Smith & Nephew(SNN) - 2023 Q4 - Annual Report

Strategic Report Our Performance In 2023, Smith+Nephew reported Group revenue of $5,549 million, a 6.4% reported increase and 7.2% on an underlying basis, with operating profit at $425 million and trading profit reaching $970 million 2023 Key Performance Indicators | Metric | 2023 Value | Change vs. Prior Year | | :--- | :--- | :--- | | Group Revenue | $5,549 million | +6.4% Reported, +7.2% Underlying | | Operating Profit | $425 million | -5.4% | | Trading Profit | $970 million | +7.6% | | Operating Profit Margin | 7.7% | -90bps | | Trading Profit Margin | 17.5% | +20bps | | Adjusted EPS (EPSA) | 82.8¢ | +18.2% | | Dividend Per Share | 37.5¢ | Unchanged | | R&D Investment | $339 million | -1.8% | | Cash Generated from Operations | $829 million | +42.7% | | Return on Invested Capital (ROIC) | 5.9% | -70bps | Who We Are Smith+Nephew is a leading portfolio medical technology company with a 168-year history, serving over 100 countries and treating more than 14 million patients in 2023, structured into three global business units - The company operates through three global business units: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management[22] 2023 Business Unit Revenue Contribution | Business Unit | Percentage of Group Revenue | | :--- | :--- | | Orthopaedics | 40% | | Sports Medicine & ENT | 31% | | Advanced Wound Management | 29% | - In 2023, the company invested $339 million in R&D and launched 20 new products[17] - The company's ESG strategy focuses on three pillars: People (community impact), Planet (environmental impact reduction), and Products (sustainable innovation)[19][20] Chair's Statement The Chair, Rupert Soames, highlights encouraging progress in 2023 with 7.2% underlying revenue growth and improved trading profit margin, expressing confidence in CEO Deepak Nath's leadership and the 12-Point Plan - The Board is confident in CEO Deepak Nath and the 12-Point Plan, which is beginning to show positive results and gather forward momentum[33][52] - A major proposal is to adjust the Remuneration Policy for US-based executives to be more competitive with US MedTech peers, as over 50% of company revenue and most senior operational managers are in the US[38][39][40] 2023 Performance Highlights from Chair's Statement | Metric | 2023 Value | Underlying Growth | | :--- | :--- | :--- | | Revenue | - | 7.2% | | Trading Profit | $970 million | 7.6% (reported) | | Operating Profit | $425 million | - | | Operating Profit Margin | 7.7% | - | - The Board recommends a final dividend of 23.1¢ per share, resulting in a total dividend of 37.5¢ per share for 2023, unchanged from 2022[50] Chief Executive Officer's Review CEO Deepak Nath reports strong 2023 performance with 7.2% underlying revenue growth to $5.55 billion and a 17.5% trading profit margin, attributing success to the 12-Point Plan and operational improvements 2023 Financial Performance Overview | Metric | 2023 Value | Underlying Growth | Reported Growth | | :--- | :--- | :--- | :--- | | Group Revenue | $5,549 million | 7.2% | 6.4% | | Trading Profit | $970 million | - | 7.6% | | Trading Profit Margin | 17.5% | +20bps | - | - The 12-Point Plan is on track and focuses on three pillars: 1) Fixing Orthopaedics, 2) Improving productivity, and 3) Accelerating growth in Advanced Wound Management and Sports Medicine & ENT[57][59] - In Orthopaedics, product availability has significantly improved, closing over 95% of the gap to target, though US Reconstruction remains a priority for improvement[60][61] - Productivity initiatives contributed approximately 160bps to the 2023 trading profit margin through actions in pricing, procurement, and manufacturing optimization[66] - Innovation remains a key growth driver, with 20 new products launched in 2023 and the acquisition of CartiHeal, a novel cartilage regeneration technology[73][75] Our Marketplace Smith+Nephew operates in a global medical technology market valued at approximately $45 billion, driven by demographic trends, lifestyle conditions, technological advancements, and emerging markets - The company competes in a global medical technology market worth around $45 billion per annum[90] - Long-term growth is driven by demographic trends (aging population), lifestyle conditions (diabetes, obesity), technological