LONDON, UK, Nov. 4, 2004 (PRIMEZONE) -- Smith & Nephew - Strong Third Quarter
4 November 2004
Smith & Nephew plc (LSE:SN) (NYSE:SNN), the global medical technology business, today announces its results for the third quarter ended 2 October 2004.
Q3 Highlights
- Group sales up 12% - Orthopaedics global sales up 19% - US sales up 23% - Endoscopy momentum sustained - sales up 8% - Wound Management - sales up 6% as US works through product switch - Operating margins improve to 19.4% - Earnings per share up 15% to 4.99p
All sales increases given above are underlying which excludes the effects of currency translation and the acquisition of Midland Medical Technologies ("MMT").
Earnings per share are stated before goodwill amortisation and exceptional items.
Commenting on the quarter's results and the outlook for the year, Sir Christopher O'Donnell, Chief Executive, said:
"Our sales growth stepped up in the third quarter. Orthopaedics sales growth was particularly strong in the US where we continue to take market share. Our Endoscopy and Advanced Wound Management divisions both improved their growth rates. We are on track to meet our underlying mid-teens EPSA growth target this year."
A conference call for analysts to discuss the company's third quarter results will be held at 1.30pm GMT/8.30am EST today. This will be broadcast live on the web and will be available on demand shortly following the close of the conference call at http://www.smith-nephew.com/Q304. If interested parties are unable to connect to the web, a listen-only service is available by calling 020 8974 7900 in the UK or 1 866 804 8688 in the US and entering the passcode C869752.
Analysts should contact Julie Allen on +44 (0) 20 7401 7646 or via email at julie.allen@smith-nephew.com for conference call details.
Third Quarter Results
Third quarter performance saw group sales return to double digit underlying growth of 12%, making 11% for the year to date, and margins improve to 19.4% from 17.6% in the same quarter last year. Reported sales in the third quarter were reduced by 8% due to translational currency and benefited by 2% from the acquisition of Midland Medical Technologies ('MMT'), resulting in reported growth of 6%.
Profit before goodwill amortisation, exceptional items and tax was GBP66m, a 15% increase over the third quarter last year. Adjusted earnings per share before goodwill amortisation and exceptional items for the quarter were 4.99p, an increase of 15% compared to the same quarter last year.
In order to provide a consistent measure of sales growth, references in the following business review refer to underlying sales. Underlying sales excludes the effects of currency translation, the acquisition of MMT and, in the 9 months results, the effect of extra sales days in the first quarter.
Orthopaedics
Orthopaedics gained market share in the third quarter, especially in hips and knees in the US. Overall sales growth was 19%, comprising 23% in the US and 10% outside the US.
In reconstruction, knee sales increased by 22% (25% in the US and 16% outside the US) and hip sales by 15% (14% in the US and 17% outside the US). Sales growth has been driven by continuing strong market conditions, particularly in the US, the expansion of our sales force and acceptance of our Minimal Incision Surgery ('MIS') procedures. Sales of the MMT hip resurfacing product, which was acquired in March this year and is sold in Europe and Australia, added 5% to Orthopaedic sales in the quarter. Sales pricing in reconstruction and trauma increased by approximately 3% in the US.
Trauma sales benefited from the substantial investment in the dedicated US sales force achieving a sales increase of 13%, (18% in the US and 5% outside the US). Clinical Therapy sales also benefited from increased sales force investment in the quarter, growing by an outstanding 49% compared with the same quarter last year.
The number of revisions of the macrotextured knee product withdrawn from the market in August 2003 was 640 as of 29 October, 22% of the total implanted. We have reached mutually satisfactory settlements with more than half the patients revised and continue to believe the withdrawal of this product remains manageable.
Endoscopy
The Endoscopy division sustained its momentum, achieving 8% sales growth in the quarter, 6% in the US and 10% outside the US.
The new progressive scan camera system increased visualisation sales by 23% in the quarter. Repair product sales grew by 13%, led by shoulder fixation. Radio frequency products were impacted by the injunction on US sales in the ongoing patent dispute with a competitor, and declined by 6%. The re-use of blades does not appear to be increasing and blade sales grew by 1%.
