SOURCE: Smith & Nephew PLC

May 05, 2005 07:03 ET

SMITH & NEPHEW - 1ST QUARTER RESULTS

London, UK -- (MARKET WIRE) -- May 5, 2005 --Smith & Nephew Maintains Momentum

5 May 2005

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, today announces its 2005 first quarter results.

Q1 Highlights

* Group revenue up 11 1/2%* to GBP330m

* Orthopaedics revenue up 17%* - US up 23%*

* Endoscopy - revenue up 10%*

* Wound Management - revenue up 4%*

* Trading profit up 17% - trading margin of 20%

* EPSA up 15%** to 5.39p

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

"I am pleased with our revenue and earnings momentum in the first quarter. Although Wound Management had a slower than expected start to the year, Orthopaedics and Endoscopy both performed strongly and our margins improved further.

Market conditions continue to be favourable across each of our businesses. These market conditions and our planned revenue growth and margin expansion support our confidence in achieving our underlying mid-teens EPSA growth goal for the year."

A conference call for analysts to discuss the company's first quarter results will be held at 2:30 pm BST / 9:30 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/Q105. If interested parties are unable to connect to the web, a listen-only service is available by calling 020 7365 1833 in the UK or 718 354 1158 in the US. Analysts should contact Samantha Hardy on +44 (0) 20 7960 2257 or via email at samantha.hardy@smith-nephew.com for conference call details.

* Unless otherwise specified as reported, all revenue increases throughout this document are underlying which adjusts for the effects of currency translation, the acquisition of MMT in Q1 last year and the effect of fewer sales days in this 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 7960 2256  
  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       
 

First Quarter Results

This is the first quarter that our results have been reported under International Financial Reporting Standards, involving a number of accounting policy changes and changes in the format and nomenclature of the accounts. Comparative figures have been restated and appropriate reconciliations from UK GAAP are provided in the appendices to this announcement.

Underlying revenue growth in the quarter was 11 1/2%. Reported revenue growth in the quarter was reduced by 1% due to translational currency movements and 3% due to two fewer sales days, but benefited by 1 1/2% from the acquisition of Midland Medical Technologies ("MMT"), in March 2004. This resulted in reported first quarter revenue increasing by 9% to GBP330m.

Trading profit in the quarter was GBP65 1/2m, with margins improving to 20%. Interest income and finance costs netted out to GBP2m positive, taxation amounted to GBP20m and the share of after tax results of the BSN joint venture was GBP3m, resulting in attributable profit before amortisation of acquisition intangibles of GBP50 1/2m. Attributable profit after amortisation was GBP49m.

Earnings per share before amortisation of acquisition intangibles ("EPSA") was 5.39p (26.95p per American Depositary Share, "ADS"), a 15% increase on the first quarter last year. Reported earnings per share was 5.22p (26.10p per ADS), an increase of 12 1/2%. A reconciliation of EPSA is provided in note 2 to this announcement.

Had our results been reported in US dollars translated at average rates of exchange ($1.90 in 2005, $1.84 in 2004), reported revenues and adjusted earnings per ADS would have been as follows:


                                                           
               Reported revenues            $627m    +13%  
               Adjusted earnings per ADS    $0.51    +19%  

Orthopaedics

The orthopaedic market continued to exhibit strong growth and we again increased our market share, with revenue up by 17% compared to the first quarter last year. Revenue growth in the US was 23% and outside the US 8%. Sales pricing in reconstruction and trauma increased by approximately 4% in the US, compared with a year ago.

In reconstruction, knee revenues increased by 17% (25% in the US and 7% outside the US) and hip revenues by 12% (11% in the US and 13% outside the US). This growth reflects continuing strong market conditions, particularly in the US, and the benefit of the expansion of our reconstruction sales force and the introduction of our minimal incision surgery procedures for knees and hips last year. The Birmingham Hip Resurfacing product, acquired with MMT in Q1 last year, added 4% to Orthopaedics revenues in the quarter.

US trauma revenues increased by 23%, well ahead of the market, continuing to benefit from the dedicated US trauma sales force. Revenue growth outside the US was 4%, giving overall revenue growth of 14%. During the quarter, we successfully launched the PERI-LOC(a) locking compression plate system at the American Academy of Orthopaedic Surgeons' Annual Meeting.

