Smith & Nephew Regulatory News (SN.)

Smith+Nephew Second Quarter and First Half 2023 Results

Strong H1 growth with FY revenue guidance raised, 12-Point Plan on track

3 August 2023

Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology company, reports results for the second quarter and first half ended 1 July 2023:

Q2 Trading Highlights1,2

· Q2 revenue of $1,379 million (Q2 2022: $1,293 million), up 7.8% on an underlying basis (6.6% on a reported basis including -120bps FX headwind)

· Orthopaedics revenue up 5.8% (4.6% reported), reflecting higher procedure volumes, accelerating robotics adoption and reduced China VBP headwind

· Sports Medicine & ENT up 12.0% (10.4% reported), with strong growth across both shoulder and knee repair

· Advanced Wound Management up 6.2% (5.5% reported), led by double-digit growth from our negative pressure wound therapy portfolio

H1 Highlights1,2

· H1 revenue of $2,734 million (H1 2022: $2,600 million), up 7.3% on an underlying basis (5.2% on a reported basis including -210bps FX headwind)

· Operating profit of $275 million (H1 2022: $242 million)

· Trading profit of $417 million (H1 2022: $440 million). Trading profit margin of 15.3% (H1 2022: 16.9%), reflecting expected seasonality and higher input inflation, transactional FX and increased sales and marketing to drive growth

· Cash generated from operations $215 million (H1 2022: $227 million). Trading cash flow $110 million (H1 2022: $154 million), primarily due to inventory increase

· Interim dividend of 14.4¢, in line with prior year

2023 Full Year Outlook1,2

· Increased full year underlying revenue growth guidance of 6.0% to 7.0% (previously 5.0% to 6.0%)

· Unchanged trading profit margin guidance, expected to be at least 17.5%

Strategic Highlights1,2

· Progress building foundations for sustainable higher growth through 12-Point Plan:

o  Significant improvement in product availability and commercial execution in Orthopaedics

o  Productivity improvements delivered with inventory reductions to follow

o  Work to further accelerate growth in Advanced Wound Management andSports Medicine & ENT on track

· Increased cadence of new product launches to drive future higher growth

Chief Financial Officer to step down in Q2 2024

· Anne-Françoise Nesmes has informed the Board of her intention to step down as Chief Financial Officer during the second quarter of 2024. The exact timing of her departure will be announced in due course

· The Board has initiated an external search for her successor

· See separate announcement issued today for further information

Deepak Nath, Chief Executive Officer, said:

"I am pleased to report strong first half revenue growth across our business. The continued outperformance in Sports Medicine and Advanced Wound Management - representing 60% of our business - has continued. In Orthopaedics, our actions to improve product supply and execution have increased our ability to benefit from strong elective procedure volumes. Overall, these results have given us the confidence to increase our full year revenue growth guidance.

"Margin development in the first half was in line with our expectations. In the second half, we expect a clear step up in both trading margin and cash generation as we begin to see the benefit of productivity gains and start bringing down inventory levels.

"Importantly, we continue to build the foundations for sustainable higher growth through our 12-Point Plan, with product availability improving and a high cadence of innovation. So far this year we have launched 13 new products, with major launches underway in high growth segments including robotics, shoulder replacement and negative pressure wound therapy."

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 at https://www.smith-nephew.com/en/about-us/investors#quarterly-reporting.

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 2022 period.

'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.

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 32 to 35 and are reconciled to the most directly comparable financial measures 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 2023 Results

Delivering our transformational Strategy for Growth

Smith+Nephew delivered a strong trading performance in the first half of 2023, with revenue of $2,734 million (H1 2022: $2,600 million). This represented growth of 7.3% on an underlying basis, ahead of our expectations. On a reported basis, revenue growth was 5.2%, including a translational foreign exchange headwind of -210bps.

All three business units contributed to this positive result. In Sports Medicine & ENT and Advanced Wound Management, our outperformance from recent years continued. In Orthopaedics, our actions to improve product availability and commercial execution are starting to have a positive impact and we were better placed to participate in a strong environment for elective procedures in the first half.

As we approach the halfway point of the 12-Point Plan, we are on track to build the foundations for sustainable higher growth. Our high cadence of innovation has also continued with major launches in high growth segments, including robotics, shoulder replacement and negative pressure wound therapy.  

Making progress across our 12-Point Plan

In July 2022 we announced our 12-Point Plan to fundamentally change the way we operate and transform business performance. The 12-Point Plan is focused on:

· Fixing Orthopaedics, to regain momentum across hip and knee implants, robotics and trauma, and win share with our differentiated technology;

· Improving productivity, to support trading profit margin expansion; and

· Further accelerating growth in our already well-performing Advanced Wound Management and Sports Medicine & ENT business units.

