Smith+Nephew Second Quarter and First Half 2021 Results

Starting to recapture pre-COVID momentum; on-track to meet full-year guidance

Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business, reports results for the second quarter and first half ended 3 July 2021:

Download a copy of the announcement in full (pdf)

Q2 Trading Highlights^1,2

• Q2 revenue of $1,335 million (2020: $901 million), up 48.2% on a reported basis and 40.3% on an underlying basis
• All franchises delivered strong growth on 2020 as COVID restrictions eased and levels of elective surgery returned towards normal in many markets
• Relative to Q2 2019, Sports Medicine & ENT and Advanced Wound Management, two of our three franchises, and the US, our largest market, delivered positive underlying revenue growth

H1 Highlights^1,2

• H1 revenue of $2,599 million (2020: $2,035 million), up 27.8% on a reported basis and 21.3% on an underlying basis
• Operating profit of $239 million (2020: operating loss of -$5 million)
• Trading profit of $459 million (2020: $172 million). Trading profit margin of 17.6% (2020: 8.5%) reflects headwinds relative to pre-COVID levels from increased investment, negative leverage from fixed costs and higher logistics/freight costs
• Significant contributions from recently launched products and acquired assets
• Operational improvement programme across manufacturing, warehousing and distribution underway
• Continuing to support employees with roll-out of flexible working programme
• Interim dividend of 14.4¢, in-line with prior year, supported by strong cash generation

Guidance Unchanged

• Targeting underlying revenue growth in range of 10.0% to 13.0%; and
• Trading profit margin in range of 18.0% to 19.0%
• Guidance assumes surgery volumes largely unconstrained by COVID in second half of 2021

Roland Diggelmann, Chief Executive Officer, said:

“Our performance in the first half of 2021 demonstrates the value of our continued investment in our portfolio, our pipeline and our people. This has put us in a strong position as COVID restrictions eased and levels of elective surgery began to return to normal, with new products and recently acquired assets performing well across the portfolio.

“Looking ahead, we believe we are well positioned to deliver on our guidance for this year. We also remain focused on setting ourselves up for sustainable success in the medium-term, prioritising revenue growth from our R&D pipeline, unlocking further value from acquisitions, and driving commercial and operational excellence.”

Analyst conference call

An analyst conference call to discuss Smith+Nephew’s second quarter and first half results will be held at 8.30am BST / 3.30am EDT, details of which are available on the Smith+Nephew website at https://www.smith-nephew.com.

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 2020 period or equivalent 2019 period where specified.
   
   ‘Underlying revenue growth’ reconciles to reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, by making two adjustments, the ‘constant currency exchange effect’ and the ‘acquisitions and disposals effect’, described below. See Other Information on pages 31 to 34 for a reconciliation of underlying revenue growth to reported revenue growth.
   
   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 year 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.
   
   The ‘acquisitions and disposals effect’ is the measure of 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 includes acquisitions and excludes 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. These sales are separately tracked in the Group’s internal reporting systems and are readily identifiable.
   
   
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 Other Information on pages 31 to 34 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.
   

Smith+Nephew Second Quarter Trading and First Half 2021 Results

Delivering on our Priorities

Our three priorities for 2021 build on the work undertaken and investments made in 2020 and are underpinned by our long-term Strategic Imperatives.

1. Return to top-line growth and recapture pre-COVID momentum
2. Deliver further operational improvement across the Group
3. Continue to respond effectively to COVID

We are encouraged by our progress in the first half of 2021 across all three priorities. First half revenue was $2,599 million (2020: $2,035 million), up 27.8% on a reported basis and 21.3% on an underlying basis, our operational improvement programmes are on track, and we continue to adapt to respond effectively to COVID.

1.   Return to top-line growth and recapture pre-COVID momentum

Our first priority for 2021 is to return to top-line growth and recapture the momentum we were building prior to COVID, with the consequence of increasing earnings through operating leverage. This priority aligns with the first three of our Strategic Imperatives targeted at improving revenue growth.

One area of focus is to drive higher returns from our differentiated product portfolio. As we entered 2021 a number of recent product launches were at early stages and we have made good progress expanding these into new markets and to new customers. Our OR3O^◊ Dual Mobility Hip System is helping to drive growth in Hip Implants, and our new robotics platform the CORI^◊ Surgical System is being well-received in the US and has been launched into other markets including Australia and India, with Europe to follow later this year. We have also continued to invest more into R&D, and have launched a number of new products and are securing regulatory approvals across our extensive pipeline of near-term innovation.

