Smith+Nephew Second Quarter and First Half 2019 Results

Positive momentum across the business; full year revenue guidance upgraded

Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business, reports results for the second quarter and first half ended 29 June 2019:

 Download the announcement in full.

Namal Nawana, Chief Executive Officer, said:

“The positive momentum across the business globally in the first half of 2019 has led us to upgrade our full year revenue growth guidance.

“Organic revenue growth has been solid across all three franchises, with strong performance in Emerging Markets and global Sports Medicine. At the same time, we expanded our margin.

“We are delivering on our commitments to accelerate revenue growth, improve profitability and importantly make investments that support the long-term success of Smith+Nephew.”

Delivering stronger revenue growth in the quarter

• Q2 revenue up 3.5% on an underlying basis; reported growth was 3.1% despite the impact of a 2.9% currency headwind
• Strong mid-teens growth from the Emerging Markets, led by China up more than 30%

Improved trading profit margin, cash generation and earnings in the first half

• Trading profit margin up 60bps to 21.4%; operating profit margin up 150bps to 16.8%
• Strong cash generated from operations at $543 million
• Adjusted EPS (‘EPSA’) up 5%; EPS up 13%

Full year revenue guidance upgraded

• Expected underlying revenue growth guidance range raised 50bps to 3.0% to 4.0%; expected trading profit margin guidance unchanged, in the range of 22.8% to 23.2%

Analyst conference call

An analyst meeting and conference call to discuss Smith+Nephew’s second quarter and first half results will be held at 8.30am BST / 3.30am EST on 31 July 2019, details of which can be found on the Smith+Nephew website at http://www.smith-nephew.com/results.

Enquiries

Notes

1. Unless otherwise specified as ‘reported’ all revenue growth throughout this document is ‘underlying’ after adjusting for the effects of currency translation and including the comparative impact of acquisitions and excluding disposals. All percentages compare to the equivalent 2018 period.
   
   Underlying revenue growth is used to compare the revenue in a given period to the comparative period on a like-for-like basis. Underlying revenue growth reconciles to reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, by making adjustments for the effect of acquisitions and disposals and the impact of movements in exchange rates (currency impact), as described below.
   
   The effect of acquisitions and disposals measures the impact on revenue from newly acquired material business combinations and recent material business disposals. This is calculated by comparing the current year, constant currency actual revenue (which include acquisitions and exclude disposals from the relevant date of completion) with prior year, constant currency actual revenue, adjusted to include the results of acquisitions and exclude disposals for the commensurate period in the prior year.
   
   The ‘constant currency exchange effect’ is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales and is measured as the difference between: 1) the increase/decrease in the current year revenue translated into US Dollars at the current year average exchange rate and the prior revenue translated at the prior year rate; and 2) the increase/decrease being measured by translating current and prior year revenues into US Dollars using the prior year closing rate.
   
   
2. Certain items included in ‘trading results’, such as trading profit, trading profit margin, tax rate on trading results, trading cash flow, trading profit to cash conversion ratio, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures reported in this announcement are explained in Note 8 and are reconciled to the most directly comparable financial measure prepared in accordance with IFRS. Reported results represent IFRS financial measures as shown in the Condensed Consolidated Interim Financial Statements.
   
   
3. Following the Group’s announcement that from 1 January 2019 it would report quarterly revenue for three global franchises of Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management, replacing the previous structure, on 25 March 2019 Smith+Nephew published its Re-presented Historical Quarterly Revenue Analysis to assist comparability with historical data.

Smith+Nephew Second Quarter Trading and First Half 2019 Results

Second Quarter 2019 Trading Update

Our second quarter revenue was $1,283 million (2018: $1,245 million), up 3.5% on an underlying basis. Reported growth of 3.1% includes a 290bps foreign exchange headwind and a 250bps benefit from acquisitions.

Unless specified as ‘reported’ all revenue growth rates throughout this document are underlying increases/decreases after adjusting for the effects of currency translation and the impact of acquisitions and disposals. All percentages compare to the equivalent 2018 period.

Q2 2019 comprised 63 trading days, one fewer than the comparable Q2 2018 period.

Second Quarter Consolidated Revenue Analysis

(i)     Revenue by franchise for the quarter ended 30 June 2018 has been re-presented to align with the new global franchise structure effective from 1 January 2019. There has been no change in total revenue for the quarter ended 30 June 2018

(ii)    Underlying growth is defined in Note 1 on page 2

(iii)    Other Reconstruction includes capital sales from robotics and cement sales

(iv)   Other Established Markets are Europe, Canada, Japan, Australia and New Zealand

Franchise Highlights for the Second Quarter

Smith+Nephew’s franchise-led operating model, introduced at the start of 2019, is driving growth by bringing a greater focus to serving customers with our portfolio of leading technologies. Our three global franchises are Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management.

Orthopaedics

Our Orthopaedics franchise delivered 3.6% revenue growth in Q2, led by strong global growth in Knee Implants and Hip Implants, both accelerating from Q1 2019. 