We have made considerable progress in our work to fix the foundations of our Orthopaedics business unit.

On product availability, we have reduced our overdue orders by around 50% from the peak in the first half of 2022 and improved the percentage of customer order lines that are filled, measured by line-item fill rates (LIFR). In the US we are around 85% of the way towards reaching industry-standards for non-instrument set LIFR. A significant driver of these improvements has been the new demand and supply planning process which brings a deeper level of specificity and collaboration between our operations and commercial teams. We are also benefiting from our actions to improve logistics and redeploy implants and instrument sets from lower to higher-utilisation customers.

We continued to improve our commercial execution as well. In the first half we repositioned our offering, streamlined the organisation, simplified our commercial process and invested in deeper sales training for the Orthopaedics team. We are starting to see the benefits of our enhanced incentive plan, which better rewards performance, sales mix, robotic placement and implant pull-through.

We are also making good progress on improving productivity, including successfully updating and standardising pricing controls across our portfolio and reducing days sales outstanding. We expect inventory levels to start to fall in the second half of the year as we roll out recent product launches, consume raw materials and complete and deploy new instrument sets.

In line with our plan, our work on manufacturing optimisation is at an earlier stage, and the benefits from network simplification and cost and asset efficiencies should flow through later in the plan, supporting our mid-term margin improvement targets.

As previously disclosed, in aggregate we expect the benefits from our productivity actions to result in more than $200 million of annual savings by 2025 for around $275 million of restructuring costs over three years.

The important third element of the 12-Point Plan is focused on building on our consistent above-market performance from our Advanced Wound Management and Sports Medicine & ENT business units. Progress is also coming through across this workstream. Our negative pressure wound therapy business is benefitting from focused additional resource behind our sales force, delivering strong growth, and the pace of cross-business unit deals into Ambulatory Surgical Centers (ASCs) has more than doubled in 2023.

Increasing our cadence of innovation

Innovation is central to our higher growth ambitions. In February we announced our expectation for 25 new product launches in 2023, a significant increase from our recent average of 18 per year. At the half year we had completed 13 launches and are on track for our full year target.

In Orthopaedics, we continue to expand our robotics-assisted CORI◊ Surgical System.

In April we added the CORI Digital Tensioner, a proprietary device for soft tissue balancing in knee replacement, and the only tensioner for robotics-assisted surgery. This helps make planning more objective and eliminates inconsistencies in surgery from current manual or mechanical tools. 

In May we brought additional data management capability onto CORI with the introduction of Personalized Planning powered by AI and the RI.INSIGHTS Data Visualization Platform. These two solutions transform data into contextual intelligence by enabling surgeons to better understand how pre-operative surgical plans and intra-operative decision-making link to post-operative outcomes.

In June we received 510(k) clearance from the United States Food and Drug Administration (FDA) for a saw solution on CORI, which we expect to roll out from the fourth quarter. This feature adds versatility, appealing to a broader range of surgeons, and makes CORI the only solution to offer robotics-assisted burring and saw bone-cutting options. This development was accelerated as part of the 12-Point Plan. It is another step in our journey of adding features and functionality as we continue to build out CORI at pace.

We are in the early stages of introducing our AETOS◊ Shoulder System, an important part of our growth plans for Trauma & Extremities. AETOS is designed with both patient and surgeon benefits in mind. For example, the MetaStem aligns with the market trend towards minimally invasive short stem devices. Short stems are easier to implant, have improved bone preservation, and are a better fit to anatomy. AETOS will enable Smith+Nephew to compete effectively in the $1.3 billion shoulder market, which, at around 9% CAGR, is one of the fastest growing segments in Orthopaedics.

In Sports Medicine, we introduced the UltraTRAC◊ QUAD ACL Reconstruction Technique, bringing together new tendon harvest and preparation guides with our family of ULTRABUTTON◊ Adjustable Fixation Devices. These technologies work together to provide an innovative procedural solution, expanding Smith+Nephew's ability to address surgeon graft preference in knee repair.

In Advanced Wound Management, we are at the early stages of releasing the new RENASYS◊ EDGE Negative Pressure Wound Therapy System. This is designed to reduce inefficiency and complexity and features an improved user interface for enhanced intuitiveness and simplicity and a durable pump built to offer virtually maintenance-free use.

We also continue to invest in the production of clinical evidence, which we view as an increasingly important differentiator. During the first half, we announced new evidence demonstrating that COBLATION◊ Technology can accelerate ENT patient recovery with fewer complications compared with total tonsillectomy techniques. We also highlighted new data supporting improved outcomes from our VISIONAIRE◊ Patient-Specific Instrumentation for total knee arthroplasty compared with conventional instrumentation.

