Smith & Nephew SNATS, Inc. (SNN)

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Smith & Nephew PLC (SNN)

Q3 2007 Earnings Call

November 1, 2007, 8:30 AM ET

Executives

David Illingworth - Chief Executive

Adrian Hennah - CFO

Analysts

Raj Denhoy - Bear Stearns

Michael Junging - Merrill Lynch

Yi-Dan Wang - Deutsche Bank

Martin Wales - UBS

Mark Mullikin - Piper Jaffray

Ed Ridley-Day - Lehman Brothers

Mike Matson - Wachovia

Steven Lichtman - Banc of America Securities LLC

Jason Wittes - Leerink Swann & Co

Hans Bostrom - Goldman Sachs International Ltd

Presentation

Operator

This presentation 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 approval 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 US Securities and Exchange Commission under the US Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent Annual Report on Form 20-F for a discussion of certain of these factors.

All forward-looking statements in this presentation 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 expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

I would now like to hand the call over to Mr. David Illingworth, Chief Executive of Smith & Nephew.

David Illingworth - Chief Executive

Good morning everyone, and welcome to our Q3 results presentation. With me is Adrian Hennah, our Chief Financial Officer.

Our third quarter results show very steady progress as we continue to generate sustainable growth in revenues and profits. We had a good quarter, particularly since as you will remember we had a very strong Q3 in 2006 for all of our businesses except our Advanced Wound Management, giving us tough competitors this time around.

I am going to start with the highlights and then I am going to turn it over to Adrian to cover the financials in detail, and then I'll come back and make some final comments about the individual businesses.

So starting with the financial highlights, overall a good quarter with double-digit revenue growth. Recon continues its remarkable track record of outpacing the market which we estimate is growing at 9% globally. BHR, our Hip Resurfacing product, continues to deliver share gains for us in the US where Hip revenue growth was a full 35%. Knee revenues were as we expected; a little soft in Q3. Trauma and Clinical Therapies had revenue growth of 11%, benefiting from good volume growth in external fixation and also our number one position in the bone stimulation market. Endoscopy delivered 9% growth overall, and our focus outside the US delivered 17% growth, a very, very good result.

We're pleased with the continued strengthening of our Advanced Wound Management business. Advanced Wound Management has grown... had growth in the US of 9% and 8% globally, as this business executes on its strategy and delivered balanced growth across all geographies.

Group margins improved by 60 basis points after 100 basis points of dilution from Plus and BlueSky. Adjusted earnings per share increased by 16% as we again delivered double-digit growth in earnings.

Next, a few comments on the business highlights. We've had a very active quarter with several key events. First, our Hip Resurfacing system, BHR, had its tenth anniversary. And we now have nearly 80,000 hips implanted, further distancing itself from the competition. Outstanding clinical results supported by ten-year data, widespread clinical acceptance and a compelling track record firmly entrenched the BHR as the gold standard in Hip Resurfacing. We've also had 3D systems approved as gender specific by the FDA this quarter, attribute to the quality of our product design.

EIP, or Earnings Improvement Program, is being driven by each of our businesses. We announced two major events this quarter. First, the move of our manufacturing facility in Florida to a new factory of our own in China. And second, we also announced a new agreement for the marketing of ACTICOAT, which both improves our earnings and has allowed us to launch several new silver-based dressings.

We also settled with the DOJ this quarter, and we've started to work with the monitor, David Samson, and we expect this relationship to work well.

Now, I'm going to hand you over to Adrian who will take you through the numbers.

Adrian Hennah - Chief Financial Officer

Thank you, Dave, and good morning, ladies and gentlemen. If we can turn firstly to slide 6 and the income statement, revenue in the quarter was $845 million. This is a headline growth rate of 24% and an underlying growth rate after adjusting for changes in exchange rates and for the acquisition of Plus and BlueSky of 10% on the comparable period last year.

Trading profit in the quarter was $169 million; this represents an underlying growth of 19%. The underlying increase in the trading margin was 160 basis points. In the appendix to the presentation, you'll find an analysis of the Plus and BlueSky sales and trading profit included in these numbers.

We provided for and paid cost of $30 million in the quarter in respect to the legal settlement with the US Department of Justice. Within the $26 million restructuring and integration costs, we provided a cost of $4 million in respect to our Earnings Improvement Program and cost of $22 million in respect to the Plus integration. We spent $9 million on the EIP and cash and $3 million on the Plus integration.

The $45 million inventory revaluation item is a non-cash acquisition item required in the IFRS. It arises, as we must revalue the acquired Plus inventory from cost to essentially its selling price less some directly connected selling costs, an increase of $92 million from the $106 million valuation at cost. You can see this preliminary revaluation in note 6 of the accounts of the announcement, net of the $20 million increase and the provision for excess and obsolete inventory.

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