Interim Results
Smith & Nephew Plc
31 July 2003
31 July 2003
Orthopaedics Drives Strong Performance at Smith & Nephew
Smith & Nephew plc, the global medical devices company, announces its interim
results for the half year ending 28 June 2003.
Key Points:
• Underlying sales growth 11%
• Margin targets again achieved
• EPS growth 11% before goodwill amortisation and exceptional items
• Excellent performance in Orthopaedics
• Outlook remains positive
Dudley Eustace, Chairman, said: 'Smith & Nephew continues to deliver a strong
performance in attractive long-term growth markets. We are particularly pleased
with the excellent results achieved by our Orthopaedics business, where our
innovative technologies enabled us once again to make market share gains. We
are confident that we can deliver sustainable sales growth and achieve our
financial targets.'
Enquiries
Peter Hooley, Finance Director Tel: +44 (0) 20 7401 7646
Smith & Nephew plc
Angie Craig, Corporate Affairs Director Tel: +44 (0) 20 7401 7646
Smith & Nephew plc
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 GMT today. The
meeting will be webcast live and will be available on demand shortly after the
close of the meetings at http://www.smith-nephew.com/interims.. The
presentation may also be heard by dialling +44 (0)20 7984 7569 (for Europe);
(913) 981 5507 (for US). The presentation can be found on our website:
http://www.smith-nephew.com/interims. High resolution photographs are available
to the media free of charge at www.newscast.co.uk.
Trading results
In the first half of 2003 Smith & Nephew continued to achieve double-digit
underlying sales growth and turned in a particularly strong performance in its
largest and fastest-growing business, Orthopaedics. Advanced Wound Management
and Endoscopy experienced a slower start to the year but both businesses have
gained momentum at the half year - a trend we expect to continue.
Underlying sales growth for the half-year was 11%, with an additional 1% of
sales arising from acquisitions, less 3% of adverse currency translation. This
growth was fuelled by the company's continued commitment to developing
innovative new products and techniques that help the surgeon and clinical
community get people back to their normal lives faster.
Among operational highlights in the first half, the Orthopaedics business formed
two separate divisions - Reconstructive Implants and Trauma. The Endoscopy
business completed the integration of the radio frequency business, ORATEC
Interventions, acquired last year. Advanced Wound Management integrated the
Dermagraft venture acquired from Advanced Tissue Sciences, Inc., ('ATS') at the
end of last year.
Profit before goodwill amortisation, exceptional items and tax amounted to £112m
for the half-year, a 10% increase over first half 2002. This comprised £103m of
operating profit before goodwill amortisation, £13m profit from our interests in
BSN Medical and AbilityOne, less £4m of interest costs.
EBITA margins before exceptional items were maintained at 17.9% despite the
increased cost of funding the pension deficit and the costs of Dermagraft,
following the acquisition of ATS's half share last year. These two expenses
impacted margins by 0.7% and 0.8% respectively.
Orthopaedics improved its operating margins by leveraging its sales growth
together with operational improvements. Endoscopy produced a substantial
improvement in its operating margins by accelerating the integration of ORATEC
and a focus on expense controls as sales growth slowed in the US. Wound
Management's margins were adversely impacted by the acquisition of the
additional half of the Dermagraft joint venture and a disproportionate share of
the increased pension funding.
EPS, tax, exceptional items and cash flow
After an ordinary tax charge of 29%, earnings per share before goodwill
amortisation and exceptional items were 8.59p, an increase on first half 2002 of
11%.
Exceptional costs of £5m were incurred in the half year, principally on
integrating Oratec's production and development facilities.
Operating cash flow was £53m, which is a profit to cash conversion ratio of 56%
before rationalisation and integration expenditure, compared to 49% a year ago.
Net debt closed at £289m.
Dividend
To conform with the terms of our offers for Centerpulse AG and InCentive Capital
AG, we have brought forward the record and payment date of our interim dividend.
An interim dividend of 1.85p per share (2002: 1.80p) will be paid on 12
September 2003 to shareholders on the register at the close of business on 15
August 2003. Shareholders may participate in the company's dividend
reinvestment plan.
Offers for Centerpulse and InCentive Capital
During the first half, we announced a recommended offer to combine our business
with that of Centerpulse AG, along with a parallel offer to acquire its largest
shareholder, InCentive Capital AG. Combining Smith & Nephew, one of the fastest
growing and most innovative medical devices companies, with Centerpulse, the
European leader, would create the world's No 3 orthopaedic implant company.
