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

Strategic Report Our performance The company achieved 7.2% underlying revenue growth to $5,549 million in 2023, with trading profit increasing by 7.6% and margin improving by 20 basis points 2023 Key Performance Indicators | Metric | 2023 Value | Change | | :--- | :--- | :--- | | Group Revenue | $5,549 million | +7.2% (Underlying) | | Operating Profit | $425 million | -5.4% | | Trading Profit | $970 million | +7.6% | | Operating Profit Margin | 7.7% | -90 basis points | | Trading Profit Margin | 17.5% | +20 basis points | | Earnings Per Share (EPS) | 30.2 cents | +1.3% | | Adjusted EPS (EPSA) | 82.8 cents | +18.2% | | Cash Generated from Operations | $829 million | +42.7% | | Trading Cash Flow | $635 million | +43.0% | | R&D Investment | $339 million | -1.8% | | Dividend Per Share | 37.5 cents | Unchanged | | Return on Invested Capital (ROIC) | 5.9% | -70 basis points | Who we are Smith+Nephew is a leading medical technology company operating through three global business units, focusing on R&D, medical education, and resilient manufacturing - The company operates through three global business units[16] Revenue Contribution by Business Unit (2023) | Business Unit | % 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[11] - The company's ESG strategy focuses on three pillars: People, Planet, and Products[13][14] Chair's statement The Chair highlights strong 7.2% underlying revenue growth and 7.6% trading profit increase in 2023, emphasizing the 12-Point Plan and proposed Remuneration Policy changes for US executives - The Board is focused on implementing the 12-Point Plan developed by CEO Deepak Nath to create sustainable long-term value and address the company's underperformance in recent years[27] - A major governance focus is the proposal to adjust the Remuneration Policy for US-based executives to align with US pay practices, as over 50% of the company's revenues and the majority of its senior operational managers are in the US[32][33][34] 2023 Performance Highlights | Metric | Value | Change | | :--- | :--- | :--- | | Revenue Growth (Reported) | 6.4% | - | | Revenue Growth (Underlying) | 7.2% | - | | Trading Profit Growth (Reported) | 7.6% | - | | Operating Profit | $425 million | - | | Operating Profit Margin | 7.7% | - | - The Board recommends a final dividend of 23.1 cents per share, resulting in a total dividend of 37.5 cents per share for 2023, unchanged from 2022[44] Chief Executive Officer's review CEO Deepak Nath reports strong 2023 performance with 7.2% underlying revenue growth and improved 17.5% trading profit margin, driven by the successful 12-Point Plan execution and innovation 2023 Financial Performance | Metric | 2023 Value | Note | | :--- | :--- | :--- | | Group Revenue | $5,549 million | 7.2% underlying growth | | Operating Profit | $425 million | - | | Operating Profit Margin | 7.7% | - | | Trading Profit | $970 million | +7.6% reported growth | | Trading Profit Margin | 17.5% | +20 basis points vs. prior year | - The 12-Point Plan, announced in July 2022, is on track and focuses on three core areas: - Fixing Orthopaedics: Regaining momentum in hip/knee implants, robotics, and trauma - Improving Productivity: Supporting trading profit margin expansion - Accelerating Growth: Building on strong performance in Advanced Wound Management and Sports Medicine & ENT[51][52] - Solid progress was made in fixing Orthopaedics, with full-year underlying growth of 5.7%, a significant improvement from 1.9% in the prior year; product availability issues have been largely resolved, closing over 95% of the gap to target[54]55 - Productivity improvements contributed approximately 160 basis points to the 2023 trading profit margin through actions in pricing, procurement, and manufacturing optimization, including the announced closure of two sites in China and Germany[60][62] - Innovation is a key growth driver, with 20 new products launched in 2023; the company also announced the acquisition of CartiHeal, developer of a novel cartilage regeneration technology[67][69] Our marketplace Smith+Nephew operates in a $45 billion global medical technology market, driven by demographics, technology, and decentralization, facing cost pressures and high regulation - The company competes in global markets worth around $45 billion per year[84] - Long-term growth is supported by demographic trends (aging