SOURCE: Smith & Nephew PLC

May 03, 2007 06:17 ET

Smith & Nephew PLC - 1st Quarter Results

London, UK -- (MARKET WIRE) -- May 3, 2007 --Smith & Nephew reports strong first quarter and announces earnings improvement programme

3 May 2007

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the quarter ended 31 March 2007.

Q1 highlights
     
-    Revenue up 12%* to $744 million

-    Trading profit up 19% to $148 million

-    EPSA** up by 18% to 11.2c**

-    Good performance across all businesses

     -    Orthopaedic Reconstruction revenue up 15%*, maintaining
          momentum and outperforming the market
     -    First mover advantage in hip resurfacing generated US hip
          growth of 40%
     -    Orthopaedic Trauma & Clinical Therapies revenue achieves an 
          outstanding 19%* growth, leading the market in both segments
     -    Endoscopy increases revenue growth to 12%*
     -    Advanced Wound Management revenue grows at 4%* after adjusting
          for the effect of tissue engineering and 2%* before adjusting

-    Reported revenue growth 16%, profit before tax up 7%

-    Basic earnings per share were 9.7c compared with 44.3c in the
     comparable period which included the gain on sale of BSN Medical

Earnings Improvement Programme
     
-    Earnings improvement programme details provided today

-    Expect trading margin growth averaging at least 1% each year until
     end 2010
Commenting on the first quarter, Sir Christopher O'Donnell, Chief Executive of Smith & Nephew, said:

"These are excellent first quarter results, driven by favourable market conditions and a strong contribution from new products; particularly our hip resurfacing product, BHRa, and two new knee systems. All our businesses are performing well but these results benefit from lower comparators from Q1 last year. The outlook for the year is unchanged."

And Chief Operating Officer David Illingworth added:

"Our Earnings Improvement Programme is already underway and we are encouraged by the progress made to date. We believe this programme will deliver material improvements to trading margin in each of our businesses in the coming years, considerably enhancing our earnings and providing significant value to shareholders over the medium term."

An analyst presentation and conference call to discuss the Company's first quarter results will be held at 11.45am BST / 6.45am EST today, Thursday 3 May. This will be broadcast live on the web and will be available on demand shortly following the close of the call at http://www.smith-nephew.com/Q107. If interested parties are unable to connect to the web, a listen-only service is available by calling +44 (0)20 7138 0815 in the UK or +1 (718) 354 1171 in the US. Analysts should contact Samantha Hardy on +44 (0)20 7960 2257 or by email at samantha.hardy@smith-nephew.com for conference call details.

     
*    Unless otherwise specified as 'reported', all revenue increases
     throughout this document are underlying increases after adjusting
     for the effects of currency translation and the impact of
     acquisitions.  See note 3 for a reconciliation of these measures to
     results reported under IFRS.
     
**   EPSA in 2007 is EPS adjusted for the costs of the Earnings
     Improvement Programme, amortisation of acquisition intangibles and
     tax thereon.  In 2006, adjustments were also made for the fair value
     loss on hedge and profit on disposal of the joint venture less
     taxation thereon.  See note 2.

Enquiries

Investors
Adrian Hennah                              +44 (0) 20 7401 7646
Chief Financial Officer
Smith & Nephew

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

Media
David Yates / Deborah Scott                +44 (0) 20 7831 3113
Financial Dynamics - London

Jonathan Birt                              +1 (212) 850 5634
Financial Dynamics - New York

Introduction

The markets in which we operate have generally been favourable in the first quarter. The US market has continued to strengthen, but some major European countries and Japan continue to be challenging as a result of healthcare spending constraints.

Orthopaedic Reconstruction again exceeded market growth rates as revenues from products launched last year had continued momentum. Revenues from the BIRMINGHAM HIPa Resurfacing ("BHRa") system in the US were particularly strong. Trauma and Clinical Therapies had an excellent quarter as a combination of new product revenues and sales force effectiveness took hold. Endoscopy has significantly improved its growth rate in the quarter and Advanced Wound Management has maintained its progress with a very strong US performance.