Clinical Therapy revenues, comprising SUPARTZ(a) joint fluid therapy and EXOGEN(a) ultrasound bone healing products, grew 51% compared with the same quarter last year. US Medicare reimbursement for EXOGEN(a) in non-healing fractures has recently been extended.

The cumulative number of revisions of the macrotextured knee product withdrawn from the market in 2003 was 827 on 30 April 2005, 28% of the total implanted, with the latest three month moving average of revisions being 21 per month. We continue to work with patients to reach mutually satisfactory settlements as quickly as possible and have achieved this in respect of 580 of the revisions. Total costs to 30 April 2005 amounted to GBP55m, of which GBP23m is disputed by insurers and is covered by the provision created in 2004.

Endoscopy

Endoscopy revenues increased by 10% from the first quarter last year, with growth in the US of 13% and 7% outside the US.

Knee and shoulder repair revenues again grew by an outstanding 21%. The progressive scan camera launched last year along with our expanded image management capabilities continued to drive visualisation and digital operating room revenues, which were up by 21% in the quarter. Blade revenues grew 2% and radio frequency, including spine, declined 1% principally due to the continued effect of a competitive patent injunction.

Advanced Wound Management

Advanced Wound Management revenues grew more slowly than expected at 4% compared to the first quarter last year. In the US revenues declined by 7% partly as a result of distributors reducing their inventory levels and in part due to reductions in third-party bulk supply revenues. Distributors' sales to end customers in the US continue to show high single digit growth. Revenue growth outside the US was 8% with Japanese revenues being particularly strong.

We have focused our sales force globally on the growth opportunities for our superbrands and ALLEVYN(a) revenues grew by 13% and ACTICOAT(a) revenues grew by 30% in the quarter. We launched ACTICOAT(a) Moisture Control in the US at the Society for Advanced Woundcare Conference in April 2005. In the US, a specialised sales force now sells DERMAGRAFT(a) and concentrates on major customers. Revenue grew by 5% in the quarter as this change took effect.

Outlook

The prospects for the orthopaedic market remain strong and this, together with our investments in our sales force and new product flow enable us to target revenue growth of around 18% in Orthopaedics for the year.

At Endoscopy we continue to expect revenue growth of around 8% for the year, although there will be some variability between quarters due to capital equipment revenues, with the second quarter expected to grow less quickly before picking up in the second half. We expect progressive revenue growth at Wound Management, as inventory levels at distributors stabilise, and to achieve around 7% for the year.

For the group as a whole, we continue to expect a pick up in the revenue growth rate, particularly in the second half. We expect our trading margin to improve to 21% for the year, as a result of further cost and efficiency gains. With our expected revenue growth, and margin expansion, we are well placed to achieve our mid-teens EPSA growth goal for this 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 8,000 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 planned growth in our business and in our 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 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 ONE RESULTS 
 
    Unaudited Group Income Statement for the 3 months to 2 April 2005  
 

                                                                        
                     Notes                    2005               2004 A 
                                              GBPm                 GBPm 
                                                                        
  Revenue                3                   330.2                302.0 
  Cost of goods sold                        (82.1)               (82.8) 
  Selling, general and                     (166.6)              (147.2) 
  administrative                                                        
  expenses                                                              
  Research and                              (16.1)               (16.0) 
  development expenses                       _____                _____ 
  Trading profit         3                    65.4                 56.0 
  Amortisation of        4                   (1.6)                (0.4) 
  acquisition                                _____                _____ 
  intangibles                                                           
  Profit before tax,                          63.8                 55.6 
  financing and share                                                   
  of results of the                                                     
  joint venture                                                         
  Interest receivable                          9.0                  6.9 
  Interest payable                           (6.8)                (5.6) 
  Other finance costs                        (0.5)                (0.4) 
                                             _____                _____ 
  Profit before tax                           65.5                 56.5 
  and share of results                                                  
  of the joint venture                                                  
  Taxation               5                  (20.0)               (16.6) 
                                             _____                _____ 
  Profit before share                         45.5                 39.9 
  of results of the                                                     
  joint venture                                                         
  Share of results of    6                     3.4                  3.4 
  the joint venture                          _____                _____ 
  Attributable profit                         48.9                 43.3 
                                             _____                _____ 
                                                                        
  Earnings per share     2                                              
  Basic                                      5.22p                4.64p 
  Diluted                                    5.19p                4.61p
                                                                        
                                                                        
  A  As restated for the effect of the transition to International   
     Financial Reporting Standards ("IFRS") - see Note 1. 

