Smith & Nephew 2011 Q1 results – good start to the year

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the first quarter ended 2 April 2011.

	3 months* to
	3 Apr 2010 $m	2 Apr 2011 $m	Underlying change %
Revenue1	995	1,055	4
Trading profit2	250	241	(6)**
Operating profit2	240	231
Trading margin (%)	25.1	22.8	(230)bps**
EPSA (cents)3	18.8	18.4
EPS (cents)	17.9	17.5
Business Unit Revenue1
Orthopaedics	566	590	2
Endoscopy	216	233	6
Advanced Wound Management	213	232	6

* Q1 2010 comprised 64 trading days (2009 - 61 trading days)
** See 'Q1 Commentary' below

Q1 Commentary

• Reported revenue was $1,055 million, underlying growth of 4%
• Reported trading profit was $241 million and trading margin was 22.8% - trading profit growth was 3% and trading profit margin essentially unchanged on last year, after deducting the $23 million benefit from the settlement of the BlueSky acquisition agreement
• EPSA was 18.4 cents
• Geographically, we grew by 4% in the US, 1% in Europe and 8% in the rest of the world
• Orthopaedics continued its momentum from last year, outperforming the reconstruction market, driven by 10% growth in US knees
• Endoscopy again achieved double digit sales growth in sports medicine repair products
• Advanced Wound Management delivered strong NPWT growth
• Strong cash flow reduced net debt to $351 million

Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:

"I have been at Smith & Nephew for only a month, but have been impressed by the team's achievements. Smith & Nephew is a quality company with strong foundations and good momentum. My goal is to ensure that this performance continues and that Smith & Nephew achieves even greater success for all stakeholders."

Commenting on trading in the first quarter, Adrian Hennah, Chief Financial Officer of Smith & Nephew, said:

"Smith & Nephew delivered underlying revenue growth of 4% for the first quarter of 2011. We had a good start to the year with our US knee franchise, sports medicine repair and Negative Pressure Wound Therapy businesses all continuing their strong growth.

We remain confident that the increased level of investment in our businesses – in particular, developing more innovative products and increasing our scale in the emerging markets – will deliver continued long term growth."

Analyst presentation and conference call

An analyst presentation and conference call to discuss Smith & Nephew's first quarter results will be held at 8.30am BST/3.30am EST today, Thursday 5 May. This will be broadcast live on the company's website and will be available on demand shortly following the close of the call at http://www.smith-nephew.com/Q111. A podcast will also be available at the same address. If interested parties are unable to connect to the web, a listen-only service is available by calling +44 (0) 20 7806 1953 in the UK or +1 212 444 0412 in the US, confirmation code: 1243173. Analysts should contact Jennifer Watson on +44 (0)20 7960 2255 or by email at jennifer.watson@smith-nephew.com for conference call details.

Notes

1. Unless otherwise specified as 'reported', all revenue increases/decreases throughout this document are underlying increases/decreases after adjusting for the effects of currency translation. See note 3 to the financial statements for a reconciliation of these measures to results reported under IFRS.
2. Reconciliation from operating profit to trading profit is given in note 4 to the financial statements. The underlying increase in trading profit is the increase in trading profit after adjusting for the effects of currency translation.
3. Adjusted earnings per ordinary share ("EPSA") growth is as reported, not underlying, and is stated before restructuring and rationalization costs, amortization of acquisition intangibles and taxation thereon. See note 2 to the financial statements.
4. All numbers given in this document are for the quarter ended 2 April 2011 unless stated otherwise.
5. References to market growth rates are estimates generated by Smith & Nephew based on a variety of sources.
6. Enquiries
   
   

   Investors/Analysts

   Phil Cowdy - Smith & Nephew
   +44 (0) 20 7401 7646
   
   

   Media

   Jon Coles
   +44 (0) 20 7404 5959
   
   Justine McIlroy
   Brunswick – London

First Quarter Results

Smith & Nephew has delivered a good start to 2011, maintaining the momentum and trends seen in the second half of 2010.

We generated revenues of $1,055 million in the quarter, compared to $995 million in 2010. This represents an underlying growth of 4% on the same period last year, after adjusting for positive movements in currency of 2%. We grew by 4% in the US, 1% in Europe and 8% in the rest of the world, where our businesses in the emerging markets continue to deliver strong growth. In Japan, our team has shown admirable resilience since the initial disruption caused by the earthquake and tsunami and we estimate we only lost $3 million of revenues and slightly more in profit in the quarter. We anticipate some further modest financial disruption.

Trading profit in the quarter was $241 million and the Group trading profit margin was 22.8%. This is an increase in trading profit of 3% and an unchanged trading profit margin after adjusting the comparable results for the $23 million credit from successfully negotiating with the vendors of BlueSky Medical Group, Inc. ("BlueSky") to settle our obligations under the original acquisition agreement. Last year, on a reported basis, trading profit was $250 million and trading profit margin 25.1%.

By business unit, Orthopaedics trading profit margin was 24.1% (140 basis point decrease compared to 25.5% last year), Endoscopy was 22.3% (120 basis point increase compared to 21.1%) and Advanced Wound Management 20.1% (230 basis points increase compared to 17.8%, which was last year's margin after deducting the benefit due to the settlement of the BlueSky acquisition agreement; the 2010 reported margin was 28.5%). These movements reflect quarterly variations in expense levels.

