Smith & Nephew(SNN) - 2023 Q2 - Quarterly Report

Financial & Operational Highlights Q2 & H1 2023 Performance Summary Smith+Nephew reported strong revenue growth for the second quarter and first half of 2023, with Q2 underlying revenue up 7.8% and H1 up 7.3%, driven by growth across all business units, particularly a 12.0% underlying increase in Sports Medicine & ENT in Q2, though H1 trading profit margin declined to 15.3% from 16.9% year-over-year due to inflation, foreign exchange headwinds, and increased sales and marketing expenses, while the interim dividend remained unchanged at 14.4 cents per share H1 2023 Key Financial Results (vs H1 2022) | Metric | H1 2023 | H1 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $2,734 million | $2,600 million | +5.2% (Reported) | | Underlying Revenue Growth | 7.3% | - | - | | Operating Profit | $275 million | $242 million | +13.6% | | Trading Profit | $417 million | $440 million | -5.2% | | Trading Profit Margin | 15.3% | 16.9% | -160 basis points | | EPS (cents) | 19.7¢ | 20.2¢ | -2.5% | | EPSA (cents) | 34.9¢ | 38.1¢ | -8.4% | Q2 2023 Underlying Revenue Growth by Business Unit | Business Unit | Q2 2023 Underlying Growth | | :--- | :--- | | Total Revenue | +7.8% | | Orthopaedics | +5.8% | | Sports Medicine & ENT | +12.0% | | Advanced Wound Management | +6.2% | - The H1 trading profit margin of 15.3% was impacted by expected seasonality, higher input inflation, transactional FX, and increased sales and marketing investments to fuel growth[13] - The interim dividend was maintained at 14.4¢ per share, consistent with the prior year[13] 2023 Full Year Outlook The company has raised its full-year underlying revenue growth guidance to a range of 6.0% to 7.0%, up from the previous 5.0% to 6.0%, while the trading profit margin guidance remains unchanged, expected to be at least 17.5%, with a significant step-up anticipated in the second half, and the forecast tax rate on trading results has been lowered to around 17% Updated 2023 Full Year Guidance | Metric | Previous Guidance | Updated Guidance | | :--- | :--- | :--- | | Underlying Revenue Growth | 5.0% to 6.0% | 6.0% to 7.0% | | Trading Profit Margin | At least 17.5% | At least 17.5% (Unchanged) | | Tax Rate on Trading Results | Around 19% | Around 17% | - A significant improvement in trading profit margin is expected in the second half, driven by seasonality, operating leverage from revenue growth, and productivity benefits, which are anticipated to more than offset headwinds from inflation and a -120 basis points transactional foreign exchange impact[71] Strategic Highlights The company is making significant progress on its 12-Point Plan, which is focused on fixing Orthopaedics, improving productivity, and accelerating growth in its other business units, with key achievements including improved product availability in Orthopaedics and an increased cadence of new product launches, while concurrently, CFO Anne-Françoise Nesmes will step down in Q2 2024, with an external search for her successor underway - The 12-Point Plan is showing progress, with significant improvements in product availability and commercial execution in Orthopaedics[17] - The company has increased its pace of innovation, with 13 new products launched in H1 2023, and is on track to meet its full-year target of 25 launches[17][34] - Chief Financial Officer Anne-Françoise Nesmes will step down in the second quarter of 2024, and the Board has initiated an external search for a successor[17] Business Performance Review Delivering our transformational Strategy for Growth The company's 12-Point Plan, initiated in July 2022, is on track to transform business performance, focusing on fixing Orthopaedics, improving productivity, and accelerating growth in Advanced Wound Management and Sports Medicine & ENT, with overdue orders in Orthopaedics reduced by approximately 50% from their peak, and productivity initiatives expected to yield over $200 million in annual savings by 2025, with inventory levels projected to decrease in the second half of 2023 - The 12-Point Plan focuses on: - Fixing Orthopaedics to regain momentum and win share - Improving productivity to expand trading profit margin - Further accelerating growth in Advanced Wound Management and Sports Medicine & ENT[29] - Progress in fixing Orthopaedics includes reducing overdue orders by around 50% from the H1 2022 peak and improving customer order fill rates (LIFR)[27] - Productivity actions are projected to deliver over $200 million in annual savings by 2025, with associated restructuring costs of around $275 million over three years[32] - Inventory