STRONG MOMENTUM PROVIDES SUSTAINABLE GROWTH

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1 7 February 2002 STRONG MOMENTUM PROVIDES SUSTAINABLE GROWTH Smith & Nephew plc, the global medical devices company, announces its preliminary results for the year ended 31 December Key Points Underlying sales growth 13% Acquisitions add a further 6% Ongoing operating profit up 19% before exceptional items EPS before exceptional items up 11% - underlying EPS up 15% BSN Medical joint venture off to successful start Continued investment in new products and sales forces for future growth Dudley Eustace, Chairman, said: The benefits of the Group s strategic restructuring became clearly evident in a strong performance during Our three main businesses performed well ahead of their markets and are now demonstrating the momentum to achieve sustainable future growth. We shall continue to invest in strengthening our sales forces, developing new products and expanding our manufacturing capacity and believe that we are well placed to achieve our mid-teens underlying EPS growth target. Enquiries Chris O Donnell, Chief Executive Tel: +44 (0) Smith & Nephew plc Peter Hooley, Finance Director Tel: +44 (0) Smith & Nephew plc Margaret Stewart, Group Director, Corporate Affairs Tel: +44 (0) Smith & Nephew plc David Yates Tel: +44 (0) 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 today. A tele-conference call for analysts will be held at 3pm today: please call Mo Noonan at Financial Dynamics on +44 (0) for details. The morning meeting will be webcast as will the teleconference at 3pm on:

2 2 Trading results In 2001 the results of our strategic restructuring became clearly evident, with strong growth achieved and a firm platform established for the future. Our three major global businesses, Orthopaedics, Endoscopy and Wound Management, all accelerated their sales and profit growth. BSN Medical, our joint venture with Beiersdorf, made a successful start following its formation on 1 April. We supplemented organic growth with two acquisitions - Beiersdorf s advanced wound management business and the antimicrobial woundcare business of Westaim Biomedical Corp. In mid-year we disposed of our ear, nose and throat (ENT) business. Sales in our ongoing businesses rose 21%, a strong performance with 13% from underlying sales growth, 6% from businesses acquired during the year and 2% from currency translation. Selling price increases accounted for approximately 1% of underlying sales growth. However, due to substantial divestments this year and last, our overall sales reduced by 5% to 1,082m. Profit before tax and exceptional items amounted to 171m. This comprises 171m of operating profit from ongoing operations, 4m profit of operations contributed to BSN Medical, and 13m share of operating profit from BSN Medical, less 17m of interest costs. Operating profit includes a benefit of 1m following the early adoption of FRS 19. The operating margin of the ongoing operations was 17%, a marginal decline on Underlying margin improvement was again in excess of 1% of sales, but this year was offset by divestment dissynergies and adverse transactional currency. EPS, tax, exceptional items and cash flow Earnings per share before exceptional items were 12.83p, an increase on 2000 of 11%. The adoption of FRS 19 increased the ordinary tax rate by 1% to 31% and the 2000 tax charge and

3 3 EPS have been similarly restated. Adjusting for the dilutive effects of the disposals this and last year, and forming the BSN Medical joint venture, the underlying increase in earnings per share before exceptional items was 15%. Exceptional items comprise a 49m gain on the disposal of the ENT business and 26m of rationalisation, divestment and acquisition integration costs. The net exceptional gain was therefore 23m, increasing the profit before tax to 194m. Operating cash flow was 119m after 24m of net outgoings on rationalisation, divestment and acquisition integration, which is a profit to cash conversion ratio of 82% before these items. The proceeds of divestments were 62m from ENT, 13m net was received on the formation of the joint venture, acquisitions cost 69m and net debt closed at 244m. Dividends The Board recommends a final dividend of 2.90p which, together with the interim dividend of 1.75p, makes a total for the year of 4.65p. The dividend will be paid on 17 May 2002 to shareholders on the register at the close of business on 19 April Shareholders may participate in the company s dividend reinvestment plan. Operating review Our three main businesses all performed strongly and are demonstrating a real momentum. We have invested substantially in two essential growth drivers a strong and experienced sales force, and new product development. During the year, we increased the sales force overall by 15% and launched significant new products in each business, many offering innovative features - new and longer lasting materials, faster healing rates, or less invasive procedures. Products launched or acquired in the past three years account for some 15% of our sales. To meet future sales growth, we commenced two significant projects to expand our manufacturing capacity. Orthopaedics is enlarging its manufacturing space in Memphis,