population), lifestyle conditions (diabetes, obesity), technological advancements, and increasing healthcare demand in emerging markets[85][86][87] - A significant market trend is the decentralization of care, with more procedures moving to outpatient settings like Ambulatory Surgery Centers (ASCs), especially in the US[88] - The industry is characterized by government pressure to reduce healthcare costs, leading to price sensitivity and policies like volume-based procurement in markets such as China[90] - The medical device sector is highly regulated, creating a high barrier to entry and requiring strict compliance with safety, efficacy, and quality standards[91][92] Our business model Smith+Nephew's business model leverages financial strength, culture, R&D, global operations, and sustainability to create value through innovative technology and customer-centric go-to-market strategies - The company's value creation is based on five key inputs: - Financial: A strong balance sheet and capital allocation framework - People: A culture based on Care, Courage, and Collaboration - R&D: Prioritized investment in new products and technologies - Global Operations: Resilient manufacturing and supply chains - Sustainability: Addressing long-term needs of stakeholders and the environment[99] - The process of creating value involves several core activities: - Innovative Technology: Offering a differentiated portfolio, including digital and robotic technologies - Product Development: A rigorous R&D model supplemented by strategic acquisitions - Go to Market: Global business units driving product strategy and marketing - Expertise and Support: A specialized sales force providing clinical and logistical support - Medical Education: The Smith+Nephew Academy supports the safe and effective use of products[103][104][105][106][108] Key Performance Indicators Smith+Nephew tracks 7.2% underlying revenue growth, 17.5% trading profit margin, and 5.9% ROIC alongside non-financial KPIs like R&D investment, new product launches, and ESG progress Financial KPIs (2023) | KPI | 2023 Value | Change vs. 2022 | | :--- | :--- | :--- | | Underlying Revenue Growth | 7.2% | +250 basis points | | Operating Profit Margin | 7.7% | -90 basis points | | Trading Profit Margin | 17.5% | +20 basis points | | Return on Invested Capital (ROIC) | 5.9% | -70 basis points | | Dividend Per Share | 37.5 cents | Unchanged | - The 12-Point Plan is reported to be approximately 65% complete against its two-year milestones[118] Non-Financial KPIs (2023) | KPI | 2023 Value | | :--- | :--- | | R&D Investment | $339 million | | New Product Launches | 20 | | Employee Engagement Score | 4.20 (83rd percentile) | | Scope 1 & 2 GHG Reduction (since 2019) | 40% | | Waste to Landfill Reduction (since 2019) | 30% | | Product Donations | $5.1 million | Financial review In 2023, Smith+Nephew achieved $5,549 million revenue with 7.2% underlying growth and $970 million trading profit, forecasting 5.0-6.0% underlying revenue growth and at least 18.0% trading profit margin for 2024 2023 Group Performance Summary | Metric | 2023 ($ 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 cents | 25.5 cents | +18.4% | | Adjusted EPS (EPSA) | 82.8 cents | 81.8 cents | +1.2% | - The company wrote off $109 million in assets and liabilities related to the discontinued Engage Surgical business, which was acquired in 2022[132] - Net debt (excluding leases) increased by $238 million to $2,577 million at year-end, influenced by dividend payments and metal-on-metal settlements[154] 2024 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 midterm target of consistently delivering 5%+ underlying revenue growth and expanding its trading profit margin to at least 20% in 2025[165][166] Creating value through innovation Innovation drives nearly half of 2023's underlying revenue growth, focusing on R&D, strategic acquisitions, medical education, and optimized manufacturing to address unmet clinical needs - Nearly 50% of the company's 2023 underlying revenue growth came from products launched in the last five years[173] Research & Development R&D focuses on unmet clinical needs, launching 20 new products in 2023, including the AETOS® Shoulder System and acquiring CartiHeal for cartilage regeneration - In 2023, the company launched 20 new products and completed development on two more for 2024 launch[186] - Key 2023 launches include the