SOURCE: Smith & Nephew PLC

August 04, 2005 06:00 ET

SMITH AND NEPHEW - INTERIM RESULTS

London, UK -- (MARKET WIRE) -- August 4, 2005 --

Smith & Nephew Reports Strong Second Quarter Results, led by 18% Growth in Orthopaedics

4 August 2005

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announced today its results for the second quarter and half year ended 2 July 2005.

                                                                      
  Q2 Highlights                        H1 Highlights                   
                                                                      
                                                                      
  * Group revenue up 12%* to GBP351m  * Group revenue up 12%* to GBP681m
                                                                      
  * Orthopaedics revenue up 18%*,     * EPSA up 16%** to 11.22p       
    US up 22%*                                                          
                                                                      
  * Endoscopy revenue up 7%*          * Interim dividend up 10% to    
                                        2.10p                           
                                                                      
  * Wound Management revenue up 6%*                                   
                                                                      
  * Trading profit up 18%, margin                                     
    improves to 20%                                                     
                                                                      
  * EPSA up 16%** to 5.83p                                            
 

Commenting on the second quarter and the outlook for the year, Sir Christopher O'Donnell, Chief Executive of Smith & Nephew, said:

"Our revenue and earnings momentum continues to be driven by new product introductions and investment in our sales force. Orthopaedics strongly out-performed the market across its product areas and we expect its run rate to continue into the second half. Endoscopy performed in line with our expectation and Wound Management improved in the quarter. This revenue momentum, and continued margin expansion, makes us well placed to achieve our underlying mid-teens EPSA growth goal for the full year."

A presentation and conference call for analysts to discuss the company's interim results will be held at 1:00 pm BST / 8:00 am EST today. The conference call will be broadcast live on the web and will be available on demand shortly following the close of the meeting at http://www.smith-nephew.com/Q205. If interested parties are unable to connect to the web, a listen-only service is available by calling 0800 559 3272 in the UK or 1866 239 0753 in the US. Analysts should contact Julie Allen on +44 (0) 20 7960 2254 or by email at julie.allen@smith-nephew.com for conference call details.

 
*      otherwise specified as reported, all revenue increases
throughout this document are underlying increases which adjust for
the effects of currency translation, the acquisition of MMT in Q1
last year and the effect of two fewer sales days in the first quarter
and one more sales day in the second quarter. See note 3. 
 
**     EPSA is stated before amortisation of acquisition intangibles.
       See note 2. 
 
Enquiries 
 
                                                                      
  Investors                                                           

  Peter Hooley                          Tel:    +44 (0) 20 7401 7646  
  Smith & Nephew Finance Director                                     
                                                                      
  Investors / Media                                                   

  Liz Hewitt                            Tel:    +44 (0) 20 7401 7646  
  Smith & Nephew Group Director                                       
  Corporate Affairs                                                   
                                                                      
  Financial Dynamics                                                  

  David Yates - London                  Tel:    +44 (0) 20 7831 3113  
  Jonathan Birt - New York              Tel:    +1 212 850 5634       
 

Introduction

In the first half of the year we continued to pursue our strategy of operating in growing markets and in expanding the markets in which we operate. This strategy continues to deliver revenue growth in all businesses as we have seen in the first half of the year. A commentary on the financial and operating results for the second quarter and the half year follows below.

This is the second quarter that our results have been reported under International Financial Reporting Standards. Comparative figures have been restated and reconciliations from UK GAAP are provided in the appendices to this announcement.

Second Quarter Results

Underlying revenue growth in the quarter was 12%. Reported revenue growth in the quarter benefited from 1/2% due to translational currency movements and 1 1/2% due to one extra sales day, resulting in reported second quarter revenue increasing by 14% to GBP351m.

Trading profit in the quarter was GBP70m, with margins improving to 20%. Interest income and finance costs netted out to GBP1m positive, taxation amounted to GBP21m and the share of after tax results of the BSN joint venture was GBP4 1/2m, resulting in attributable profit before amortisation of acquisition intangibles of GBP54 1/2m.

Earnings per share before amortisation of acquisition intangibles ("EPSA") was 5.83p (29.15p per American Depositary Share, "ADS"), a 16% increase on the second quarter last year. A reconciliation of EPSA to reported earnings per share is given in note 2 to the accounts.

Orthopaedics

The orthopaedic market continues to exhibit strong growth and we again increased our market share, with revenue up by 18% relative to the second quarter last year. Revenue growth in the US was 22% and outside the US 14%. Sales pricing in reconstruction and trauma increased by approximately 4% globally, compared with a year ago.

In reconstruction our expanded global sales force generated growth in knee revenues of 20% (18% in the US and 21% outside the US) and hip revenues of 16% (13% in the US and 20% outside the US). OXINIUMa and minimal incision instruments continue to drive revenues globally, and BHR hip resurfacing is augmenting this outside the US.

US trauma revenues increased by 24%, well ahead of the market, benefiting from the establishment of a dedicated sales force in the US last year and the launch of the PERI-LOCa locking compression plate system in the first quarter this year. Overall trauma revenue growth was 13%. Revenues outside the US were flat and this is being addressed by the roll-out of our trauma sales strategy.

Clinical Therapy revenues, comprising EXOGENa ultrasound bone healing products and SUPARTZa joint fluid therapy, benefited from further sales force investment and grew 42% compared with the same quarter last year.