4 4 Tennessee by around one third, and Endoscopy is increasing manufacturing space in two factories and moving its headquarters to new premises close to its facility in Andover, Massachusetts. We improved underlying margins, at the same time as we continued to invest in the sales force and product development. We aim to raise margins further through operational performance and product mix going forward. Our longer term research strategy focuses on key areas which we expect to benefit all of our businesses: these include bioresorbable materials to facilitate healing and surgical reconstruction; tissue engineering to help replace, repair and regenerate damaged tissue; and non-invasive devices to stimulate tissue repair. Orthopaedics Orthopaedic sales rose by an underlying 18%, significantly higher than the market average. Reconstructive implant sales grew 22%, boosted by surgeons very positive response to our new oxidised zirconium knees, helping us maintain our position as the fastest-growing orthopaedic implant company. Trauma grew 12%, revitalised by the new TriGen nailing system. We obtained US reimbursement coding for Supartz, an injection to relieve joint pain. Endoscopy Endoscopy sales grew at an underlying 11%. The previous year s acquisition of shoulder specialist Orthopaedic Biosystems Ltd, Inc., brought total sales growth to 14%. Knee ligament repair was a key growth area, with sales up 15%. Some 15% of revenue came from new products. Significant innovations included a suture repair system for damaged meniscus, a radio frequency surgical cutting system and the first in a range of digital cameras to meet growing demand for information capture in the operating room.

5 5 Advanced Wound Management In a year of significant change for the division, Wound Management became the world leader in advanced treatments for hard-to-heal wounds. Underlying sales growth was 11%. The sales base improved a further 18% from two acquisitions made in the year, Beiersdorf s advanced woundcare business and the Acticoat silver product for burns from Westaim. The more traditional woundcare business was transferred to the new BSN Medical joint venture with Beiersdorf. With our partner Advanced Tissue Sciences, we received FDA approval in the US for Dermagraft, our diabetic foot ulcer treatment, and a preliminary reimbursement coding which will become effective in Rehabilitation We set out a year ago to establish if our Rehabilitation business could be re-positioned to achieve the global status and higher sales growth expected of the businesses that form Smith & Nephew. Sales grew by an underlying 6% and progress was made in the newly targeted physiotherapy market. However, it is clear that we are not going to be able to grow this business at the pace and to the size required by the Group. The rehabilitation industry is consolidating, and we have received approaches expressing an interest in the business. We are therefore taking time to reconsider the future of Rehabilitation within the Smith & Nephew group. BSN Medical BSN Medical, our joint venture with Beiersdorf came into operation in April Based in Hamburg, it is run independently of its parents. It has made a successful start, delivering sales of 247m and operating profits before exceptional items of 26m in 2001, and its rationalisation programme proceeds to plan. The divestment of some 8m of annualised sales to comply with EU competition conditions was agreed in January 2002 and is almost complete.

6 6 Outlook Our chosen markets are strong and growing robustly. People are living longer and remaining more active and there is a growing demand for products that repair bone, dermal and soft tissue better and faster. We are well positioned to benefit from this demand by developing easier to use, more efficient products that bring noticeable benefits to patients and healthcare providers. We continue to invest in our businesses by increasing sales force strength, adding manufacturing capacity and enhancing new product development to generate vigorous organic growth. We will also acquire businesses or technologies which strengthen our long term prospects. We intend to maintain the momentum we have developed since completing our strategic restructuring and believe we are well placed to achieve our mid-teens underlying EPS growth target.

