Smith+Nephew Second Quarter and First Half 2022 Results

Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology company, reports results for the second quarter and first half ended 2 July 2022:

Download a copy of the announcement in full (pdf) 

Q2 Trading Highlights^1,2

• Q2 revenue of $1,293 million (2021: $1,335 million), up 1.2% on an underlying basis (down 3.1% on a reported basis including 430bps FX headwind) with one fewer trading day than equivalent prior-year period
• Orthopaedics revenue declined -1.1% (-4.9% reported) reflecting execution and supply chain challenges, and China VBP
• Sports Medicine & ENT up 1.9% (-2.4% reported) with growth significantly impacted by the COVID-related lockdown in China
• Advanced Wound Management up 3.8% (-1.3% reported) with all regions and segments contributing

H1 Highlights^1,2

• H1 revenue of $2,600 million (2021: $2,599 million), up 3.5% on an underlying basis (flat on a reported basis including 350bps FX headwind)
• Operating profit of $242 million (2021: $239 million)
• Trading profit of $440 million (2021: $459 million). Trading profit margin of 16.9% (2021: 17.6%) reflects higher input inflation
• $125 million of 2022 share buyback programme completed to date
• Interim dividend of 14.4¢, in-line with prior year

2022 Full Year Outlook^1,2

• Unchanged full-year underlying revenue growth guidance of 4.0% to 5.0%
• Trading profit margin now expected to be around 17.5%, reflecting prolonged impact of the inflationary environment and continued external supply challenges

Strategic Highlights^1,2

• Comprehensive action plan underway to drive excellence in execution supporting Strategy for Growth, focused on:
  • Fixing Orthopaedics
  • Improving productivity
  • Accelerating growth in Advanced Wound Management and
    Sports Medicine & ENT
• Continued cadence of new product launches and investment in R&D pipeline

Deepak Nath, Chief Executive Officer, said:

“After only a few months at Smith+Nephew it is clear to me that we have many more opportunities than challenges. Our fundamental competitive position is strong, and we have a clear right to win in all three franchises through product differentiation and proprietary platform technologies. And, importantly, delivery is well on-track in two of the three franchises, providing 60% of our revenue.

“Orthopaedics continues to be held back by execution and supply chain challenges. In the last three months, I have reviewed the business and, together with the team, we have developed a comprehensive plan to drive better execution at pace.

“Our focus is on delivering our transformational strategy. We will drive operational benefits in Orthopaedics, as soon as this year, and build on our strong positions in Advanced Wound Management and Sports Medicine & ENT. I am confident in our ability to transform Smith+Nephew into a structurally higher-growth business delivering greater value for all our stakeholders.”

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/results/.

Enquiries

Notes

1. Unless otherwise specified as ‘reported’ or ‘organic’ 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 2021 period.

‘Organic revenue growth’ reconciles to reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, by only making the ‘constant currency exchange effect’ adjustment described below.

‘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 32 to 35 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.

1. 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 32 to 35 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 2022 Results

Delivering our Transformational Strategy for Growth

Smith+Nephew has a clear Strategy for Growth. Through this we will compound our outperformance in Advanced Wound Management and Sports Medicine & ENT, and regain momentum in Orthopaedics. Our ambition is to transform to a structurally higher-growth company.

Our Strategy for Growth is based on three pillars.

• First, Strengthen the foundations of Smith+Nephew. A solid base in commercial and manufacturing will enable us to serve customers sustainably and simply, and deliver the best from our core portfolio.
• Second, Accelerate our growth profitably, through more robust prioritisation of resources and investment, and with continuing customer focus.
• Third, continue to Transform ourselves for higher long-term growth, through investment in innovation and acquisitions.

Better Execution at Pace

In recent years we have consistently demonstrated successful execution across Sports Medicine and improved performance from Advanced Wound Management. Following investment, Orthopaedics has a strong portfolio with differentiated products and enabling technologies, but recent performance has been held back by execution and supply chain challenges.

To take the business forward and deliver on our Strategy for Growth pillars to Strengthen and Accelerate, we have in the last three months developed a comprehensive plan to drive better execution at pace, focused on:

• Fixing Orthopaedics
• Improving productivity
• Accelerating growth in Advanced Wound Management and Sports Medicine & ENT

Among the actions to address these are the following:

• Rewiring Orthopaedics commercial delivery and winning share with our current portfolio through greater focus on differentiated products and procedural innovations and more detailed customer segmentation, aligning sales resources and incentives with the greatest growth opportunities
• Streamlining the reconstruction portfolio to reduce the number of implant systems in each category and focus sales on lead brands
• Improving asset utilisation by establishing clear principles on where instrument sets are placed, along with use of digital planning tools
• Rebuilding demand planning process through closer collaboration between operations and commercial, improving short and long-term planning signals

Along with strengthening Orthopaedics, we see significant opportunities to invest further behind our well performing Advanced Wound Management and Sports Medicine & ENT franchises.