levels are expected to start falling in the second half of the year as new products are rolled out and raw materials are consumed[30] Increasing our cadence of innovation Innovation is a key pillar of the company's growth strategy, with 13 new products launched in H1 2023 out of a targeted 25 for the full year, including enhancements to the CORI Surgical System, such as a Digital Tensioner and a new saw solution, and the introduction of the AETOS Shoulder System to compete in the fast-growing shoulder market and the RENASYS EDGE Negative Pressure Wound Therapy System - The CORI Surgical System was enhanced with the CORI Digital Tensioner for soft tissue balancing and received FDA 510(k) clearance for a saw solution, adding versatility to the robotics platform[35][37] - The AETOS Shoulder System was introduced to compete in the $1.3 billion shoulder market, which is growing at approximately 9% CAGR[38][40] - In Advanced Wound Management, the new RENASYS EDGE Negative Pressure Wound Therapy System was launched, designed for improved efficiency and simplicity[42] - In Sports Medicine, the UltraTRAC QUAD ACL Reconstruction Technique was introduced, expanding the company's procedural solutions for knee repair[41] Second Quarter 2023 Trading Update In Q2 2023, Smith+Nephew achieved underlying revenue growth of 7.8% to $1,379 million, driven by strong elective procedure volumes and solid performance across all business units, with Orthopaedics growing 5.8%, Sports Medicine & ENT surging by 12.0%, and Advanced Wound Management increasing by 6.2%, demonstrating robust growth in both Established Markets (+7.1%) and Emerging Markets (+11.0%) Q2 2023 Consolidated Revenue Analysis (in millions of US dollars) | Category | Q2 2023 | Q2 2022 | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,379 million | $1,293 million | +6.6% | +7.8% | | Orthopaedics | $554 million | $530 million | +4.6% | +5.8% | | Sports Medicine & ENT | $422 million | $381 million | +10.4% | +12.0% | | Advanced Wound Management | $403 million | $382 million | +5.5% | +6.2% | Q2 Performance by Business Unit In Q2, Orthopaedics revenue grew 5.8% underlying, with Knee Implants up 7.8% and Hip Implants up 3.4%, while Sports Medicine & ENT was a standout performer with 12.0% growth, driven by a 12.5% increase in Joint Repair and a 38.9% surge in ENT, and Advanced Wound Management grew 6.2%, led by a 21.4% increase in Advanced Wound Devices, particularly the PICO and RENASYS systems - Orthopaedics: Grew 5.8% underlying, with Knee Implants rising 7.8% and Hip Implants 3.4%, and Other Reconstruction, including robotics, growing 21.0%[50][51] - Sports Medicine & ENT: Grew 12.0% underlying, with Sports Medicine Joint Repair up 12.5%, and ENT surging 38.9% due to the recovery in tonsil and adenoid procedures[53][54] - Advanced Wound Management: Grew 6.2% underlying, with Advanced Wound Devices leading with 21.4% growth, driven by strong performance from both PICO and RENASYS negative pressure systems[55][56] Q2 Performance by Geography Geographically, Q2 2023 revenue growth was strong across the board, with Established Markets growing 7.1% underlying, including the US up 6.3% and Other Established Markets up 8.5%, while Emerging Markets delivered robust growth of 11.0% underlying, largely due to volume recovery in China following earlier COVID-related restrictions Q2 2023 Underlying Revenue Growth by Geography | Geography | Underlying Growth | | :--- | :--- | | Established Markets | +7.1% | | - US | +6.3% | | - Other Established Markets | +8.5% | | Emerging Markets | +11.0% | First Half 2023 Consolidated Analysis For the first half of 2023, revenue was $2,734 million, up 7.3% underlying, with trading profit at $417 million, resulting in a trading profit margin of 15.3%, down from 16.9% in H1 2022 due to inflation and strategic investments, while cash generated from operations was $215 million, with trading cash flow at $110 million, impacted by an increase in inventory, and net debt increased to $2,656 million, and the company declared an interim dividend of 14.4 cents per share - H1 trading profit was $417 million with a margin of 15.3%, compared to $440 million and 16.9% in H1 2022, with the decline attributed to inflation, FX headwinds, and increased sales and marketing expenses[61] - Trading cash flow was $110 million (H1 2022: $154 million), with a trading profit to cash conversion ratio of 26% (H1 2022: 35%), and the reduction was primarily due to increased inventory, which is expected to decrease in H2 2023[63][64] - Net debt (excluding lease liabilities) increased to $2,656 million at the end