7 7 SMITH & NEPHEW plc 2001 PRELIMINARY RESULTS continued Group Profit and Loss Account for the Year Ended 31 December 2001 Turnover Restated # Notes m m Ongoing operations 1, Operations contributed to the joint venture Continuing operations 1, Discontinued operations Group turnover 1, ,134.7 Share of joint venture , ,134.7 Operating profit 1 Ongoing operations - before exceptional items exceptional items* 4 (19.3) (7.7) Operations contributed to the joint venture - before exceptional items exceptional items* 4 (1.8) (8.6) Continuing operations Discontinued operations Share of operating profit of the joint venture - before exceptional items exceptional items* 5 (5.0) Discontinued operations - net profit on disposals* Profit on ordinary activities before interest Interest payable 6 (17.4) (7.0) Profit on ordinary activities before taxation Taxation Attributable profit for the year Dividends - ordinary special Retained profit/(deficit) for the year 86.7 (249.4) Basic earnings per ordinary share p 20.07p Diluted earnings per ordinary share p 19.95p Results before exceptional items (*) 11 Profit before taxation 170.5m 172.0m Adjusted basic earnings per ordinary share 12.83p 11.52p Adjusted diluted earnings per ordinary share 12.72p 11.45p # See Note 12

8 8 SMITH & NEPHEW plc 2001 PRELIMINARY RESULTS continued Abridged Group Balance Sheet as at 31 December 2001 Notes Restated # m m Fixed assets Intangible fixed assets Tangible fixed assets Investment in joint venture ß Investments Working capital Stocks Debtors Creditors acquisition consideration (21.7) (40.6) other (302.8) (289.7) Provisions (95.3) (103.5) Share capital and reserves Net borrowings Gearing 60% 88% ß Investment in joint venture comprises share of gross assets of 103.9m, goodwill 70.6m and loans 5.1m less share of gross liabilities 65.6m. Abridged Group Cash Flow for the Year Ended 31 December Restated # m m Operating profit Depreciation and amortisation Ø Working capital and provisions (22.4) (21.0) Net cash inflow from operating activities* Capital investment net (72.6) (66.7) Operating cash flow Interest (16.5) (7.0) Taxation (76.2) (46.5) Dividends (42.0) (475.9) Acquisitions (69.3) (51.1) Disposals Joint venture formation Issues of ordinary share capital Net cash outflow (1.4) (225.7) Exchange adjustments (5.8) (32.9) Opening net (borrowings)/cash (236.3) 22.3 Closing net borrowings (243.5) (236.3) Ø Includes goodwill amortisation of 10.4m ( m). * After 23.5m ( m) of outgoings on rationalisation, acquisition integration and divestment costs. # See Note 12.

9 9 SMITH & NEPHEW plc NOTES TO THE 2001 PRELIMINARY RESULTS 1. Performance Group Turnover Group Operating profit Restated 2001 Restated m m m m By activity Ongoing operations 1, Operations contributed to the joint venture Continuing operations 1, Discontinued operations , , By product Group Turnover 2001 m 2000 Restated m Underlying sales growth Orthopaedics % Endoscopy % Advanced Wound Management % Rehabilitation % Ongoing operations 1, % By geographic market Europe* % America % Africa, Asia and Australasia % Ongoing operations 1, % * Includes United Kingdom sales of 91.2m ( m) Turnover and profits for the year 2000 have been restated for FRS 19 (Note 12) and to reflect the final outcome of the Joint Venture Agreement whereby Smith & Nephew retained distribution of BSN Medical products in certain countries. Underlying sales growth is sales growth adjusted to eliminate the effect of translational currency, acquisitions and disposals.