                                                                        
  Unaudited Group Statement of Recognised Income and Expense for the 3  
  months to 2 April 2005                                                
 
                                                                        
                                                         2005    2004 A 
                                                         GBPm      GBPm 
                                                                        
  Attributable profit                                    48.9      43.3 
                                                        _____     _____ 
  Translation differences on foreign currency net           -     (0.2) 
  investments                                                           
  Gains on cash flow hedges                               5.0         - 
                                                        _____     _____ 
  Net income/(expense) recognised directly in equity      5.0     (0.2) 
  Restatement for the effects of IAS 32 and 39          (5.5)         - 
                                                        _____     _____ 
  Total recognised income and expense                    48.4      43.1 
                                                        _____     _____ 
 

                                                              
            Unaudited Group Balance Sheet as at 2 April 2005  

                                                                        
  31 Dec 2004 A, B                         Notes     2 April    3 April 
                                                        2005     2004 A 
        GBPm                                            GBPm       GBPm 
               ASSETS                                                   
               Non-current assets                                       
       290.3   Property, plant and                     299.3      266.8 
               equipment                                                
       375.3   Intangible assets                       375.5      373.1 
         4.9   Investments                               5.0        4.9 
       120.7   Investment in joint                     117.1      113.6 
               venture C                                                
        25.6   Non-current receivables                   6.7       23.4 
        67.6   Deferred tax assets                      68.4       58.8 
       _____                                           _____      _____ 
       884.4                                           872.0      840.6 
               Current assets                                           
       284.9   Inventories                             313.6      243.6 
       320.2   Trade and other                         340.3      310.7 
               receivables                                              
        32.6   Cash and bank                            75.9       26.8 
       _____                                           _____      _____ 
       637.7                                           729.8      581.1 
       _____                                           _____      _____ 
     1,522.1   TOTAL ASSETS                          1,601.8    1,421.7 
       _____                                           _____      _____ 
                                                                        
               EQUITY AND LIABILITIES                                   
               Equity attributable to                                   
               equity holders of the                                    
               parent                                                   
       114.5   Called up equity share                  114.6      114.3 
               capital                                                  
       159.6   Share premium account                   160.8      154.7 
       (4.2)   Own shares                              (2.2)      (2.5) 
         1.4   Other reserves                          (0.4)        1.1 
       430.7   Retained earnings                       480.9      388.0 
       _____                                                            
       702.0   Total equity                8           753.7      655.6 
                                                                        
               Non-current liabilities                                  
       152.6   Long-term borrowings                    104.1      193.6 
       146.8   Retirement benefit                      147.5      137.2 
               obligation                                               
        15.8   Other payables due after                  3.9       17.6 
               one year                                                 
        31.8   Provisions - due after                   31.0          - 
               one year                                                 
        40.9   Deferred tax liabilities                 41.8       66.5 
       _____                                           _____      _____ 
       387.9                                           328.3      414.9 
               Current liabilities                                      
       244.2   Trade and other payables                248.7      213.6 
        32.3   Bank overdrafts and loans               114.0       43.2 
               due within one year                                      
        49.9   Provisions - due within                  42.7       17.1 
               one year                                                 
       105.8   Current tax payable                     114.4       77.3 
       _____                                           _____      _____ 
       432.2                                           519.8      351.2 
       _____                                           _____      _____ 
       820.1   Total liabilities                       848.1      766.1 
       _____                                           _____      _____ 
     1,522.1   TOTAL EQUITY AND                      1,601.8    1,421.7 
       _____   LIABILITIES                             _____      _____ 
 
                                                                        
A     As restated for the effect of the transition to IFRS.           

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

C     Investment in joint venture at 2 April 2005 comprises goodwill  
      £68.8 million, share of gross assets £112.3 million less share 
      of gross liabilities £64.0 million.

D     Net currency swap assets of £27.7 million (2004 - £49.7         
      million) are included in the balance sheet as follows: 
      £5.5 million  (2004 - £21.9 million) in non-current receivables,
      £24.2 million (2004 - £37.2 million) in trade and other  
      receivables, £0.2 million (2004 - £2.8 million) in other payables 
      due after one year and £1.8 million (2004 - £6.6 million) in trade  
      and other payables.            
 