Work towards completion of our CHF 1,086 million ($889 million) acquisition of Plus Orthopedics Holding AG ("Plus"), the private Swiss orthopaedic company that we announced on 12 March 2007, is progressing well and completion is expected in the summer. After this acquisition Smith & Nephew is expected to rank fourth in the global orthopaedic reconstruction market and will have considerable opportunities to leverage the combined sales forces and product ranges. We expect the Plus Orthopedics acquisition to be broadly EPSA neutral this year and to be accretive thereafter.

This statement includes details of our Earnings Improvement Programme ("EIP") first announced last year which is expected to deliver significant enhancement to trading margins in the coming years.

First Quarter Results

Revenue in the quarter was $744 million. This represents growth of 16% as reported and an underlying growth rate of 12% after adjusting for movements in currency when compared to the same period last year.

Trading profit in the quarter was $148 million, representing growth of 19%. Trading margin increased to 19.9%, and interest and finance income was $4 million.

The Group trading margin at 19.9% in the quarter reflected the heavier expenses which are characteristic of this quarter. Advanced Wound Management's improved trading margin at 15.4% showed the benefit of early EIP activities when compared with the same quarter last year.

The tax charge was at the estimated effective rate for the full year of 31%. Attributable profit before the costs of EIP, amortisation of acquisition intangibles and taxation thereon was $106 million.

Adjusted earnings per share was 11.2c (56.0c per American Depositary Share, "ADS "), which was 18% higher than in the prior year.

Basic earnings per share was 9.7c (48.5c per ADS) compared with 44.3c (221.5c per ADS) in 2006, which included the profit on disposal of the joint venture.

Orthopaedic Reconstruction

Reconstruction revenues at $262 million grew by 15% compared to the first quarter last year, well ahead of the global market which grew at 9%. Reconstruction revenues in the US grew by 20% in the quarter as BHRa continued to make revenue contributions above our expectations. Outside the US growth was 9%, with much improved growth in hips in France and Germany. Knee growth improved in the UK and Australia. New products generated 21% of revenues reflecting the success of last year's product launches.

Knee revenue growth was 12% for the quarter as the success of our JOURNEYa Bi- Cruciate Stabilised Knee System introduced last year continued. Within the US, revenue growth increased by 10% and outside the US revenues grew 14%, the second successive quarter of above average growth as the benefit of new product introductions spread to other markets.

Hip revenues continued the strong growth momentum seen in Q4 2006 growing by 23% in the quarter. In the US hip revenues grew by 40%. BHRa was a major contributor to hip revenue growth in the US where the market is developing faster than we had expected. We remain ahead of our expectations with BHRa and have now trained a large pool of surgeons who are regularly using it. Outside the US hip revenue growth was 5%.

Orthopaedic Trauma and Clinical Therapies

Trauma revenue growth strengthened considerably this quarter at $136 million growing by 19% relative to the same period last year and led the market. Growth in the US improved to 18% as the focus on sales force effectiveness gained traction and revenues outside the US were up 21%. Strong revenue growth for fixation products combined with excellent progress for Clinical Therapies and had a particularly strong quarter. New products generated 42% of revenues.

Fixation product revenues grew by 13% in line with the market. There was a marked improvement in growth in the US to 15% and outside the US revenues grew by 10%. The quarter's revenue growth again benefited from the continued success of our PERI-LOCa Periarticular locked plating system and JET-Xa.

Clinical Therapies revenue growth was 33% with a particularly strong contribution from the EXOGEN 4000+a unit introduced last year. Following the worldwide licensing agreement with Q-Med AB in Sweden last year we have integrated the DUROLANE® products and continue to work with Q-Med AB towards pre-market approval of the product in the US although this is not now expected this year.

Endoscopy

Endoscopy revenue growth of 12% to $177 million is a welcome return to double digit sales growth and close to estimated market growth rates. US revenues grew by 6%, a little slower than expected, but balanced by strong growth outside the US of 19%, with UK, Japan and Australia performing particularly well. New products generated 27% of revenue.

Repair revenues grew strongly at 22% and equalled resection revenues for the first time. Knee, shoulder and hip arthroscopy all made major contributions to this growth, with the BIORAPTORa and TWINFIXa product families and KINSAa Suture Anchors for shoulders all making major contributions.