Our actions are focused on maximising the value of our strong portfolio, where we already have leading technology across the franchises. The plan includes clear accountability to ensure sustained impact. We have a refreshed leadership team across Orthopaedics and Global Operations with area specific experience and track record. There is a high cadence of interactions for the responsible teams under the oversight of the Chief Executive Officer. Each area has specific action plans with meaningful KPIs to track progress and ensure accountability.

First Half Delivery of Strategy

We continue to invest behind our manufacturing and supply chain operations to drive productivity. During the first half we opened our new high technology orthopaedics manufacturing facility in Malaysia and announced plans for a new R&D and manufacturing facility for Advanced Wound Management in the UK. We are also closely managing the impact of the widely reported global shortages of some raw materials and components.

Our commitment to innovation is central to our Strategy for Growth and we continue to invest behind recent product launches and in our R&D programme. New product launches in the first half included expanding the robotics-enabled CORI^◊ Surgical System by bringing both cementless total knee and total hip arthroplasty onto the platform. Other new innovations include the WOUND COMPASS^◊ Clinical Support App,  a comprehensive digital support tool for health care professionals that aids wound assessment and decision-making to help reduce practice variation.

We have continued to deliver successful acquisitions, bringing novel and disruptive technologies into our portfolio. In January we acquired Engage Surgical, owner of the only cementless partial knee system commercially available in the US. The system will have an application on CORI in the future.

Second Quarter 2022 Trading Update

Our second quarter revenue was $1,293 million (2021: $1,335 million), up 1.2% year-on-year on an underlying basis. On a reported basis this represented a decline of -3.1%, including a 430bps headwind from foreign exchange (primarily due to the strength of the US Dollar). The second quarter comprised 63 trading days, one less than the equivalent period in 2021.

Two of our three franchises delivered revenue growth in the quarter, with Sports Medicine & ENT up 1.9% (-2.4% reported) and Advanced Wound Management up 3.8% (-1.3% reported). Growth from Sports Medicine was significantly impacted by the recent COVID-related lockdowns in China. Advanced Wound Management delivered growth across all regions and segments. Revenue from Orthopaedics declined -1.1% (-4.9% reported). This performance reflects the implementation of the previously disclosed hip and knee volume-based-procurement (VBP) programme in China.

Revenue growth in our Established Markets was up 1.2% (-3.2% reported). Within this, the US delivered 2.0% revenue growth (2.0% reported) while Other Established Markets was flat (-11.4% reported) reflecting a weak quarter in Asia-Pacific. Emerging Markets revenue was up 0.8% (-3.0% reported) with the expected China performance offset by strong growth in India, Middle East and Latin America as COVID-related restrictions eased.

Second Quarter Consolidated Revenue Analysis

(i)   Underlying growth is defined in Note 1 on page 3

(ii)  Other Reconstruction includes robotics capital sales, our joint reconstruction business and cement

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

Orthopaedics

Revenue from our Orthopaedics franchise declined -1.1% (-4.9% reported) in the second quarter. Excluding China, Orthopaedics grew by around 2%.

Knee Implants revenue was up 2.7% (-1.3% reported) and Hip Implants revenue was down -3.7% (-7.7% reported). Our performance was impacted by execution and supply chain challenges, and China VBP. We delivered modest growth across our primary cemented total knee systems, driving benefit from the recovery in elective surgery volumes. We also continued to roll-out the launch of the LEGION^◊ CONCELOC^◊ Cementless Total Knee System.

Other Reconstruction revenue growth was 10.8% (6.0% reported) with strong demand for the CORI Surgical System.

In Trauma & Extremities revenue declined -6.0% (-8.9% reported) with growth in hip fracture offset by our decision not to participate in the broader roll-out of  provincial trauma tenders in China. We continue to invest behind the EVOS^◊ Plating System, including launching EVOS Large in the second half of the year.

Sports Medicine & ENT

Sports Medicine & ENT delivered revenue growth of 1.9% (-2.4% reported). Excluding China, growth would have been around 5%.

Sports Medicine Joint Repair revenue was up 2.1% (-2.3% reported) in the quarter, reflecting the previously mentioned COVID-lockdown impact in China offsetting performance elsewhere, which was led by good growth from our knee repair portfolio in Established Markets, as levels of physical activity normalise.

Arthroscopic Enabling Technologies revenue declined -0.5% (-5.0% reported) with growth across fluid management and video offset by continued softness in core COBLATION^◊ and patient positioning.

ENT revenue was up 11.2% (8.4% reported) reflecting the continued recovery in procedure volumes from the impact of COVID and successful price increases in the US.

Advanced Wound Management

Advanced Wound Management revenue growth was 3.8% (-1.3% reported).

Advanced Wound Care revenue was up 3.3% (-4.4% reported) including good growth from our infection management portfolio and a strong quarter in Emerging Markets and Japan, Australia and New Zealand.

Advanced Wound Bioactives revenue was up 2.4% (1.8% reported) driven by our skin substitutes portfolio.

Advanced Wound Devices revenue was up 7.9% (0.9% reported), reflecting continued strong growth from our PICO^◊ single-use Negative Pressure Wound Therapy System.