Advanced Wound Management
The Advanced Wound Management division generated underlying sales growth of 6%, both inside and outside the US. This improvement in growth in the US reflects the reducing impact of the switch in enzyme debrider products. Sales growth, in the US, excluding enzyme debriders was 15%. Outside the US, healthcare reforms in Europe, particularly Germany, adversely impacted growth in the quarter.
ACTICOAT() antimicrobial dressings again made substantial progress with sales growing by 40%, and ALLEVYN() dressings and DERMAGRAFT() dermal replacement also saw good sales growth of 10% and 19% respectively.
9 Months Results
Underlying sales growth in the 9 months to date was 11%. Reported sales benefited by 1% from extra sales days in the first quarter and 2% from the acquisition of MMT in March, but adverse translational currency reduced reported sales by 8%. Reported group sales were consequently up 6% to GBP916m.
Profit before goodwill amortisation, exceptional items and tax was GBP195m, a 15% increase over the same 9 months of 2003. The operating profit margin before exceptional items improved to 19.2% from 17.8%. Profit before taxation and after goodwill amortisation and exceptional items increased by 10% to GBP180m.
After a tax charge of 29%, adjusted earnings per share before goodwill amortisation and exceptional items were 14.81p (74.05p per ADS) for the 9 months, an increase of 14% compared to the same period last year. Basic unadjusted earnings per share were 13.18p (65.90p per ADS).
Operating cash flow was GBP80m, which is an operating profit to cash conversion ratio of 46%, before rationalisation and integration expenditure of GBP2m, compared to 76% last year. This reflects the build-up of inventory and instruments at Orthopaedics to fuel its increased growth, together with insurance receivables in respect of settled macrotextured claims. The Group's net debt of GBP162m, includes GBP69m of acquisition cost for MMT.
Had our 9 months results been reported in US dollars translated at average rates of exchange ($1.82 in 2004, $1.61 in 2003), reported group sales and earnings per ADS before goodwill amortisation and exceptional items would have been as follows:
Reported Group Sales $1.7bn +19% Earnings per ADS $1.35 +29%
International Financial Reporting Standards
International Financial Reporting Standards ("IFRS") will apply from 2005 onwards. Smith & Nephew will give a webcast presentation and teleconference on 17 November on the application of IFRS and will provide pro-forma statements, on a quarterly basis, for 2003 and 2004 together with EBITA, PBTA and EPSA information under IFRS. Our preliminary results for 2004, will also include a quantification of the application of IFRS on those results.
Outlook
In the last quarter we expect to deliver strong growth, capitalising on our recent investment in sales forces and new products. Market fundamentals continue to be favourable. We expect both Orthopaedics and Endoscopy to benefit from a seasonally stronger last quarter.
We have strong momentum going into 2005, which should see us achieving high teens sales growth at Orthopaedics and high single digit growth at Endoscopy and Wound Management next year. We also plan further margin improvements. We are thus well placed to sustain our underlying mid-teens EPSA growth target from this year into next.
About us
Smith & Nephew is a global medical technology business, specialising in Orthopaedics, Endoscopy and Advanced Wound Management products. Smith & Nephew leads the world in arthroscopy and advanced wound management and is one of the fastest growing global orthopaedics companies.
Smith & Nephew is dedicated to helping improve people's lives. The company prides itself on the strength of its relationships with its surgeons and professional healthcare customers, with whom its name is synonymous with high standards of performance, innovation and trust. The company has over 8,000 employees and operates in 32 countries around the world generating annual sales of nearly GBP1.2 billion.
Forward-Looking Statements
This press release contains certain "forward-looking statements" within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding planned growth in our business and in our operating margins discussed under "Outlook" are forward-looking statements. These statements, as well as the phrases "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions, are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20F, for a discussion of certain of these factors.
All forward-looking statements in this press release are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
() Trademark of Smith & Nephew. Certain names registered at the US Patent and Trademark Office.