                                                                        
  Unaudited Condensed Group Cash Flow Statement for the 3 months to 2   
  April 2005                                                            
 

                                                                        
                                                        2005      2004 A 
                                                        GBPm        GBPm 
                                                                        
  Net cash inflow from operating                                        
  activities                                                            
  Profit before tax, financing and share                 63.8      55.6 
  of results of the joint venture                                       
  Depreciation and amortisation                          18.5      14.6 
  Share based payment expense                             2.0       1.6 
  Movements in working capital and                     (46.1)    (31.8) 
  provisions E                                          _____     _____ 
  Cash generated from operations                         38.2      40.0 
  Net interest received                                   1.4       1.4 
  Income taxes paid                                     (9.5)     (6.2) 
                                                        _____     _____ 
  Net cash inflow from operating                         30.1      35.2 
  activities                                                            
                                                                        
  Cash flows from investing activities                                  
  Acquisitions                                          (1.5)    (21.7) 
  Cash acquired on acquisition                             -        1.8 
  Dividends received from the joint                       5.7       5.9 
  venture                                                               
  Capital expenditure                                  (25.6)    (19.1) 
                                                        _____     _____ 
  Net cash used in investing activities                (21.4)    (33.1) 
                                                                        
  Cash flow before financing activities                   8.7       2.1 
                                                                        
  Cash flows from financing activities                                  
  Proceeds from issue of ordinary share                   1.3       2.9 
  capital                                                               
  Decrease in borrowings and finance                    (5.6)     (8.8) 
  leases                                                                
  Settlement of net currency swaps                        2.2      10.9 
                                                        _____     _____ 
  Net cash used in financing activities                 (2.1)       5.0 
                                                                        
  Net increase in cash and cash                           6.6       7.1 
  equivalents                                                           
  Cash and cash equivalents at beginning                 22.3      14.4 
  of period                                                             
  Exchange adjustments                                  (0.5)     (0.7) 
                                                        _____     _____ 
  Cash and cash equivalents at end of                    28.4      20.8 
  period F                                              _____     _____ 
 

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

E  After £8.1 million (2004 - nil) unreimbursed by insurers        
   relating to macrotextured knee revisions and £0.4 million (2004 -     
   £1.1 million) of outgoings on rationalisation, acquisition and        
   divestment costs.                                                     

F  Cash and cash equivalents at the end of the period represent    
   cash and bank net of overdrafts of £47.5 million (2004 - £6.0         
   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 1 2005 represent the first 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 is included within these   
        interim financial statements as Appendix A.                     

        Appendix B and Appendix C respectively reconcile attributable
        profit and the balance sheet, for the three months to 3 April   
        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 will be         
        delivered to the Registrar of Companies after approval by       
        shareholders on 5 May 2005.                                     
                                                                        
  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 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 943 million (2004 - 940 million).            
 
                                                                       
                                                          2005     2004 
                                                          GBPm     GBPm 
                                                                        
      Attributable profit                                 48.9     43.3 
      Adjustment: Amortisation of acquisition              1.6      0.4 
      intangibles                                        _____    _____ 
      Adjusted attributable profit                        50.5     43.7 
                                                         _____    _____ 
                                                                        
      Adjusted basic earnings per share                  5.39p    4.67p 
      Adjusted diluted earnings per share                5.36p    4.65p 
 

                                                                        
  3.    Segmental performance for the 3 months to 2 April 2005 was as   
        follows:                                                        
 

                                                                        
                                   2005     2004    Underlying growth in
                                                                revenue 
                                   GBPm     GBPm                      % 
                                                                        
      Revenue by business                                               
      segment                                                           
      Orthopaedics                164.9    142.4                     17 
      Endoscopy                    79.2     74.7                     10 
      Advanced Wound               86.1     84.9                      4 
      Management                  _____    _____                  _____ 
                                  330.2    302.0                 11 1/2 
                                  _____    _____                  _____ 
                                                                        
      Trading Profit by                                                 
      business segment                                                  
      Orthopaedics                 39.6     32.4                        
      Endoscopy                    15.9     14.1                        
      Advanced Wound                9.9      9.5                        
      Management                  _____    _____                        
                                   65.4     56.0                        
                                  _____    _____                        
                                                                        
      Revenue by geographic                                             
      market                                                            
      Europe G                    109.0    101.7                      4 
      United States               161.2    146.4                     17 
      Africa, Asia,                60.0     53.9                     14 
      Australasia and Other       _____    _____                  _____ 
      America                                                           
                                  330.2    302.0                 11 1/2 
                                  _____    _____                  _____ 
 