Endoscopy

Endoscopy's revenue growth was 7%, with growth in the US slower, as expected, at 2% due to lower visualisation and digital operating room revenues in the US ahead of the launch of the 400 Series camera in June. Outside the US revenue growth was 13%.

Knee and shoulder repair revenues continued strongly, benefiting from new product introductions, with 23% growth. Visualisation and digital operating room revenues grew 3% and blade revenues grew 2%. Radio frequency, including spine, declined 6%, with radio frequency continuing to be impacted by the injunction over bi-polar products.

In order to improve further the competitive position and to lower the overall costs of production we will close one of our US manufacturing facilities. A margin improvement of around 1% should accrue to Endoscopy at the end of the programme in 2007. A GBP9m restructuring charge will be taken in the third quarter.

Advanced Wound Management

Advanced Wound Management revenues grew 6% compared to the second quarter last year. Outside the US revenue growth was in line with the market at 8%. Revenues inside the US declined by 4%, compared to a decline of 7% in Q1, reflecting continued lower contracted supplies of intermediate products in the US. The improvement reflects some stabilisation of third party distributor inventories, end user traced sales are growing at around 7%.

Our sales forces globally continue to concentrate on ALLEVYNa and ACTICOATa, achieving revenue growth of 14% and 33% respectively in the quarter. Our concentration on major accounts for DERMAGRAFTa ahead of the anticipated venous leg ulcer approval in the US has resulted in a small decline in its quarterly revenues.

Half Year Results

Underlying and reported revenue growth in the first half was 12%, as one fewer sales day was offset by the benefit from the acquisition of MMT in Q1 last year. Translational currency was neutral. Reported revenues were consequently GBP681m.

Trading profit in the half year was GBP136m, with margins 1% ahead of a year ago at 20%. Interest income and finance costs netted to GBP3m positive, taxation amounted to GBP42m and the share of the after tax results of the BSN joint venture was GBP8m, resulting in attributable profit before amortisation of acquisition intangibles of GBP105m. Attributable profit after amortisation was GBP102m.

EPSA was 11.22p (56.10p per ADS) for the half year, an increase of 16% compared to the same period last year. Reported earnings per share were 10.88p (54.40p per ADS). A reconciliation of reported earnings per share to EPSA is provided in note 2 to the accounts.

Operating cash flow, defined as cash generated from operations less capital expenditure, was GBP39m. This is a trading profit to cash conversion ratio of 38%, before rationalisation and integration expenditure of GBP1m and GBP12m of funding of settlement payments to patients in respect of macrotextured revisions which are not being reimbursed by insurers, and compares with 41% a year ago.

An interim dividend of 2.10p per share (10.50p per ADS) will be paid on 11 November 2005 to shareholders on the register at the close of business on 21 October 2005. Having increased our dividend cover over recent years, this is an increase in the dividend of 10%.

Had our results been reported in US dollars translated at average rates of exchange, reported revenues and adjusted earnings per ADS would have been as follows:


                                                                      
                             Second Quarter            Half Year      
  Reported revenues                $643m    +15%       $1270m    +14% 
  Adjusted earnings                $0.54    +17%        $1.05    +18% 
  per ADS                                                             
 

Outlook

The orthopaedic market continues to grow strongly, particularly in the US. We continue to take market share as we benefit from our sales force investment and new product flow. We expect Orthopaedics to maintain its first half revenue growth momentum and achieve growth of around 18% for the full year.

We expect Endoscopy to achieve revenue growth of around 8% for the full year. Wound Management should see its revenue growth improve across the second half, but we are reducing our previous guidance for revenue growth to around 6% for the full year.

Revenue growth should pick up slightly in the second half for the Group as a whole and translational currency (at today's rates) should add 1% - 2% to revenue for the full year. We expect trading margins to continue to improve from efficiency gains and approach 21% for the full year. Overall on an underlying basis, excluding the Endoscopy restructuring charge, we are well placed to achieve our underlying mid teens EPSA growth goal for the full year.

About us

Smith & Nephew is a global medical technology business, specialising in Orthopaedics, Endoscopy and Advanced Wound Management products. Smith & Nephew is a global leader 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 8,500 employees and operates in 33 countries around the world generating annual sales of GBP1.25 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 expected revenue growth and operating 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.

a Trademark of Smith & Nephew. Certain names registered at the US Patent and Trademark Office.

 
SMITH & NEPHEW plc 
 
2005 QUARTER TWO AND HALF YEAR RESULTS 
 

  Unaudited Group Income Statement for the 3 months and 6 months to 2 
  July 2005                                                           
 

                                                                      
     3         3 Months                              6 Months   6 Months
   Months       2005                     Notes        2005     2004 A 
   2004 A                                                             
    GBPm        GBPm                                  GBPm       GBPm 
                                                                      