Unaudited Group Profit and Loss Account
For the 3 Months and 9 Months to 2 October 2004
3 Months 3 Months 9 Months 9 Months
2003 2004 Notes 2004 2003
GBPm GBPm GBPm GBPm
330.2 349.0 Turnover 1,040.3 988.5
including
share of
joint venture
(41.3) (41.9) Share of (124.0) (122.3)
joint venture
_____ _____ _____ _____
288.9 307.1 Group 1 916.3 866.2
turnover from
continuing
operations
(86.4) (81.1) Cost of sales (246.4) (258.6)
(135.0) (149.7) Selling, (445.0) (405.1)
general and
administrative
expenses
(16.6) (16.8) Research and (49.4) (48.5)
development
expenses
_____ _____ _____ _____
50.9 59.5 Operating 175.5 154.0
profit before
goodwill
amortisation
and
exceptional
items
(4.6) (5.5) Goodwill (15.3) (14.0)
amortisation *
(17.6) - Exceptional 2 - (21.9)
items *
_____ _____ _____ _____
28.7 54.0 Group 1 160.2 118.1
operating
profit from
continuing
operations
6.6 6.2 Share of 17.5 16.5
operating
profit of the
joint venture
before
exceptional
items
(1.2) - Share of 4 - (1.8)
joint venture
exceptional
items *
______ _____ ______ _____
34.1 60.2 177.7 132.8
1.4 - Share of - 4.8
operating
profit of
associated
undertaking
31.5 - Net profit 3 - 31.5
on disposal
of associated
undertaking *
_____ _____ _____ _____
67.0 60.2 Profit on 177.7 169.1
ordinary
activities
before
interest
(1.7) 0.1 Interest 5 2.0 (5.7)
_____ _____ _____ _____
65.3 60.3 Profit on 179.7 163.4
ordinary
activities
before
taxation
(30.7) (19.0) Taxation 6 (56.5) (61.6)
_____ _____ _____ _____
34.6 41.3 Attributable 123.2 101.8
profit
- - Ordinary 7 (17.8) (17.2)
dividends
_____ _____ _____ _____
34.6 41.3 Retained 105.4 84.6
profit
_____ _____ _____ _____
3.72p 4.41p Basic 8 13.18p 10.95p
earnings per
ordinary
share
3.70p 4.40p Diluted 8 13.11p 10.89p
earnings per
ordinary
share
*Results
before
goodwill
amortisation
and
exceptional
items
GBP57.2m GBP65.8m Profit before 9 GBP195.0m GBP169.6m
taxation
4.35p 4.99p Adjusted 9 14.81p 12.94p
basic
earnings per
ordinary
share
4.33p 4.98p Adjusted 9 14.73p 12.87p
diluted
earnings per
ordinary
share
Unaudited Abridged Group Balance Sheet as at 2 October 2004
2 October 27 September
2004 2003
GBPm GBPm
Intangible assets 343.3 289.6
Tangible assets 277.8 260.8
Investment in joint venture A 125.2 123.3
Investments 5.3 4.8
_____ _____
751.6 678.5
_____ _____
Stock 291.6 242.3
Debtors 334.2 295.3
Cash 39.3 43.4
Creditors (352.3) (286.7)
_____ _____
312.8 294.3
Borrowings (216.9) (276.5)
Provisions
- deferred tax (69.7) (51.6)
- other (25.4) (27.9)
_____ _____
Shareholders' funds 752.4 616.8
_____ _____
A Investment in joint venture comprises goodwill GBP69.9 million,
share of gross assets GBP119.2 million less share of gross
liabilities GBP63.9 million.
Unaudited Abridged Movement in Shareholders' Funds
For the 9 Months to 2 October 2004
9 months 9 months
2004 2003
GBPm GBPm
Opening shareholders' funds as at 1 640.8 516.9
January
Attributable profit B 123.2 101.8
Dividends (17.8) (17.2)
Exchange adjustments B 1.8 1.2
Goodwill on disposals - 8.2
Share based expense recognised in the 1.4 1.2
profit and loss account
Cost of own shares purchased (2.4) -
Issues of shares 5.4 4.7
_____ _____
Closing shareholders' funds 752.4 616.8
_____ _____
B These items are the only components of the statement of total
recognised gains and losses.