AETOS® Shoulder System to compete in the $1.7 billion shoulder repair market and expanded features for the CORI® Surgical System, such as the CORI® Digital Tensioner and AI-powered planning[187][189] - The company acquired CartiHeal, developer of the CARTIHEAL® AGILI-C® Cartilage Repair Implant, a novel technology for cartilage regeneration; the deal involved a $180 million payment on completion with up to a further $150 million contingent on future performance[192] Medical education Smith+Nephew Academy educates healthcare professionals on product use, expanding its global presence with the new S+N Academy Munich expected to train over 5,000 providers annually - The Smith+Nephew Academy provides a comprehensive learning environment for healthcare professionals, combining digital platforms (S+N Academy Online) with in-person training centers[199][200] - In October 2023, the company opened S+N Academy Munich, a new central European hub for medical education, expected to train over 5,000 healthcare providers each year[206][207] Manufacturing Global Operations supports the 12-Point Plan by improving Orthopaedics product availability, optimizing the manufacturing network, and ensuring 90% EU MDR certification for product lines - Global Operations is integral to the 12-Point Plan, focusing on fixing Orthopaedics and improving productivity through better collaboration between commercial and operations teams[211] - A redesigned Sales, Inventory and Operations Planning (SIOP) process was rolled out in 2023 to better align production with demand, leading to improved service[212][213] - As part of manufacturing network optimization, the company announced the closure of two smaller facilities in China and Germany[215] - The company has made good progress with European Union Medical Device Regulation (EU MDR) submissions, with 90% of respective product lines having received MDR certification[224] Taking our innovation to market Smith+Nephew commercializes innovations through three global business units: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management, each with dedicated sales and marketing teams - The company's go-to-market strategy is executed through three global business units, each with dedicated strategy, marketing, and sales teams[227] Orthopaedics The Orthopaedics unit, 40% of revenue, grew 5.7% in 2023, driven by improved supply and execution, with key products like JOURNEY® II and the CORI® Surgical System Orthopaedics Financial Performance (2023) | Metric | Value | Change (Underlying) | | :--- | :--- | :--- | | Revenue | $2,214 million | +5.7% | | Trading Profit | $398 million | +3.9% (Reported) | | Revenue by Segment | | | | Knee Implants | $940 million | +5.5% | | Hip Implants | $599 million | +3.8% | | Other Reconstruction | $111 million | +28.0% | | Trauma & Extremities | $564 million | +4.4% | - A major focus of the 12-Point Plan is to 'fix Orthopaedics'; in 2023, progress was made in improving product availability, logistics, and commercial execution[237] - The CORI® Surgical System is a key enabling technology, now indicated for partial, total, and revision knee procedures, as well as computer-guided hip surgery[244][245] Sports Medicine & ENT This unit achieved 10.0% underlying growth to $1,729 million in 2023, led by REGENETEN® and ENT, focusing on procedural innovation and the growing ASC market Sports Medicine & ENT Financial Performance (2023) | Metric | Value | Change (Underlying) | | :--- | :--- | :--- | | Revenue | $1,729 million | +10.0% | | Trading Profit | $503 million | +6.6% (Reported) | | Revenue by Segment | | | | Sports Medicine Joint Repair | $945 million | +9.9% | | Arthroscopic Enabling Technologies | $588 million | +4.7% | | ENT | $196 million | +29.8% | - The Sports Medicine Joint Repair segment delivered strong performance, led by the REGENETEN® Bioinductive Implant[264] - The ENT business grew strongly, led by its tonsil and adenoid business utilizing COBLATION® Plasma Technology[264][283] - The company is uniquely positioned to serve the growing Ambulatory Surgery Centers (ASCs) market by offering procedural solutions across sports medicine, orthopaedics, and post-surgical wound care[282] Advanced Wound Management This unit generated $1,606 million revenue with 6.4% underlying growth, driven by Advanced Wound Devices, addressing complex needs through innovation and digital tools Advanced Wound Management Financial