advancements (AI, biotech), and rising demand in emerging markets[91][92][93] - A key market trend is the decentralization of care, with more procedures moving to outpatient settings like Ambulatory Surgery Centers (ASCs), especially in orthopaedics and sports medicine[94] - The market is characterized by significant cost pressure from governments, stringent regulations that create high barriers to entry, and seasonality in procedure volumes, with higher activity in winter months[96][97][100] Our Business Model Smith+Nephew's business model creates value for patients, clinicians, and shareholders through its 'Life Unlimited' purpose and 'Strategy for Growth', leveraging financial strength, R&D, and global operations - The business model is designed to create value by transforming outcomes for patients, clinicians, and healthcare systems, guided by the 'Life Unlimited' purpose[103] - Key inputs for value creation include financial strength, a culture based on Care, Courage, and Collaboration, prioritized R&D investment, a focus on sustainability, and resilient global operations[105] - The value creation process involves developing innovative products, setting product strategy through three global business units, providing expertise and support via a specialized sales force, and offering medical education through the Smith+Nephew Academy[109][110][111][114] Key Performance Indicators Smith+Nephew tracks its performance using financial and non-financial KPIs, achieving 7.2% underlying revenue growth and a 17.5% trading profit margin in 2023, while also improving employee engagement and sustainability metrics Financial KPIs (2023) | KPI | 2023 Result | Trend/Comment | | :--- | :--- | :--- | | Underlying Revenue Growth | 7.2% | Ahead of guidance | | Operating Profit Margin | 7.7% | Decreased from 8.6% in 2022 | | Trading Profit Margin | 17.5% | Increased by 20bps from 2022 | | Return on Invested Capital (ROIC) | 5.9% | Decreased from 6.6% in 2022 | | Dividend per Share | 37.5¢ | Unchanged from 2022 | Non-Financial KPIs (2023) | KPI | 2023 Result | Comment | | :--- | :--- | :--- | | R&D Investment | $339 million | - | | New Product Launches | 20 | +2 ready for 2024 launch | | Employee Engagement Score | 4.20 | 83rd percentile in Gallup's database | | Headline Safety Rate | 0.15 | Incidents per 200,000 hours worked | | Practitioner Training Sessions | 97,405 | Medical education sessions provided | | Scope 1 & 2 GHG Reduction (vs 2019) | 40% | On track for 70% reduction by 2025 | - The 12-Point Plan, a key strategic initiative, is reported to be approximately 65% complete against its milestones[124] Financial Review In 2023, Smith+Nephew achieved strong financial results with 7.2% underlying revenue growth to $5.55 billion and a trading profit margin of 17.5%, despite impacts from restructuring costs and a $109 million write-off 2023 Group Performance Summary | Metric | 2023 ($ million) | 2022 ($ million) | Change | | :--- | :--- | :--- | :--- | | Revenue | 5,549 | 5,215 | +6.4% | | Operating profit | 425 | 450 | -5.6% | | Trading profit | 970 | 901 | +7.6% | | Profit before tax | 290 | 235 | +23.4% | | Basic EPS | 30.2¢ | 25.5¢ | +18.4% | | Adjusted EPS (EPSA) | 82.8¢ | 81.8¢ | +1.2% | - The company recorded a $109 million write-off of assets and liabilities from the discontinued Engage Surgical business, which was acquired in 2022[138] - The 12-Point Plan incurred $220 million in restructuring costs in 2023, delivering incremental benefits of around $68 million during the year[139] 2024 Financial Outlook | Metric | 2024 Guidance | | :--- | :--- | | Underlying Revenue Growth | 5.0% to 6.0% | | Trading Profit Margin | At least 18.0% | | Tax Rate on Trading Results | 19% to 20% | - The company maintains its mid-term target of achieving at least a 20% trading profit margin in 2025[170] Creating Value Through Innovation Smith+Nephew's innovation strategy, driven by R&D, medical education, and manufacturing optimization, contributed nearly 50% of 2023's underlying revenue growth through new product launches and strategic acquisitions - Approaching 50% of the company's 2023 underlying revenue growth came from products launched in the last five years[177][72] - The company's R&D is focused on four key trends: robotics and digital systems, biologics, procedural