The net interest charge was $2 million.

The tax charge was at the estimated effective rate for the full year of 30.8% on profit before restructuring and rationalisation costs and amortisation of acquisition intangibles. Adjusted attributable profit of $164 million is before the costs of restructuring and rationalisation and amortisation of acquisition intangibles and taxation thereon.

Adjusted earnings per share was 18.4¢ (92.0¢ per American Depositary Share, "ADS"). Basic earnings per share was 17.5¢ (87.5¢ per ADS) compared with 17.9¢ (89.5¢ per ADS) in 2010.

Trading cash flow (defined as cash generated from operations less capital expenditure but before restructuring and rationalisation costs) was $206 million in the quarter reflecting a trading profit to cash conversion ratio of 85%. Net debt decreased by &141 million in the quarter to $351 million.

Orthopaedics

Orthopaedics (consisting of Reconstruction, Trauma and Clinical Therapies) grew revenues by 2% in the quarter to $590 million. Geographically, Orthopaedics grew by 5% in the US, -2% in Europe and 3% in the rest of the world.

The rate of like-for-like pricing decline in Orthopaedics was consistent with that experienced in the previous few quarters. This was largely offset by mix benefits.

Orthopaedic Reconstruction revenues grew by 2%, outperforming the estimated global market growth rate of 0%. In the US our growth was 4% and outside the US it was flat.

Our global knee franchise grew by 5% and global hips declined -2%. Our US knee business again significantly outperformed the market with growth of 10%. Our VERILAST* bearing technology for knee replacement, with its 30-year wear claim, and our VISIONAIRE* Patient Matched Instrumentation sets continue to drive our growth. In hips, we recently introduced the SMF* Short Modular Femoral Hip System which offers the surgeon a wide variety of stem implant options. Our BIRMINGHAM HIP* Resurfacing System (BHR) continues to be impacted by the metal-on-metal debate. Excluding this, our hip portfolio grew at above the market rate.

Orthopaedic Trauma revenues grew by 6% to $116 million compared to an estimated worldwide market growth of 6%. This is another quarter of improved growth from this business as our investment in the sales force and new product introductions results in a more consistent performance.

Clinical Therapies grew revenues 2% to $55 million. Our EXOGEN* Bone Healing System delivered strong growth again. Our joint fluid therapy franchise, while resilient, is facing increasing competition in the US market.

Endoscopy

Endoscopy revenues grew 6% to $233 million. US revenues grew by 1%, Europe grew by 6% and the rest of the world grew by 12%.

By business segment, Arthroscopy (sports medicine) grew by 8%. Our repair products for the shoulder and hip were particularly strong, benefiting from several new product introductions over the last year. In addition, we recently launched a range of instruments for hip arthroscopy and this summer we will launch our BIORAPTOR* CURVED Suture Anchor which is designed for easier anatomic anchor placement during arthroscopic repairs of the hip and shoulder. In our resection franchise we have introduced our DYONICS* PLATINUM range of blades, designed to provide superior resection and sharpness than conventional blades. Visualisation revenues declined by -7%.

Advanced Wound Management

Advanced Wound Management grew revenues by 6% to $232 million, outperforming the estimated global market growth rate of 3%. European revenues grew by 2% to $117 million. US revenues grew by 6%, partly reflecting some distributor stocking last quarter ahead of price increases. Our revenues in the rest of the world increased by 15%.

Our Exudate Management product range grew by 2% and Infection Management declined by -1% reflecting the impact of the austerity measures we are experiencing in European markets. We continue to reinforce the clinical and economic benefits of our advanced portfolio, as we believe that our products help reduce the human and economic cost of wounds.

Negative Pressure Wound Therapy (NPWT) achieved strong growth across all regions, where our momentum is building and we are making significant contract wins in Europe and the US. We anticipate launching further extensions to our NPWT range during the second quarter of 2011.

Outlook

Our outlook guidance for 2011 is unchanged.

We expect Orthopaedic Reconstruction to grow at above the market rate and Orthopaedic Trauma to sustain its improved performance. In Endoscopy we expect to achieve above market growth in Arthroscopy (sports medicine) and in Advanced Wound Management we believe we will continue to grow at above the market rate.

Our 2010 trading profit margin was 23.9% (before the benefit of the BlueSky settlement). While there will be quarterly variations, we anticipate that the further efficiency savings we achieve will be reinvested to drive additional growth.

We remain confident that the increased level of investment in our businesses – in particular, developing more innovative products and increasing our scale in the emerging markets – will deliver continued long term growth.

About Us

Smith & Nephew is a global medical technology business with global leadership positions in Orthopaedics, including Reconstruction, Trauma and Clinical Therapies; Endoscopy, including Sports Medicine; and Advanced Wound Management. Smith & Nephew is a global leader in arthroscopy and advanced wound management and is one of the leading 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 distribution channels, purchasing agents and buying entities in over 90 countries worldwide. Annual sales in 2010 were nearly $4.0 billion.

Forward-Looking Statements

This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payors and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses; and numerous other matters that affect us or our markets, including those of a political, economic, business or competitive nature. 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 20-F, for a discussion of certain of these factors.

Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.

*Trademark of Smith & Nephew. Certain marks registered US Patent and Trademark Office.