Performance (2023) | Metric | Value | Change (Underlying) | | :--- | :--- | :--- | | Revenue | $1,606 million | +6.4% | | Trading Profit | $472 million | +8.3% (Reported) | | Revenue by Segment | | | | Advanced Wound Care | $725 million | +2.1% | | Advanced Wound Bioactives | $553 million | +6.2% | | Advanced Wound Devices | $328 million | +17.6% | - Growth was led by the Advanced Wound Devices segment, driven by both the traditional RENASYS® and single-use PICO® Negative Pressure Wound Therapy (NPWT) systems[293] - The market is driven by long-term trends such as an aging population and increasing prevalence of obesity and diabetes, which are key drivers of wound prevalence[290] - The business unit is also focused on digital health, building on its WOUND COMPASS® Clinical Support App to leverage AI and data-driven services for more efficient and effective wound care[314] Building a culture of belonging Smith+Nephew fosters an inclusive culture through IDE, wellbeing, and engagement, meeting diversity goals and significantly improving employee engagement to the 83rd percentile in 2023 - The company's culture is guided by three pillars: Care, Courage, and Collaboration[317] - In 2023, the company met its diversity goals, with 34% of management positions held by females and 21% of US management positions held by ethnically diverse individuals[318][319][322] - Employee engagement, measured by the Gallup Q12 survey, improved significantly, placing the company in the 83rd percentile of Gallup's database, up from the 73rd percentile in 2022[336][339] - The company expanded its global wellness program, focusing on physical, mental, and financial wellness, and introduced a new Employee Assistance Plan provider, Spring Health[329][330] Shaping a healthy and sustainable future Smith+Nephew's ESG strategy focuses on People, Planet, and Products, committing to net zero GHG emissions by 2045 and achieving a 40% reduction in Scope 1 and 2 emissions since 2019 - The ESG strategy focuses on three areas: People (community impact), Planet (environmental impact), and Products (sustainable innovation)[356] - The company has committed to achieving net zero Scope 1 and 2 GHG emissions by 2040 and net zero Scope 3 GHG emissions by 2045[371] 2023 Progress Against Key ESG Objectives (vs. 2019 Baseline) | Objective | 2023 Progress | | :--- | :--- | | Scope 1 & 2 GHG Emissions | 40% reduction | | Waste to Landfill (Strategic Sites) | 30% reduction | | Product Donations (2023) | $5.1 million | - A new ESG Operating Committee was established in January 2023 to implement and execute the ESG strategy, reporting to the Executive Committee[365] - The company's Scope 3 GHG emissions for 2023 were calculated at 1.3 million tonnes of CO2e, with purchased goods and services being the most significant contributor (over 83%)[454][455] Risk report Smith+Nephew's ERM framework identifies principal risks across five categories, with emerging risks including ESG and AI, and the Board confirming viability for the next three years - The company's principal risks are grouped into five categories: - Compliance and Reputation: (e.g., Legal and Compliance, Quality and Regulatory) - External: (e.g., Political and Economic) - Financial: (e.g., Foreign Exchange, Pricing and Reimbursement) - Operational: (e.g., Cybersecurity, Global Supply Chain, M&A, New Product Innovation) - People: (e.g., Talent Management)[475] - Emerging risks identified in 2023 include the increasing focus on Environmental, Social, and Governance (ESG) matters and the strategic implications of Artificial Intelligence (AI)[467] - The Board has determined that a three-year period to December 2026 is appropriate for its Viability Statement, aligning with the Group's strategic planning process[515] - Based on scenario testing of principal risks, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period[517] Our stakeholders The Board considers stakeholder interests—employees, investors, customers, suppliers, governments, and communities—to ensure long-term success, integrating feedback into decision-making - The Board considers the interests of key stakeholders in its decision-making process to promote the long-term success of the company[529] - Key stakeholder groups and their areas of interest include: - Employees: Purpose, strategy, culture, wellbeing, and IDE - Investors: Strategy, performance, capital allocation, remuneration, and