We are also starting to see significant benefits from a number of recent acquisitions. The Osiris acquisition is transforming the growth profile of Advanced Wound Bioactives as we train the Osiris and SANTYL^◊ focused sales forces to cross-sell the portfolio. In Sports Medicine, REGENETEN^◊ and NOVOSTITCH^◊ are delivering strong growth in the US, and are only at the start of their launch in other markets. In Orthopaedics the collaboration with Brainlab for robotics and digital surgery is achieving its milestones. The Extremity Orthopaedics business acquired in January 2021 grew strongly in the first half despite market conditions, and we are excited by the potential for cross-selling our respective portfolios and its new product pipeline. The Tula^◊ System, acquired in January 2020, has the potential to transform tympanostomy tube treatment of children as ENT surgery levels recover.

2.   Deliver further operational improvement across the Group

Our second priority for 2021 is to drive further operational improvement across the Group in order to provide more resources for investment in the medium term, including in R&D. This priority aligns to our Strategic Imperative to become the best owner.

During the first half we continued our programme to optimise our manufacturing network. Preparations at our new manufacturing facility in Malaysia are on track, and we expect first production towards the end of 2022. We are consolidating our network and continue to transfer our global warehousing and distribution functions in the US and Europe to a specialist third party partner. These and other changes are expected to deliver around $200 million of annualised benefits by 2025 for a one-off cost of around $350 million, as previously announced. These efficiencies will help offset the cost and price pressures that the business regularly faces.

3.   Continue to respond effectively to COVID

We continue to prioritise the health and wellbeing of employees. As restrictions lift in our markets we are taking a measured approach to reopening offices, and continue to encourage employees to take advantage of flexible working arrangements where they can. In some locations, such as India, we have worked to support employees and their families as COVID infection levels rose significantly, including organising vaccination drives. During the period Smith+Nephew gifted raw materials and equipment and provided ex-gratia consultancy to OxVent to support the manufacture of its simple, low-cost ventilator in India. The OxVent ventilator was developed in 2020 by University of Oxford and King’s College London in collaboration with Smith+Nephew.

Second Quarter 2021 Trading Update

Our second quarter revenue was $1,335 million (2020: $901 million), representing revenue growth of 48.2% including a 140bps benefit from acquisitions and 650bps benefit from foreign exchange (primarily due to movements in the Euro, Renminbi, and Australian Dollar). On an underlying basis revenue was up 40.3% year-on-year, reflecting a weak comparator as Q2 2020 saw the peak impact of COVID on our business. Compared to Q2 2019, our Q2 2021 revenue was down -1.0% on an underlying basis.

The second quarter comprised 64 trading days, one more than the equivalent period in 2020. Q2 2019 comprised 63 trading days.

All three franchises delivered strong year-on-year revenue growth in the quarter, with Orthopaedics up 43.4% (53.0% reported), Sports Medicine & ENT up 50.9% (58.5% reported) and Advanced Wound Management up 27.2% (33.5% reported). Our performance reflects the easing of COVID restrictions and increased levels of elective surgery in many markets, as well as our decisions during the last twelve months to maintain investment in our sales force, new product development and launches, and focus on improving commercial execution.

Encouragingly, two of our franchises delivered positive underlying revenue growth over 2019 levels, with Sports Medicine & ENT up 1.3% and Advanced Wound Management up 5.1%. Although Orthopaedics revenue was down -6.2% underlying against Q2 2019, the franchise built on its first quarter 2021 performance as restrictions on elective surgery continued to ease, albeit held back by near-term supply constraints in some product lines.

Geographically, revenue growth was 46.8% against Q2 2020 (53.9% reported) in our Established Markets and 16.2% (26.4% reported) in Emerging Markets.

In Established Markets, the US delivered 51.3% revenue growth (54.1% reported) as elective surgery levels recovered strongly across the majority of categories. Revenue from our Other Established Markets was up 40.1% (53.7% reported), with surgery volumes improving in Europe over the first quarter, although still below pre-COVID levels, and Japan and Australia weakened as some restrictions were reimposed.

In Emerging Markets performance from China was held back by distributor ordering patterns ahead of the previously highlighted new government tendering programme, and other markets including India, Middle East and Latin America continued to be impacted by COVID-related restrictions.

