Smith & Nephew Fourth Quarter and Full Year 2018 Results

Smith & Nephew plc (LSE:SN, NYSE:SNN) results for the Quarter and Year to 31 December 2018:

 For a full copy of the announcement, please click here. (PDF 424KB)

	Reported			Trading2
	31 Dec	31 Dec	Reported	31 Dec	31 Dec	Underlying
	2018	2017	growth	2018	2017	growth
	$m	$m	%	$m	$m	%
Fourth Quarter Results1
Revenue	1,294	1,278	1	1,294	1,278	3
Full Year Results1
Revenue	4,904	4,765	3	4,904	4,765	2
Operating/trading profit	863	934		1,123	1,048
Operating/trading profit margin (%)	17.6	19.6		22.9	22.0
Cash generated from operations/trading cash flow	1,108	1,273		951	940
EPS/ EPSA (cents)	76.0	87.8		100.9	94.5

Namal Nawana, Chief Executive Officer of Smith & Nephew, said:

“We accelerated performance across 2018, with 3% underlying revenue growth in both the third and fourth quarters and a 7% uplift in full year trading profit. We start 2019 with a strengthened organisation and a new growth-oriented operating model.”

2018 Full Year Financial Highlights^1,2

• Underlying revenue up 2% and trading profit margin up 90bps to 22.9%, in line with guidance
  • Reported revenue growth of 3% is after +1% FX impact
  • Trading profit margin includes 50bps benefit from one-off legal settlement
  • Operating profit margin reflects restructuring costs of $120m, with c.$60m of benefits realised in 2018
• Performance improved across the year, with revenue growth 1% in H1 and 3% in H2
• Strong growth in Reconstruction and Emerging Markets (China growth double-digit), offset by continued softness in Arthroscopic Enabling Technologies and Advanced Wound Bioactives
• Cash conversion ratio 85%; significant balance sheet capacity with 0.8x net debt to adjusted EBITDA ratio
• Tax rate on trading results down 100bps to 16.1%, including provision release (15.1% reported tax rate)
• EPSA up 7% to 100.9¢, reflecting improved trading and lower tax rate (EPS down 13% to 76.0¢ after restructuring and other non-trading costs)
• Full year dividend up 3% to 36.0¢ per share

Strategic Highlights

• New operating model complete from 1 January 2019, led by strengthened leadership team
• Five new strategic imperatives to drive value creation over the medium term established

2019 Guidance¹

• Revenue expected to increase 2.5-3.5% underlying (around 1.8-2.8% reported³)
• Trading profit margin expected in 22.8-23.2% range, a 40-80bps improvement excluding one-off 2018 legal gain
• Tax rate on trading results expected to be 19-21%

Analyst conference call

An analyst meeting and conference call to discuss Smith & Nephew’s results for the year ended 31 December 2018 will be held today, Thursday 7 February 2019 at 8.30am GMT / 3.30am EST. 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

Investors
Andrew Swift	+44 (0) 20 7960 2285
Smith & Nephew
Media
Charles Reynolds	+44 (0) 1923 477314
Smith & Nephew
Ben Atwell / Andrew Ward	+44 (0) 20 3727 1000
FTI Consulting

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 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 commensurate period in the prior year.
   
   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 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.
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, net debt to adjusted EBITDA ratio 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 Financial Statements.
3. Reported growth rate guidance assumes exchange rates prevailing at 1 February 2019.

Smith & Nephew Fourth Quarter Trading and Full Year 2018 Results

Fourth 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 Q4 2017 analysis is a reclassification of $6 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 Q4 2018 results

Fourth Quarter 2018 Trading Update

Our Q4 revenue was $1,294 million (2017: $1,278 million), up 3% on an underlying basis.  Reported revenue growth was 1%, including a -2% foreign exchange headwind.

The fourth quarter 2018 comprised 61 trading days, one more than the same period last year.

Fourth Quarter 2018 Franchise Highlights

Sports Medicine Joint Repair delivered 9% revenue growth in the quarter, driven by good performance across our shoulder repair portfolio. The recently acquired REGENETEN^◊ Bioinductive Implant for rotator cuff repair continued to perform ahead of expectations.

During the quarter we announced the acquisition of Ceterix Orthopaedics, Inc., the developer of the NovoStitch^◊ Pro Meniscal Repair System. This unique device addresses complex meniscal tear patterns not adequately served by other repair systems and is highly complementary to Smith & Nephew’s leading FAST-FIX^◊ 360 Meniscal Repair System. The acquisition completed on 22 January 2019.

Revenue from Arthroscopic Enabling Technologies was down -4% as the softness in resection seen in previous quarters continued. We expect the launch of the FLOW 90^◊ COBLATION^◊ wand for shoulder repair in the first half of 2019 to support improved performance.

