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Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the quarter ended 29 March 2008.

The markets in which we operate have generally been favourable in the first quarter although the early Easter has had a seasonal effect across the orthopaedics industry as a whole reducing our revenues by about 2% to 3%.

As part of the integration of Plus, we uncovered certain sales practices in parts of Europe which are unacceptable to Smith & Nephew. We have undertaken a thorough investigation, which has progressed a long way, but is not yet complete. We have immediately moved to harmonise these practices with Smith & Nephew’s standards. This has impacted our Q1 performance, predominantly in Greece, and will continue to impact performance over the course of the year.

Reconstruction performed well in the US this quarter as our BIRMINGHAM HIP^◊ Resurfacing (“BHR^◊”) product continued to deliver good results. Trauma had a difficult quarter in the US and we have initiated a range of actions to address this performance.  Reconstruction and Trauma in Europe have both been impacted by our actions to harmonise the sales practices of parts of the former Plus business.  In Endoscopy revenue performance outside the US was strong and Advanced Wound Management also had good performance outside the US and a successful launch of Negative Pressure Wound Therapy (“NPWT”).

Our Earnings Improvement Programme (“EIP”) continues to deliver material margin enhancement and we are pleased with the progress made this quarter.

This has been a challenging quarter.  We have responded with clear, firm actions and are confident that we are building a stronger business.

Revenue in the quarter was $911 million.  This represents growth of 22% as reported and an underlying growth rate of 2% after adjusting for movements in currency (6%) and acquisitions (14%) when compared to the same period last year. Excluding all Plus products, underlying revenue growth was 5%.

Trading profit in the quarter was $182 million, representing reported growth of 23%.  The Group’s trading margin increased by an underlying 60 basis points to 20% in the quarter.  This reflected significant increases in the Reconstruction, Trauma and  Endoscopy divisions offset by a weaker margin of 9% in Advanced Wound Management which was impacted by the costs of the launch of NPWT.  The group trading margin also reflects seasonally heavier expenses which are characteristic of this quarter.

Net interest and finance expense was $16 million.

The tax charge was at the estimated effective rate for the full year of 31% on profit before restructuring and rationalisation costs, acquisition related costs and amortisation of acquisition intangibles.  Attributable profit before restructuring and rationalisation costs, acquisition related costs, amortisation of acquisition intangibles and taxation thereon was $114 million.

Adjusted earnings per share increased 14% to 12.8¢ (64.0¢ per American Depositary Share, “ADS”).  Basic earnings per share was 9.3¢ (46.5¢ per ADS) compared with 9.7¢ (48.5¢ per ADS) in 2007.

Net debt increased by $146 million from the year end to $1,456 million in the quarter.  Our financial position remains strong and we expect working capital funding and capital expenditure needs for 2008 to be met by existing resources and facilities.

The Group purchased 7.2 million of its own shares during the quarter at a cost of $91 million, in line with our target buy back of $400 million for the full year.

Reconstruction revenues at $377 million grew by 2% compared to the first quarter last year.  Excluding all Plus products, growth at constant currencies was 8%. Growth was reduced by about 2% from the fewer sales days in the quarter.

The harmonisation of the former Plus sales practices directly reduced revenue in Europe in the quarter by about $10 million. In addition there was some impact from the associated management disruption.

Reconstruction revenues in the US grew by 7% in the quarter as BHR^◊ continued to make an excellent contribution and to lead the market in hip re-surfacing worldwide with a global market share of over 50%.

Knee revenue growth was 1% worldwide (7% excluding Plus products) for the quarter, as the impact of the sales practice harmonisation in Europe masked the increasing success of our JOURNEY^◊ Bi Cruciate Stabilised Knee System which was introduced last year.  Within the US, knee revenue growth increased by 5% and outside the US revenues decreased 2%.

Hip revenues continued the underlying momentum seen in Q4 2007 growing by 4% worldwide (9% excluding Plus products) in the quarter.  In the US hip revenues grew by 11% as BHR^◊ continued to grow well. In Europe hip revenue decreased by 6%.  In Japan we started to see the benefits of the Plus integration.

Trading margin in the quarter was 25.2% an underlying increase of 240 basis points.  This strong increase in margin was mainly attributable to EIP activities, but also reflected in part delays in getting approval from the Federally appointed Monitor for research and development.

Trauma and Clinical Therapies revenues this quarter at $151 million were impacted by the harmonisation of sales practices in Europe and by a disappointing performance in the US.

In Europe very strong inherent growth was offset by the effect of the harmonisation of sales practices. Sales practice changes led directly to a reduction in revenue of about $6 million, or about 20 percentage points of growth in Europe.

Growth in the US was 1% in the quarter. It has become clear that this business would benefit from a change in structure, including the separation of Clinical Therapies from Trauma. A series of actions are underway to increase the collaboration between our Trauma and Reconstruction sales forces while retaining the focus on developing the Trauma portfolio and supporting trauma surgeons.  We have a strong product range and expect the benefits of these actions to return the business to market growth by the end of this year.