innovation for less invasive methods, and delivering economic value[188] - In 2023, the company launched 20 new products and acquired CartiHeal, developer of a novel cartilage regeneration implant, for an initial $180 million[190][128] - A new Smith+Nephew Academy was opened in Munich, expected to train over 5,000 healthcare providers annually, serving as a central European hub for medical education[211][212] - Manufacturing operations are being optimized under the 12-Point Plan, including closing two smaller facilities in China and Germany to improve efficiency and product availability[220] Research & Development Smith+Nephew's R&D focuses on addressing unmet clinical needs, launching 20 new products in 2023 including enhancements to its CORI® Surgical System and the new AETOS® Shoulder System, and leveraging M&A for innovation like the CartiHeal acquisition - Key 2023 product launches included the AETOS® Shoulder System, designed to compete in the $1.7 billion shoulder market, and expanded functionality for the CORI® Surgical System, including AI-powered planning tools[193][191][192] - The company announced the acquisition of CartiHeal, developer of the CARTIHEAL® AGILI-C® Cartilage Repair Implant, a novel technology for cartilage regeneration in the knee with a broader indication than existing treatments[197] - The new RENASYS® EDGE Negative Pressure Wound Therapy System was launched, designed for enhanced simplicity and durability, particularly for home-care settings[200] Medical Education Smith+Nephew is committed to educating healthcare professionals through the Smith+Nephew Academy, a global network offering blended learning, which expanded its physical presence with a new academy in Munich in 2023 - The Smith+Nephew Academy provides comprehensive medical education through a blended learning environment, including digital platforms, hands-on experiences, and VR simulations[204][205] - In October 2023, the company opened S+N Academy Munich, a new central European hub expected to train more than 5,000 healthcare providers each year[211][212] - The company's medical education programs have received the highest level of accreditation from the Royal College of Surgeons of England (RCSEng)[213] Manufacturing Global Operations, central to the 12-Point Plan, improved product availability and reduced production in 2023 through a redesigned SIOP process, network optimization, and progress on EU MDR certification - A redesigned Sales, Inventory and Operations Planning (SIOP) process was rolled out in 2023, leading to improved service and better alignment between commercial and operations teams[217][218] - Manufacturing network optimization included announcing the closure of two smaller facilities in China and Germany and reducing the contingent workforce[220] - The company has made good progress with EU Medical Device Regulation (EU MDR) submissions, with 90% of respective product lines having received MDR certification[230] Taking Our Innovation to Market Smith+Nephew markets its innovations through three global business units—Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management—all of which delivered strong underlying revenue growth in 2023 by leveraging differentiated technology and specialized sales forces 2023 Business Unit Performance (Underlying Revenue Growth) | Business Unit | 2023 Underlying Revenue Growth | | :--- | :--- | | Orthopaedics | 5.7% | | Sports Medicine & ENT | 10.0% | | Advanced Wound Management | 6.4% | - The company serves its markets through three global business units, each with specialist sales and support teams dedicated to specific healthcare professional requirements[233] Orthopaedics The Orthopaedics division, representing 40% of Group revenue, achieved 5.7% underlying revenue growth in 2023, driven by its CORI® Surgical System and Trauma & Extremities, with a strategic focus on robotic-enabled growth and expansion into the shoulder market Orthopaedics 2023 Revenue Performance | Segment | Revenue ($ million) | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | | Total Orthopaedics | $2,214 million | 4.8% | 5.7% | | Knee Implants | $940 million | 4.7% | 5.5% | | Hip Implants | $599 million | 2.5% | 3.8% | | Other Reconstruction | $111 million | 27.8% | 28.0% | | Trauma & Extremities | $564 million | 3.7% | 4.4% | - The division's trading profit was $398 million in 2023, up from $383 million in 2022[236] - A major focus of the 12-Point Plan is 'Fixing Orthopaedics', which in 2023 involved improving product availability, logistics, and commercial execution[243] - Key growth drivers include the CORI® Surgical System, which is the only system indicated for partial, total, and revision knee procedures, and the newly launched AETOS® Shoulder System[251][258] Sports Medicine & ENT The Sports Medicine & ENT division delivered strong 10.0% underlying revenue growth in 2023, reaching $1.729 billion, driven by the REGENETEN® Bioinductive Implant and ENT products, with a strategy focused on procedural innovation and market development Sports Medicine & ENT 2023 Revenue Performance | Segment | Revenue ($ million) | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | | Total Sports Medicine & ENT | $1,729 million | 8.8% | 10.0% | | Sports Medicine Joint Repair | $945 million | 8.7% | 9.9% | | Arthroscopic Enabling Technologies | $588 million | 3.7% | 4.7% | | ENT | $196 million | 28.1% | 29.8% | - The division's trading profit was $503 million in 2023, an increase of 6.6% from $472 million in 2022[262][270] - Strong performance in Sports Medicine Joint Repair was led by the REGENETEN® Bioinductive Implant, which has been shown to change the course of rotator cuff tear progression[270][278] - The company is expanding its portfolio with the acquisition of CartiHeal for cartilage regeneration and new solutions for foot and ankle soft tissue repair[280][283] Advanced Wound Management The Advanced Wound Management division achieved 6.4% underlying revenue growth in 2023, reaching $1.606 billion, driven by strong performance across all segments, particularly Advanced Wound Devices, and focuses on innovation in products and digital tools Advanced Wound Management 2023 Revenue Performance | Segment | Revenue ($ million) | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | | Total Advanced Wound Management | $1,606 million | 6.2% | 6.4% | | Advanced Wound Care | $725 million | 1.8% | 2.1% | | Advanced Wound Bioactives | $553 million | 6.3% | 6.2% | | Advanced Wound Devices | $328 million | 17.0% | 17.6% | - The division's trading profit increased by 8.3% to $472 million in 2023, with a trading profit margin of 29.4%[294][301] - Growth in Advanced Wound Devices was driven by both the traditional RENASYS® and single-use PICO® Negative Pressure Wound Therapy (NPWT) systems[301] - The company is investing in digital health tools, such as the WOUND COMPASS® Clinical Support App, to optimize clinical practice and support patient care[321] Building a Culture of Belonging Smith+Nephew is focused on creating an inclusive and high-performing culture, advancing its Inclusion, Diversity, and Equity (IDE) program, improving employee engagement, and maintaining a robust global compliance program - The company met its 2023 diversity goals, achieving 34% female representation in management and 21% ethnic diversity in US management positions[325] - Employee Inclusion Groups (EIGs) are a key part of the IDE strategy, with over 800 members globally across groups like the Women's Network, UNITY (race & ethnicity), and PRIDE (LGBTQ+)[332][334] - The annual Gallup employee engagement survey showed continued improvement, with an 89% participation rate and a grand mean score placing the company in the 83rd percentile of Gallup's database[129][343] - A comprehensive global compliance program is in place to ensure adherence to laws, regulations, and industry codes, with oversight from a Board-level Compliance & Culture Committee[347][350] Shaping a Healthy and Sustainable Future Smith+Nephew's ESG strategy, integral to its 'Strategy for Growth', focuses on People, Planet, and Products, with commitments to net-zero emissions by 2045 and significant progress in reducing Scope 1 & 2 GHG emissions - The ESG strategy focuses on three pillars: People (community impact), Planet (environmental reduction), and Products (sustainable innovation)[363] - The company has committed to achieving net-zero Scope 1 and 2 GHG emissions by 2040 and Scope 3 by 2045[378] 2023 ESG Progress Highlights | Area | 2023 Progress | | :--- | :--- | | People | $5.1 million in product donations; 95 community/charity