    307.2      350.9   Revenue           3           681.1      609.2 
   (82.5)     (91.3)   Cost of goods               (173.4)    (165.3) 
                       sold                                           
  (148.8)    (173.4)   Selling,                    (340.0)    (296.0) 
                       general and                                    
                       administrative                                 
                       expenses                                       
   (16.6)     (16.0)   Research and                 (32.1)     (32.6) 
    _____      _____   development                   _____      _____ 
                       expenses                                       
     59.3       70.2   Trading profit    3           135.6      115.3 
    (1.2)      (1.6)   Amortisation of   5           (3.2)      (1.6) 
    _____      _____   acquisition                   _____      _____ 
                       intangibles                                    
     58.1       68.6   Profit before                 132.4      113.7 
                       tax, financing                                 
                       & share of                                     
                       results of the                                 
                       joint venture                                  
      3.0        3.7   Interest                        7.9        9.9 
                       receivable                                     
    (2.1)      (2.9)   Interest                      (5.4)      (7.7) 
                       payable                                        
    (0.5)        0.5   Other finance                   0.5      (0.9) 
    _____      _____   income/(costs)                _____      _____ 
     58.5       69.9   Profit before                 135.4      115.0 
                       tax and share                                  
                       of results of                                  
                       the joint                                      
                       venture                                        
   (17.0)     (21.3)   Taxation          6          (41.3)     (33.6) 
    _____      _____                                 _____      _____ 
     41.5       48.6   Profit before                  94.1       81.4 
                       share of                                       
                       results of the                                 
                       joint venture                                  
      4.1        4.4   Share of          7             7.8        7.5 
    _____      _____   results of the                _____      _____ 
                       joint venture                                  
     45.6       53.0   Attributable                  101.9       88.9 
    _____      _____   profit                        _____      _____ 
                                                                      
                       Earnings per      2                            
                       share                                          
    4.88p      5.66p   Basic                        10.88p      9.52p 
    4.85p      5.60p   Diluted                      10.79p      9.46p 
 

                                                                      
  A     As restated for the effect of the transition to International 
  Financial Reporting Standards ("IFRS") - see Note 1.                
 

                                                                      
  Unaudited Group Statement of Recognised Income & Expense for the 3  
  months and 6 months to 2 July 2005                                  
 

                                                                      
   3 Months    3 Months                          6 Months    6 Months 
     2004 A        2005                              2005      2004 A 
       GBPm        GBPm                              GBPm        GBPm 
                                                                      
       45.6        53.0   Attributable profit       101.9        88.9 
      _____       _____                             _____       _____ 
          -         2.4   Translation                 2.4       (0.2) 
                          differences on                              
                          foreign currency                            
                          net investments                             
          -         5.0   Gains on cash flow         10.0           - 
                          hedges                                      
          -      (21.6)   Actuarial losses on      (21.6)           - 
                          defined benefit                             
                          plans                                       
          -         7.2   Taxation on items           7.2           - 
      _____       _____   taken directly to         _____       _____ 
                          equity                                      
          -       (7.0)   Net expense               (2.0)       (0.2) 
                          recognised directly                         
                          in equity                                   
          -           -   Restatement for the       (5.5)           - 
      _____       _____   effects of IAS 32         _____       _____ 
                          and 39 B                                    
       45.6        46.0   Total recognised           94.4        88.7 
      _____       _____   income and expense        _____       _____ 
 

                                                                      
  B     As detailed in Note 1, on 1 January 2005 the balance sheet    
  was restated for the effects of IAS 32 and 39.                      
 
 

                                                            
            Unaudited Group Balance Sheet as at 2 July 2005 
 

                                                                      
      31 Dec                                        2 July     3 July 
   2004 A, B                          Notes           2005     2004 A   
        GBPm                                          GBPm     GBPm  
               ASSETS
               Non-current assets                                     
       290.3   Property, plant and                   326.2      276.1 
               equipment                                              
       375.3   Intangible assets                     392.7      376.5 
         4.9   Investments                             5.6        4.9 
       120.7   Investment in joint                   122.8      118.9 
               venture                                                
        25.6   Non-current receivables                 0.8       22.4 
        67.6   Deferred tax assets                    80.9       59.0 
       _____                                         _____      _____ 
       884.4                                         929.0      857.8 
               Current assets                                         
       284.9   Inventories                           344.8      264.2 
       320.2   Trade and other                       335.1      309.1 
               receivables                                            
        32.6   Cash and bank                          53.9       25.1 
       _____                                         _____      _____ 
       637.7                                         733.8      598.4 
       _____                                         _____      _____ 
     1,522.1   TOTAL ASSETS                        1,662.8    1,456.2 
       _____                                         _____      _____ 
                                                                      
               EQUITY AND LIABILITIES                                 
               Equity attributable to                                 
               equity holders of the                                  
               parent                                                 
       114.5   Called up equity share                114.7      114.3 
               capital                                                
       159.6   Share premium account                 164.1      156.0 
       (4.2)   Own shares                            (2.2)      (2.5) 
         1.4   Other reserves                          6.0        1.1 
       430.7   Retained earnings                     492.5      406.0 
       _____                                         _____      _____ 
       702.0   Total equity              9           775.1      674.9 
                                                                      
               Non-current liabilities                                
       152.6   Long-term borrowings                  116.6      209.6 
       146.8   Retirement benefit                    165.0      137.2 
               obligation                                             
        15.8   Other payables due                      4.4       18.6 
               after one year                                         
        31.8   Provisions - due after                 26.6          - 
               one year                                               
        40.9   Deferred tax                           41.7       69.9 
       _____   liabilities                           _____      _____ 
       387.9                                         354.3      435.3 
               Current liabilities                                    
       244.2   Trade and other                       259.0      214.3 
               payables                                               
        32.3   Bank overdrafts and                   116.3       34.0 
               loans due within one                                   
               year                                                   
        49.9   Provisions - due within                43.9       15.3 
               one year                                               
       105.8   Current tax payable                   114.2       82.4 
       _____                                         _____      _____ 
       432.2                                         533.4      346.0 
       _____                                         _____      _____ 
       820.1   Total liabilities                     887.7      781.3 
       _____                                         _____      _____ 
     1,522.1   TOTAL EQUITY AND                    1,662.8    1,456.2 
       _____   LIABILITIES                           _____      _____ 
 

                                                                      
  A     As restated for the effect of the transition to IFRS.         