Fixation product revenues grew by 2% (6% excluding Plus products), below the estimated market growth rate of 11%.  We achieved strong growth in plates and screws but this was offset by lagging revenues from nail and external fixation.

Clinical Therapies revenue growth decreased by 2% (a 3% increase excluding Plus products) driven by the continued pricing weakness in the joint fluid therapy market that we have seen for some quarters.  EXOGEN^◊ and DUROLANE® have performed well this quarter markedly outgrowing the market and gaining from their strong market positions.

Trading margin increased an underlying 260 basis points to 19.9% as the business unit continues to realise significant benefits from the EIP.

Endoscopy revenues grew by 4% to $194 million. Strong European growth of 10% and the rest of the world growth of 14% was dampened by a 3% decline in US revenues.  In the US the new management team is taking action and making key changes in operational management.  Outside the US, performance continued to be strong with growth of 11%.

Repair revenues grew strongly at 10%, driven by a number of products including FASTFIX^◊  Meniscal Repair System for the knee and BIORAPTOR^◊ Suture Anchor for shoulder.

Visualisation (including DOR) revenues continue to be volatile and decreased by 5%, in part due to management’s intention to operate at a more profitable level in this segment.  Resection product sales increased by 4% in the quarter.

The trading margin of 20.6%, an underlying improvement of 230 basis points, includes continued benefit from the facility closure completed in the second quarter of last year.

Advanced Wound Management revenues grew to $189 million for the quarter.  Growth in Europe and the rest of the world was 6% and 7% respectively, a stronger result than the previous quarter.  In the US, which accounts for around 20% of this business, revenues decreased by 13% reflecting the salesforce focus on the launch of NPWT.  The combined revenue growth was 2% globally. 

NPWT was launched globally during March and we are pleased with progress at this early stage.

ALLEVYN^◊ dressings performed well in the quarter with revenues increasing by 9%, helped by a wider product range, including the recently launched ALLEVYN^◊ GENTLE BORDER.  ALLEVYN^◊ Ag, a lower priced silver dressing launched late last year, provides greater product options as ACTICOAT^◊ antimicrobial silver dressings continued to be affected by low price competition.

Advanced Wound Management achieved a reduced margin of 9% in the quarter as a result of the investment in the launch of NPWT.  Excluding these costs, the margin would have fallen slightly when compared to the corresponding quarter last year.

Global market conditions continue to be favourable driven by underlying demographic trends which are creating strong demand for our products.

The outlook for the year has been impacted by the changes we are making to harmonise the Plus sales practices with Smith & Nephew policies.

We have undertaken a thorough investigation of these practices which has made significant progress, but is not yet fully complete.  We currently expect revenues, in a full twelve month period, to be reduced by about $100 million.  Much of the reduction in sales relationships has been experienced in quarter one and we expect some further reductions over the next two quarters, therefore we expect the reduction in 2008 to be close to the twelve month level.  We expect about 70% of the reduction in revenues to be in the Reconstruction business, and about 30% in Trauma.  A large part of this issue relates to Greece where pro-forma 2007 revenues were $60 million.  We do not expect to recover these lost revenues, but we see no ongoing impact on the continuing robust growth of the business, including the Plus revenues unaffected by the changed sales practices.

We expect the lost profit from the reduced sales to be at the Group net margin once we have worked through the changes. In the short-term we expect to see a somewhat higher impact on profit as it takes time to adjust the cost base, and as we are bearing some additional costs associated with the investigation.

We expect that our Reconstruction business in the US will continue to grow at above market rates.  We believe that the actions that we are taking in our Trauma business will lead to revenue growth returning to the market growth rate by the end of the year.  In Clinical Therapies we continue to expect to be impacted by the declining market growth in the US.

In Endoscopy we continue to expect to grow slightly behind the market in 2008, with visualisation revenues continuing to be volatile.  Advanced Wound Management, excluding NPWT, is expected to grow close to the market rate for the full year.  We are pleased with the NPWT launch and expect sales to grow materially through 2008 and beyond.

Except for the temporary impact of the harmonisation of sales practices in Europe, our Earnings Improvement Programme continues to be firmly on track.

Although this has been a challenging quarter in parts of our business in Europe, we have taken firm action and we are confident that the overall business is in a strong position for continued strong sustainable profitable growth.

Smith & Nephew is a global medical technology business, specialising in Orthopaedic Reconstruction, Orthopaedic Trauma and Clinical Therapies, Endoscopy and Advanced Wound Management products.  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 operates in 32 countries around the world.  Annual sales in 2007 were $3.4 billion.

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 expected revenue growth and trading margins discussed under “First Quarter Results”, “Orthopaedic Trauma and Clinical Therapies” and "Outlook" are forward-looking statements as are discussions of our product pipeline.  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 (including, but not limited to, the harmonisation of sales practices, the outcome of litigation, claims and regulatory approvals) 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.