Zimmer Holdings Inc. has also made offers to acquire Centerpulse and InCentive
Capital, and the two companies' offers are running concurrently. Smith & Nephew
remains convinced it is the best partner for Centerpulse and its shareholders
and is currently reviewing its options.
Operating review
Orthopaedics
Orthopaedics sales rose by an underlying 16%, and its growth continued to be
among the best in the industry, with 26% of sales coming from new products. The
divisionalisation of the Orthopaedics business, announced earlier this year, is
progressing smoothly and has enabled us to take further advantage of the
opportunities within the reconstructive and trauma marketplaces. By the end of
the year, we will have in place a dedicated trauma sales force of more than 60
to focus on key trauma centres in the United States.
Reconstructive sales grew by an impressive 20% boosted by a strong performance
by Oxinium products, where we continue to take both knee and hip market share.
Knee sales are growing at 23% and hip sales 14%. Trauma sales grew 11% in the
first half driven by external fixation devices and the Exogen ultrasound bone
healing and TriGen nail products.
Response to our unique Oxinium range of products continues to be exceptional,
with the use of Oxinium components in the US reaching 36% penetration of our
sales in knees and 24% in hips, the latter only introduced in February. The
unicompartmental knee incorporating Oxinium is being introduced this week and we
are in the process of launching a dynamic direct-to-consumer marketing campaign
for Oxinium implants in the US.
We have also launched Accuris instrumentation for the unicompartmental knee, as
well as instrumentation for minimally invasive surgery for total knee
replacement. We continue to make progress in the area of computer assisted
surgery, and have partnered with GE Medical Systems to develop applications for
reconstructive and trauma surgeries.
Endoscopy
Strong sales growth of 14% outside the Americas allowed us to achieve underlying
sales growth of 5% in the first half of the year - despite flat sales in the US.
The acquisition of ORATEC last year added to this a further 5% of sales.
The resection blades business in the US has suffered a 4% sales decline in the
first half due to a rise in the number of hospitals using reprocessed blades.
Endoscopy sales to HealthSouth, both of consumables and capital equipment, were
also disrupted as a result of its financial difficulties. US blade sales will
continue to experience some pressure in the second half; however, new product
launches are expected to improve overall Endoscopy sales growth.
While there is already a high level of penetration in the US market for
arthroscopic knee surgery, shoulder arthroscopic procedures and overall business
growth outside the US remain robust. Our outstanding developments in cartilage
and ligament repair for both shoulders and knees continue to drive double digit
growth globally for these products.
Advanced Wound Management
Sales of Advanced Wound Management products grew an underlying 8%. The US grew
strongly despite production start up delays, which have now been overcome.
Europe had a slower start to the year, principally due to reimbursement changes
in Germany. We have now fully integrated the Dermagraft La Jolla, California,
facility into the business.
Our lead product Allevyn has again maintained strong sales growth of 18% and we
are expanding its production in the US. Sales of Acticoat, the silver-based
dressing, are up 50% and the product continues to gain acceptance globally. We
are encouraged by the first half performance of Dermagraft, our bioengineered
skin replacement for diabetic foot ulcers, as well as TransCyte, used to treat
burn patients. Reimbursement coverage for Dermagraft in the US is now virtually
complete.
BSN Medical
BSN again improved operating margins as the programme of manufacturing
rationalisation continues.
New corporate brand
Smith & Nephew is today introducing a new corporate brand, modernising the
previous identity which has been unchanged for over twenty years. The new brand
reflects the energy and vitality in today's Smith & Nephew that has come with
the transformation of the company over the past four years. Adoption of the new
Smith & Nephew brand identity throughout the group will result in heightened
visibility and awareness of the company in the marketplace and increase the
value of the Smith & Nephew brand.
Outlook
Smith & Nephew has again delivered a strong overall performance in attractive
long-term growth markets. Our margin improvement programmes continue to deliver
positive results.
Looking forward to the remainder of the year, we are confident that our
innovative product technologies will allow us to sustain our strong growth rate
in Orthopaedics. In Endoscopy, new product launches and stronger international
sales are expected increasingly to offset weakening sales in the US blades
market. Advanced Wound Management has the momentum to deliver improved growth
in the second half.