events held | | Planet | 40% reduction in Scope 1 & 2 GHG emissions since 2019; 30% reduction in waste to landfill from strategic sites since 2019 | | Products | Sustainability review embedded into New Product Development process | - The company has streamlined its ESG governance with the establishment of an ESG Operating Committee reporting to the Executive Committee, with Board oversight[372] TCFD Reporting Smith+Nephew's TCFD report details its climate change governance, strategy, and risk management, with Board oversight and integration of climate risks into its ERM process, targeting net-zero by 2045 and a 70% reduction in Scope 1 & 2 emissions by 2025 - Board-level oversight of ESG and climate-related risks is in place, with specific responsibilities delegated to the Audit, Compliance & Culture, and Remuneration Committees[428][430] - Climate-related risks are integrated into the company's Enterprise Risk Management (ERM) process, covering both transition risks (commercial, legal, pricing) and physical risks (extreme weather, sea-level rise)[434][436] - The company has committed to net-zero Scope 1 & 2 GHG emissions by 2040 and Scope 3 by 2045. It is on track for its interim target of a 70% reduction in Scope 1 & 2 emissions by 2025[441] GHG Emissions (2023 vs. 2019 Baseline) | Emission Scope | 2023 (tonnes CO2e) | 2019 (tonnes CO2e) | Reduction | | :--- | :--- | :--- | :--- | | Scope 1 | 15,901 | 9,888 | N/A (Increase) | | Scope 2 (market-based) | 24,365 | 57,152 | N/A | | Total Scope 1 & 2 (market-based) | 40,266 | 67,040 | 40% | Risk Report Smith+Nephew employs a comprehensive Enterprise Risk Management (ERM) framework to identify, assess, and mitigate risks across compliance, external, financial, operational, and people categories, with the Board confirming the Group's viability for the next three years - The company utilizes a formal Enterprise Risk Management (ERM) process with a 'top-down' and 'bottom-up' approach to identify and manage risks[471][478] - Emerging risks identified in 2023 include heightened stakeholder focus on ESG and the strategic implications of Artificial Intelligence (AI)[474] - Principal Risks are categorized into five groups: Compliance and Reputation (e.g., legal, quality), External (e.g., political, economic), Financial (e.g., foreign exchange, pricing), Operational (e.g., cybersecurity, supply chain), and People (e.g., talent management)[482] - The Board has issued a Viability Statement, confirming a reasonable expectation that the Group can continue operations and meet its liabilities for the three-year period ending December 2026[524] Our Stakeholders Smith+Nephew's Board considers the impact on key stakeholders—Employees, Investors, Customers and Suppliers, Governments and Regulators, and the Environment and Communities—in its decision-making process, engaging through various channels to deliver sustainable long-term value - The Board considers the interests of key stakeholders when making decisions to deliver sustainable long-term value, in compliance with Section 172 of the Companies Act 2006[537] - Key stakeholder groups identified are: Employees, Investors, Customers and suppliers, Environment and communities, and Governments and regulators[539][541][542] - Engagement with employees includes Board listening sessions, site visits, and monitoring culture through surveys. Key 2023 feedback focused on innovation, strategy communication, and talent development[545][548] - The Chair and senior management engage regularly with investors on strategy, performance, and remuneration, with feedback shaping Board agendas and proposals like the 2024 Remuneration Policy[550][553] Governance Governance at a Glance Smith+Nephew is committed to high standards of corporate governance, complying with the UK Corporate Governance Code 2018 and relevant NYSE and SEC rules, with a Board demonstrating strong engagement and a focus on diversity and experience - The company complies with the UK Corporate Governance Code 2018 and the rules of the NYSE and SEC applicable to foreign private issuers[571] 2023 Board and Committee Meeting Attendance | Committee | Attendance Rate | | :--- | :--- | | Board | 94% | | Audit | 100% | | Nomination & Governance | 88% | | Compliance & Culture | 95% | | Remuneration | 96% | - As of year-end 