of H1 2023, up from $2,339 million at the end of 2022[65] - Adjusted earnings per share (EPSA) was 34.9¢, a decrease from 38.1¢ in H1 2022[68] Condensed Consolidated Interim Financial Statements Group Income Statement For the half year ended July 1, 2023, the company reported revenue of $2,734 million, an increase from $2,600 million in the prior-year period, with operating profit growing to $275 million from $242 million, though attributable profit for the period slightly decreased to $172 million compared to $177 million in H1 2022, resulting in a basic EPS of 19.7 cents H1 2023 Income Statement Summary (in millions of US dollars) | Line Item | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Revenue | 2,734 million | 2,600 million | | Gross Profit | 1,898 million | 1,827 million | | Operating Profit | 275 million | 242 million | | Profit before taxation | 211 million | 204 million | | Attributable profit | 172 million | 177 million | | Basic EPS | 19.7¢ | 20.2¢ | Group Balance Sheet As of July 1, 2023, total assets stood at $9,844 million, a slight decrease from $9,966 million at the end of 2022, with total equity at $5,233 million, and a notable change being the increase in inventories to $2,411 million from $2,205 million at year-end 2022, while total liabilities were $4,611 million Balance Sheet Summary (in millions of US dollars) | Category | 1 July 2023 | 31 Dec 2022 | | :--- | :--- | :--- | | Total Assets | 9,844 million | 9,966 million | | Inventories | 2,411 million | 2,205 million | | Goodwill | 3,049 million | 3,031 million | | Total Liabilities | 4,611 million | 4,707 million | | Long-term borrowings | 2,633 million | 2,712 million | | Total Equity | 5,233 million | 5,259 million | Condensed Group Cash Flow Statement For H1 2023, net cash inflow from operating activities was $113 million, a decrease from $207 million in H1 2022, primarily due to a larger negative movement in working capital, with net cash used in investing activities at $182 million, and net cash used in financing activities at $86 million, resulting in a net decrease in cash and cash equivalents of $155 million for the period H1 2023 Cash Flow Summary (in millions of US dollars) | Category | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Cash generated from operations | 215 million | 227 million | | Net cash inflow from operating activities | 113 million | 207 million | | Net cash used in investing activities | (182 million) | (268 million) | | Net cash used in financing activities | (86 million) | (704 million) | | Net decrease in cash and cash equivalents | (155 million) | (765 million) | | Cash and cash equivalents at end of period | 183 million | 512 million | Group Statement of Changes in Equity Total equity decreased from $5,259 million at the beginning of 2023 to $5,233 million as of July 1, 2023, primarily driven by the payment of equity dividends totaling $201 million, which was partially offset by the attributable profit of $172 million for the period - Total equity started at $5,259 million on Jan 1, 2023 and ended at $5,233 million on July 1, 2023[87] - Key movements in equity included attributable profit of +$172 million, other comprehensive loss of -$18 million, and equity dividends paid of -$201 million[87] Notes to the Financial Statements Note 1: Basis of Preparation and Accounting Policies The interim financial statements were prepared in accordance with IAS 34 and on a going concern basis, with directors concluding the Group has sufficient resources to continue operations for at least 12 months despite the challenging economic environment, and the principal risks remain consistent with the 2022 Annual Report, including supply chain, commercial execution, and cybersecurity, while critical estimates relate to inventory valuation, legal provisions, and impairment - The financial statements have been prepared on a going concern basis, with directors concluding the Group has sufficient resources and headroom on its borrowing facilities and financial covenants[91][93] - The provision for excess and obsolete inventory increased from $504 million at year-end 2022 to $576 million at 1 July 2023, primarily due to higher inventory levels[105] - The principal risks and uncertainties are consistent with the 2022 Annual Report and include business continuity, commercial execution, cybersecurity, global supply chain, and legal/compliance risks[94] Note 2: Business Segment Information The Group operates and reports across three global business units: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management, with H1 2023 Orthopaedics generating $1,102 million