                                                                        
G Includes United Kingdom revenue of GBP31.5 million (2004 - GBP29.4 
  million).               
                                                                        
      Underlying revenue growth is calculated by eliminating the        
      effects of translational currency, acquisitions and fewer sales   
      days compared to Quarter 1 2004. Reported growth by business      
      segment reconciles to underlying growth as follows:               
 

                                                                        
                   Reported   Foreign   Acquisitions   Sales  Underlying
                   growth    currency       effect      days   growth in 
                      in     translation                effect  revenue
                    revenue     effect
                        %           %             %       %           % 
                                                                        
      Orthopaedics     16           2           (4)       3          17 
      Endoscopy         6           1             -       3          10 
      Advanced          1           -             -       3           4 
      Wound         _____       _____         _____   _____       _____ 
      Management                                                        
                        9           1       (1 1/2)       3      11 1/2 
                    _____       _____         _____   _____      _____  
 

                                                                        
  4.    Amortisation of acquisition intangibles of GBP1.6 million (2004 - 
        GBP0.4 million) can be allocated by business segment as follows:  
        Orthopaedics GBP1.4 million (2004 - GBP0.2 million) and 
        Endoscopy   
        GBP0.2 million (2004 - GBP0.2 million).                             
                                                                        
  5.    Taxation of GBP20.0 million (2004 - GBP16.6 million) 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%).                             
                                                                        
  6.    The share of results of the joint venture is after interest     
        payable of GBP0.4 million (2004 - GBP0.3 million) and taxation of   
        GBP1.7 million (2004 - GBP1.2 million). The Group's share of        
        revenue of the joint venture is GBP40.3 million (2004 - GBP39.0     
        million).                                                       
                                                                        
  7.    No dividends were accrued or paid in the quarter in 2005 or     
        2004. The proposed final dividend for 2004 of 3.20 pence per    
        ordinary share was approved by the Board on 8 March 2005 and    
        will be put before shareholders for approval on 5 May 2005.     
        This is payable on 13 May 2005 to shareholders whose names      
        appear on the register at the close of business on 22 April     
        2005. Shareholders may participate in the dividend              
        re-investment plan.                                             
                                                                        
  8.    The movement in total equity for the 3 months to 2 April 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)        - 
                                                         _____    _____ 
      Restated opening equity as at 1 January            696.5    610.4 
      Attributable profit for the period                  48.9     43.3 
      Exchange adjustments                                   -    (0.2) 
      Gains on cash flow hedges                            5.0        - 
      Share based payment recognised in the income         2.0      1.6 
      statement                                                         
      Cost of own shares purchased                           -    (2.4) 
      Issue of ordinary share capital                      1.3      2.9 
                                                         _____    _____ 
      Closing equity                                     753.7    655.6 
                                                         _____    _____ 
 

                                                            
9.    Net debt as at 2 April 2005 comprises:  
 

                                                                        
                                                        2005       2004 
                                                        GBPm       GBPm

      Cash and bank                                     75.9       26.8 
      Long-term borrowings                           (104.1)    (193.6) 
      Bank overdrafts and loans due within one       (114.0)     (43.2) 
      year                                                              
      Net currency swap assets                          27.7       49.7 
                                                       _____      _____ 
                                                     (114.5)    (160.3) 
                                                       _____      _____ 
 
                       The movements were as follows:  
 
      Opening net debt as at 1 January               (120.7)    (136.7) 
      Cash flow before financing activities              8.7        2.1 
      Loan notes issued on acquisition                     -     (50.3) 
      Proceeds from issue of ordinary share              1.3        2.9 
      capital                                                           
      Exchange adjustments                             (3.8)       21.7 
                                                       _____      _____ 
      Closing net debt                               (114.5)    (160.3) 
                                                       _____      _____ 
 
INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc 
 

                                                                        
  Introduction                                                          

  We have been instructed by the company to review the financial        
  information for the three months ended 2 April 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. We have read the other information contained in    
  the interim report for quarter one 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 one, 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 one in accordance with the   
  Listing Rules of the Financial Services Authority which require that  
  the accounting policies and presentation applied to the interim       
  figures should be consistent with those applied in preparing the      
  preceding annual accounts except where any changes, and the reasons   
  for them, are disclosed.                                              
                                                                        
  As disclosed in Note 1, the next annual accounts of the Group will be 
  prepared in accordance with those International Financial Reporting   
  Standards adopted for use by the EU.                                  
                                                                        