  B     Before adjustment for the effects of IAS 32 and 39.           

  C     Net currency swap liabilities of GBP1.1 million (2004 - GBP36.4   
        million assets) are included in the balance sheet as follows: 
        GBP0.1 million (2004 - GBP20.9 million) in non-current 
        receivables, GBP5.8 million (2004 - GBP26.1 million) in trade 
        and other receivables, nil (2004 - GBP3.7 million) in other 
        payables due after one year and GBP7.0 million 
        (2004 - GBP6.9 million) in trade and other payables.          
                                                                      
  Unaudited Condensed Group Cash Flow Statement for the 3 months and  
  6 months to 2 July 2005                                             
 

                                                                      
   3 Months    3 Months                           6 Months   6 Months 
     2004 A        2005                               2005     2004 A 
       GBPm        GBPm                               GBPm       GBPm 
                                                                      
                          Net cash inflow from                        
                          operating activities                        
       58.1        68.6   Profit before tax,         132.4      113.7 
                          financing and share                         
                          of results of the                           
                          joint venture                               
       15.2        20.3   Depreciation and            38.8       29.8 
                          amortisation                                
        1.3         2.0   Share based payment          4.0        2.9 
                          expense                                     
     (25.8)      (31.5)   Movement in working       (77.6)     (57.6) 
      _____       _____   capital and                _____      _____ 
                          provisions D                                
       48.8        59.4   Cash generated from         97.6       88.8 
                          operations                                  
        0.8         1.1   Net interest received        2.5        2.2 
      (9.5)      (22.8)   Income taxes paid         (32.3)     (15.7) 
      _____       _____                              _____      _____ 
       40.1        37.7   Net cash inflow from        67.8       75.3 
                          operating activities                        
                                                                      
                          Cash flows from                             
                          investing activities                        
      (6.7)       (7.6)   Acquisitions               (9.1)     (28.4) 
          -           -   Cash acquired on               -        1.8 
                          acquisition                                 
          -           -   Dividends received           5.7        5.9 
                          from the joint                              
                          venture                                     
     (24.7)      (33.1)   Capital expenditure       (58.7)     (43.8) 
      _____       _____                              _____      _____ 
     (31.4)      (40.7)   Net cash used in          (62.1)     (64.5) 
                          investing activities                        
                                                                      
        8.7       (3.0)   Cash flow before             5.7       10.8
                          financing activities                        
                                                                      
                          Cash flows from                             
                          financing activities                        
        1.3         3.4   Proceeds from issue          4.7        4.2
                          of ordinary share                           
                          capital                                     
      (2.4)           -   Own shares purchased           -      (2.4) 
     (28.9)      (30.0)   Equity dividends paid     (30.0)     (28.9) 
        7.1        12.8   Increase/(decrease)          7.2      (1.7) 
                          in borrowings and                           
                          finance leases                              
       12.5         0.5   Settlement of net            2.7       23.4 
      _____       _____   currency swaps             _____      _____ 
     (10.4)      (13.3)   Net cash used in          (15.4)      (5.4) 
                          financing activities                        
                                                                      
      (1.7)      (16.3)   Net                        (9.7)        5.4 
                          (decrease)/increase                         
                          in cash and cash                            
                          equivalents                                 
       20.8        28.4   Cash and cash               22.3       14.4 
                          equivalents at                              
                          beginning of period                         
          -           -   Exchange adjustments       (0.5)      (0.7) 
      _____       _____                              _____      _____ 
       19.1        12.1   Cash and cash               12.1       19.1 
      _____       _____   equivalents at end of      _____      _____ 
                          period E                                    
 

                                                                      
  A     As restated for the effect of the transition to IFRS.         

  D     After GBP11.7 million (2004 - nil) unreimbursed by insurers     
  relating to macrotextured knee revisions and GBP1.4 million (2004 -   
  GBP1.7 million) of outgoings on rationalisation and acquisition       
  integration costs in the six months.                                

  E     Cash and cash equivalents at the end of the period are net of 
  overdrafts of GBP41.8 million (2004 - GBP6.0 million).                  
 
 
                                      
                                 NOTES 
 

                                                                      
  1.    Smith & Nephew plc has previously prepared its primary        
        financial statements under UK generally accepted accounting   
        principles ("UK GAAP"). From 2005 the Group is required to    
        prepare its consolidated financial statements in accordance   
        with IFRS as adopted by the European Union ("EU"). For the    
        purposes of this document the term IFRS includes              
        International Accounting Standards ("IAS").                   
                                                                      
        The results for Quarter 2 2005 represent the second interim   
        financial statements the Group has prepared in accordance     
        with its accounting policies under IFRS. The first annual     
        report under IFRS will be for the year ended 31 December      
        2005. A description of how the Group's reported performance   
        and financial position are affected by this change, including 
        reconciliations from UK GAAP to IFRS for prior year results   
        and the revised summary of significant accounting policies    
        under IFRS, is published under Report and Results in the      
        Investors section of the corporate website at                 
        www.smith-nephew.com/investors/archive.html. If required,     
        printed copies are available from the Company Secretary.      
                                                                      