Second Quarter Consolidated Revenue Analysis

Q2 2021 to Q2 2020

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

(ii)  Other Reconstruction includes robotics capital sales, the joint reconstruction business acquired from Brainlab and cement

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

Q2 2021 to Q2 2019

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

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

Orthopaedics

Knee Implants revenue was up 58.8% (65.5% reported) and Hip Implants up 37.2% (43.6% reported) as volumes improved in our Established Markets, with Knee Implants performance in particular reflecting an especially weak Q2 2020 comparator. Hip Implants included good performances from the REDAPT^◊ Revision Hip System and OR3O Dual Mobility Hip System. We remain on track to launch our cementless knee implant system later this year following required regulatory clearances/approvals.

Other Reconstruction delivered revenue growth of 64.0% (72.1% reported) driven by US sales of our new handheld robotics platform the CORI Surgical System. We also announced a new study showing that computer-guided technology for total hip arthroplasty, such as Smith+Nephew’s RI.HIP^◊ NAVIGATION, significantly reduces the risk of revision and increases patient satisfaction when using our implants.

In Trauma & Extremities revenue was up 28.2% (44.3% reported, including 11.4% benefit from the Extremity Orthopaedics acquisition). This included strong performances from our EVOS^◊ Plating System as well as from the TAYLOR SPATIAL FRAME^◊ External Fixator as elective limb deformity case volumes started to recover.

Sports Medicine & ENT

Sports Medicine Joint Repair delivered revenue growth of 55.9% (63.6% reported) in the quarter. Within this we delivered a good performance across both meniscal and shoulder repair, driven by technologies developed by Smith+Nephew and acquired assets. In July we announced the launch of the FAST-FIX FLEX^◊ Meniscal Repair System extending our leading meniscal repair portfolio.

Arthroscopic Enabling Technologies revenue was up 45.5% (53.0% reported), with good growth from our COBLATION^◊ technologies and high definition video portfolio. We launched the DOUBLEFLO^◊ Inflow/Outflow Pump and 4KO^◊ (Optimized) Arthroscopes and Laparoscopes in the quarter.

ENT revenue was up 45.2% (51.8% reported), although overall paediatric procedures remain below historical levels with tonsillectomies and ear tubes showing slow recovery. As a result the introduction of Tula, a new system for in-office delivery of ear tubes to treat recurrent or persistent ear infections, continued to be impacted.

Advanced Wound Management

Advanced Wound Care revenue was up 20.6% (29.4% reported) driven by good growth from our ALLEVYN^◊ Life range of foam dressings. All regions contributed to the robust performance, including a strong quarter in the US.

Advanced Wound Bioactives revenue was up 29.9% (30.6% reported) including growth from our enzymatic debrider SANTYL and a strong quarter from the acquired skin substitute products GRAFIX^◊ and STRAVIX^◊.

Advanced Wound Devices revenue was up 42.8% (52.6% reported), reflecting strong demand for our negative pressure wound therapy portfolio in the US and Europe, supported by recovering levels of elective surgery.

First Half 2021 Consolidated Analysis

Smith+Nephew results for the first half ended 3 July 2021:

(i)           See Other Information on pages 31 to 34

First Half 2021 Analysis

Our first half revenue was $2,599 million (H1 2020: $2,035 million), up 27.8% on a reported basis including a foreign exchange tailwind of 470bps and 180bps benefit from acquisitions. Revenue was up 21.3% on an underlying basis. The first half comprised 128 trading days, three more than the equivalent period in 2020. H1 2019 comprised 126 trading days.

The Group reported an operating profit of $239 million (H1 2020: operating loss of
-$5 million) after acquisition and disposal related items, restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred in the first half (see Other Information on pages 31 to 34).

Trading profit was $459 million in the first half (H1 2020: $172 million), with a trading profit margin of 17.6% (H1 2020: 8.5%). The margin expansion reflects improved trading compared to 2020, along with discretionary cost control. Compared to pre-COVID levels, there are still headwinds including from increased investments in R&D, M&A and new launches; ongoing COVID-related negative leverage from fixed costs; and higher logistics and freight costs.

Restructuring costs, primarily related to the Operations and Commercial Excellence programme, totalled $77 million in the first half, with incremental benefits recognised of around $20 million.

Each of the three global franchises contributed to the improvement in trading profit in the first half of 2021 (see Note 2 to the Interim Financial Statements).