  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 EU. 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 EU, 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 and presentation have been consistently applied,  
  unless otherwise disclosed. 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 ended 2 April 2005.                    
                                                                        
  Ernst & Young LLP                                                     
  London                                                                
                                                                        
  5 May 2005                                                            
 
  APPENDIX A - Restatement of Balance Sheet and Equity at 1 January     
  2005 for the effects of the Financial Instruments Standards IAS 32    
  and IAS 39                                                            

  Under IFRS 1, First time adoption of International Financial          
  Reporting Standards, the Group is not required to present comparative 
  information which complies with IAS 32 and IAS 39. The Group's        
  hedging strategy is unchanged in respect of both hedging the net      
  investment position of foreign subsidiaries and covering the          
  transactional risk of foreign currency purchases. The accounting      
  differences for which the opening 2005 balance sheet is restated and  
  which will apply to the 2005 figures are noted below:                 
 
                     Balance Sheet at 1 January 2005 
 
                   IFRS pre    Gross  Transactional  Interest   Restated
                restatement      up         forward      rate      IFRS 
                        for      for      contracts    hedges           
                IAS 32 & 39    debt           (ii)     (iii)            
                              offset                                    
                                (i)                                     
                       GBPm    GBPm           GBPm      GBPm       GBPm 
  ASSETS                                                                
  Non-current                                                           
  assets                                                                
  Property,           290.3       -              -         -      290.3 
  plant and                                                             
  equipment                                                             
  Intangible          375.3       -              -         -      375.3 
  assets                                                                
  Investments           4.9       -              -         -        4.9 
  Investment          120.7       -              -         -      120.7 
  in joint                                                              
  venture                                                               
  Non-current          25.6       -              -         -       25.6 
  receivables                                                           
  Deferred             67.6       -              -         -       67.6 
  tax assets          _____   _____          _____     _____      _____ 
                      884.4       -              -         -      884.4 
  Current                                                               
  assets                                                                
  Inventories         284.9       -          (1.6)         -      283.3 
  Trade and           320.2       -            2.0       1.8      324.0 
  other                                                                 
  receivables                                                           
  Cash and             32.6    33.9              -         -       66.5 
  bank                _____   _____          _____     _____      _____ 
                      637.7    33.9            0.4       1.8      673.8 
                      _____   _____          _____     _____      _____ 
  TOTAL ASSETS      1,522.1    33.9            0.4       1.8    1,558.2 
                      _____   _____          _____     _____      _____ 
                                                                        
  EQUITY AND                                                            
  LIABILITIES                                                           
  Equity attributable to equity                                         
  holders of the parent                                                 
  Called up           114.5       -              -         -      114.5 
  equity                                                                
  share                                                                 
  capital                                                               
  Share               159.6       -              -         -      159.6 
  premium                                                               
  account                                                               
  Own shares          (4.2)       -              -         -      (4.2) 
  Other                 1.4       -          (7.1)       0.3      (5.4) 
  reserves                                                              
  Retained            430.7       -              -       1.3      432.0 
  earnings            _____   _____          _____     _____      _____ 
  Total               702.0       -          (7.1)       1.6      696.5 
  equity                                                                
                                                                        
  Non-current                                                           
  liabilities                                                           
  Long-term           152.6       -              -         -      152.6 
  borrowings                                                            
  Retirement          146.8       -              -         -      146.8 
  benefit                                                               
  obligation                                                            
  Other                15.8       -              -         -       15.8 
  payables                                                              
  due after                                                             
  one year                                                              
  Provisions           31.8       -              -         -       31.8 
  - due after                                                           
  one year                                                              
  Deferred             40.9       -              -         -       40.9 
  tax                 _____   _____          _____     _____      _____ 
  liabilities                                                           
                      387.9       -              -         -      387.9 
  Current                                                               
  liabilities                                                           
  Trade and           244.2       -            7.5       0.2      251.9 
  other                                                                 
  payables                                                              
  Bank                                                                  
  overdrafts           32.3    33.9              -         -       66.2 
  and loans                                                             
  due within                                                            
  one year                                                              
  Provisions           49.9       -              -         -       49.9 
  - due                                                                 
  within one                                                            
  year                                                                  
  Current tax         105.8       -              -         -      105.8 
  payable             _____   _____          _____     _____      _____ 
                      432.2    33.9            7.5       0.2      473.8 
                      _____   _____          _____     _____      _____ 
  Total               820.1    33.9            7.5       0.2      861.7 
  liabilities         _____   _____          _____     _____      _____ 
  TOTAL             1,522.1    33.9            0.4       1.8    1,558.2 
  EQUITY AND          _____   _____          _____     _____      _____ 
  LIABILITIES
 