Management will continue to focus on its successful margin improvement
programmes and we remain on track to achieve our financial targets.
United States of America
The offer for Centerpulse shares is being made in the United States only through
a prospectus/offer to exchange, which is part of a registration statement filed
with the SEC by Smith & Nephew Group. Centerpulse shareholders who are US
persons or are located in the United States are urged to read the registration
statement, including the prospectus/offer to exchange included therein, and the
other documents filed, or to be filed, with the SEC by Smith & Nephew Group or
Centerpulse relating to the Centerpulse offer, because they contain important
information about the Centerpulse offer. You may obtain a free copy of these
documents from the SEC's Web site at www.sec.gov. You may also obtain this
information from Morrow & Co., Inc., the US information agent for the
Centerpulse offer, at (800) 607-0088, or by e-mail at
centerpulse.info@morrowco.com
SMITH & NEPHEW plc
2003 INTERIM RESULTS continued
Unaudited Group Profit and Loss Account
for the Half Year Ended 28 June 2003
Year Notes
2002 2003 2002
£m £m £m
Turnover 1
1,083.7 Continuing operations 577.3 531.9
26.2 Discontinued operations 2 - 26.2
______ ______ ______
1,109.9 Group turnover 577.3 558.1
155.0 Share of joint venture 81.0 79.3
______ ______ ______
1,264.9 658.3 637.4
______ ______ ______
Operating profit 1
Continuing operations
196.0 - before goodwill amortisation and exceptional 103.1 95.2
items
(17.5) - goodwill amortisation* (9.4) (8.1)
(29.9) - exceptional items* 3 (4.3) (15.3)
______ ______ ______
148.6 89.4 71.8
2.1 Discontinued operations 2 - 2.1
______ ______ ______
150.7 89.4 73.9
Share of operating profit of the joint venture
19.6 - before exceptional items 9.9 9.4
(2.6) - exceptional items* 4 (0.6) (1.3)
______ ______ ______
167.7 98.7 82.0
4.9 Share of operating profit of the associated undertaking 3.4 1.4
______ ______ ______
172.6 102.1 83.4
18.0 Discontinued operations - net profit on disposals* 2 - 19.0
______ ______ ______
190.6 Profit on ordinary activities before interest 102.1 102.4
(12.7) Interest payable 5 (4.0) (6.3)
______ ______ ______
177.9 Profit on ordinary activities before taxation 98.1 96.1
65.8 Taxation 6 30.9 45.5
______ ______ ______
112.1 Attributable profit 67.2 50.6
44.6 Ordinary dividends 7 17.2 16.7
______ ______ ______
67.5 Retained profit 50.0 33.9
______ ______ ______
12.11p Basic earnings per ordinary share 8 7.23p 5.46p
12.02p Diluted earnings per ordinary share 8 7.19p 5.42p
*Results before goodwill amortisation and exceptional items
£209.9m Profit before taxation 9 £112.4m £101.8m
16.02p Adjusted basic earnings per ordinary share 8 8.59p 7.76p
15.89p Adjusted diluted earnings per ordinary share 8 8.54p 7.71p
SMITH & NEPHEW plc
2003 INTERIM RESULTS continued
Abridged Group Balance Sheet as at 28 June 2003
Year 2002
2002 2003 Restated B
£m £m £m
317.2 Intangible assets 304.1 332.8
255.8 Tangible assets 259.5 248.9
115.0 Investment in joint venture A 120.9 112.4
8.5 Investment in associated undertaking 10.6 7.5
8.2 Investments 5.7 17.7
______ ______ ______
704.7 700.8 719.3
______ ______ ______
229.5 Stocks 241.4 241.6
280.7 Debtors 327.7 293.4
22.5 Cash 36.4 56.2
(315.9) Creditors (295.9) (333.5)
______ ______ ______
216.8 309.6 257.7
(316.1) Borrowings (348.7) (407.1)
(56.0) Provisions - deferred taxation (59.1) (54.8)
(32.1) - other (30.1) (37.2)
______ ______ ______
517.3 Shareholders' funds 572.5 477.9
______ ______ ______
A Investment in joint venture comprises goodwill £71.6 million,
share of gross tangible assets £109.5 million less share of gross liabilities
£60.2 million.