        The Group is required to apply all relevant standards in      
        force at the first reporting date: for the Group this is at   
        31 December 2005. As a consequence, these results have been   
        prepared on the basis that all IFRSs and International        
        Financial Reporting Interpretation Committee ("IFRIC")        
        interpretations, in particular the recently amended versions  
        of IAS 19, Employee Benefits and IAS 39, Financial            
        Instruments: Recognition and Measurement, will be adopted by  
        the European Commission. The failure of the European          
        Commission to adopt these amended standards in time for full  
        year financial reporting in 2005, the issue of further        
        interpretations by IFRIC in advance of the reporting date, or 
        the development of other accepted practice, could result in   
        the need to change the basis of accounting or presentation of 
        certain financial information from that presented in this     
        document.                                                     
                                                                      
        As permitted under IFRS 1, First Time Adoption of             
        International Financial Reporting Standards, management has   
        elected not to restate comparative information for the        
        Financial Instrument standards IAS 32 and IAS 39. A           
        restatement of the opening balance sheet at 1 January 2005 to 
        present the Group's 2005 opening position under IAS 32 and 39 
        was included within the interim financial statements for      
        Quarter 1 2005.                                               
                                                                      
        Appendix A reconciles attributable profit for the three       
        months and six months to 3 July 2004 as previously reported   
        under UK GAAP to IFRS. Appendix B reconciles the balance      
        sheet and equity for the six months to 3 July 2004 as         
        previously reported under UK GAAP to IFRS.                    
                                                                      
        The financial information contained in this document does not 
        constitute statutory accounts as defined in section 240 of    
        the Companies Act 1985. The auditors have issued an           
        unqualified opinion on the Group's statutory financial        
        statements under UK GAAP for the year ended 31 December 2004, 
        which have been filed with the Registrar of Companies.        
                                                                      
  2.    In order to provide a trend measure of underlying             
        performance, attributable profit is adjusted to exclude items 
        which management consider will distort comparability, either  
        due to their significant non-recurring nature or as a result  
        of specific accounting treatments. Adjusted earnings per      
        share ("EPSA") has been calculated by dividing adjusted       
        attributable profit by the weighted (basic) average number of 
        ordinary shares in issue of 937 million (2004 - 934 million). 
        The diluted weighted average number of ordinary shares in     
        issue is 944 million (2004 - 940 million).                    
 

                                                                      
   3 Months    3 Months                          6 Months    6 Months 
       2004        2005                              2005        2004 
       GBPm        GBPm                              GBPm        GBPm 
                                                                      
       45.6        53.0   Attributable profit       101.9        88.9 
        1.2         1.6   Adjustment:                 3.2         1.6 
      _____       _____   Amortisation of           _____       _____ 
                          acquisition                                 
                          intangibles                                 
       46.8        54.6   Adjusted                  105.1        90.5 
      _____       _____   attributable profit       _____       _____ 
                                                                      
      5.01p       5.83p   Adjusted basic           11.22p       9.68p 
                          earnings per share                          
      4.98p       5.77p   Adjusted diluted         11.13p       9.63p 
                          earnings per share                          
 

                                                                  
 3.    Segmental performance to 2 July 2005 was as follows:  
 

                                                                      
       3        3                      6       6   Underlying growth 
  Months   Months                  Months  Months      in revenue     
    2004     2005                   2005    2004                      
    GBPm     GBPm                   GBPm    GBPm           %          
                                                    3 Months  6 Months
                                                                      
                    Revenue by                                        
                    business                                          
                    segment                                           
   144.9    174.8   Orthopaedics   339.7   287.3          18       18 
    75.4     82.1   Endoscopy      161.3   150.1           7        9 
    86.9     94.0   Advanced       180.1   171.8           6        5 
   _____    _____   Wound          _____   _____       _____    _____ 
                    Management                                        
   307.2    350.9                  681.1   609.2          12       12 
   _____    _____                  _____   _____       _____    _____ 
                                                                      
                    Trading                                           
                    Profit by                                         
                    business                                          
                    segment                                           
    33.4     41.8   Orthopaedics    81.4    65.8                      
    14.3     16.4   Endoscopy       32.3    28.4                      
    11.6     12.0   Advanced        21.9    21.1                      
   _____    _____   Wound          _____   _____                      
                    Management                                        
    59.3     70.2                  135.6   115.3                      
   _____    _____                  _____   _____                      
                                                                      
                    Revenue by                                        
                    geographic                                        
                    market                                            
   101.9    112.0   Europe F       221.0   203.6           9        6 
   150.4    170.5   United         331.7   296.8          13       15 
                    States                                            
    54.9     68.4   Africa,        128.4   108.8          16       15 
   _____    _____   Asia,          _____   _____       _____    _____ 
                    Australasia,                                      
                    other                                             
                    America                                           
   307.2    350.9                  681.1   609.2          12       12 
   _____    _____                  _____   _____       _____    _____ 
 

                                                                      
   F   Includes United Kingdom six months revenue of GBP64.4 million    
       (2004 - GBP61.9 million) and three months revenue of GBP32.9       
       million (2004 - GBP32.5 million).                                
                                                                      