in revenue and $174 million in trading profit, Sports Medicine & ENT having revenue of $843 million and trading profit of $224 million, and Advanced Wound Management reporting revenue of $789 million and trading profit of $223 million, while total Group trading profit of $417 million was reconciled from a Group operating profit of $275 million H1 2023 Revenue and Trading Profit by Segment (in millions of US dollars) | Segment | Revenue | Trading Profit | | :--- | :--- | :--- | | Orthopaedics | 1,102 million | 174 million | | Sports Medicine & ENT | 843 million | 224 million | | Advanced Wound Management | 789 million | 223 million | | Segment Total | 2,734 million | 621 million | | Corporate Costs | - | (204 million) | | Group Trading Profit | - | 417 million | - Group operating profit of $275 million was adjusted for items including restructuring costs ($46 million) and amortisation of acquisition intangibles ($102 million) to arrive at the Group trading profit of $417 million[128] Note 3: Taxation The reported tax charge for H1 2023 was $39 million, resulting in an effective tax rate of 18.5%, compared to a 13.2% rate in H1 2022, and the Group will be subject to the OECD Pillar Two model rules starting in 2024, which is expected to increase the Group's tax rate - The reported tax charge for H1 2023 was $39 million, with an effective tax rate of 18.5%[136] - The Group will be subject to the OECD Pillar Two global minimum tax rate of 15% from 2024, which is expected to increase the Group's tax rate[137] Note 4: Dividends The Board approved an interim dividend for 2023 of 14.4 US cents per ordinary share, payable on November 1, 2023, to shareholders on record as of October 6, 2023, following the 2022 final dividend of $201 million paid on May 17, 2023 - The 2023 interim dividend was approved at 14.4 US cents per share, payable on November 1, 2023[139] Note 6: Net Debt As of July 1, 2023, net debt including lease liabilities was $2,849 million, an increase from $2,535 million at the end of 2022, with net debt excluding lease liabilities standing at $2,656 million, and the Group has private placement debt of $105 million due for repayment in the second half of 2023 and another $100 million due in the first half of 2024 Net Debt Position (in millions of US dollars) | Category | 1 July 2023 | 31 Dec 2022 | | :--- | :--- | :--- | | Net debt (excl. leases) | 2,656 million | 2,339 million | | Net debt (incl. leases) | 2,849 million | 2,535 million | - The Group has upcoming debt repayments of $105 million in H2 2023 and $100 million in H1 2024 from private placement debt[145] Other Disclosures Directors' Responsibilities and Independent Review Report The Directors confirmed that the interim financial statements were prepared in accordance with IAS 34 and provide a fair review of the company's performance and position, and the independent auditor, KPMG LLP, concluded their review by stating that nothing has come to their attention to suggest the financial statements are not prepared in all material respects in accordance with IAS 34 and UK regulations - The Directors confirmed the interim financial statements were prepared in accordance with IAS 34[160] - KPMG LLP, the independent auditor, provided a review conclusion stating no material misstatements were found, but noted a review is substantially less in scope than an audit[162][164] Reconciliation of Non-IFRS Measures This section defines and reconciles non-IFRS financial measures used by management, such as underlying revenue growth, trading profit, and Adjusted EPS (EPSA), where underlying revenue growth adjusts for currency effects and acquisitions/disposals, and trading profit excludes items like acquisition-related costs, restructuring charges, and significant legal expenses to show underlying performance, with H1 2023 reported EPS of 19.7 cents adjusted to an EPSA of 34.9 cents - Underlying revenue growth is a non-IFRS measure that adjusts reported revenue for constant currency exchange effects and the impact of acquisitions and disposals[176] - Trading profit is a non-IFRS measure that excludes items such as acquisition/disposal costs, restructuring expenses, amortisation of acquisition intangibles, and significant legal costs from operating profit[179] H1 2023 Reconciliation of Reported EPS to EPSA (in cents) | Description | Per Share Amount (¢) | | :--- | :--- | | Reported Basic EPS | 19.7¢ | | Acquisition and disposal related items | 0.1¢ | | Restructuring and rationalisation costs | 4.6¢ | | Amortisation of acquisition intangibles | 9.1¢ | | Legal and other | 1.4¢ | | Adjusted EPS (EPSA) | 34.9¢ |