 (i)      Under IFRS and UK GAAP an enforceable right of offset is     
           required to offset cash and borrowings. However, under IFRS  
           there must also be an intention to settle these balances     
           net. This means that the gross cash and borrowing positions  
           included in the IFRS financial statements are different to   
           those shown under UK GAAP.                                   
                                                                        
  (ii)     The Group has applied hedge accounting under IAS 39 for      
           certain foreign currency exposures. Under the special        
           transitional rules, the outstanding forward contracts at 31  
           December 2004 have been designated as part of the hedging    
           relationship, and the adjustment to recognise them at fair   
           value has therefore been taken to hedging reserves in        
           equity, to be recycled when the hedged item affects the      
           Income Statement. As far as possible, the Group has          
           structured its ongoing hedging activities to achieve hedge   
           accounting under IFRS.                                       
                                                                        
  (iii)    Only those interest rate swaps that hedge the interest rate  
           risk of floating rate debt have been designated as hedging   
           instruments under the special transitional rules of IAS 39   
           at 1 January 2005. The adjustment to recognise these swaps   
           at fair value has been taken to hedging reserves in equity.  
           IFRS does not permit the use of hedge accounting for         
           derivatives contracted to fix forward interest costs arising 
           on currency swaps used to hedge the Group's net investments. 
           The adjustment to recognise these swaps at fair value has    
           been taken to retained earnings.                             
 

                                                                        
  APPENDIX B - Reconciliation of Attributable Profit for the 3 Months   
  to 3 April 2004                                                       
 

                                                                        
                           As           Joint    Accounting    Restated 
                     reported         venture        policy        IFRS 
                     under UK    presentation       changes             
                       GAAP H        change I         under             
                                                     IFRS J             
                         GBPm            GBPm          GBPm        GBPm 
                                                                        
  Revenue               302.0               -             -       302.0 
  Cost of goods        (82.8)               -             -      (82.8) 
  sold                                                                  
  Selling,            (146.9)               -         (0.3)     (147.2) 
  general and                                                           
  administrative                                                        
  expenses                                                              
  Research and         (16.0)               -             -      (16.0) 
  development           _____           _____         _____       _____ 
  expenses                                                              
  Trading profit         56.3               -         (0.3)        56.0 
  (i)                                                                   
                                                                        
  Amortisation of       (4.3)               -           3.9       (0.4) 
  acquisition           _____           _____         _____       _____ 
  intangibles                                                           
  (ii)                                                                  
  Profit before          52.0               -           3.6        55.6 
  tax, financing                                                        
  and share of                                                          
  results of the                                                        
  joint venture                                                         
  Interest                6.9               -             -         6.9 
  receivable                                                            
  Interest              (5.7)             0.3         (0.2)       (5.6) 
  payable (iii)                                                         
  Other finance             -               -         (0.4)       (0.4) 
  costs (iv)            _____           _____         _____       _____ 
  Profit before          53.2             0.3           3.0        56.5 
  tax and share                                                         
  of results of
  the joint
  venture
  Taxation (v)         (18.1)             1.2           0.3      (16.6) 
                        _____           _____         _____       _____ 
  Profit before          35.1             1.5           3.3        39.9 
  share of                                                              
  results of the                                                        
  joint venture
  Share of                4.9           (1.5)             -         3.4 
  results of the        _____           _____         _____       _____ 
  joint venture                                                         
  Attributable           40.0               -           3.3        43.3 
  profit                _____           _____         _____       _____ 
 

                                                                        
  H     The order and description of items presented as "reported under 
  UK GAAP" have been amended to enable a direct comparison with IFRS    
  presentation.                                                         
                                                                        
  I     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.                                                     
                                                                        
  J     The accounting policy changes are as follows: (i) the trading   
  profit reduction relates to share based payment costs of GBP1.2 million 
  and other costs of GBP0.1 million partially offset by GBP1.0 million      
  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) these adjustments have a consequential deferred    
  tax effect.                                                           
 