       Underlying revenue growth is calculated by eliminating the     
       effects of translational currency, acquisitions and different  
       numbers of sales days. Reported growth reconciles to           
       underlying growth as follows:                                  
 

                                                                      
               Reported     Foreign                                   
                 growth    currency                  Sales  Underlying
                     in translation  Acquisitions     days   growth in
                revenue      effect        effect   effect     revenue 
                                                                        
                     %           %             %        %           % 
  6 Months                                                            
  Orthopaedics      18           1           (2)        1          18 
                                                                      
  Endoscopy          8           -             -        1           9 
  Advanced           5         (1)             -        1           5 
  Wound          _____       _____         _____    _____       _____ 
  Management                                                          
                    12           -           (1)        1          12 
                 _____       _____         _____    _____       _____ 
  3 Months                                                            
  Orthopaedics      20       (1/2)             -   (1 1/2)         18 
                                                                      
  Endoscopy          9       (1/2)             -   (1 1/2)          7 
  Advanced           8       (1/2)             -   (1 1/2)          6 
  Wound          _____       _____         _____    _____       _____ 
  Management                                                          
                    14       (1/2)             -   (1 1/2)         12 
                 _____       _____         _____    _____       _____ 
 

                                                                      
  4.    The cumulative number of revisions of the macrotextured knee  
        product was 882 on 2 July 2005 compared with 809 at the end   
        of Quarter One 2005. This represents 30% of the total         
        implanted. Settlements with patients have been achieved in
        respect of 609 revisions. Costs of GBP30.4 million are in       
        dispute with insurers and are provided for in full. GBP56.3     
        million of provision remains to cover future settlement       
        costs.                                                        
                                                                      
        At 30 July 2005 the cumulative number of revisions was 897.
 

                                                                      
  5.    Amortisation of acquisition intangibles for the six months of 
        GBP3.2 million (2004 - GBP1.6 million) was incurred as follows:   
        Orthopaedics GBP2.9 million (2004 - GBP1.2 million) and Endoscopy 
        GBP0.3 million (2004 - GBP0.4 million).                           
                                                                      
  6.    Taxation of GBP41.3 million (2004 - GBP33.6 million) for the six  
        months on the profit before amortisation of acquisition       
        intangibles and the share of results of the joint venture is  
        at the full year estimated effective rate of 30% (2004 -      
        29%). GBP32.0 million (2004 - GBP27.0 million) of the charge      
        relates to overseas taxation.                                 
                                                                      
  7.    The share of results of the joint venture is after interest   
        payable of GBP0.7 million (2004 - GBP0.6 million) and taxation of 
        GBP3.8 million (2004 - GBP3.2 million). The Group's share of      
        revenue of the joint venture for the six months is GBP84.0      
        million (2004 - GBP82.1 million).                               
                                                                      
  8.    The 2004 final dividend of GBP30.0 million was paid on 13 May   
        2005. An interim dividend of 2.1 pence per ordinary share     
        (2004 - 1.9 pence per ordinary share) was approved by the     
        Board on 4 August 2005. This is payable on 11 November 2005   
        to shareholders whose names appear on the register at the     
        close of business on 21 October 2005. Shareholders may        
        participate in the dividend re-investment plan.               
                                                                      
  9.    The movement in total equity for the six months to 2 July     
        2005 was as follows:                                          
 

                                                                      
                                                       2005      2004 
                                                       GBPm      GBPm 
                                                                      
  Opening equity as at 1 January                      702.0     610.4 
  Restatement for the effects of IAS 32 and 39        (5.5)         - 
  (see Note 1)                                        _____     _____ 
  Restated opening equity as at 1 January             696.5     610.4 
  Attributable profit for the period                  101.9      88.9 
  Equity dividends paid                              (30.0)    (28.9) 
  Exchange adjustments                                  2.4     (0.2) 
  Gains on cash flow hedges (net of taxation)           9.0         - 
  Actuarial losses on defined benefit plans (net     (13.4)         - 
  of taxation)                                                        
  Share based payment recognised in the income          4.0       2.9 
  statement                                                           
  Issue of ordinary share capital                       4.7       4.2 
  Own shares purchased                                    -     (2.4) 
                                                      _____     _____ 
  Closing equity                                      775.1     674.9 
                                                      _____     _____ 
 

                                                           
  10.    Net debt as at 2 July 2005 comprises:  
 

                                                                      
                                                      2005       2004 
                                                      GBPm       GBPm 
                                                                      
  Cash and bank                                       53.9       25.1 
  Long-term borrowings                             (116.6)    (209.6) 
  Bank overdrafts and loans due within one year    (116.3)     (34.0) 
  Net currency swap (liabilities)/assets             (1.1)       36.4 
                                                     _____      _____ 
                                                   (180.1)    (182.1) 
                                                     _____      _____ 
 

                                                             
           The movements in the six months were as follows:  
 

                                                                      
  Opening net debt as at 1 January                 (120.7)    (136.7) 
  Cash flow before financing activities                5.7       10.8 
  Loan notes issued on acquisition                       -     (50.3) 
  Proceeds from issue of ordinary share capital        4.7        4.2 
  Own shares purchased                                   -      (2.4) 
  Equity dividends paid                             (30.0)     (28.9) 
  Exchange adjustments                              (39.8)       21.2 
                                                     _____      _____ 
  Closing net debt                                 (180.1)    (182.1) 
                                                     _____      _____ 
 