B Half year 2002 comparative figures have been restated for the
reclassification of currency swap assets and liabilities from cash and
borrowings to debtors and creditors respectively.
Abridged Movement in Shareholders' Funds
for the Half Year Ended 28 June 2003
Year
2002 2003 2002
£m £m £m
404.6 Opening shareholders' funds 517.3 404.6
112.1 Attributable profit 67.2 50.6
(44.6) Dividends (17.2) (16.7)
9.1 Exchange adjustments 2.9 6.0
30.0 Goodwill on disposals - 30.0
(2.3) Movements relating to the QUEST - (0.4)
8.4 Issue of shares 2.3 3.8
______ ______ ______
517.3 Closing shareholders' funds 572.5 477.9
______ ______ ______
SMITH & NEPHEW plc
2003 INTERIM RESULTS continued
Abridged Group Cash Flow for the Half Year Ended 28 June 2003
Year
2002 2003 2002
£m £m £m
150.7 Operating profit 89.4 73.9
94.4 Depreciation and amortisation C 37.2 43.9
(35.8) Working capital and provisions (44.7) (38.9)
______ ______ ______
209.3 Net cash inflow from operating activities D 81.9 78.9
(86.1) Capital expenditure and financial investment (29.2) (41.2)
______ ______ ______
123.2 Operating cash flow 52.7 37.7
3.9 Joint venture dividend 2.7 2.2
(10.2) Interest (2.6) (5.2)
(52.3) Taxation (23.3) (29.7)
(43.5) Dividends (27.9) (26.8)
(206.3) Acquisitions (3.6) (193.5)
- Centerpulse transaction costs (15.6) -
71.8 Disposals - 71.8
5.7 Joint venture formation - 5.7
6.1 Issues of ordinary share capital 2.3 3.4
______ ______ ______
(101.6) Net cash outflow (15.3) (134.4)
68.2 Exchange adjustments 3.7 27.8
(243.5) Opening net debt (276.9) (243.5)
______ ______ ______
(276.9) Closing net debt (288.5) (350.1)
______ ______ ______
54% Gearing 50% 73%
C Comparative figures include £8.0 million exceptional write-down of
the group's equity investment in Advanced Tissue Sciences, Inc. at the half year
and £17.5 million for full year 2002.
D After £5.3 million (£9.1 million at the half year and £19.3 million
for full year 2002) of outgoings on rationalisation, acquisition integration and
divestment costs.
Net debt includes £23.8 million of net currency swap assets (£0.8 million at the
half year and £16.7 million for full year 2002).
Statement of Total Recognised Gains and Losses
for the Half Year Ended 28 June 2003
Year
2002 2003 2002
£m £m £m
112.1 Attributable profit 67.2 50.6
Currency translation differences on foreign currency net
investments
9.1 2.9 6.0
______ ______ ______
121.2 Total recognised gains and losses 70.1 56.6
______ ______ ______
SMITH & NEPHEW plc
NOTES TO THE 2003 INTERIM RESULTS
1. Segmental performance for the half year ended 28 June 2003 was as
follows:
Group turnover by business segment
Year
2002 2003 2002 Underlying
£m £m £m sales growth
470.2 Orthopaedics 260.0 235.8 16%
291.8 Endoscopy 148.8 141.7 5%
321.7 Advanced Wound Management 168.5 154.4 8%
______ ______ ______ ______
1,083.7 Continuing operations 577.3 531.9 11%
______ ______ ______ ______
Group operating profit by business segment
Year
2002 2003 2002
£m £m £m
98.2 Orthopaedics 58.4 51.2
53.8 Endoscopy 27.9 21.4
44.0 Advanced Wound Management 16.8 22.6
______ ______ ______
196.0 103.1 95.2
(17.5) Goodwill amortisation (9.4) (8.1)
(29.9) Exceptional items (4.3) (15.3)
______ ______ ______
148.6 Continuing operations 89.4 71.8
______ ______ ______
Group turnover by geographic market
Year
2002 2003 2002 Underlying
£m £m £m sales growth
318.7 Europe* 182.0 155.6 9%
610.5 America 312.6 303.1 12%
154.5 Africa, Asia and Australasia 82.7 73.2 11%
______ ______ ______ ______
1,083.7 Continuing operations 577.3 531.9 11%
______ ______ ______ ______
* Includes United Kingdom sales of £46.2 million (£40.8 million at the half
year and £87.3 million for full year 2002).