10 10 SMITH & NEPHEW plc NOTES TO THE 2001 PRELIMINARY RESULTS continued 2. On 1 April 2001, the casting and bandaging and traditional woundcare businesses were contributed to a joint venture with Beiersdorf AG called BSN Medical in return for a 50% equity interest. The transaction has been accounted for in accordance with UITF 31. The results of these businesses prior to contribution represent operations contributed to the joint venture. 3. Discontinued operations comprise the results and net profit on disposal of the ear, nose and throat business disposed of in June 2001 for net proceeds of 61.7m. Discontinued operations in 2000 represent the results and net profit on disposal of the Consumer business. 4. Operating exceptional items within ongoing operations comprise the costs of manufacturing rationalisation, 2.9m; rationalisation consequent on the contribution of businesses to BSN Medical, 7.5m; and integration in connection with the acquisition of the Advanced Woundcare business from Beiersdorf AG, 8.9m. The items in 2000 comprised expenditure on the manufacturing rationalisation programme of 4.3m and acquisition integration expenditure of 3.4m. Operating exceptional items within operations contributed to the joint venture represent manufacturing rationalisation costs of operations subsequently contributed to BSN Medical. 5. The group s share of exceptional items of the joint venture relates to manufacturing rationalisation costs of BSN Medical. 6. Interest includes 0.9m ( nil) in respect of the group s share of the net interest charge of BSN Medical. 7. Taxation of 52.3m (2000 restated 52.9m) arises on the profit before exceptional items, an effective rate of 31% (2000 restated 31%) of which 3.9m arises in BSN Medical. Taxation on the net gain on disposal is 17.7m (2000 restated - 8.0m) and tax relief of 6.0m (2000 restated - 3.2m) arises as a consequence of the exceptional costs of rationalisation and acquisition integration of which 1.4m is in BSN Medical. 8. A final dividend of 2.9 pence per ordinary share is recommended ( pence per ordinary share) which, together with the interim dividend of 1.75 pence per share ( pence) paid on 5 December 2001, makes a total for the year of 4.65 pence ( pence). The final dividend is payable on 17 May 2002 to shareholders whose names appear on the register at the close of business on 19 April Shareholders may participate in the dividend re-investment plan. 9. In 2000, the company changed its capital structure through the return of 415.6m of cash to shareholders by way of a special dividend of pence per share together with a related consolidation of ordinary share capital by conversion into 9 new shares of 12 2 / 9 p for every 11 old 10p shares in issue. No adjustment has been made to comparative data in respect of the share consolidation as, together with the special dividend payment, the overall effect was that of a share repurchase at fair value. 10. The basic weighted average number of ordinary shares in issue was 921m (2000 1,034m). The diluted weighted average number of ordinary shares was 929m (2000 1,040m).

11 11 SMITH & NEPHEW plc NOTES TO THE 2001 PRELIMINARY RESULTS continued 11. Results before exceptional items state profit before taxation before charging the cost of exceptional items and the net profit on the disposal of discontinued operations. Adjusted basic earnings per ordinary share is based on the attributable profit for the year before accounting for these items and associated taxation thereon. 12. FRS 19 has been adopted in the 2001 results and comparative figures have been restated accordingly. As a result of the restatement, 2000 operating profits increased by 0.6m due to lower goodwill amortisation, the ordinary taxation charge increased by 1.5m and the net profit on disposal increased by 3.2m. Basic earnings per share increased by 0.22 pence and adjusted basic earnings per share decreased by 0.09 pence. As a result of the restatement in the 2000 balance sheet reserves are lower by 61.6m, goodwill is lower by 9.2m and the net deferred tax liability is higher by 52.4m. Debtors are 3.2m and provisions 55.6m higher respectively as a result of the deferred tax restatement. 13. Abridged Movement in Shareholders Funds Restated m m Opening shareholders funds FRS 19 adjustments as at 1 January (60.9) Retained profit/(deficit) for the year 86.7 (249.4) Exchange adjustments (8.8) (12.9) Issue of shares Joint venture formation Goodwill on disposals Closing shareholders funds This financial statement does not constitute the statutory accounts. It has been extracted from the statutory accounts of Smith & Nephew plc on which the auditors have given an unqualified report but which have not yet been filed with the Registrar of Companies. 7 February 2002