Visualisation and Digital Operating Room revenues grew well at 20% benefiting in part from higher sales ahead of a new camera launch and positively reflecting the uneven pattern of revenues in this market.

Resection products increased by 4% in the quarter and were particularly strong outside the US, increasing by 12%.

The trading margin of 18.6% reflects the impact of revenue mix, particularly the higher level of visualisation and Digital Operating Room revenues. The re-organisation of US manufacturing facilities, a 20 month project, was successfully completed shortly after the end of the quarter.

Advanced Wound Management

Our strategy for our Advanced Wound Management business has three areas of focus: the product portfolio, an effective cost structure and to significantly increase our share of the US market. Actions are already underway to address structural cost and continue strong revenue growth in the US.

Advanced Wound Management revenues grew to $169 million, slightly below market growth but up 4% relative to the first quarter last year excluding the effect of the exit from tissue engineering, up 2% if this is included. US revenue growth at 10% was particularly strong and continued the improved performance seen in the last quarter of 2006. Revenue growth in Europe was slower as expected due to high revenues in the UK in the last quarter of 2006 and revenues in Japan were impacted by downward pricing pressure. New products generated 12% of revenues in the quarter.

ALLEVYNa dressings had another strong quarter with revenues increasing by 10% benefiting from a wider product range. Within infection management, our IODOSORBa product grew strongly but ACTICOATa antimicrobial silver dressings continued to be affected by low price competition.

We signed a worldwide distribution agreement with Covalon Technologies Ltd in the quarter, providing a new technology and strengthening the product portfolio.

Earnings Improvement Programme

Last year we announced that a substantial Earnings Improvement Programme was in the research and planning stages. This programme is designed to continue our investment at a level which will maintain above market revenue growth rates and to drive a renewed focus on costs. The balance of these two elements is expected to bring considerable trading margin improvement.

The programme currently includes 12 workstreams. These workstreams include leveraging infrastructure, for example through shared IT and procurement resources, creating more efficient and effective sales and marketing teams and an increase in the level of low cost sourcing and manufacturing. The workstreams are across the business as a whole although the impact will be stronger in some areas than others. We expect that around one half of the total margin improvement will be in the Orthopaedics businesses, the next largest benefit in Advanced Wound Management, and a smaller but still significant opportunity in Endoscopy.

We expect trading margin to increase by an average of at least 1% each year for the next four years. This increase is net of an expected increase in research and development expenditure from 4.3% to about 5% of revenues and before the effects of the acquisition of Plus Orthopedics. Trading profit is therefore expected to increase by at least $100 million in 2009 and at least $150 million in 2010 as a result of margin improvements. The costs of the programme, which will be largely incurred over the first three years and will be reported separately in the income statement after trading profit, are expected to be $125 million in cash costs and $75 million in non-cash costs. There will also be a modest increase in capital expenditure to above historic levels.

The initial progress from the EIP work already underway is encouraging and we expect the programme to provide considerable value to shareholders.

Outlook

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

The strong revenue performance in the first quarter is slightly flattered by a relatively weak 2006 comparator, particularly in Reconstruction and Clinical Therapies. We are likely to experience a competitor for BHRa in the second half of the year when the comparators are stronger. Endoscopy's high revenue growth from visualisation and Digital Operating Room in the first quarter reflects the uneven nature of that part of the business and will not be as strong in the rest of the year. Advanced Wound Management is expected to continue the improvement already seen in the US but will continue to experience slower growth in the UK and Japan.

Trading margin is expected to benefit from the EIP this year. We continue to expect the Plus Orthopedics acquisition to be broadly EPSA neutral this year and to become accretive thereafter. Our expectations for 2007 revenues, trading profit and earnings have not changed since the start of the year.

We expect the EIP to increase trading margin by an average of at least 1% per annum until the end of 2010, including a significant increase in 2007, followed by larger increases in subsequent years. In 2010 this margin improvement equates to at least an additional $150 million in trading profit. We expect the cash costs of the programme to be incurred broadly evenly over three years, but we expect provisions charged to the profit and loss account to be earlier and more uneven.

