Delivering on commitments and investing for the future
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business, announces results for the Fourth Quarter and Year to 31 December 2019:
For a full copy of the announcement, please click here (PDF)
|
| Reported | Trading2 | ||||
|
| 31 Dec | 31 Dec | Reported | 31 Dec | 31 Dec | Underlying |
|
| 2019 | 2018 | growth | 2019 | 2018 | growth |
|
| $m | $m | % | $m | $m | % |
| Fourth Quarter Results1 |
|
|
|
|
|
|
| Revenue | 1,407 | 1,294 | 8.7 | 1,407 | 1,294 | 5.6 |
|
|
|
|
|
|
|
|
| Full Year Results1 |
|
|
|
|
|
|
| Revenue | 5,138 | 4,904 | 4.8 | 5,138 | 4,904 | 4.4 |
| Operating/trading profit | 815 | 863 |
| 1,169 | 1,123 |
|
| Operating/trading profit margin (%) | 15.9 | 17.6 |
| 22.8 | 22.9 |
|
| Cash generated from operations/trading cash flow | 1,370 | 1,108 |
| 970 | 951 |
|
| EPS/ EPSA (cents) | 68.6 | 76.0 |
| 102.2 | 100.9 |
|
2019 Full Year Financial Highlights
- Underlying revenue growth up 4.4%, a substantial improvement year-on-year (2018: 2%); 4.8% reported growth includes -220bps FX headwind and 260bps acquisition benefit
- All global franchises and regions positively contributed to growth, led by Sports Medicine & ENT (7.0%), and Emerging Markets (16.1%)
- Trading profit margin of 22.8% includes impact of dilution from acquisitions; operating profit margin of 15.9% reflects restructuring and acquisition costs
- Cash generated from operations $1,370 million (2018: $1,108 million)
- Full year dividend up 4% to 37.5¢ per share
Strategic Highlights
- New operating model and strategic imperatives behind improved performance
- Five acquisitions in higher-growth segments completed in 2019
- Tusker Medical acquired in January 2020, securing complementary and innovative ENT technology
- 2020 priorities include continued progress in delivering an excellent customer experience, increasing investment in innovation and further improving efficiency
2020 Outlook
- Underlying revenue growth expected to be in the range 3.5% to 4.5% (around 4.0% to 5.0% reported3)
- Trading profit margin expected to be at or slightly above that achieved in 2019 after absorbing FX headwind, acquisition-related dilution and increase in R&D
- Outlook assumes situation regarding COVID-19 outbreak normalises early in Q2
- Tax rate on trading results expected to be in the range of 18.5% to 19.5%
Roland Diggelmann, Chief Executive Officer of Smith+Nephew, said:
“The improved underlying revenue growth of 4.4% in 2019, the best for several years, has propelled Group sales above $5 billion for the first time in Smith+Nephew’s history. All franchises and regions meaningfully contributed to this record.
“At the same time, we’ve continued investing to drive mid-term growth, both increasing our R&D spend, and also bringing in innovative technologies and expertise through acquisitions.
“For 2020, our focus is on sustaining the positive momentum and our strategic imperatives remain the right path to value creation. Within these, we will focus on delivering a consistent and excellent customer experience, maximising the impact from our increased investment in innovation, and continuing to improve our operational agility and efficiency.”
Analyst conference call
An analyst meeting and conference call to discuss Smith+Nephew’s results for the year ended 31 December 2019 will be held today, Thursday 20 February 2020 at 9.00am GMT / 4.00am 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) 1923 477433 |
| Smith+Nephew |
|
|
|
|
| Media |
|
| Charles Reynolds | +44 (0) 1923 477314 |
| Smith+Nephew |
|
|
|
|
| Charis Gresser / Ayesha Bharmal | +44 (0) 20 7404 5959 |
| Brunswick |
|
Notes
- 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 2018 period.
‘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.
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.
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. - 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, leverage 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.
- Reported growth rate guidance assumes exchange rates prevailing at 14 February 2020.
Smith+Nephew Fourth Quarter Trading and Full Year 2019 Results
Fourth Quarter 2019 Trading Update
Our fourth quarter (‘Q4’) revenue was $1,407 million (2018: $1,294 million), up 5.6% on an underlying basis. Reported growth of 8.7% included a -80bps foreign exchange headwind and a 390bps benefit from acquisitions.