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 six months ended 2 July 2005   
  which comprises Group Income Statement, Group Statement of          
  Recognised Income and Expense, Group Balance Sheet, Condensed Group 
  Cash Flow Statement and the related notes 1 to 10. We have read the 
  other information contained in the interim report for quarter two   
  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 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 two, 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 two in accordance with the 
  Listing Rules of the Financial Services Authority.                  
                                                                      
  As disclosed in Note 1, the next annual accounts of the Group will  
  be prepared in accordance with those International Financial        
  Reporting Standards ("IFRS") adopted for use by the European Union. 
                                                                      
  The accounting policies are consistent with those that the          
  directors intend to use in the next annual accounts. There is,      
  however, a possibility that the directors may determine that some   
  changes to these policies are necessary when preparing the full     
  annual accounts for the first time in accordance with those IFRSs   
  adopted for use by the European Union. This is principally because, 
  as disclosed in Note 1, the directors have anticipated that the     
  revised versions of IAS 39, Financial Instruments: Recognition and  
  Measurement and IAS 19, Employee Benefits which have yet to be      
  formally adopted for use in the European Union, will be so adopted  
  in time to be applicable to the next annual accounts.               
                                                                      
  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 enquiries of group management 
  and applying analytical procedures to the financial information and 
  underlying financial data, and based thereon assessing whether the  
  accounting policies have been applied. 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 six months ended 2 July 2005.    
                                                                      
  Ernst & Young LLP                                                   
  London                                                              
                                                                      
  4 August 2005                                                       
 
 

                                                                      
  APPENDIX A - Reconciliation of Attributable Profit for the 3 months 
  and 6 months to 3 July 2004                                         
 

                                                                      
                                                Accounting            
                            As          Joint       policy            
                      reported        Venture      changes            
                      under UK   presentation       under    Restated 
                       GAAP G       change H       IFRS I        IFRS 
  6 Months               GBPm           GBPm         GBPm        GBPm 
                                                                      
  Revenue               609.2              -            -       609.2 
  Cost of goods       (165.3)              -            -     (165.3) 
  sold                                                                
  Selling,            (295.3)              -        (0.7)     (296.0) 
  general and                                                         
  administrative                                                      
  expenses                                                            
  Research and         (32.6)              -            -      (32.6) 
  development           _____          _____        _____        _____
  expenses                                                            
  Trading profit        116.0              -        (0.7)       115.3 
  (i)                                                                 
  Amortisation of       (9.8)              -          8.2       (1.6) 
  acquisition           _____          _____         _____       _____
  intangibles                                                         
  (ii)                                                                
  Profit before         106.2              -          7.5       113.7 
  tax, financing                                                      
  and share of                                                        
  results of the                                                      
  joint venture                                                       
  Interest                9.9              -            -         9.9 
  receivable                                                          
  Interest              (8.0)            0.6        (0.3)       (7.7) 
  payable (iii)                                                       
  Other finance             -              -        (0.9)       (0.9) 
  costs (iv)            _____          _____         _____       _____
  Profit before         108.1            0.6          6.3       115.0 
  tax and share                                                       
  of results of                                                       
  the joint                                                           
  venture                                                             
  Taxation (v)         (37.5)            3.2          0.7      (33.6) 
                        _____          _____         _____       _____
  Profit before          70.6            3.8          7.0        81.4 
  share of                                                            
  results of the                                                      
  joint venture                                                       
  Share of               11.3          (3.8)            -         7.5 
  results of the        _____          _____         _____      _____ 
  joint venture                                                       
  Attributable           81.9              -          7.0        88.9 
  profit                _____          _____         _____       _____
 

                                                                      
  3 Months                                                            
                                                                      
  Revenue                          307.2        -        -      307.2 
  Cost of goods sold              (82.5)        -        -     (82.5) 
  Selling, general and           (148.4)        -    (0.4)    (148.8) 
  administrative expenses                                             
  Research and development        (16.6)        -        -     (16.6) 
  expenses                         _____    _____    _____      _____ 
  Trading profit (i)                59.7        -    (0.4)       59.3
  Amortisation of acquisition      (5.5)        -      4.3      (1.2) 
  intangibles (ii)                 _____    _____    _____      _____ 
  Profit before tax,                54.2        -      3.9       58.1 
  financing and share of                                              
  results of the joint                                                
  venture
  Interest receivable                3.0        -        -        3.0
  Interest payable (iii)           (2.3)      0.3    (0.1)      (2.1) 
  Other finance costs (iv)             -        -    (0.5)      (0.5) 
                                   _____    _____    _____      _____ 
  Profit before tax and share       54.9      0.3      3.3       58.5 
  of results of the joint                                             
  venture                                                             
  Taxation (v)                    (19.4)      2.0      0.4     (17.0) 
                                   _____    _____    _____      _____ 
  Profit before share of            35.5      2.3      3.7       41.5 
  results of the joint                                                
  venture                                                             
  Share of results of the            6.4    (2.3)        -        4.1 
  joint venture                    _____    _____    _____      _____ 
  Attributable profit               41.9        -      3.7       45.6 
                                   _____    _____    _____      _____ 
 

                                                                      
  G     The order and description of items presented as "reported     
  under UK GAAP" have been amended to enable a direct comparison with 
  IFRS presentation.                                                  
                                                                      
  H     Under IFRS the Group's share of the after tax results of the  
  joint venture is included as a single line item after the Group's   
  post tax results.                                                   
                                                                      
  I     The accounting policy changes are as follows: (i) the trading 
  profit reduction in the six months relates to share based payment   
  costs of GBP2.2 million (GBP1.0 million in the three months) and other  
  costs of GBP0.2 million (GBP0.1 million in the three months) partially  
  offset by GBP1.7 million (GBP0.7 million in the three months) benefits  
  on pension      current service costs; (ii) there is no goodwill    
  amortisation; (iii) interest payable is increased due to            
  reclassification of a lease; (iv) finance costs represent pension   
  financing; and (v) certain of these adjustments have a              
  consequential deferred tax effect.                                  
 