The underlying growth in the business, coupled with the EIP and the Plus Orthopedics acquisition, means that Smith & Nephew is well positioned for strong revenue performance and trading margin improvement for 2007 and beyond.

About us

Smith & Nephew is a global medical technology business, specialising in Orthopaedic Reconstruction, Orthopaedic Trauma and Clinical Therapies, Endoscopy and Advanced Wound Management products. Smith & Nephew is a global leader in arthroscopy and advanced wound management and is one of the leading global orthopaedics companies.

Smith & Nephew is dedicated to helping improve people's lives. The Company prides itself on the strength of its relationships with its surgeons and professional healthcare customers, with whom its name is synonymous with high standards of performance, innovation and trust. The Company has over 8,800 employees and operates in 31 countries around the world generating annual sales of $2.8 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 trading margins discussed under "Outlook" are forward-looking statements as are discussions of our product pipeline. These statements, as well as the phrases "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions, are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors (including, but not limited to, the outcome of litigation, claims and regulatory approvals) that could cause the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20F, for a discussion of certain of these factors.

All forward-looking statements in this press release are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

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

DUROLANE(R) is a trademark of Q-Med AB.
DERMAGRAFT(R) is a trademark of Advanced BioHealing Inc.


SMITH & NEPHEW plc

2007 QUARTER ONE RESULTS

Unaudited Group Income Statement for the 3 months to 31 March 2007

                                            Notes    2007      2006
                                                       $m        $m

Revenue                                     3         744       643
Cost of goods sold                                  (192)     (175)
Selling, general and administrative                 (372)     (315)
expenses
Research and development expenses                    (32)      (29)
                                                    _____     _____
Trading profit                              4         148       124
Earnings improvement programme -            5        (17)         -
restructuring costs
Amortisation of acquisition intangibles               (4)       (2)
                                                    _____     _____
Operating Profit                            4         127       122
Interest receivable                                     4         7
Interest payable                                      (2)       (4)
Other finance income                                    2         1
Loss on hedge of the sale proceeds of the               -       (3)
joint venture
                                                    _____     _____
Profit before taxation                                131       123
Taxation                                    8        (40)      (38)
                                                    _____     _____
Profit from continuing operations                      91        85

Discontinued operations: Net profit on      9           -       332
disposal of the joint venture
                                                    _____     _____
Attributable profit                                    91       417
                                                    _____     _____

Earnings per share                          2

Including discontinued operations:
Basic                                                9.7c     44.3c
Diluted                                              9.6c     44.1c
Continuing operations:
Basic                                                9.7c      9.0c
Diluted                                              9.6c      9.0c


Unaudited Group Statement of Recognised Income and Expense for
the 3 months to 31 March 2007
                                                     2007      2006
                                                       $m        $m

Translation differences                                 4        26
Cumulative translation adjustment on disposal of        -      (14)
the joint venture
Losses on cash flow hedges                            (1)       (2)
Actuarial gains on defined benefit pension plans       20        37
Taxation on items taken directly to equity            (7)      (12)
                                                    _____     _____
Net income recognised directly in equity               16        35
Attributable profit                                    91       417
                                                    _____     _____
Total recognised income and expense                   107       452
                                                    _____     _____


Unaudited Group Balance Sheet as at 31 March 2007


  31 Dec                                     Notes      31        1
                                                     March    April
    2006                                              2007     2006
      $m                                                $m       $m
         ASSETS
         Non-current assets
     635 Property, plant and equipment                 631      600
     831 Intangible assets                             831      687
      10 Investments                                    10       10
     110 Deferred tax assets                           108      149
   _____                                             _____    _____
   1,586                                             1,580    1,446
         Current assets
     619 Inventories                                   652      585
     680 Trade and other receivables                   636      609
     346 Cash and bank                                 349      421
   _____                                             _____    _____
   1,645                                             1,637    1,615
   _____                                             _____    _____
   3,231 TOTAL ASSETS                                3,217    3,061
   _____                                             _____    _____