Revenue from Knee Implants was up 4.3%, ahead of market growth, led by demand for our JOURNEY^◊ II and LEGION^◊ Revision knee systems. The roll-out of JOURNEY II outside the US is being well received.  

Hip Implants revenue was up 2.9%, also ahead of market growth. The POLAR3^◊ Total Hip Solution, with its class-leading survivorship data, and the REDAPT^◊ Revision Hip System, continued to drive our growth. During the quarter we presented new US outcomes data for our proprietary OXINIUM^◊ (Oxidized Zirconium alloy) bearing surface. The data showed that OXINIUM, when compared with all other bearing surfaces for total hip replacement surgery, reduced post-acute average cost per 90-day episode of care by 9.88%, and patients implanted with OXINIUM demonstrated lower readmission and revision rates in the first 90 days.

Other Reconstruction (which comprises capital sales from robotics and cement sales) delivered revenue growth of 3.5%. During the quarter we continued to develop our multi-asset digital surgery and robotic ecosystem.

We completed the purchase of the Brainlab Orthopaedic Joint Reconstruction (‘Brainlab OJR’)  business in the quarter, and are working to integrate this with our robotics-assisted NAVIO^◊ Surgical System, as well as initiating a research and development partnership with Brainlab in the areas of digital surgery, augmented reality and robotics.

We also announced the acquisition of Atracsys Sàrl, which was completed on 1 July 2019.  Atracsys’ fusionTrack 500 optical tracking camera will be a core enabling technology for our next generation robotics-assisted surgical platform.

In July, we initiated the launch of the latest version of our robotics-assisted surgical system. NAVIO 7.0 is designed to improve efficiency, overall usability and reduce the learning curve. This software release incorporates improvements that reduce the number of steps from the current work flow by over 40%.

Trauma revenue growth was 2.8%. Demand for our EVOS^◊ System continued to build as we expand this product family. During the quarter we launched the CONQUEST^◊ FN System, a new implant solution to treat femoral neck fractures and promote bone preservation.

Sports Medicine & ENT

Our Sports Medicine & ENT franchise delivered 5.6% revenue growth, completing a first half of good, consistent growth.

Sports Medicine Joint Repair delivered 11.9% revenue growth, accelerating further from the strong Q1 performance. Once again, all regions contributed, with the US delivering mid-teens growth driven by our shoulder repair portfolio. Within this, demand for the REGENETEN^◊ Bioinductive Implant for rotator cuff repair remained strong.

Arthroscopic Enabling Technologies declined -2.1% as the softness in resection seen in previous quarters continued. During the quarter we launched the WEREWOLF^◊ FLOW 90^◊ Wand with FLOW~IQ^◊ Technology and new mechanical resection blades. Together with the LENS^◊ 4K Surgical Imaging System, we expect these products to help return this business to growth during the second half of 2019. 

ENT delivered 6.3% growth as we continued to successfully convert surgeons conducting tonsil and adenoid procedures with traditional surgery approaches to using our COBLATION^◊ technology.

Advanced Wound Management

Our Advanced Wound Management franchise delivered 1.2% revenue growth, with the performance from Advanced Wound Devices again a highlight.

Advanced Wound Care declined 1.7%, principally due to the ongoing weakness in some European markets, along with wholesaler destocking.

Advanced Wound Bioactives revenue declined -1.2% against a stronger comparator than in the first quarter. In April we completed the acquisition of Osiris Therapeutics, Inc., a fast-growing company delivering regenerative medicine products, including skin, bone-graft and articular cartilage substitutes. The Osiris portfolio delivered double-digit growth in the quarter and we expect it to improve the overall growth outlook for Advanced Wound Bioactives.

Advanced Wound Devices delivered another quarter of double-digit growth, with revenue up 16.0%. Performance was driven by our PICO^◊ Single Use Negative Pressure Wound Therapy System plus an increasing contribution from our traditional system RENASYS^◊ in the US.

During the quarter, the UK National Institute for Health and Care Excellence (NICE) issued guidance recognising that PICO provides better outcomes than standard dressings in patients at high risk of surgical site infections, at similar overall cost.

We completed the acquisition of the LEAF^◊ Patient Monitoring System in April, supporting our pressure injury prevention strategy.

Regional Performance in the Second Quarter

We delivered revenue growth of 0.9% from Established Markets in the second quarter. Within this, revenue from the US, our largest single market, was up 2.3%, partially offset by revenue decline of -1.3% in Other Established Markets.

Performance in the Emerging Markets, which now account for 19% of all sales, continued to be good, with revenue up 16.2%. China again performed strongly, delivering revenue growth of more than 30%.

First Half 2019 Consolidated Analysis

Smith+Nephew results for the first half ended 29 June 2019:

First Half 2019 Analysis

Our first half revenue was $2,485 million (H1 2018: $2,440 million), up 3.9% on an underlying basis. Reported growth of 1.8% includes a foreign exchange headwind of 350bps and 140bps benefit from acquisitions.