Second Quarter 2023 Trading Update

Our second quarter revenue was $1,379 million (Q2 2022: $1,293 million), up 7.8% year-on-year on an underlying basis. On a reported basis this represented growth of 6.6%, including a translational -120bps headwind from foreign exchange (primarily due to the strength of the US Dollar). The second quarter comprised 63 trading days, in line with the equivalent period in 2022.

Orthopaedics delivered revenue growth of 5.8% (4.6% reported), an acceleration from the first quarter. This was driven by the increase in elective procedure volumes as well as accelerated growth from our robotics business. We also annualised the impact of hip and knee implant Volume Based Procurement (VBP) in China during the quarter.

Sports Medicine & ENT delivered growth of 12.0% (10.4% reported) and Advanced Wound Management revenue grew 6.2% (5.5% reported), as both continued to perform strongly, building on their innovative and broad portfolios and excellent commercial execution.

This good overall performance was achieved despite some continued supply chain challenges. In Orthopaedics, disruptions delayed the completion and deployment of some instrument sets, and we saw some component shortages in Sports Medicine.

Revenue growth in our Established Markets was up 7.1% (6.8% reported). Within this, the US delivered 6.3% revenue growth (6.3% reported) and Other Established Markets 8.5% revenue growth (7.8% reported), as elective procedure volumes stayed strong across Europe and Asia-Pacific. Emerging Markets revenue was up 11.0% (5.5% reported), resulting from volume recovery in China following the Covid-related restrictions at the start of the year.

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 business unit was up 5.8% (4.6% reported) in the second quarter. Orthopaedics grew by 7.7% underlying excluding China, where we saw a reduced headwind from VBP as this impact annualised.

Knee Implants revenue was up 7.8% (6.6% reported) and Hip Implants revenue was up 3.4% (1.9% reported). Knee performance was led by our kinematic JOURNEY II◊ Knee System and LEGION◊ Revision Knee System. Hip growth was led by our POLAR3◊ Total Hip Solution, OR3O◊ Dual Mobility Hip System and REDAPT◊ Revision Hip System. Other Reconstruction revenue growth was 21.0% (20.4% reported). We delivered strong growth from our robotics-assisted CORI Surgical System across a wide range of healthcare facilities, including ASCs, and more than half of CORI sales included applications for both knee and hip procedures. In Trauma & Extremities revenue growth was 2.5% (1.4% reported), a step up from the first quarter with a strong performance from US Trauma as we drove sales of the EVOS◊ Plating System. We expect growth to accelerate further across the year as we continue to roll-out EVOS, expand the launch of the new AETOS Shoulder System, and lap local market exits made in 2022.

Sports Medicine & ENT

Sports Medicine & ENT delivered strong revenue growth of 12.0% (10.4% reported).

Sports Medicine Joint Repair revenue was up 12.5% (10.9% reported) in the quarter with good growth across our knee and shoulder repair portfolios. We delivered strong double-digit growth from our REGENETEN◊ Bioinductive Implant. Arthroscopic Enabling Technologies revenue grew 4.6% (3.2% reported), driven by our WEREWOLF◊ Fastseal COBLATION system and mechanical resection, offsetting a slower quarter in video. ENT revenue was up 38.9% (36.2% reported), reflecting the continued recovery in tonsil and adenoid procedure volumes.

Advanced Wound Management

Advanced Wound Management revenue growth was 6.2% (5.5% reported).

Advanced Wound Care revenue was up 2.7% (1.6% reported), including good growth from our foams and film portfolio and a strong quarter in Europe. Advanced Wound Bioactives revenue was up 3.1% (3.2% reported), led by our skin substitutes portfolio, where there is strong clinical evidence supporting the use of our GRAFIX◊ Membrane. Advanced Wound Devices revenue was up 21.4% (20.0% reported), with continued strong growth from both our single-use PICO◊ Negative Pressure Wound Therapy System and our traditional RENASYS◊ Negative Pressure Wound Therapy System.

First Half 2023 Consolidated Analysis

Smith+Nephew results for the first half ended 1 July 2023:

(i) See Other Information on pages 32 to 35

First Half 2023 Analysis

Our first half revenue was $2,734 million (H1 2022: $2,600 million), up 7.3% on an underlying basis and up 5.2% on a reported basis, including a translational foreign exchange headwind of -210bps. The first half comprised 127 trading days, in line with the equivalent period in 2022.

