we are not aware of any material modifications
that should be made to the financial information as presented for the half
year ended 1 July 2000.
Ernst & Young
London
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