ESG - Customers and Suppliers: Innovation, product quality, and ethical partnerships - Environment and Communities: ESG strategy (People, Planet, Products) - Governments and Regulators: Product safety and compliance[531][533][534] - In 2023, engagement with investors on the proposed US Executive Director Remuneration Policy shaped the final proposal submitted to shareholders[545] - Board listening sessions with employees provided valuable feedback on topics like innovation, strategy communication, and talent development, leading to management actions in 2024[540][541] Governance Board leadership and Company purpose The Board ensures the company's long-term success by overseeing strategy, risk, and stakeholder engagement, led by the Chair and CEO with a diverse composition and clear responsibilities - The Board is responsible for the long-term success of the company, approving strategy, managing risk, and overseeing stakeholder engagement[640] - The Board has a clear division of responsibilities between the Chair (Rupert Soames), CEO (Deepak Nath), Senior Independent Director (Marc Owen), and other Non-Executive Directors[623][624][626] - Key Board activities in 2023 focused on: - Strategy and Innovation: Monitoring the 12-Point Plan, approving the three-year strategic plan, and setting capital investment priorities - Operations and Commercial Excellence: Strategic deep dives on business units and monitoring operational metrics - Risk Oversight: Evaluating risks related to strategic initiatives, including cybersecurity and ESG[646][651][653][654] Nomination & Governance Committee Report The Nomination & Governance Committee oversaw key Board and executive appointments, succession planning, and diversity initiatives in 2023, ensuring a balanced and effective Board composition - The committee oversaw four key appointments in 2023/early 2024: Rupert Soames (Chair), Jez Maiden (NED), Simon Lowth (NED), and John Rogers (CFO)[657][658][659] - Board succession planning is a key focus, with an emphasis on aligning Board skills with strategic priorities and enhancing diversity[667][669] Board Diversity (as of 31 Dec 2023) | Category | Representation | | :--- | :--- | | Female Directors | 33.33% | | Directors from Ethnic Minority Backgrounds | 2 out of 12 | - An internal Board effectiveness review was conducted in 2023, identifying strengths in Board operations and setting focus areas for 2024, including long-term value creation and management succession planning[710][713][714] Compliance & Culture Committee Report The Compliance & Culture Committee oversees ethics, compliance, quality, regulatory affairs, sustainability, and culture, reviewing program effectiveness and monitoring ESG progress and employee engagement - The committee's responsibilities cover four main areas: Ethics and Compliance, Sustainability, Culture, and Quality and Regulatory Affairs (QRA)[717][722] - In 2023, the committee reviewed the ESG strategy to ensure alignment with the 12-Point Plan and monitored performance against People, Planet, and Product initiatives using enhanced dashboards[725][726] - The committee received regular reports on QRA, including results of external regulatory inspections (e.g., by the FDA) and progress on EU Medical Device Regulation (MDR) compliance[732][733] - Culture was a key focus, with the committee reviewing employee engagement survey results which showed strong connection to the company's purpose, and tracking actions from employee listening sessions[737][740][742] Audit Committee Report The Audit Committee ensured financial reporting integrity, oversaw risk management, and monitored internal controls, reviewing key accounting judgments and managing the external auditor transition - The committee identified three significant matters related to the 2023 financial statements: - Valuation of inventories: Particularly for the Orthopaedics business, due to high levels of product required at customer sites - Liability provisioning: Primarily for legal disputes related to metal-on-metal hip products, which involves significant estimation - Impairment: Review of goodwill and acquisition intangible assets, with a focus on the Orthopaedics CGU[753][755][757] - The committee oversaw the transition of the external auditor, with Deloitte LLP to be appointed for the 2024 financial year, replacing KPMG[773] - The committee reviewed the effectiveness of the