Unaudited Abridged Group Cash Flow to 2 October 2004
3 Months 3 Months 9 Months 9 Months
2003 2004 2004 2003
GBPm GBPm GBPm GBPm
28.7 54.0 Operating profit 160.2 118.1
20.2 20.6 Depreciation and 58.4 57.4
amortisation
19.9 (15.7) Working capital (71.2) (40.4)
and provisions
_____ _____ _____ _____
68.8 58.9 Net cash inflow 147.4 135.1
from operating
activities C
(15.0) (24.1) Capital (67.9) (44.2)
expenditure and
financial
investment
_____ ______ _____ _____
53.8 34.8 Operating cash 79.5 90.9
flow
- - Joint venture 5.9 2.7
dividend
(1.2) 0.5 Interest 3.0 (3.8)
(12.5) (9.2) Taxation (24.9) (35.8)
(17.2) - Dividends (28.9) (45.1)
(0.3) (0.9) Acquisitions (77.8) (3.9)
52.4 - Disposals - 52.4
- - Own shares (2.4) -
purchased
2.4 1.2 Issue of shares 5.4 4.7
_____ _____ _____ _____
77.4 26.4 Net cash flow (40.2) 62.1
0.3 (15.0) Exchange 5.7 4.0
adjustments
(288.5) (173.0) Opening net (127.1) (276.9)
borrowings
_____ _____ _____ _____
(210.8) (161.6) Closing net (161.6) (210.8)
borrowings
_____ _____ _____ _____
Gearing 21% 34%
C After GBP2.0 million of outgoings on rationalisation, acquisition
integration and divestment costs in the 9 months (2003 - GBP8.3
million) and in 2003 GBP17.6 million on Centerpulse transaction
costs.
Net borrowings includes GBP16.0 million of net currency swap assets (2003 - GBP22.3 million net currency swap assets).
NOTES TO THE 2004 QUARTER THREE RESULTS
1. Segmental performance to 2 October 2004 was as follows:
3 3 9 9 Underlying growth
Months Months Months Months in sales
2003 2004 2004 2003 %
GBPm GBPm GBPm GBPm
3 months 9 months
Group
turnover by
business
segment
126.5 144.5 Orthopaedics 431.8 386.5 19 17
72.2 72.0 Endoscopy 222.1 221.0 8 8
90.2 90.6 Advanced 262.4 258.7 6 5
Wound
Management
_____ ____ _____ _____ _____ _____
288.9 307.1 916.3 866.2 12 11
_____ _____ _____ _____ _____ _____
Group
operating
profit by
business
segment
25.4 32.3 Orthopaedics 98.4 83.8
13.1 13.1 Endoscopy 41.7 41.0
12.4 14.1 Advanced 35.4 29.2
Wound
Management
_____ _____ _____ _____
50.9 59.5 175.5 154.0
(4.6) (5.5) Goodwill (15.3) (14.0)
amortisation
(17.6) - Exceptional - (21.9)
items
_____ _____ _____ _____
28.7 54.0 160.2 118.1
_____ _____ _____ _____
Group
turnover by
geographic
market
88.0 97.5 Europe D 301.1 270.0 7 8
146.6 151.4 United 448.2 442.1 15 13
States
54.3 58.2 Africa, 167.0 154.1 11 11
Asia,
Australasia
& other
America
_____ _____ _____ _____ _____ _____
288.9 307.1 916.3 866.2 12 11
_____ _____ _____ _____ _____ _____
D Includes United Kingdom 9 month sales of GBP94.8 million (2003 -
GBP71.0 million) and 3 month sales of GBP32.9 million (2003 -
GBP24.8 million).