Cash generated from operations was $459 million (H1 2020: $125 million) and trading cash flow was $404 million (H1 2020: $25 million) as we continued to invest in capital expenditure, including progressing changes to our manufacturing network (see Other Information on pages 31 to 34 for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was 88% (H1 2020: 14%), reflecting the improved trading performance.

The net interest charge within reported results was $39 million (H1 2020: $21 million) including $4 million from the application of IFRS 16 Leases (H1 2020: $3 million). The higher net interest charge reflects interest on the corporate bond issued in October 2020 and a full half year of interest on the $550 million of private placement notes drawn in June 2020. The Group’s net debt, excluding lease liabilities, at 3 July 2021 was $1,989 million (see Note 7 to the Interim Financial Statements) with committed facilities of $4.4 billion.

Our reported tax for the period ended 3 July 2021 was a charge of $18 million (H1 2020 reported tax credit: $134 million). The tax rate on trading results for the period ended 3 July 2021 was 18.3% (H1 2020: 17.0%) (see Note 4 to the Interim Financial Statements and Other Information on pages 31 to 34 for further details on taxation).

Basic earnings per share (‘EPS’) was 23.4¢ (46.8¢ per ADS) (H1 2020: 11.5¢ per share). Adjusted earnings per share (‘EPSA’) was 38.8¢ (77.6¢ per ADS) (H1 2020: 13.4¢ per share).

On 4 January 2021 the Group completed the acquisition of the Extremity Orthopaedics business of Integra LifeSciences Holdings Corporation for a provisional fair value of consideration of $237 million. The provisional fair value of assets acquired included $112 million for intangible assets and $85 million for goodwill.

Interim Dividend

The interim dividend is 14.4¢ per share (28.8¢ per ADS), in line with 2020. This equates to 10.5p per share at prevailing exchange rates as of 23 July 2021. The interim dividend is payable on 27 October 2021 to shareholders whose names appear on the register at the close of business on 1 October 2021 (see Note 5 to the Interim Financial Statements for further detail).

Outlook

Smith+Nephew’s guidance is unchanged from that given with the first quarter Trading Update on 29 April 2021.

We are targeting underlying revenue growth for 2021 in the range of 10.0% to 13.0%. On a reported basis this equates to a range of around 14.4% to 17.4%, with a foreign exchange benefit of 250bps based on exchange rates prevailing on 23 July 2021 and completed acquisitions adding around 190bps.

We expect our Hip Implants business to continue to outperform Knee Implants, our Sports Medicine & ENT franchise to perform strongly as markets recover, and for Advanced Wound Management’s growth trajectory to improve as commercial changes continue to deliver benefits.

Our 2021 trading profit margin guidance range is 18.0% to 19.0%. Consistent with our previous outlook, relative to 2019 (the year before COVID) we continue to anticipate a temporary headwind from the impact of reduced production volumes on gross margin as a result of COVID, as well as dilution of around 100bps from the increased investment in R&D and around 150bps from completed acquisitions. Foreign exchange will be an additional headwind of around 100bps. Finally, we expect to see a headwind in the second half from continued higher logistics and freight costs.

The revenue and trading profit margin targets assume that surgery volumes are largely unconstrained by COVID in the second half.

We continue to expect the tax rate on trading results for 2021 to be in the range of 18.0% to 19.0%, subject to any material changes to tax law, or other one-off items.

Looking ahead, we will continue to build for the medium-term, prioritising revenue growth through investing behind R&D and our exciting new product pipeline, unlocking further value from recent acquisitions, and driving our commercial execution and efficiency programmes.

Forward calendar

The Q3 Trading Report will be released on 4 November 2021.

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 18,000 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, Sports Medicine & ENT and Advanced Wound Management.

Founded in Hull, UK, in 1856, we now operate in more than 100 countries, and generated annual sales of $4.6 billion in 2020. 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.

^{Forward-looking statements}

^{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: risks related to the impact of COVID, such as the depth and longevity of its impact, government actions and other restrictive measures taken in response, material delays and cancellations of elective procedures, reduced procedure capacity at medical facilities, restricted access for sales representatives to medical facilities, or our ability to execute business continuity plans as a result of COVID; economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers (including, without limitation, as a result of COVID); 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 (including, without limitation, as a result of COVID); 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.}

^{◊ Trademark of Smith+Nephew. Certain marks registered US Patent and Trademark Office.}