2023, the Board composition was 33.3% female[580] Board Leadership and Company Purpose The Board of Directors, led by Chair Rupert Soames, is responsible for the long-term success of the company, overseeing strategy, risk, and stakeholder engagement, with the Executive Committee managing day-to-day operations - The Board's primary focus is the long-term sustainable success of the company, approving strategy, evaluating risk, and overseeing implementation[646] - Key Board activities in 2023 included reviewing progress against the 12-Point Plan, approving the three-year strategic plan, setting dividend policy, and overseeing succession planning[656] - All Non-Executive Directors are considered independent under both UK and US requirements, ensuring independent oversight and challenge of management[637] - The Executive Committee, led by the CEO, is responsible for the day-to-day operational management of the Group and executing its strategy[617] Nomination & Governance Committee Report The Nomination & Governance Committee focused on Board and executive succession in 2023, managing key appointments and overseeing Board effectiveness and diversity, while identifying long-term value creation and management succession as key focus areas for 2024 - The committee managed four significant appointments in 2023/early 2024: Rupert Soames (Chair), Jez Maiden (NED), Simon Lowth (NED), and John Rogers (CFO)[663][664][665][666] - The Board appointment process evaluates skills, experience, and diversity, using external advisors to compile a diverse shortlist of candidates for consideration[670][671][672] Board Diversity Statistics (as of 31 Dec 2023) | Category | Board Representation | | :--- | :--- | | Women | 33.33% | | Ethnic Minority Background | 2 Directors (16.67%) | - The 2023 internal Board effectiveness review found the Board to be operating effectively. Key focus areas for 2024 are long-term strategic drivers for value creation and enhanced management succession planning[718][720][721] Compliance & Culture Committee Report The Compliance & Culture Committee oversees the company's ethics, compliance, quality, regulatory affairs, culture, and sustainability programs, reviewing global program effectiveness, ESG strategy, and monitoring corporate culture through employee engagement and Board listening sessions - The committee oversees ethics and compliance, receiving regular reports on the global program's effectiveness, audit findings, and significant allegations[729][730] - In 2023, the committee reviewed and monitored the company's ESG strategy and performance against targets for People, Planet, and Products, using enhanced dashboards from the new ESG Operating Committee[732][733] - The committee monitored Quality and Regulatory Affairs, reviewing performance against KPIs, results of external inspections (e.g., by the FDA), and progress on emerging regulations like EU MDR[738][739] - Culture was monitored via employee engagement surveys, IDE strategy updates, and five Board listening sessions held in 2023, which provided direct employee feedback on strategy, leadership, and culture[745][749] Audit Committee Report The Audit Committee focused on the transition to Deloitte as external auditor, IT framework oversight, and ERM, while reviewing significant financial matters including Orthopaedics inventory valuation, legal provisions for metal-on-metal hip products, and goodwill impairment, concluding the 2023 Annual Report is fair and internal controls are effective - A key focus for 2024 is supporting the transition of the external audit from KPMG to Deloitte, effective from January 1, 2024[753][777] - Significant matters reviewed included the valuation of inventories, particularly the $544 million provision for excess & obsolete (E&O) inventory, of which 82% relates to Orthopaedics[760][1080] - The committee reviewed legal provisions, including the $149 million provision for metal-on-metal hip product claims, and concluded the levels were appropriate[761][762] - Impairment reviews were a key focus, resulting in the full impairment of goodwill and intangible assets related to the discontinued Engage Surgical business. The Orthopaedics CGU goodwill was also closely reviewed but not impaired[763][764] - The committee reviewed and confirmed the effectiveness