                                                                        
  APPENDIX C - Reconciliation of Balance Sheet and Equity as at 3 April 
  2004                                                                  
 

                                                                        
                 As      Goodwill  Deferred     Post    Other L  Restated
           reported           and       tax  retirement              IFRS
           under UK   acquisition              benefits   
             GAAP K    accounting
               GBPm          GBPm      GBPm        GBPm    GBPm      GBPm 

  ASSETS                                                                
  Non-current assets
  Property,    258.1           -        -           -     8.7     266.8 
  plant and                                                             
  equipment                                                             
  Intangible   341.3        31.8        -           -       -     373.1 
  assets                                                                
  Investments    4.9           -        -           -       -       4.9 
  Investment   114.0           -        -       (0.4)       -     113.6 
  in joint 
  venture
  Non-current   30.5           -        -       (7.1)       -      23.4 
  receivables                                                            
  Deferred       4.4           -     11.0        43.4       -      58.8 
  tax          _____       _____    _____       _____   _____     _____ 
  assets                                                                
               753.2        31.8     11.0        35.9     8.7     840.6 
  Current                                                               
  assets                                                                
  Inventories  243.6           -        -           -       -     243.6 
  Trade and    310.7           -        -           -       -     310.7 
  other                                                                 
  receivables  
  Cash and      26.8           -        -           -       -      26.8 
  bank         _____       _____    _____       _____   _____     _____ 
               581.1           -        -           -       -     581.1 
               _____       _____    _____       _____   _____     _____ 
  TOTAL       1,334.3       31.8     11.0        35.9     8.7   1,421.7 
  ASSETS                   _____    _____       _____   _____     _____ 
               _____                                                    
                                                                        
  EQUITY AND LIABILITIES

  Equity attributable to equity                                         
  holders of the parent                                                 

  Called up    114.3           -        -           -       -     114.3 
  equity share  
  capital
  Share        154.7           -        -           -       -     154.7 
  premium                                                               
  account                                                               
  Own          (2.5)           -        -           -       -     (2.5) 
  shares                                                                
  Other          3.9       (1.3)    (6.0)         4.4     0.1       1.1 
  reserves                                                              
  Retained     411.4        22.3     23.2      (91.2)    22.3     388.0 
  earnings     _____       _____    _____       _____   _____     _____ 
  Total        681.8        21.0     17.2      (86.8)    22.4     655.6 
  equity                                                                
                                                                        
  Non-current  
  liabilities                                                            
  Long-term    184.3           -        -           -     9.3     193.6 
  borrowings                                                            
                                                                        
  Retirement     9.1           -        -       128.1       -     137.2 
  benefit                                                               
  obligation                                                            
                                                                        
  Other         17.6           -        -           -       -      17.6 
  payables                                                              
  due after                                                             
  one year                                                              
  Provisions       -           -        -           -       -         - 
  - due                                                                 
  after one                                                             
  year                                                                  
  Deferred      63.3        10.8    (6.2)       (1.4)       -      66.5 
  tax          _____       _____    _____       _____   _____     _____ 
  liabilities                                                           
               274.3        10.8    (6.2)       126.7     9.3     414.9 
  Current liabilities
  Trade and    240.8           -        -       (4.0)   (23.2)    213.6 
  other                                                                 
  payables                                                              
  Bank          43.0           -        -           -     0.2      43.2 
  overdrafts                                                            
  and loans                                                             
  due                                                                   
  within                                                                
  one year                                                              
  Provisions    17.1           -        -           -       -      17.1 
  - due within
  one year  
  Current       77.3           -        -           -       -      77.3 
  tax          _____       _____    _____       _____   _____     _____ 
  payable                                                               
               378.2           -        -       (4.0)   (23.0)    351.2 
               _____       _____    _____       _____             _____ 
                                                        _____           
  Total        652.5        10.8    (6.2)       122.7   (13.7)    766.1 
  liabilities  _____       _____    _____       _____             _____ 
  TOTAL       1,334.3       31.8     11.0        35.9     8.7   1,421.7 
  EQUITY                   _____    _____       _____   _____     _____ 
  AND          _____                                                    
  LIABILITIES                                                            
 

                                                                        
  K     The order and description of items presented as "reported under 
  UK GAAP" have been amended to enable a direct comparison with IFRS    
  presentation.                                                         
                                                                        
  L     Other adjustments includes the reclassification into long-term  
  borrowings of a lease of GBP9.3 million, the reversal of the year-end   
  dividend accrual of GBP28.9 million and the inclusion of an accrual for 
  vacation pay of GBP5.7 million.                                         
 
 
END  

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