Underlying sales growth is sales growth adjusted to eliminate the effects of
translational currency, acquisitions and disposals.
SMITH & NEPHEW plc
NOTES TO THE 2003 INTERIM RESULTS continued
2. Discontinued operations in 2002 represent the results and net profit on
disposal of the rehabilitation business to AbilityOne.
3. Operating exceptional items within continuing operations comprise £4.3
million of acquisition integration costs (2002 half year £4.2 million; full year
£8.4 million) and in half year 2002 £8.0 million write down against the group's
equity investment in Advanced Tissue Sciences, Inc. (full year £17.5 million)
and £3.1 million costs of rationalisation consequent on the contribution of
businesses to BSN Medical and manufacturing rationalisation (full year £4.0
million).
4. The group's share of exceptional items of the joint venture relates to
manufacturing rationalisation costs of BSN Medical.
5. Interest includes £0.9 million (2002 half year £0.8 million; full year
£1.6 million) in respect of the group's share of the net interest charge of BSN
Medical and £0.5 million (2002 half year £0.3 million; full year £0.9 million)
in respect of the group's share of the net interest charge of AbilityOne.
6. Taxation of £32.6 million (2002 half year £29.9 million; full year
£61.6 million) arises on the profit before goodwill amortisation and exceptional
items, an estimated effective rate of 29% on the full year's results before
exceptional items and goodwill amortisation and a credit of £1.7 million arises
in respect of the net exceptional items. Of the total, £32.3 million relates to
overseas taxation, £2.5 million relates to the group's share of the tax of BSN
Medical and £1.2 million relates to the group's share of the tax of AbilityOne.
7. An interim dividend of 1.85 pence per ordinary share (2002 - 1.80 pence
per ordinary share) will be paid on 12 September 2003 to all shareholders on the
register at the close of business on 15 August 2003. Shareholders may
participate in the dividend reinvestment plan.
8. The basic average number of ordinary shares in issue was 929 million
(2002 - 926 million). The diluted average number of ordinary shares in issue
was 934 million (2002 - 933 million).
9. Results before goodwill amortisation and exceptional items states
profit on ordinary activities before taxation before charging goodwill
amortisation and exceptional items and before the net profit on the disposal of
discontinued operations. Earnings per ordinary share before goodwill
amortisation and exceptional items is based on the attributable profit before
accounting for these items and taxation on the exceptional items.
10. On 23 June 2003 the 51/2% £1.00 cumulative preference shares in Smith &
Nephew plc were cancelled resulting in a reduction in share capital of £268,501.
In consideration, preference shareholders were paid £1.38 per share on 7 July
2003.
11. 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 2002. The financial information contained in this
interim statement does not constitute statutory accounts as defined in Section
240 of the Companies Act 1985.
12. The financial information for the year ended 31 December 2002 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.
13. In April 2003, Smith & Nephew made a public offer to purchase
Centerpulse AG, a listed medical devices company incorporated under the laws of
Switzerland, along with a parallel offer to acquire its largest shareholder,
InCentive Capital AG. In June 2003, Zimmer Holdings Inc. made counter offers to
purchase Centerpulse AG and InCentive Capital AG. The offers and counter offers
are still open. Until the offers are resolved transaction costs relating to the
offers to acquire Centerpulse AG and InCentive Capital AG will be included in
debtors. As at 28 June 2003 the amount was £15.6 million.
Independent Review Report to Smith & Nephew plc
Introduction
We have been instructed by the company to review the financial information for
the six months ended 28 June 2003 which comprises the Group Profit and Loss
Account, Abridged Group Balance Sheet, Abridged Movement in Shareholders' Funds,
Abridged Group Cash Flow Statement, Statement of Total Recognised Gains and
Losses and the related notes 1 to 13. 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.
This report is made solely to the company in accordance with guidance contained
in Bulletin 1999/4 'Review of interim financial information' issued by the
Auditing Practices Board. To the fullest extent permitted by the 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 report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which 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.
Review Work Performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
'Review of interim financial information' issued by the Auditing Practices Board
for use in the United Kingdom. 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 United Kingdom 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.
Review Conclusion
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 six months
ended 28 June 2003.
Ernst & Young LLP
London 31 July 2003
This information is provided by RNS
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