of the Group's internal controls over financial reporting, in compliance with the UK Corporate Governance Code and the Sarbanes-Oxley Act (SOX)[801][803] Directors' Remuneration Report The 2023 Remuneration Report proposes amending the Remuneration Policy for US-based Executive Directors to align with US MedTech market norms, including increased CEO share ownership guidelines and a new Restricted Share Programme, deemed crucial for talent retention and long-term stability - A new Remuneration Policy is proposed for 2024 to make compensation for US-based executives more competitive with the US MedTech market, where over 50% of the company's revenue is generated[817][820] - Proposed changes for US executives include introducing a Restricted Share Programme (RSP) of 125% of salary and increasing the Performance Share Programme (PSP) maximum opportunity to 300% of salary. The share ownership guideline for the CEO will increase from 300% to 500% of salary[830][831][837] 2023 Executive Director Bonus Payout | Executive Director | Total Bonus Earned | Payout as % of Base Salary | | :--- | :--- | :--- | | Deepak Nath (CEO) | $1,997,124 | 130.8% | | Anne-Françoise Nesmes (CFO) | £812,763 | 127.5% | - The 2021 Performance Share Programme (PSP) award vested at 21% of the maximum opportunity, based on performance over the 2021-2023 period[851][995] - The CEO pay ratio for 2023 was 72:1 against the median UK employee. Excluding a one-off buy-out award vesting, the ratio would have been 55:1[1031] Accounts Statement of Directors' Responsibilities The Directors confirm their responsibility for preparing the Annual Report and financial statements in accordance with applicable laws and regulations, asserting that the financial statements provide a true and fair view of the Group's affairs and that the Annual Report is fair, balanced, and understandable - Directors are responsible for preparing financial statements that give a 'true and fair view' of the Group's financial position and performance[1058] - The Group financial statements are prepared in accordance with both UK-adopted international accounting standards and IFRS as issued by the IASB[1057] - The Directors confirm that the Annual Report is fair, balanced, and understandable, providing necessary information for shareholders to assess the company's position, performance, business model, and strategy[1063] Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on Smith & Nephew's consolidated financial statements for the three-year period ended December 31, 2023, and confirmed the effectiveness of internal control over financial reporting, while identifying three critical audit matters - KPMG issued an unqualified audit opinion, stating the consolidated financial statements are fairly presented in accordance with IFRS[1069] - KPMG also provided a positive opinion on the effectiveness of the Group's internal control over financial reporting as of December 31, 2023[1069] - Three critical audit matters were identified: 1) Recoverability of Orthopaedics CGU goodwill, 2) Provision for excess and obsolescence (E&O) for Orthopaedics inventory, and 3) Provision for metal-on-metal hip products[1077][1080][1082] Group Financial Statements The Group's financial statements for 2023 show revenue of $5.55 billion and an attributable profit of $263 million, with total assets of $9.99 billion and total equity of $5.22 billion, reflecting a net cash inflow from operating activities of $608 million Group Income Statement Highlights (Year ended Dec 31, 2023) | Item | 2023 ($ million) | 2022 ($ million) | | :--- | :--- | :--- | | Revenue | 5,549 | 5,215 | | Gross profit | 3,819 | 3,675 | | Operating profit | 425 | 450 | | Profit before taxation | 290 | 235 | | Attributable profit for the year | 263 | 223 | Group Balance Sheet Highlights (As of Dec 31, 2023) | Item | 2023 ($ million) | 2022 ($ million) | | :--- | :--- | :--- | | Total assets | 9,987 | 9,966 | | Total liabilities | 4,770 | 4,707 | | Total equity | 5,217 | 5,259 | Group Cash Flow Statement Highlights (Year ended Dec 31, 2023) | Item | 2023 ($ million) | 2022 ($ million) | | :--- | :--- | :--- | | Net cash inflow from operating activities | 608 | 468 | | Net cash used in investing activities | (448) | (472) | | Net cash used in financing activities | (200) | (926) | | Net