In Trauma & Extremities revenue was up 1%, with good growth across the nail portfolio and an increased contribution from the new EVOS^◊ SMALL plating system for lower extremity fractures. The global roll-out of this product is progressing well. During the quarter we announced two new studies showing positive clinical results and cost savings from using the INTERTAN^◊ Intertrochanteric Antegrade Nail.

Our Other Surgical Businesses franchise delivered revenue growth of 11% in the quarter, led by strong capital sales for our robotic NAVIO^◊ Surgical System. 

We delivered 3% revenue growth across our Reconstruction business in the quarter.

Within this, revenue from Knee Implants grew 3%. Growth across our JOURNEY^◊ II, LEGION^◊  REVISION and ANTHEM^◊ knee systems remained strong. In November we announced new clinical evidence showing excellent mid-term survivorship results for JOURNEY II BCS.

Revenue from Hip Implants was up 4%, continuing the much improved dynamic seen last quarter. This was again led by increased demand for the POLAR3^◊ total hip solution, with its class-leading survivorship data, and the continued roll-out of the REDAPT^◊ Revision System.

Advanced Wound Care revenue was up 2%. Good growth in the US, led by ALLEVYN^◊ LIFE and our pressure ulcer prevention strategy, continues to be offset by softness in some European countries.

Advanced Wound Bioactives revenue was down -3%, with SANTYL^◊ volumes remaining under pressure. Following review of two large safety studies, the FDA approved the removal of the boxed warning from REGRANEX^◊, and we are relaunching this product.

Revenue from Advanced Wound Devices was up 14%, completing a year of strong growth from this franchise. During the quarter we announced the European launch of the new PICO^◊ 7Y Single Use Negative Pressure Wound Therapy System (sNPWT) with AIRLOCK^◊ Technology. This is the first sNPWT system to include an innovative integrated Y extension enabling the utilisation of two dressings concurrently from one pump. We also completed the US launch of the new PICO 7 sNPWT System.

In December 2018, Smith & Nephew and our partner - digital health provider Inhealthcare - announced plans to pilot a multi-platform digital application designed to reduce variation in practice by community nurses by enabling consistent wound assessment and treatment recommendations in real-time. This formed part of the Wound Care Sector Deal launched by the UK Government within its Life Sciences Industrial Strategy.

Fourth Quarter Regional Performance

In the fourth quarter, revenue growth was 3% in the US and flat across our Other Established Markets. Revenue growth was 8% across the Emerging Markets. China growth remained double-digit.

Full Year 2018 Results

Smith & Nephew results for the Full Year ended 31 December 2018:

			Reported
	2018	2017	growth
	$m	$m	%
Revenue	4,904	4,765	3
Operating profit	863	934	-8
Acquisition and disposal related items	(7)	(10)
Restructuring and rationalisation costs	120	-
Amortisation and impairment of acquisition intangibles	113	140
Legal and other	34	(16)
Trading profit (non-IFRS)	1,123	1,048	7
	¢	¢
Earnings per share “EPS”	76.0	87.8	-13
Acquisition and disposal related items	(0.7)	(0.9)
Restructuring and rationalisation costs	11.0	-
Amortisation and impairment of acquisition intangibles	10.3	11.4
Legal and other	4.3	(0.1)
US tax reform	-	(3.7)
Adjusted Earnings per share “EPSA”	100.9	94.5	7

 

Full Year 2018 Analysis

Our full year revenue was $4,904 million (2017: $4,765 million), up 3% on a reported basis, including a foreign exchange tailwind of 1%. Revenue was up 2% on an underlying basis.

Trading profit for the year was $1,123 million (2017: $1,048 million), and the trading profit margin was 22.9% (2017: 22.0%), up 90bps. This reflects both improved trading performance and cost control and includes the 50bps benefit of a one-off legal settlement.

The Accelerating Performance and Execution (APEX) programme, initiated at the end of 2017, incurred restructuring costs of $120 million, with benefits recognised in 2018 P&L of around $60 million. We are making good progress across all three workstreams of (i) Manufacturing, Warehousing and Distribution, (ii) General and Administrative (G&A) Expenses, and (iii) Commercial Effectiveness. APEX is expected to drive an annualised benefit of $160 million by 2022, for a one-off cost of $240 million.

Reported operating profit of $863 million (2017: $934 million) was after the APEX restructuring and rationalisation costs, as well as acquisition and disposal related items, amortisation of acquisition intangibles and legal and other items incurred in the year (see Note 8 to the Condensed Consolidated Financial Statements).

Cash generated from operations was $1,108 million (2017: $1,273 million), reflecting higher working capital outflows including increased inventory supporting sales growth, new product launches and an increase in safety stock levels in part in preparation for the UK’s exit from the European Union (EU). Trading cash flow was $951 million (2017: $940 million) (see Note 8 for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was again good at 85% (2017: 90%).

