Smith & Nephew : Q2 results announcement 29 July 2021 (pdf)

Smith+Nephew Second Quarter and First Half 2021 Results

Starting to recapture pre-COVID momentum; on-track to meet full-year guidance

29 July 2021

Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business, reports results for the second quarter and first half ended 3 July 2021:

	3 July	27 June	Reported	Underlying
	2021	2020	growth	growth
Second Quarter Results1,2	$m	$m	%	%
Revenue	1,335	901	48.2	40.3
Half Year Results1,2
Revenue	2,599	2,035	27.8	21.3
Operating profit/(loss)	239	(5)
Operating profit/(loss) margin (%)	9.2	(0.2)
EPS (cents)	23.4	11.5
Trading profit	459	172
Trading profit margin (%)	17.6	8.5
EPSA (cents)	38.8	13.4

Q2 Trading Highlights1,2

• Q2 revenue of $1,335 million (2020: $901 million), up 48.2% on a reported basis and 40.3% on an underlying basis
• All franchises delivered strong growth on 2020 as COVID restrictions eased and levels of elective surgery returned towards normal in many markets
• Relative to Q2 2019, Sports Medicine & ENT and Advanced Wound Management, two of our three franchises, and the US, our largest market, delivered positive underlying revenue growth

H1 Highlights1,2

• H1 revenue of $2,599 million (2020: $2,035 million), up 27.8% on a reported basis and 21.3% on an underlying basis
• Operating profit of $239 million (2020: operating loss of -$5 million)
• Trading profit of $459 million (2020: $172 million). Trading profit margin of 17.6%
  (2020: 8.5%) reflects headwinds relative to pre-COVID levels from increased investment, negative leverage from fixed costs and higher logistics/freight costs
• Significant contributions from recently launched products and acquired assets
• Operational improvement programme across manufacturing, warehousing and distribution underway
• Continuing to support employees with roll-out of flexible working programme
• Interim dividend of 14.4¢, in-line with prior year, supported by strong cash generation

Guidance Unchanged

• Targeting underlying revenue growth in range of 10.0% to 13.0%; and
• Trading profit margin in range of 18.0% to 19.0%
• Guidance assumes surgery volumes largely unconstrained by COVID in second half of 2021

Roland Diggelmann, Chief Executive Officer, said:

"Our performance in the first half of 2021 demonstrates the value of our continued investment in our portfolio, our pipeline and our people. This has put us in a strong position as COVID restrictions eased and levels of elective surgery began to return to normal, with new products and recently acquired assets performing well across the portfolio.

"Looking ahead, we believe we are well positioned to deliver on our guidance for this year. We also remain focused on setting ourselves up for sustainable success in the medium-term, prioritising revenue growth from our R&D pipeline, unlocking further value from acquisitions, and driving commercial and operational excellence."

Analyst conference call

An analyst conference call to discuss Smith+Nephew's second quarter and first half results will be held at 8.30am BST / 3.30am EDT, details of which are available on the Smith+Nephew website at https://www.smith-nephew.com.

Enquiries
Investors
Andrew Swift	+44	(0)	1923 477433
Smith+Nephew
Media
Charles Reynolds	+44	(0)	1923 477314
Smith+Nephew
Susan Gilchrist / Ayesha Bharmal	+44	(0)	20 7404 5959
Brunswick

Notes

1. Unless otherwise specified as 'reported' all revenue growth throughout this document is 'underlying' after adjusting for the effects of currency translation and including the comparative impact of acquisitions and excluding disposals. All percentages compare to the equivalent 2020 period or equivalent 2019 period where specified.
   'Underlying revenue growth' reconciles to reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, by making two adjustments, the 'constant currency exchange effect' and the 'acquisitions and disposals effect', described below. See Other Information on pages 31 to 34 for a reconciliation of underlying revenue growth to reported revenue growth.
   The 'constant currency exchange effect' is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales and is measured as the difference between: 1) the increase/decrease in the current year revenue translated into US Dollars at the current year average exchange rate and the prior year revenue translated at the prior year rate; and 2) the increase/decrease being measured by translating current and prior year revenues into US Dollars using the prior year closing rate.
   The 'acquisitions and disposals effect' is the measure of the impact on revenue from newly acquired material business combinations and recent material business disposals. This is calculated by comparing the current year, constant currency actual revenue (which includes acquisitions and excludes disposals from the relevant date of completion) with prior year, constant currency actual revenue, adjusted to include the results of acquisitions and exclude disposals for the commensurate period in the prior year. These sales are separately tracked in the Group's internal reporting systems and are readily identifiable.
2. Certain items included in 'trading results', such as trading profit, trading profit margin, tax rate on trading results, trading cash flow, trading profit to cash conversion ratio, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures reported in this announcement are explained in Other Information on pages 31 to 34 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.