Group's risk management program and internal controls, including compliance with the Sarbanes-Oxley (SOX) Act, and found them to be effective[788][798] - The committee reviewed management's going concern assessment and concurred that its continued adoption is appropriate[763] Directors' Remuneration Report The Remuneration Committee proposed a new policy for US-based executives to align pay with market norms, reflecting strong 2023 performance with the CEO's bonus at 130.8% of base salary - The committee is proposing a new Remuneration Policy for US-based Executive Directors to be voted on at the 2024 AGM; this is to address a competitiveness gap with the US MedTech market[812][817][822] - Proposed changes for US Executive Directors include: - PSP: Maximum opportunity to increase from 275% to 300% of base salary - RSP: Introduction of a new Restricted Share Programme at 125% of base salary, vesting in three equal tranches - Share Ownership Guideline: Increase from 300% to 500% of base salary[825][826][832] 2023 Annual Bonus Payout | Executive Director | Payout (% of Base Salary) | Payout (% of Maximum) | | :--- | :--- | :--- | | Deepak Nath (CEO) | 130.8% | 61.4% | | Anne-Françoise Nesmes (CFO) | 127.5% | 59.3% | - The 2021 Performance Share Programme (PSP) award, based on performance from 2021-2023, vested at 21% of the target amount[846][990] Accounts Group financial statements This section presents the consolidated financial statements for the Smith+Nephew Group for 2023, including the Income Statement, Balance Sheet, and Cash Flow Statement, prepared under UK-adopted IFRS Group Income Statement Summary (Year ended Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Revenue | 5,549 | | Gross Profit | 3,819 | | Operating Profit | 425 | | Profit Before Taxation | 290 | | Attributable Profit for the Year | 263 | Group Balance Sheet Summary (As of Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Total Assets | 9,987 | | Total Liabilities | 4,770 | | Total Equity | 5,217 | Group Cash Flow Statement Summary (Year ended Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Net Cash Inflow from Operating Activities | 608 | | Net Cash Used in Investing Activities | (448) | | Net Cash Used in Financing Activities | (200) | | Net Decrease in Cash and Cash Equivalents | (40) | Company financial statements This section presents the separate financial statements for Smith & Nephew plc for 2023, detailing the parent company's financial position under FRS 101 Company Balance Sheet Summary (As of Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Total Assets | 10,498 | | Total Liabilities | 4,089 | | Shareholders' Funds | 6,409 | - The attributable profit for the year dealt with in the accounts of the Company was $58 million, compared to $80 million in 2022[1431] Other information Group information This section provides supplementary Group information, including risk factors, cybersecurity management, and reconciliations of non-IFRS financial measures for clearer performance understanding - The company has a dedicated cybersecurity function led by a Chief Information Security Officer (CISO) who reports to the Audit and Executive Committees; no cybersecurity incidents materially affected the Group in 2023[1474][1481] - Detailed risk factors are outlined, covering areas such as Global Supply Chain, Strategy and Commercial Execution, Competitive Markets, Pricing and Reimbursement, New Product Innovation, Cybersecurity, and Legal/Compliance risks[1484] - The report provides detailed reconciliations for non-IFRS measures like 'Underlying Revenue Growth' to reported growth, and 'Trading Profit' to 'Operating Profit' to clarify performance trends[1549][1559][1562] Shareholder information This section provides essential shareholder information, including AGM details, dividend history, share capital, major shareholders, and tax considerations for UK and US investors - The Annual General Meeting (AGM) will be held on Wednesday, May 1, 2024[1686] 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 | - The company's ordinary shares are traded on the London Stock Exchange (LSE: SN) and as American Depositary Shares (ADSs) on the New York Stock Exchange (NYSE: SNN), with each ADS representing two ordinary shares[1581] - As of February 16, 2024, BlackRock, Inc. was the only major shareholder with a notifiable interest, holding 5.2% of the ordinary shares in issue[1601][1609]