Smith & Nephew Second Quarter & First Half 2018 Results

Q2 revenue growth of 4% reported and 2% underlying. Full year guidance reconfirmed.

Smith & Nephew (LSE:SN, NYSE:SNN), the global medical technology business, reports results for the second quarter and first half ended 30 June 2018:

For a full copy of the announcement, with accounts, please click here

Namal Nawana, Chief Executive Officer, said:

“We delivered 4% reported and 2% underlying growth in the quarter. We reconfirm our full year guidance.

“In my first few weeks at Smith & Nephew I have reviewed our businesses and operations and validated that we have an excellent product portfolio with numerous best-in-class medical technologies. We are now focused on energising and organising the business to accelerate growth.”

Second Quarter Highlights^1,2

• Q2 reported revenue growth of 4%, including 2% FX tailwind, with underlying growth of 2%
• Established Markets returned to growth, with improved dynamics across Hip and Knee Implants and strong performance from Sports Medicine and Advanced Wound Devices
• Emerging Markets up 6%; double digit China growth offset by lower level of Middle East tenders

First Half Highlights¹

• H1 reported revenue growth of 4%, including 3% FX tailwind, with underlying revenue up 1%
        - Trading profit margin down 30bps, in line with guidance
        - Operating profit margin down 240bps, reflecting $58 million costs of APEX programme
• APEX programme on track, with actions undertaken in H1 which will deliver more than $50 million of annualised benefits
• Trading cash flow of $387 million, up from $327 million in 2017, with higher trading profit to cash conversion ratio of 76% (2017: 66%)
• Adjusted earnings per share (EPSA) up 2% to 43.7¢, reflecting improved trading (EPS 31.4¢; 2017 37.0¢)
• Interim dividend of 14.0¢ per share, in-line with our progressive dividend policy (2017: 12.3¢)

Full year guidance unchanged

• Underlying revenue growth expected to be in the range 2-3% with a trading profit margin at or above that achieved in 2017
• Tax rate on trading results expected to be within the range of 20-21% barring changes to tax legislation or other one-off items

Analyst conference call

An analyst meeting and conference call to discuss Smith & Nephew’s second quarter trading and first half 2018 results for the period ended 30 June 2018 will be held today, Thursday 26 July at 9:00am BST / 4:00am EDT. This will be webcast live and available for replay shortly after. The details can be found on the Smith & Nephew website at www.smith-nephew.com/results.

Enquiries

^Notes

1. <sup>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 2017 period.
   
   Underlying revenue growth is used to compare the revenue in a given period to the comparative period on a like-for-like basis. Underlying revenue growth reconciles to reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, by making adjustments for the effect of acquisitions and disposals and the impact of movements in exchange rates (currency impact), as described below.
   
   The effect of acquisitions and disposals measures the impact on revenue from newly acquired business combinations and recent business disposals. This is calculated by comparing the current year, constant currency actual revenue (which include acquisitions and exclude 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 corresponding period in the prior year.
   
   Currency impact measures 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 current year revenue translated into US Dollars at the current year average rate and the prior year revenue translated at the prior year average rate; and 2) the increase/decrease measured by translating current and prior year revenue into US Dollars using a constant fixed rate.</sup>
   
2. ^{Certain items included in ‘trading results’, such as trading profit, trading profit margin, trading cash flow, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures reported in this announcement are explained in Note 8 and are reconciled to the most directly comparable financial measure prepared in accordance with IFRS. Reported results represent IFRS financial measures as shown in the Condensed Consolidated Interim Financial Statements.}

Smith & Nephew Second Quarter Trading and First Half 2018 Results

Second Quarter 2018 Trading Update

Our second quarter revenue was $1,245 million (2017: $1,194 million), up 4% on a reported basis, including a foreign exchange tailwind of 2%. Revenue was up 2% on an underlying basis.

The second quarter 2018 comprised 64 trading days, one more than in the same period of 2017, which typically impacts our surgical businesses more than our Advanced Wound Management businesses and the Established Markets more than the Emerging Markets.

Unless otherwise specified as ‘reported’ all revenue growth rates throughout this document are underlying increases/decreases after adjusting for the effects of currency translation and including the comparative impact of acquisitions and excluding disposals. All percentages compare to the equivalent 2017 period.

Second Quarter Consolidated Revenue Analysis

^{(i)    Underlying growth is defined in Note 1 on page 2
(ii)   Other Established Markets are Europe, Canada, Japan, Australia and New Zealand
(iii)  Included within the Q2 2017 analysis is a reclassification of $5 million of revenue formerly included in Other Established Markets which has now been included in Emerging Markets in order to present consistent analysis to the Q2 2018 results}

Regional performance

Revenue grew 1% in the Established Markets in the quarter, an improved performance over the first quarter as procedure levels returned to more normal levels in most markets over the period.

Revenue was up 6% in the Emerging Markets. China, our largest Emerging Markets business, delivered strong double digit growth. Growth across most of our other Emerging Markets countries remained good, although the Middle East faced a strong comparator period following a significant tender order in 2017 which mainly benefitted our Trauma & Extremities franchise.

Q2 2018 Franchise Highlights

Sports Medicine Joint Repair delivered 8% revenue growth in the quarter. Within this, the recently acquired REGENETEN^◊ Bioinductive Implant for rotator cuff repair is performing ahead of our expectations, contributing to sustained growth from our shoulder repair portfolio. In Arthroscopic Enabling Technologies revenue was down -1%, an improvement over recent quarters, as our actions are stabilising performance in mechanical resection.

Trauma & Extremities revenue was down -5%, reflecting the tough comparator period in the Middle East described above. We delivered a strong performance in Plates and Screws following the successful launch of the EVOS^◊ SMALL plating system, which we expect to drive an improved franchise performance in the second half of the year.