         EQUITY AND LIABILITIES
         Equity attributable to equity holders
         of the parent
     189 Called up equity share capital                189      188
     329 Share premium account                         341      317
       - Treasury shares                              (80)        -
     (1) Own shares                                    (1)      (1)
   1,657 Accumulated profits and other               1,708    1,333
         reserves
   _____                                             _____    _____
   2,174 Total equity                        11      2,157    1,837

         Non-current liabilities
      15 Long-term borrowings                           21       16
     154 Retirement benefit obligation                 134      173
       3 Other payables due after one year               3       14
      34 Provisions - due after one year                31       55
      35 Deferred tax liabilities                       38       21
   _____                                             _____    _____
     241                                               227      279
         Current liabilities
     119 Bank overdrafts and loans due within          123      136
         one year
     421 Trade and other payables                      422      473
      49 Provisions - due within one year               52       70
     227 Current tax payable                           236      266
   _____                                             _____    _____
     816                                               833      945
   _____                                             _____    _____
   1,057 Total liabilities                           1,060    1,224
   _____                                             _____    _____
   3,231 TOTAL EQUITY AND LIABILITIES                3,217    3,061
   _____                                             _____    _____




Unaudited Condensed Group Cash Flow Statement for the 3 months to 31 March 2007


                                                      2007    2006
                                                        $m      $m
Net cash inflow from operating activities

Profit before taxation                                 131     123
Less: Net interest receivable                          (2)     (3)
Depreciation and amortisation                           45      36
Share based payment expense                              7       4
Movement in working capital and provisions            (53)    (71)
                                                     _____   _____
Cash generated from operations A                       128      89
Net interest received                                    2       3
Income taxes paid                                     (32)    (27)
                                                     _____   _____
Net cash inflow from operating activities               98      65

Cash flows from investing activities
Acquisitions                                           (4)     (4)
Disposal of joint venture B                              -     551
Capital expenditure                                   (38)    (58)
                                                     _____   _____
Net cash used in investing activities                 (42)     489
                                                     _____   _____

Cash flow before financing activities                   56     554

Cash flows from financing activities
Proceeds from issue of ordinary share capital           12       3
Purchase of treasury shares                           (65)       -
Cash movements in borrowings                             5   (270)
Settlement of currency swaps                           (2)       2
                                                     _____   _____
Net cash used in financing activities                 (50)   (265)

Net increase in cash and cash equivalents                6     289
Cash and cash equivalents at beginning of period       291      65
Exchange adjustments                                     -       6
                                                     _____   _____
Cash and cash equivalents at end of period C           297     360
                                                     _____   _____


     
A    After $6 million (2006 - $8 million) unreimbursed by insurers
     relating to macrotextured knee revisions, $10 million (2006 - nil)
     of bid related costs and $5 million (2006 - $8 million) of outgoings
     on restructuring, rationalisation and acquisition integration costs.
     
B    Discontinued operations accounted for nil (2006 - $551 million) of
     net cash flow from investing activities.

C    Cash and cash equivalents at the end of the period are net of
     overdrafts of $52 million (2006 - $61 million).

NOTES
     
1.   The financial information for the three months has been prepared on
     the basis of the accounting policies set out in the full annual
     accounts of the Group for the year ended 31 December 2006.

     The 2006 full annual accounts were restated to correct for a change
     in the method of calculating the elimination of intra-group profit
     carried in inventory, reclassification of certain indirect
     production overhead expenses from selling, general and
     administrative expenses to cost of goods sold and a voluntary change
     in accounting policy for death-in-service benefits.  These
     restatements have been reflected in the 2006 three month
     Unaudited Group Income Statement, Unaudited Group Statement of
     Recognised Income and Expense, Unaudited Group Balance Sheet and
     Unaudited Condensed Group Cash Flow Statement.

     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 for the year ended 31
     December 2006, which will be delivered to the Registrar of Companies
     after approval by shareholders on 3 May 2007.
     
2.   Adjusted earnings per ordinary share ("EPSA") is a trend measure
     which presents the long-term profitability of the Group excluding
     the impact of specific transactions that management considers as
     affect the Group's short-term profitability.  The Group presents
     this measure to assist investors in their understanding of trends.
     Adjusted attributable profit is the numerator used for this measure.