Trading profit was up to $532 million in the first half (H1 2018: $507 million). The trading profit margin was 21.4% (H1 2018: 20.8%), up 60 basis points, reflecting savings realised under the APEX programme and a foreign exchange tailwind, partially offset by re-investment in the business, including more in R&D. From 1 January 2019 the Group has three reportable segments, being the global franchises - Orthopaedics, Sports Medicine & ENT and Advanced Wound Management. Each of these global franchises made a strong contribution to the Group’s trading profit for the first half (see Note 2 to the Interim Financial Statements for further detail).  

Reported operating profit of $419 million (H1 2018: $372 million) was after restructuring and rationalisation costs, as well as acquisition and disposal related items, amortisation of acquisition intangibles and legal and other items incurred in the year (see Note 8 to the Interim Financial Statements). The ongoing APEX programme incurred restructuring costs of $48 million in the first half, with incremental benefits against the first half of 2018 recognised in the income statement of around $40 million.

Cash generated from operations was $543 million (H1 2018: $418 million) and trading cash flow was $405 million (H1 2018: $387 million) (see Note 8 to the Interim Financial Statements for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was 76% (H1 2018: 76%).

The net interest charge within reported results was $25 million (H1 2018: $25 million) including $2 million from the adoption of IFRS 16 Leases.

The tax rate on trading results for the 2019 half year was 19.7% (H1 2018: 20.1%) in line with our guided rate of between 19% and 21%. The reported tax rate for the 2019 half year was 19.3% (H1 2018: 19.6%) (see Note 3 to the Interim Financial Statements for further details on taxation).

Adjusted earnings per share (‘EPSA’) was up 5% at 45.8¢ (91.6¢ per ADS) (H1 2018: 43.7¢). Basic earnings per share (‘EPS’) was 35.3¢ (70.6¢ per ADS) (H1 2018: 31.4¢), including the impact of acquisitions completed during the first half. 

Acquisitions resulted in goodwill and intangible assets increasing by $844 million from 31 December 2018 to $4,391 million at the 2019 half year. Net debt also increased from $1,104 million at 31 December 2018 to $1,880 million at 29 June 2019 with the increase primarily due to the impact of acquisitions. We adopted IFRS 16 Leases on 1 January 2019 which initially resulted in $164 million of assets and lease liabilities being recognised on the balance sheet.   

Interim Dividend

Consistent with previous periods, the interim dividend is set by a formula and is equivalent to 40% of the total dividend for the previous year. The interim dividend for the first half of 2019 is therefore 14.4¢ per share (28.8¢ per ADS), a 2.9% increase on last year (H1 2018: 14.0¢ per share). This equates to 11.5p per share at prevailing exchange rates as of 25 July 2019. The interim dividend will be paid on 30 October 2019 to shareholders on the register at the close of business on 4 October 2019.

Full Year Revenue Guidance Upgraded

We have accelerated the Group’s revenue growth in the first half of 2019 to 3.9%. As a result of this improved momentum across the business, we now expect to deliver underlying revenue growth between 3.0% and 4.0% for the full year, a 50bps increase over previous guidance.

The reported revenue growth rate is expected to be in the range of 3.6% to 4.6% including a 200bps reduction from foreign exchange rates prevailing on 25 July 2019 and a 260bps increase from the Ceterix, Osiris, Leaf, Brainlab OJR and Atracsys acquisitions.

We continue to expect 2019 trading profit margin to be in the range of 22.8% to 23.2%, including the impact of dilution from acquisitions.

We continue to expect the tax rate on trading results for 2019 to be in the range of 19% to 21%, subject to any material changes to tax law, or other one-off items.

Forward calendar

The Q3 Trading Report will be released on 31 October 2019.

About Smith+Nephew

Smith+Nephew is a portfolio medical technology business that exists to restore people’s bodies and their self-belief by using technology to take the limits off living. We call this purpose ‘Life Unlimited’. Our 16,000+ employees deliver this mission every day, making a difference to patients’ lives through the excellence of our product portfolio, and the invention and application of new technologies across our three global franchises of Orthopaedics, Advanced Wound Management and Sports Medicine & ENT. Founded in Hull, UK, in 1856, we now operate in more than 100 countries, and generated annual sales of $4.9 billion in 2018. Smith+Nephew is a constituent of the FTSE100 (LSE:SN, NYSE:SNN). The terms ‘Group’ and ‘Smith+Nephew’ are used to refer to Smith & Nephew plc and its consolidated subsidiaries, unless the context requires otherwise.

For more information about Smith+Nephew, please visit www.smith-nephew.com and follow us on Twitter, LinkedIn, Instagram or Facebook.

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^{This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. For Smith+Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls or other problems with quality management systems or failure to comply with related regulations; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; disruption to our supply chain or operations or those of our suppliers; competition for qualified personnel; strategic actions, including acquisitions and dispositions, our success in performing due diligence, valuing and integrating acquired businesses; disruption that may result from transactions or other changes we make in our business plans or organisation to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature. 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 20-F, for a discussion of certain of these factors. Any forward-looking statement is based on information available to Smith+Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith+Nephew are qualified by this caution. Smith+Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith+Nephew's expectations.}

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