Underlying sales growth is calculated by eliminating the effects of translational currency, acquisition of MMT and extra sales days. Reported growth in sales by business segment reconciles to underlying growth in sales for the 9 months and three months is as follows:
Reported Foreign Acquisitions Sales Underlying
growth currency effect days growth in
in translation effect sales
sales effect
% % % % %
9 Months
Orthopaedics 12 10 (4) (1) 17
Endoscopy - 9 - (1) 8
Advanced 1 5 - (1) 5
Wound
Management
_____ _____ _____ _____ _____
6 8 (2) (1) 11
_____ _____ _____ _____ _____
3 Months
Orthopaedics 14 10 (5) - 19
Endoscopy - 8 - - 8
Advanced - 6 - - 6
Wound
Management
_____ _____ _____ _____ _____
6 8 (2) - 12
_____ _____ _____ _____ _____
2. Operating exceptional items in 2003 comprised GBP17.6 million of
costs, net of a break fee of GBP10.8 million, written off as a
consequence of the unsuccessful public offers to purchase
Centerpulse AG and Incentive Capital AG and GBP4.3 million of
acquisition integration costs.
3. On 12 September 2003, the associated undertaking in AbilityOne was
disposed of to Patterson Dental Inc. for GBP52.4 million cash. The
net profit on disposal of GBP31.5 million was stated after
deducting GBP8.2 million of acquisition goodwill previously set-
off against reserves and GBP1.1 million of adjustments in respect
of previous disposals.
4. The group's share of exceptional items of the joint venture in
2003 related to manufacturing rationalisation costs of BSN
Medical.
5. Interest receivable for the 9 months is after charging GBP1.0
million (2003 - GBP1.2 million) in respect of the group's share of
the net interest of BSN Medical and in 2003 GBP0.7 million in
respect of the group's share of the net interest of AbilityOne.
6. Taxation on the profit before goodwill amortisation and
exceptional items, is at the full year estimated effective rate of
29% (2003 - 29%). For the 9 months GBP5.1 million (2003 - GBP4.8
million) arises in BSN Medical and in 2003 GBP1.3 million arose in
AbilityOne and a tax charge of GBP12.3 million arose as a
consequence of the net exceptional items.
7. An interim dividend of 1.90 pence per ordinary share (2003 - 1.85
pence per ordinary share) was declared on 5 August 2004 and will
be paid on 12 November 2004 to all shareholders on the register at
the close of business on 22 October 2004.
8. The basic average number of ordinary shares in issue was 935
million (2003 - 929 million). The diluted average number of
ordinary shares in issue was 940 million (2003 - 935 million).
9. Profit before taxation, goodwill amortisation and exceptional
items and adjusted earnings per ordinary share are calculated as
follows:
3 Months 3 Months 9 Months 9 Months
2003 2004 2004 2003
GBPm GBPm GBPm GBPm
65.3 60.3 Profit on 179.7 163.4
ordinary
activities before
taxation
Adjustments:
4.6 5.5 Goodwill 15.3 14.0
amortisation
17.6 - Exceptional items - 21.9
(31.5) - Net profit on - (31.5)
disposal of
associated
undertaking
1.2 - Share of joint - 1.8
venture
exceptional items
_____ _____ _____ _____
57.2 65.8 Profit before 195.0 169.6
taxation,
goodwill
amortisation and
exceptional items
(16.7) (19.0) Tax on profit (56.5) (49.3)
before goodwill
amortisation and
exceptional items
_____ _____ _____ _____
40.5 46.8 Earnings before 138.5 120.3
goodwill
amortisation and
exceptional items
_____ _____ _____ _____
4.35p 4.99p Adjusted basic 14.81p 12.94p
earnings per
ordinary share
4.33p 4.98p Adjusted diluted 14.73p 12.87p
earnings per
ordinary share
10. The quarter three 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 2003.
Independent Review Report to Smith & Nephew plc
Introduction
We have been instructed by the company to review the financial information for the three months and nine months ended 2 October 2004 which comprises the Group Profit and Loss Account, Abridged Group Balance Sheet, Abridged Movement in Shareholders' Funds, Abridged Group Cash Flow Statement and the related notes 1 to 10. We have read the other information contained in the interim report for quarter three 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 for quarter three, 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 for quarter three in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim report results 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 enquires 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 three months and nine months ended 2 October 2004.
Ernst & Young LLP
London 3 November 2004
This information is provided by RNS
The company news service from the London Stock Exchange