decrease in cash and cash equivalents | (40) | (930) | Notes to the Group Accounts The notes to the Group accounts detail accounting policies and financial figures, highlighting critical estimates in inventory valuation, legal provisions, and impairment testing, and reporting segment performance and post-balance sheet events - Critical accounting estimates involve valuation of inventories (especially for Orthopaedics), liability provisions for legal disputes (e.g., metal-on-metal hip cases), and impairment of goodwill and intangible assets[1136][1154][1157][1159] 2023 Revenue and Trading Profit by Segment ($ million) | Segment | Revenue | Trading Profit | | :--- | :--- | :--- | | Orthopaedics | 2,214 | 398 | | Sports Medicine & ENT | 1,729 | 503 | | Advanced Wound Management | 1,606 | 472 | | Total Segment | 5,549 | 1,373 | - The provision for metal-on-metal hip claims was $149 million at year-end 2023, down from $239 million in 2022, primarily due to utilization[1369][1370] - Post-balance sheet, the Group completed the acquisition of CartiHeal on January 9, 2024, for an initial cash payment of $180 million[1460] Other Information Risk Factors Smith+Nephew faces significant risks including supply chain disruptions, intense market competition requiring continuous innovation, pricing and reimbursement pressures, and substantial legal and compliance risks such as product liability claims and cybersecurity threats - Global supply chain risks include disruption at key manufacturing sites, reliance on single-source suppliers, and increased costs from geopolitical events and freight issues[1523][1524] - The company faces intense competition, requiring continuous new product innovation. Failure to innovate or integrate acquisitions successfully could lead to loss of market share[1533][1544] - Pricing and reimbursement pressures from government-controlled healthcare systems and initiatives like volume-based procurement pose a significant risk to revenue and margins[1536][1539] - Legal and compliance risks are substantial, including product liability claims (e.g., metal-on-metal hips), adherence to complex global regulations like EU MDR, and managing cybersecurity threats[1554][1558][1551] Non-IFRS Financial Information - Adjusted Measures Smith+Nephew uses non-IFRS financial measures like underlying revenue growth, trading profit, and adjusted EPS (EPSA) to provide a clearer view of its underlying performance by excluding specific items, aiding management assessment and investor understanding of trends - The company uses non-IFRS measures like trading profit, underlying revenue growth, and EPSA to show underlying performance, excluding items such as acquisition costs, restructuring, and major legal expenses[1587] Reconciliation of Reported to Underlying Revenue Growth (2023) | Metric | Value | | :--- | :--- | | Reported Growth | 6.4% | | Currency Impact | (0.8)% | | Acquisitions/Disposals | 0.0% | | Underlying Growth | 7.2% | Reconciliation of Operating Profit to Trading Profit (2023, $ million) | Item | Value | | :--- | :--- | | Operating Profit | 425 | | Acquisition and disposal-related items | 60 | | Restructuring and rationalisation costs | 220 | | Amortisation and impairment of acquisition intangibles | 207 | | Legal and other | 58 | | Trading Profit | 970 | - Adjusted Earnings Per Share (EPSA) for 2023 was 82.8¢, reconciled from a basic EPS of 30.2¢ by adjusting for the after-tax impact of the excluded items[1599][1600] Shareholder Information This section provides key information for Smith & Nephew plc shareholders, including its dual listing on the LSE and NYSE, progressive dividend policy, major shareholder interests, and tax implications - The company's ordinary shares are listed on the LSE (SN.) and as ADSs on the NYSE (SNN), with each ADS representing two ordinary shares[1619] Dividend History (US cents per share) | Year | Interim | Final | Total | | :--- | :--- | :--- | :--- | | 2023 | 14.40 | 23.10 | 37.50 | | 2022 | 14.40 | 23.10 | 37.50 | | 2021 | 14.40 | 23.10 | 37.50 | | 2020 | 14.40 | 23.10 | 37.50 | | 2019 | 14.40 | 23.10 | 37.50 | - As of February 16, 2024, BlackRock, Inc. was the only shareholder with a holding exceeding 3%, at 5.2% of issued shares[1639][1647] - The Annual General Meeting (AGM) will be held on May 1, 2024[1724]