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Smith+Nephew Second Quarter Trading and First Half 2021 Results

Delivering on our Priorities

Our three priorities for 2021 build on the work undertaken and investments made in 2020 and are underpinned by our long-term Strategic Imperatives.

1. Return to top-line growth and recapture pre-COVID momentum
2. Deliver further operational improvement across the Group
3. Continue to respond effectively to COVID

We are encouraged by our progress in the first half of 2021 across all three priorities. First half revenue was $2,599 million (2020: $2,035 million), up 27.8% on a reported basis and 21.3% on an underlying basis, our operational improvement programmes are on track, and we continue to adapt to respond effectively to COVID.

1. Return to top-line growth and recapture pre-COVID momentum

Our first priority for 2021 is to return to top-line growth and recapture the momentum we were building prior to COVID, with the consequence of increasing earnings through operating leverage. This priority aligns with the first three of our Strategic Imperatives targeted at improving revenue growth.

One area of focus is to drive higher returns from our differentiated product portfolio. As we entered 2021 a number of recent product launches were at early stages and we have made good progress expanding these into new markets and to new customers. Our OR3O◊ Dual Mobility Hip System is helping to drive growth in Hip Implants, and our new robotics platform the CORI◊ Surgical System is being well-received in the US and has been launched into other markets including Australia and India, with Europe to follow later this year. We have also continued to invest more into R&D, and have launched a number of new products and are securing regulatory approvals across our extensive pipeline of near-term innovation.

We are also starting to see significant benefits from a number of recent acquisitions. The Osiris acquisition is transforming the growth profile of Advanced Wound Bioactives as we train the Osiris and SANTYL◊ focused sales forces to cross-sell the portfolio. In Sports Medicine, REGENETEN◊ and NOVOSTITCH◊ are delivering strong growth in the US, and are only at the start of their launch in other markets. In Orthopaedics the collaboration with Brainlab for robotics and digital surgery is achieving its milestones. The Extremity Orthopaedics business acquired in January 2021 grew strongly in the first half despite market conditions, and we are excited by the potential for cross- selling our respective portfolios and its new product pipeline. The Tula◊ System, acquired in January 2020, has the potential to transform tympanostomy tube treatment of children as ENT surgery levels recover.

2. Deliver further operational improvement across the Group

Our second priority for 2021 is to drive further operational improvement across the Group in order to provide more resources for investment in the medium term, including in R&D. This priority aligns to our Strategic Imperative to become the best owner.

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During the first half we continued our programme to optimise our manufacturing network. Preparations at our new manufacturing facility in Malaysia are on track, and we expect first production towards the end of 2022. We are consolidating our network and continue to transfer our global warehousing and distribution functions in the US and Europe to a specialist third party partner. These and other changes are expected to deliver around $200 million of annualised benefits by 2025 for a one-off cost of around $350 million, as previously announced. These efficiencies will help offset the cost and price pressures that the business regularly faces.

3. Continue to respond effectively to COVID

We continue to prioritise the health and wellbeing of employees. As restrictions lift in our markets we are taking a measured approach to reopening offices, and continue to encourage employees to take advantage of flexible working arrangements where they can. In some locations, such as India, we have worked to support employees and their families as COVID infection levels rose significantly, including organising vaccination drives. During the period Smith+Nephew gifted raw materials and equipment and provided ex-gratia consultancy to OxVent to support the manufacture of its simple, low-cost ventilator in India. The OxVent ventilator was developed in 2020 by University of Oxford and King's College London in collaboration with Smith+Nephew.

Second Quarter 2021 Trading Update

Our second quarter revenue was $1,335 million (2020: $901 million), representing revenue growth of 48.2% including a 140bps benefit from acquisitions and 650bps benefit from foreign exchange (primarily due to movements in the Euro, Renminbi, and Australian Dollar). On an underlying basis revenue was up 40.3% year-on-year, reflecting a weak comparator as Q2 2020 saw the peak impact of COVID on our business. Compared to Q2 2019, our Q2 2021 revenue was down -1.0% on an underlying basis.

The second quarter comprised 64 trading days, one more than the equivalent period in 2020. Q2 2019 comprised 63 trading days.