The net interest charge within reported results was $51 million (2017: $51 million). Net debt was $1,104 million at year-end, a decrease of $177 million from $1,281 million at 31 December 2017  (see Note 6 for a reconciliation of net debt). Net debt to adjusted EBITDA ratio was 0.8x at year-end (see Note 8 to the Condensed Consolidated Financial Statements).

The tax rate on trading results for the year to 31 December 2018 was 16.1% (2017: 17.1%). This was lower than the guided rate of between 20-21% mainly due to a one-off benefit from a tax provision release following expiry of statute of limitations and a beneficial geographical mix of profits. The reported tax rate was 15.1% (2017: 12.7%). Details of the reconciliation between trading results and reported results are set out in Note 8 to the Condensed Consolidated Financial Statements.

Adjusted earnings per share (‘EPSA’) was up 7% at 100.9¢ (201.8¢ per ADS) (2017: 94.5¢) as a result of the improved trading performance and lower tax rate on trading results. Basic earnings per share (‘EPS’) was down 13% to 76.0¢ (152.0¢ per ADS), primarily due to the impact of the restructuring charges related to the APEX programme as well as other non-trading costs (2017: 87.8¢).

Dividend

The Board is pleased to recommend a Final Dividend of 22.0¢ per share (44.0¢ per ADS). This, together with an Interim Dividend of 14.0¢ per share (28.0¢ per ADS), will give a total distribution of 36.0¢ per share (72.0¢ per ADS) in 2018 representing year-on-year growth of 3% in the declared full year dividend. The Final Dividend will be paid on 8 May 2019 to shareholders on the register at the close of business on 5 April 2019.

Business update

Smith & Nephew has launched five new strategic imperatives which form our value creation plan for the medium term.

1. Achieve the full potential of our portfolio – improving commercial execution to accelerate organic revenue growth performance with a focus on
   (i) platform-specific plans;
   (ii) Ambulatory Surgery Centers; and
   (iii) Emerging Markets, especially China and Latin America.
2. Transform the business through enabling technologies – by acquiring and developing leading enabling technologies to transform procedures, including robotics, imaging and augmented reality.
3. Expand in high-growth segments – by accelerating portfolio growth, strengthening or establishing leadership positions, and driving meaningful synergies organically and through M&A and partnering.
4. Strengthen talent and capabilities – by developing a winning culture to improve retention and attract talent.
5. Become the best owner – through operations transformation and organisation simplification, hence driving meaningful margin expansion.

The strategic imperatives build on the previously announced new global commercial model.  From 1 January 2019 a president is responsible for each of our three specialised global marketing franchises – Orthopaedics, Sports Medicine/ENT and Wound. The franchise presidents also have commercial responsibility for the US. Aligned with, and supporting the franchises, are presidents and regional commercial organisations for Europe, Middle East, and Africa (EMEA), and Asia Pacific (APAC).  

The Group has also introduced a new brand purpose – Life Unlimited – and three supporting culture pillars - Care, Collaboration and Courage. Life Unlimited captures the essence of Smith & Nephew and our purpose to address meaningfully the health issues that hinder people from living their lives to the fullest. The culture pillars are grounded in the service of patients and practitioners. They guide employees to work together and couple the idea of continuous learning and improvement with the aspiration to lead in all our endeavours.

UK’s withdrawal from the EU

Smith & Nephew’s management does not believe that the UK’s decision to leave the EU will have a significant impact on our long-term ability to conduct business into and out of the EU or UK. The UK accounts for approximately 5% of global revenue and the majority of our manufacturing takes place outside the UK and EU. We are making good progress with our preparations for the various scenarios.

2019 Outlook

Our 2019 guidance for further improvement in underlying performance at the top and bottom line is an important step in realising our medium-term ambition to outgrow our markets.

In terms of revenue, we expect our underlying growth to be in the range of 2.5% to 3.5% in 2019. On a reported basis this equates to a range of around 1.8% to 2.8% at exchange rates prevailing on 1 February 2019 and including the effect of the Ceterix acquisition.

We expect 2019 trading profit margin to be in the range of 22.8% to 23.2%, a further 40-80bps improvement over 2018, excluding the one-off 50bps legal settlement benefit.

The tax rate on trading results for 2019 is expected to be in the range 19% to 21%, subject to any material changes to tax law, or other one-off items.

Forward calendar

The Q1 Trading Report will be released on 2 May 2019.

About Smith & Nephew

Smith & Nephew is a portfolio medical technology business with leadership positions in Orthopaedics, Advanced Wound Management and Sports Medicine. Smith & Nephew has more than 16,000 employees and a presence in more than 100 countries. Annual sales in 2018 were $4.9 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 and follow us on Twitter, LinkedIn or Facebook.

^{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.}

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