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30 July 2009

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the second quarter ended 27 June 2009.

* Q2 2009 comprises 63 trading days (2008 - 64 trading days)
** H1 2009 comprises 124 trading days (2008 - 126 trading days)

• Reported trading profit $212 million, up 17% underlying
• EPSA increased 10% to 15.4 cents
• Orthopaedics continues to be impacted by deferred procedures
• Endoscopy achieved strong repair product sales off-set by the weak capital related market
• Advanced Wound Management delivered another good sales and profit performance
• Trading margin improved 310 basis points to 22.9%
• Interim dividend increased by 10% to 5.46¢

Commenting on the second quarter, David Illingworth, Chief Executive of Smith & Nephew, said:

“As a result of the continual improvement in our operational efficiency we achieved growth in trading profit of 17% at constant currency.  A good achievement in weaker markets.

Our focus on products for younger more active patients has positioned us well over several years.  In the current environment this market segment and these products are facing greater challenges.  We are confident that our strategy of market led innovation and high customer service levels will position us to achieve above market growth in the future.  In the meantime, we are focused on executing our operational improvement plans and delivering profit growth in these tough markets.”

An analyst presentation and conference call to discuss Smith & Nephew’s second quarter results will be held at 9am GMT/4am EST today, 30 July.  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/Q209.  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 8322 2048 in the UK or +1 (866) 432 7175 in the US.  Analysts should contact Binti McEvaddy on +44 (0) 20 7960 2257 or by email at binti.mcevaddy@smith-nephew.com for conference 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. A 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 and acquisitions.
3. Adjusted earnings per ordinary share (“EPSA”) growth is as reported, not underlying, and is stated before restructuring and rationalisation costs, acquisition related costs, amortisation and impairment of acquisition intangibles and taxation thereon.  See note 2 to the financial statements.
4. All numbers given are for the quarter ended 27 June 2009 unless stated otherwise.

Smith & Nephew has again achieved a strong profit performance reflecting our focus on operational efficiency in the current challenging market conditions.

We generated revenues of $926 million, compared to $1,000 million in 2008.  On a reported basis this reflects a 7% adverse currency movement.  In addition, there was one less sales day than in the comparative period in 2008.  Adjusting for this, our underlying revenue growth was about 1%.

Trading profit in the quarter was $212 million, representing strong underlying growth of 17% and the Group trading margin increased by 310 basis points to 22.9%.  The margin improvement flows from progress in our Earnings Improvement Programme (“EIP”), tight cost control and a weaker comparative period.

The net interest charge was $11 million.  The tax charge was at the estimated effective rate for the full year of 31.8% on profit before restructuring and rationalisation costs, acquisition related costs and amortisation of acquisition intangibles.  Adjusted attributable profit of $136 million is before the costs of restructuring and rationalisation, acquisition related costs and amortisation of acquisition intangibles and taxation thereon.

Adjusted earnings per share increased by 10% to 15.4¢ (77.0¢ per American Depositary Share, “ADS”).  Basic earnings per share was 13.4¢ (67.0¢ per ADS) compared with 11.6¢ (58.0¢ per ADS) in 2008.

Trading cash flow (defined as cash generated from operations less capital expenditure but before the costs of macrotextured settlements, acquisition related costs and restructuring and rationalisation costs) was $135 million in the quarter reflecting a trading profit to cash conversion rate of 64%.

Net debt increased in the quarter to $1,205 million, primarily due to dividend payments and currency movements.

A first interim dividend of 5.46¢ per share (27.3¢ per ADS) will be paid on 3 November 2009 to shareholders on the register at the close of business on 16 October 2009.  This represents a 10% increase on the 2008 first interim dividend.

Orthopaedics

Orthopaedics (consisting of Reconstruction, Trauma and Clinical Therapies) generated revenues of $531 million in the quarter, which was unchanged on the prior year on an underlying basis.  Geographically, Orthopaedics grew by 2% in the US and by 7% in the rest of the world (other than Europe).  In Europe our revenue fell by 8%, partly reflecting the weaker local market conditions.  Earlier this year we strengthened our European management team and they are implementing a series of operational improvements.

Orthopaedic Reconstruction revenues were unchanged on an underlying basis, with growth of 3% in the US. We estimate that the worldwide market grew at 3%, reflecting a further softening in procedure volumes. We recently opened a new training centre in Shanghai, China as part of our investment in our emerging markets business, which continues to grow strongly.