All three franchises delivered strong year-on-year revenue growth in the quarter, with Orthopaedics up 43.4% (53.0% reported), Sports Medicine & ENT up 50.9% (58.5% reported) and Advanced Wound Management up 27.2% (33.5% reported). Our performance reflects the easing of COVID restrictions and increased levels of elective surgery in many markets, as well as our decisions during the last twelve months to maintain investment in our sales force, new product development and launches, and focus on improving commercial execution.

Encouragingly, two of our franchises delivered positive underlying revenue growth over 2019 levels, with Sports Medicine & ENT up 1.3% and Advanced Wound Management up 5.1%. Although Orthopaedics revenue was down -6.2% underlying against Q2 2019, the franchise built on its first quarter 2021 performance as restrictions on elective surgery continued to ease, albeit held back by near-term supply constraints in some product lines.

Geographically, revenue growth was 46.8% against Q2 2020 (53.9% reported) in our Established Markets and 16.2% (26.4% reported) in Emerging Markets.

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In Established Markets, the US delivered 51.3% revenue growth (54.1% reported) as elective surgery levels recovered strongly across the majority of categories. Revenue from our Other Established Markets was up 40.1% (53.7% reported), with surgery volumes improving in Europe over the first quarter, although still below pre-COVID levels, and Japan and Australia weakened as some restrictions were reimposed.

In Emerging Markets performance from China was held back by distributor ordering patterns ahead of the previously highlighted new government tendering programme, and other markets including India, Middle East and Latin America continued to be impacted by COVID-related restrictions.

Second Quarter Consolidated Revenue Analysis

Q2 2021 to Q2 2020

	3 July	27 June	Reported	Underlying	Acquisitions	Currency
Consolidated revenue by franchise	2021	2020	growth	Growth(i)	/disposals	impact
$m	$m	%	%	%	%
Orthopaedics	557	364	53.0	43.4	3.5	6.1
Knee Implants	226	137	65.5	58.8	-	6.7
Hip Implants	161	112	43.6	37.2	-	6.4
Other Reconstruction(ii)	21	12	72.1	64.0	-	8.1
Trauma & Extremities	149	103	44.3	28.2	11.4	4.7
Sports Medicine & ENT	391	247	58.5	50.9	-	7.6
Sports Medicine Joint Repair	211	129	63.6	55.9	-	7.7
Arthroscopic Enabling Technologies	147	96	53.0	45.5	-	7.5
ENT (Ear, Nose and Throat)	33	22	51.8	45.2	-	6.6
Advanced Wound Management	387	290	33.5	27.2	-	6.3
Advanced Wound Care	186	144	29.4	20.6	-	8.8
Advanced Wound Bioactives	132	101	30.6	29.9	-	0.7
Advanced Wound Devices	69	45	52.6	42.8	-	9.8
Total	1,335	901	48.2	40.3	1.4	6.5
Consolidated revenue by geography
US	677	440	54.1	51.3	2.8	-
Other Established Markets(iii)	422	274	53.7	40.1	0.7	12.9
Total Established Markets	1,099	714	53.9	46.8	1.8	5.3
Emerging Markets	236	187	26.4	16.2	-	10.2
Total	1,335	901	48.2	40.3	1.4	6.5

1. Underlying growth is defined in Note 1 on page 2
2. Other Reconstruction includes robotics capital sales, the joint reconstruction business acquired from Brainlab and cement
3. Other Established Markets are Europe, Canada, Japan, Australia and New Zealand

Q2 2021 to Q2 2019

	3 July	29 June	Reported	Underlying	Acquisitions	Currency
Consolidated revenue by franchise	2021	2019	growth	Growth(i)	/disposals	impact
$m	$m	%	%	%	%
Orthopaedics	557	552	0.9	-6.2	5.3	1.8
Sports Medicine & ENT	391	379	3.3	1.3	-	2.0
Advanced Wound Management	387	352	10.1	5.1	2.1	2.9
Total	1,335	1,283	4.1	-1.0	3.0	2.1
Consolidated revenue by geography
US	677	635	6.8	2.3	4.5	-
Other Established Markets(ii)	422	402	4.9	-3.5	1.8	6.6
Total Established Markets	1,099	1,037	6.0	-	3.3	2.7
Emerging Markets	236	246	-4.1	-5.3	1.6	-0.4
Total	1,335	1,283	4.1	-1.0	3.0	2.1

1. Underlying growth is defined in Note 1 on page 2
2. Other Established Markets are Europe, Canada, Japan, Australia and New Zealand

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