Our Other Surgical Businesses franchise revenue grew 8% in the quarter. Our robotic NAVIO^◊ Surgical System had a strong quarter in the US as we benefited from its unique portfolio of partial and total knee applications.

Knee Implants revenue was up 3% driven by our leading portfolio including the JOURNEY^◊ II, LEGION^◊ and ANTHEM^◊ knee systems. Revenue from our Hip Implants franchise was up 1%, globally with the US delivering its strongest growth in a number of years driven by a renewed focus on our POLAR3^◊ total hip solution and its class-leading survivorship data.

Advanced Wound Care delivered 2% revenue growth as our actions to improve performance in Europe are beginning to have a positive impact, although certain end markets remain soft, as previously reported.

Advanced Wound Bioactives revenue declined -6%, an improvement on the first quarter. SANTYL^◊ performed sequentially better, but OASIS^◊ continued to perform significantly below last year.

Advanced Wound Devices delivered 9% revenue growth. Our disposable negative pressure wound therapy (‘NPWT’) device PICO^◊, continued to perform strongly. During the quarter, the UK’s National Institute for Health and Care Excellence (NICE) issued a Medtech innovation briefing on the prophylactic use of PICO as a potentially more effective alternative to standard surgical dressings in the prevention of surgical site complications. This is the only such brief published by NICE on an NPWT device for preventing this type of complications.

First Half 2018 Consolidated Analysis

Smith & Nephew results for the first half ended 30 June 2018:

First Half 2018 Analysis

Our first half revenue was $2,440 million (H1 2017: $2,336 million), up 4% on a reported basis, including a foreign exchange tailwind of 3%. Revenue was up 1% on an underlying basis.

Reported operating profit of $372 million (H1 2017: $414 million) is after integration and acquisition costs, as well as restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred in the first half (see Note 8 to the Interim Financial Statements).

Trading profit was $507 million in the first half (H1 2017: $493 million), and the trading profit margin was 20.8% (H1 2017: 21.1%), down 30bps due to the expected revenue and cost phasing across the year.

In the first half, the Accelerating Performance and Execution (APEX) programme, initiated at the end of 2017, incurred restructuring costs, primarily cash, of $58 million with actions undertaken that will result in annualised benefits of more than $50 million. We are on track across all three workstreams of 1) Manufacturing, Warehousing and Distribution, 2) General and Administrative (G&A) Expenses, and 3) Commercial Effectiveness. APEX is expected to drive an annualised benefit of $160 million by 2022 for a one-off cost of $240 million.

The net interest charge within reported results was $25 million (H1 2017: $25 million).

The tax rate on trading results for the 2018 half year was 20.1% (H1 2017: 19.0%) in line with our guided rate of between 20% and 21%. The reported tax rate for the 2018 half year was 19.6% (H1 2017: 15.4%) (see Note 3 for further details on taxation).

Adjusted earnings per share (‘EPSA’) was up 2% at 43.7¢ (87.4¢ per ADS) (H1 2017: 43.0¢). Basic earnings per share (‘EPS’) was 31.4¢ (62.8¢ per ADS) (H1 2017: 37.0¢), primarily arising from the restructuring costs in the current year. 

Cash generated from operations was $418 million (H1 2017: $438 million) and trading cash flow was $387 million (H1 2017: $327 million) (see Note 8 for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was 76% (H1 2017: 66%) as a result of actions to improve working capital performance.

Interim Dividend

Consistent with previous periods, the interim dividend is set by a formula and is equivalent to 40% of the total dividend for the previous year. The interim dividend for the first half of 2018 is therefore 14.0¢ per share (28.0¢ per ADS), a 14% increase on last year (H1 2017: 12.3¢ per share). This equates to 10.7 pence per share at prevailing exchange rates as of 20 July 2018. The interim dividend will be paid on Wednesday 31 October 2018 to shareholders on the register at the close of business on Friday 5 October 2018.

Outlook

Smith & Nephew is on-track to deliver on its guidance for full year underlying revenue growth in the range of 2-3% and a trading profit margin at or above that achieved in 2017, as updated at the first quarter trading results.

Our reported revenue growth rate will also include an estimated 1% benefit from foreign exchange rates prevailing on 20 July 2018 and the Rotation Medical acquisition.

We continue to expect the 2018 tax rate on trading results to be in the range of 20% to 21%, barring any changes to tax legislation or other one-off items.

Forward calendar

The Q3 Trading Report will be released on 1 November 2018.

About Smith & Nephew

Smith & Nephew is a global medical technology business dedicated to supporting healthcare professionals in their daily efforts to improve the lives of their patients. With leadership positions in Orthopaedic Reconstruction, Advanced Wound Management, Sports Medicine and Trauma & Extremities, Smith & Nephew has more than 15,000 employees and a presence in more than 100 countries. Annual sales in 2017 were almost $4.8 billion. Smith & Nephew is a member of the FTSE100 (LSE:SN, NYSE:SNN).

For more information about Smith & Nephew, please visit our corporate website www.smith-nephew.com, follow @SmithNephewplc on Twitter or visit SmithNephewplc on Facebook.com.

^{Forward-looking Statements}

^{This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls or other problems with quality management systems or failure to comply with related regulations; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; disruption to our supply chain or operations or those of our suppliers; competition for qualified personnel; strategic actions, including acquisitions and dispositions, our success in performing due diligence, valuing and integrating acquired businesses; disruption that may result from transactions or other changes we make in our business plans or organisation to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20-F, for a discussion of certain of these factors. Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.}

^{◊ Trademark of Smith & Nephew. Certain marks registered US Patent and Trademark Office.}