     On 8 February 2007, the Group announced its intention to undertake a
     share buy back programme of up to $1.5 billion over the next two
     years.  This followed an assessment of the medium term capital needs
     of the Group both internally and for acquisitions in which
     management determined that shareholder value and balance sheet
     efficiency would be enhanced by returning capital to shareholders.
     As at 31 March 2007, 6,440,000 ordinary shares had been purchased at
     a cost of $80 million.

     EPSA has been calculated by dividing adjusted attributable profit by
     the weighted (basic) average number of ordinary shares in issue of
     943 million (2006 - 941 million).  The diluted weighted average
     number of ordinary shares in issue is 947 million (2006 - 945
     million). 

                                                       2007  2006
                                                         $m    $m
     Attributable profit                                 91   417
     Adjustments:
     Earnings improvement programme - restructuring      17     -
     costs
     Amortisation of acquisition intangibles              4     2
     Net profit on disposal of the joint venture          - (332)
     Loss on hedge of the sale proceeds of the joint      -     3
     venture
     Taxation on excluded items                         (6)   (1)
                                                      _____ _____
     Adjusted attributable profit                       106    89
                                                      _____ _____

     Adjusted basic earnings per share                11.2c  9.5c
     Adjusted diluted earnings per share              11.2c  9.4c

3. Revenue by segment for the three months to 31 March 2007 was as
   follows:
                                           2007    2006 Underlying
                                                         growth in
                                                           revenue
                                             $m      $m          %

    Revenue by business segment
    Reconstruction                          262     221         15
    Trauma and Clinical Therapies           136     112         19
    Endoscopy                               177     153         12
    Advanced Wound Management               169     157          2
                                          _____   _____      _____
                                            744     643         12
                                          _____   _____      _____

    Revenue by geographic market
    United States                           369     319         15
    Europe D                                240     203          8
    Africa, Asia, Australasia and Other     135     121         11
    America
                                          _____   _____      _____
                                            744     643         12
                                          _____   _____      _____
     

D    Includes United Kingdom revenue of $67 million (2006 - $54 million).

     Responsibility for the Group's spinal products was transferred from
     the endoscopy business to the trauma and clinical therapies business
     with effect from 1 January 2007.  Revenue, trading profit and
     operating profit relating to spinal products is now reported within
     the trauma and clinical therapies segment and comparative figures
     have been restated.

     Underlying revenue growth is calculated by eliminating the effects of
     translational currency and acquisitions.  Reported growth reconciles
     to underlying growth as follows:

                      Reported  Constant Acquisitions Underlying  
                        growth  currency       effect  growth in  
                            in  exchange                 revenue  
                       revenue    effect                          
                             %         %            %          %  
                                                                  
    Reconstruction          19       (4)            -         15  
    Trauma and              21       (2)            -         19  
    Clinical
    Therapies                                                     
    Endoscopy               16       (3)          (1)         12  
    Advanced Wound           8       (6)            -          2  
    Management                                                    
                         _____     _____        _____      _____  
                            16       (4)            -         12  
                         _____     _____        _____      _____  

                                                                 

     
4.   Trading and operating profit by segment for the three months to 31
     March 2007 was as follows:
   

                                                   2007       2006
                                                     $m         $m
     Trading Profit by business segment                           
     Reconstruction                                  66         56
     Trauma and Clinical Therapies                   23         19
     Endoscopy                                       33         30
     Advanced Wound Management                       26         19
                                                  _____      _____
                                                    148        124
                                                   ____      _____
     Operating Profit by business segment                         
     Reconstruction                                  58         54
     Trauma and Clinical Therapies                   21         19
     Endoscopy                                       30         30
     Advanced Wound Management                       18         19
                                                  _____      _____
                                                    127        122
                                                  _____      _____

     
5.   The earnings improvement programme's restructuring costs of $17
     million in 2007 comprise redundancy costs and consultancy fees.
     