First Half 2022 Consolidated Analysis

Smith+Nephew results for the first half ended 2 July 2022:

(i)           See Other Information on pages 32 to 35

First Half 2022 Analysis

Our first half revenue was $2,600 million (H1 2021: $2,599 million), up 3.5% on an underlying basis and flat on a reported basis, including a foreign exchange headwind of 350bps. The first half comprised 127 trading days, one fewer than the equivalent period in 2021.

The Group reported an operating profit of $242 million (H1 2021: $239 million) after acquisition and disposal related items, restructuring and rationalisation costs, amortisation and impairment of acquisition intangibles and legal and other items incurred in the first half (see Other Information on pages 32 to 35).

Trading profit was $440 million in the first half (H1 2021: $459 million), with a trading profit margin of 16.9% (H1 2021: 17.6%). The margin decline reflects higher input inflation in freight and logistics, the impact of China VBP, as well as sales and marketing expenditure levels returning to more normal levels (see Note 2 to the Interim Financial Statements for global franchise trading profit).

Restructuring costs, primarily related to the Operations and Commercial Excellence programme, totalled $63 million in the first half, with incremental benefits recognised of around $25 million.

Cash generated from operations was $227 million (H1 2021: $459 million) and trading cash flow was $154 million (H1 2021: $404 million) as we saw adverse working capital movements, driven primarily from inventory including from spot buying of raw materials and components to secure supply and mitigate the risk of shortages, and as we continued to invest in capital expenditure, including progressing changes to our manufacturing network (see Other Information on pages 32 to 35 for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was 35% (H1 2021: 88%), which is expected to improve in the second half of 2022 as inventory balances stabilise and other working capital movements phase out.

The net interest charge within reported results was $32 million (H1 2021: $39 million) with the charge lower than prior year due to debt repayments made in the second half of 2021 and the first half of 2022. The Group’s net debt, excluding lease liabilities, at 2 July 2022 was $2,197 million (see Note 7 to the Interim Financial Statements) with committed facilities of $3.7 billion.

On 18 January 2022 the Group completed the acquisition of Engage Uni, LLC (operating as Engage Surgical) for a provisional fair value consideration of $131 million (see Note 6 to the Financial Statements for further detail). The provisional fair value of assets acquired included $44 million for intangible assets and $84 million for goodwill.

Our reported tax for the period ended 2 July 2022 was a charge of $27 million (H1 2021: $18 million). The tax rate on trading results for the period ended 2 July 2022 was 17.6% (H1 2021: 18.3%) (see Note 4 to the Interim Financial Statements and Other Information on pages 32 to 35 for further details on taxation).

Basic earnings per share (‘EPS’) was 20.2¢ (40.4¢ per ADS) (H1 2021: 23.4¢ per share). Adjusted earnings per share (‘EPSA’) was 38.1¢ (76.2¢ per ADS) (H1 2021: 38.8¢ per share).

Share Buyback

In December 2021 we announced an updated capital allocation policy to prioritise the use of cash as follows:

1. Invest in innovation to drive organic growth, and to meet our sustainability targets and further embed our ESG agenda
2. Acquire new technologies and expand in higher growth segments, that have a strong strategic fit and meet our financial criteria
3. Maintain investment grade credit metrics, our existing progressive dividend policy, and an optimal balance sheet position
4. Return surplus capital to shareholders through a regular annual buyback, with circa $250 million to $300 million of buybacks proposed in 2022

The share buyback commenced on 22 February 2022. To date $125 million of the 2022 buyback has been completed, with the 7.8 million shares repurchased representing 0.9% of our year end 2021 share count.

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 2022 is therefore 14.4¢ per share (28.8¢ per ADS), in line with last year (H1 2021: 14.4¢ per share). This equates to 12.0p per share at prevailing exchange rates as of 22 July 2022. This dividend is payable on 26 October 2022 to shareholders whose names appear on the register at the close of business on 30 September 2022 (see Note 5 to the Interim Financial Statements for further detail).

2022 Full Year Outlook

In February we announced our guidance for 2022 targeting underlying revenue growth of 4.0% to 5.0% with an expansion in trading profit margin of around 50bps for the full year.

Our revenue growth guidance for 2022 is unchanged at 4.0% to 5.0% (around
-0.2% to +0.8% on a reported basis, including a foreign exchange headwind of 420bps based on exchange rates prevailing on 22 July 2022). As previously disclosed we expect revenue growth to be stronger in the second half than the first half of 2022.

In terms of trading profit margin, we now expect the trading profit margin to be around 17.5%, reflecting prolonged impact of the inflationary environment and continued external supply challenges.

We expect the tax rate on trading results for 2022 to be around 18%, subject to any material changes to tax law, or other one-off items.

Forward calendar

The Q3 Trading Report will be released on 3 November 2022.

About Smith+Nephew

Smith+Nephew is a portfolio medical technology company 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 $5.2 billion in 2021. 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.comand 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.