The Group reported an operating profit of $275 million (H1 2022: $242 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 $417 million in the first half (H1 2022: $440 million), with a trading profit margin of 15.3% (H1 2022: 16.9%). The margin decline reflects persistent inflation, a transactional foreign exchange headwind and increased sales and marketing, partly offset by productivity improvements (see Note 2 to the Interim Financial Statements for global business unit trading profit).

Restructuring costs related to the efficiency and productivity work underway across the Group totalled $46 million (see Note 2 to the Interim Financial Statements).

Cash generated from operations was $215 million (H1 2022: $227 million) and trading cash flow was $110 million (H1 2022: $154 million), with the year on year reduction primarily driven by working capital movements due to increased inventory. This included stock to support acceleration in negative pressure wound therapy, accumulation of both products and instrument sets due to supply constraints for a small number of components holding back completion and deployment, and increased factory inventory from spot buying of raw materials, as well as inventory growth tracking the overall growth of revenue.

Looking ahead, we expect inventory days to decrease as we deliver growth in negative pressure wound therapy; the reliability of global supply chains continues to improve; instrument sets are completed and deployed; and we reduce production volumes relative to sales (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 26% (H1 2022: 35%), which is expected to improve in the second half of 2023 as the above factors take effect.

The net interest charge within reported results was $44 million (H1 2022: $32 million), with the change due to an increase in net debt year on year and an increase in the overall weighted average interest rate given the prevailing higher rate environment. The Group's net debt, excluding lease liabilities, increased from $2,339 million at 31 December 2022 to $2,656 million at 1 July 2023 (see Note 6 to the Interim Financial Statements), with committed facilities of $3.7 billion. We expect to finish 2023 with leverage of 2.0x, unchanged year-on-year.

Our reported tax for the period ended 1 July 2023 was a charge of $39 million (H1 2022: $27 million). The tax rate on trading results for the period ended 1 July 2023 was 17.4% (H1 2022: 17.6%) (see Note 3 to the Interim Financial Statements and Other Information on pages 32 to 35 for further details on taxation).

Basic earnings per share ('EPS') was 19.7¢ (39.4¢ per ADS) (H1 2022: 20.2¢ per share). Adjusted earnings per share ('EPSA') was 34.9¢ (69.8¢ per ADS) (H1 2022: 38.1¢ per share).

Interim Dividend

The interim dividend is 14.4¢ per share (28.8¢ per ADS), in line with 2022. This equates to 11.2p per share at prevailing exchange rates as of 28 July 2023. This dividend is payable on 1 November 2023 to shareholders whose names appear on the register at the close of business on 6 October 2023 (see Note 4 to the Interim Financial Statements for further detail).

2023 Full Year Outlook

In February we announced our guidance for 2023 targeting both revenue growth and trading profit margin above 2022.

Following our strong first half revenue growth, we are upgrading our underlying revenue growth target for the full year to be in the range of 6.0% to 7.0% (previously 5.0% to 6.0%). On a reported basis the updated guidance equates to a range of around 6.0% to 7.0% based on exchange rates prevailing on 28 July 2023.

For trading profit margin, we continue to expect to deliver at least 17.5%. We expect a significant step up in margin in the second half driven by typical seasonality, combined with positive operating leverage from revenue growth and the accumulating benefits of productivity improvements, which more than offset the continuing headwinds from raw material cost inflation, higher wages and a -120bps headwind from transactional foreign exchange.

The tax rate on trading results for 2023 is now forecast to be around 17% subject to any material changes to tax law or other one-off items (previously around 19%).

Forward calendar

The Q3 Trading Report will be released on 2 November 2023.

Smith+Nephew will be holding a Meet the Management event in London on 29 November 2023. More details will be published in due course.

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 19,000 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 business units 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 2022. 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 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 profit 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 healthcare 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 and financial 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 disposals, 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; relationships with healthcare professionals; reliance on information technology and cybersecurity; disruptions due to natural disasters, weather and climate change related events; changes in customer and other stakeholder sustainability expectations; changes in taxation regulations; effects of foreign exchange volatility; 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, which is available on the SEC's website at www. sec.gov, 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 in US Patent and Trademark Office.

First Half 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

2023 HALF YEAR CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Unaudited Group Income Statement for the Half Year ended 1 July 2023

Unaudited Group Statement of Comprehensive Income for the Half Year ended 1 July 2023

A Attributable to the equity holders of the parent and wholly derived from continuing operations.

Unaudited Group Balance Sheet as at 1 July 2023

Unaudited Condensed Group Cash Flow Statement for the Half Year ended 1 July 2023

B Cash and cash equivalents at the end of the period are net of overdrafts of $7m (2 July 2022: $4m).

Unaudited Group Statement of Changes in Equity for the Half Year ended 1 July 2023