6.   On 12 March 2007 the Group announced that it had agreed the purchase
     of Plus Orthopaedics Holding AG ("Plus"), a private Swiss
     orthopaedic company, for a total of CHF 1,086 million ($889 million)
     in cash, including assumed debt. Completion of the agreement is
     conditional on receipt of competition clearances which are expected
     within three months.  Plus reported revenues of CHF 367 million
    ($300 million) in 2006 and profit before interest and taxation of CHF
     44 million ($36 million).  The acquisition will be financed
     by bank borrowings.
     
7.   The cumulative number of revisions of the macrotextured knee product
     was 1,006 on 31 March 2007 compared with 999 at 31 December 2006.
     This  represents 41% of the total implanted.  Settlements with
     patients have been achieved in respect of 937 revisions (31 December
     2006 - 923 settlements). Costs of $118 million are in dispute with
     insurers and are provided for in full.  $36 million of provision
     remains to cover future settlement costs.
    
8.   Taxation of $46 million (2006 - $39 million) on the profit before
     restructuring costs, the loss on hedge of the sale proceeds of the
     joint venture and discontinued operations is at the full year
     estimated effective rate.  Of the $40 million (2006 - $38 million)
     taxation charge $28 million (2006 - $26 million) relates to overseas
     taxation.
    
9.   On 23 February 2006 the Group sold its 50% interest in the BSN
     Medical joint venture for cash consideration of $562 million.  The
     net profit of $332 million on the disposal of the joint venture is
     after a credit of $14 million for cumulative translation adjustments
     and $26 million of transaction costs.  A further $1 million of
     transaction costs, $3 million of indemnity provision and a $23
     million release of taxation provisions relating to this transaction
     was recorded in the year ended 31 December 2006.  The Group's
     discontinued operations earnings per share in 2006 was basic 35.3c
     and diluted 35.1c.
     
10.  No dividends were paid in the quarter in 2007 or 2006.  The second
     interim dividend for 2006 of 6.71 US cents per ordinary share was
     declared by the Board on 8 February 2007 and is accrued within trade
     and other payables. All shareholders will receive the sterling
     equivalent of 3.41 pence per ordinary share.  This is payable on 11
     May 2007 to shareholders whose names appear on the register at the
     close of business on 20 April 2007. Shareholders may participate in
     the dividend re-investment plan.
     
11.  The movement in total equity for the three months to 31 March 2007
     was as follows:


                                                      2007    2006
                                                        $m      $m

     Opening equity as at 1 January                  2,174   1,435
     Attributable profit                                91     417
     Equity dividends accrued                         (63)    (57)
     Exchange adjustments                                4      12
     Losses on cash flow hedges                        (1)     (2)
     Actuarial gains on defined benefit pension         20      37
     plans
     Share based payment recognised in the income        7       4
     statement
     Taxation on items taken directly to equity        (7)    (12)
     Purchase of treasury shares                      (80)       -
     Issue of ordinary share capital                    12       3
                                                     _____   _____
     Closing equity                                  2,157   1,837
                                                     _____   _____


12. Net cash as at 31 March 2007 comprises:

                                                      2007    2006
                                                        $m      $m

     Cash and bank                                     349     421
     Long-term borrowings                             (21)    (16)
     Bank overdrafts and loans due within one year   (123)   (136)
     Net currency swap (liabilities)/assets E          (2)       2
                                                     _____   _____
                                                       203     271
                                                     _____   _____

     The movements were as follows:

     Opening net cash/(net debt) as at 1 January       210    (306)
     Cash flow before financing activities              56      554
     New finance leases                                (7)        -
     Proceeds from issue of ordinary share capital      12        3
     Purchase of treasury shares                      (65)        -
     Exchange adjustments                              (3)       20
                                                     _____    _____
     Closing net cash                                  203      271
                                                     _____    _____


   
E    Net currency swap liabilities of $2 million (2006 - $2 million
     assets) comprises nil (2006 - $3 million) of current asset
     derivatives within trade and other receivables and $2 million (2006 -
     $1 million) of current liability derivatives within trade and other
     payables.

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 31 March 2007 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 12. 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. The accounting policies are consistent with those that the directors intend to use in 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 International Standards on Auditing (UK and Ireland) 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 31 March 2007.

Ernst & Young LLP London

3 May 2007

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