 

                                                                      
  APPENDIX B - Reconciliation of Balance Sheet and Equity as at 3     
  July 2004                                                           
 

                                                                      
                   As    Goodwill                                     
             reported         and                Post                 
                under acquisition Deferred  retirement         Restated
                   UK  accounting      tax    benefits   Other     IFRS 
               GAAP G                                        J          
                 GBPm        GBPm     GBPm        GBPm    GBPm     GBPm 
  ASSETS                                                              
  Non-current                                                          
  assets                                                            
  Property,    267.7           -        -          -     8.4    276.1 
  plant and                                                           
  equipment                                                           
  Intangible   340.5        36.0        -          -       -    376.5 
  assets                                                              
  Investments    4.9           -        -          -       -      4.9 
  Investment   119.3           -        -      (0.4)       -    118.9 
  in joint                                                            
  venture                                                             
  Non-current     29.5           -        -      (7.1)       -     22.4 
  receivables                                                          
  Deferred       4.4           -     11.2       43.4       -     59.0 
  tax          _____       _____    _____      _____   _____    _____ 
  assets                                                              
               766.3        36.0     11.2       35.9     8.4    857.8 
  Current                                                             
  assets                                                              
  Inventories  264.2           -        -          -       -    264.2 
  Trade and    309.1           -        -          -       -    309.1 
  other                                                               
  receivables                                                          
  Cash and      25.1           -        -          -       -     25.1 
  bank         _____       _____    _____      _____   _____    _____ 
               598.4           -        -          -       -    598.4 
               _____       _____    _____      _____   _____    _____ 
  TOTAL       1,364.7       36.0     11.2       35.9     8.4   1,456.2
  ASSETS                   _____    _____      _____   _____          
               _____                                            _____ 
                                                                      
  EQUITY AND LIABILITIES
  Equity attributable to
  equity holders                                                             
  of the parent                                                              
  Called up    114.3           -        -          -       -    114.3 
  equity                                                              
  share                                                               
  capital                                                             
  Share        156.0           -        -          -       -    156.0 
  premium                                                             
  account                                                             
  Own          (2.5)           -        -          -       -    (2.5) 
  shares                                                              
  Other          4.3       (1.4)    (6.4)        4.4     0.2      1.1 
  reserves                                                            
  Retained     435.8        26.8     23.4     (91.0)    11.0    406.0 
  earnings     _____       _____    _____      _____   _____    _____ 
  Total        707.9        25.4     17.0     (86.6)    11.2    674.9 
  equity                                                              
                                                                      
  Non-current
  liabilities
  Long-term    200.7           -        -          -     8.9    209.6 
  borrowings                                                          
                                                                      
  Retirement     9.3           -        -      127.9       -    137.2 
  benefit                                                             
  obligation                                                          
                                                                      
  Other         18.6           -        -          -       -     18.6 
  payables                                                            
  due after                                                           
  one year                                                            
  Provisions       -           -        -          -       -        - 
  - due                                                               
  after one                                                           
  year                                                                
  Deferred      66.5        10.6    (5.8)      (1.4)       -     69.9 
  tax          _____       _____    _____      _____   _____    _____ 
  liabilities                                                          
               295.1        10.6    (5.8)      126.5     8.9    435.3 
  Current                                                             
  liabilities                                                          
  Trade and    230.2           -        -      (4.0)   (11.9)   214.3 
  other                                                               
  payables                                                            
  Bank          33.8           -        -          -     0.2     34.0 
  overdrafts                                                          
  and loans                                                           
  due                                                                 
  within                                                              
  one year                                                            
  Provisions    15.3           -        -          -       -     15.3 
  - due                                                               
  within                                                              
  one year                                                            
  Current       82.4           -        -          -       -     82.4 
  tax          _____       _____    _____      _____   _____    _____ 
  payable                                                             
               361.7           -        -      (4.0)   (11.7)   346.0 
               _____       _____    _____      _____            _____ 
                                                       _____          
  Total        656.8        10.6    (5.8)      122.5   (2.8)    781.3 
  Liabilities  _____       _____    _____      _____   _____    _____ 
  TOTAL       1,364.7       36.0     11.2       35.9     8.4   1,456.2
  EQUITY                   _____    _____      _____   _____          
  AND          _____                                            _____ 
  LIABILITIES                                                          
 

                                                                      
  G     The order and description of items presented as "reported     
  under UK GAAP" have been amended to enable a direct comparison with 
  IFRS presentation.                                                  
                                                                      
  J     Other adjustments includes the reclassification into          
  long-term borrowings of a lease of GBP8.9 million, the reversal of    
  the interim dividend accrual of GBP17.8 million and the inclusion of  
  an accrual for vacation pay of GBP5.9 million.                        
 
 
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