Global knee growth was 1% and global hips fell by 1%.  Our new products, such as the R3^◊ Acetabular System, continue to perform well, as do our core hip and knee ranges.  Our higher specification and early intervention implant systems, such as BIRMINGHAM HIP^◊ Resurfacing System and the JOURNEY^◊ Active Knee Solutions, have a greater exposure to the impact of the global recession as we believe that the rate of deferred procedures has been higher among younger, privately insured patients, rather than the older, potentially retired, population.  The larger impact on the sales volume of our higher specification products has a negative effect on our sales mix.

Orthopaedic Trauma revenues grew by 2%, with growth of 4% in the US.  We estimate that the worldwide market grew by 7% in the quarter.  Sales of our external fixation products improved from the first quarter and our advanced product lines continue to sell well.

Clinical Therapies revenues fell by 4%.  DUROLANE® Hyaluronic Acid Stabilised Single Injection is due to go to a FDA panel for hearing on 19 August.

Orthopaedics achieved a trading margin increase of 210 basis points to 24.4%, mainly derived from improving operational effectiveness, such as rationalising our global logistics facilities and increased manufacturing and procurement efficiency.

Endoscopy

Endoscopy revenues were down 2% on the prior year to $187 million, as capital related sales continue to be weak, particularly in the US and increasingly in Europe.

US revenues fell by 10%, Europe grew by 4% and the rest of the world grew by 7%, led by strong contributions from Japan and Australia.

Visualisation sales continue to be affected by hospitals significantly reducing capital purchases due to the macro economic climate, and fell by 26%.  Arthroscopy as a whole grew by 4%, driven by continued strong Repair segment performance from our existing product portfolio and new introductions such as the BICEPTOR^◊ Tenodesis System, the first all-arthroscopic procedure for biceps tendon repair.  Resection was weaker as it also suffered from a capital related reduction in spending by customers.  The second half should see the introduction of our next generation of radiofrequency (RF) resection devices.

The trading margin for Endoscopy was 22.7%, up 340 basis points on the prior year, benefiting from the closure of our manufacturing site in Warsaw, Indiana and a range of operational improvements.  Last year the margin was reduced by higher than normal litigation and business development spend.

Advanced Wound Management

Advanced Wound Management revenues grew 4% to $208 million, compared to a market rate of 4% which was slower than the market growth rate during 2008.  European revenue growth at 3% was reduced slightly by the consolidation of our UK wholesale distribution arrangement, as previously highlighted.  US revenues were unchanged on an underlying basis and the rest of the world grew by 8%.

Exudate Management grew by 3% and Infection Management 13%, supported by the launches of ALLEVYN^◊ GENTLE Ag and ALLEVYN^◊ GENTLE BORDER Ag.

Negative Pressure Wound Therapy continues to make good progress as we roll out our enhanced pump range, expand our dressings range, penetrate new accounts and successfully defend our intellectual property position.

In June we announced the opening of our new manufacturing facility in Suzhou, China.  The plant has been making test batches of product for some weeks and this process will continue for a few months before full scale production is started towards the end of the year.

Advanced Wound Management achieved a strong trading margin increase of 500 basis points to 19.1%, primarily driven by the significant benefit of its extensive EIP initiatives, rigorous cost control and a weaker comparative.

Reported revenues were $1,791 million, with underlying growth at 2% compared to the same period last year.

Reported trading profit for the year to date was up 15% underlying to $395 million, with trading margin improving by 210 basis points to 22.0%.  The net interest charge was $21 million.  The tax charge of $106 million reflects the estimated effective rate for the year of 31.8%.  Adjusted attributable profit of $252 million is before the costs of restructuring and rationalisation, acquisition related costs, amortisation of acquisition intangibles and taxation thereon.  Attributable profit was $216 million.

EPSA rose by 6.3% to 28.5¢ (142.5¢ per ADS).  Reported basic earnings per share were 24.5¢ (122.5¢ per ADS).

Trading cash flow was $263 million compared with $273 million a year ago.  This is a trading profit to cash conversion ratio of 67% compared with 72% a year ago.

Our guidance is unchanged from the last quarter, except that we expect our products which serve the younger more active patient segment to continue to be disproportionately impacted by the current market weakness.

Notwithstanding the challenging economic environment, our success in continuing to deliver our EIP and maintaining tight cost discipline gives us confidence in our ability to deliver a good outcome for the full year.

We believe that our strategy of market led innovation and high customer service levels will position us to achieve above market growth in the future. 

Smith & Nephew is a global medical technology business, specialising in Orthopaedics, including Reconstruction, Trauma and Clinical Therapies; Endoscopy 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 operates in 32 countries around the world.  Annual sales in 2008 were $3.8 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 "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 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.

^◊ Trademark of Smith & Nephew.  Certain marks registered US Patent and Trademark Office.
DUROLANE® is a trademark of Q-Med AB.