Unless specified as ‘reported’ all revenue growth rates throughout this document are underlying increases/decreases after adjusting for the effects of currency translation and the impact of acquisitions and disposals. All percentages compare to the equivalent 2018 period.
Q4 2019 comprised 62 trading days, one more than the comparable Q4 2018 period.
Fourth Quarter Consolidated Revenue Analysis
|
| 31 December | 31 December | Reported | Underlying | Acquisitions | Currency |
|
| 2019 | 2018(i) | growth | Growth(ii) | /disposals | impact |
| Consolidated revenue by franchise | $m | $m | % | % | % | % |
| Orthopaedics | 600 | 571 | 5.1 | 5.1 | 0.7 | -0.7 |
| Knee Implants | 279 | 269 | 3.9 | 4.7 | - | -0.8 |
| Hip Implants | 160 | 160 | - | 0.7 | - | -0.7 |
| Other Reconstruction(iii) | 30 | 19 | 58.2 | 31.6 | 27.6 | -1.0 |
| Trauma | 131 | 123 | 6.5 | 7.0 | - | -0.5 |
|
|
|
|
|
|
|
|
| Sports Medicine & ENT | 424 | 386 | 9.8 | 10.1 | 0.5 | -0.8 |
| Sports Medicine Joint Repair | 221 | 193 | 14.2 | 14.0 | 1.1 | -0.9 |
| Arthroscopic Enabling Technologies | 163 | 157 | 4.2 | 5.1 | - | -0.9 |
| ENT (Ear, Nose and Throat) | 40 | 36 | 10.0 | 10.7 | - | -0.7 |
|
|
|
|
|
|
|
|
| Advanced Wound Management | 383 | 337 | 13.6 | 1.9 | 12.7 | -1.0 |
| Advanced Wound Care | 184 | 185 | -0.7 | 0.7 | - | -1.4 |
| Advanced Wound Bioactives | 133 | 94 | 41.0 | -2.2 | 43.3 | -0.1 |
| Advanced Wound Devices | 66 | 58 | 14.8 | 15.2 | 0.9 | -1.3 |
|
|
|
|
|
|
|
|
| Total | 1,407 | 1,294 | 8.7 | 5.6 | 3.9 | -0.8 |
|
|
|
|
|
|
|
|
| Consolidated revenue by geography |
|
|
|
|
|
|
| US | 724 | 649 | 11.5 | 4.2 | 7.3 | - |
| Other Established Markets(iv) | 431 | 427 | 1.1 | 2.4 | 0.4 | -1.7 |
| Total Established Markets | 1,155 | 1,076 | 7.4 | 3.5 | 4.5 | -0.6 |
| Emerging Markets | 252 | 218 | 15.4 | 16.6 | 0.4 | -1.6 |
| Total | 1,407 | 1,294 | 8.7 | 5.6 | 3.9 | -0.8 |
(i) Revenue by franchise for the quarter ended 31 December 2018 has been re-presented to align with the new global franchise structure effective from 1 January 2019. There has been no change in total revenue for the quarter ended 31 December 2018
(ii) Underlying growth is defined in Note 1 on page 2
(iii) Other Reconstruction includes robotics capital sales, the orthopaedic joint reconstruction business acquired from BrainLab and cement
(iv) Other Established Markets are Europe, Canada, Japan, Australia and New Zealand
Fourth Quarter 2019 Trading Update
Smith+Nephew serves customers through three global franchises: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management.
Orthopaedics
Our Orthopaedics franchise delivered 5.1% revenue growth in Q4, led by the highest quarterly growth of the year in each of our Knee Implants, Trauma and Other Reconstruction segments.
Revenue from Knee Implants was up 4.7%, with strong demand for the JOURNEY◊ II Total Knee System, in particular from centres that have installed our robotics-assisted NAVIO◊ Surgical System. During the quarter we announced the first surgeries for the new JOURNEY II Unicompartmental Knee System, an important addition to our portfolio.
Hip Implants revenue growth was 0.7%. The POLAR3◊ Total Hip Solution, with its class-leading survivorship data, and the REDAPT◊ Revision Hip System continued to support good growth in the US, although this was offset by a slower quarter outside of the US, in large part related to a distributor change in the Asia-Pacific region. We announced the launch of the OR3O◊ Dual Mobility Hip for use in primary and revision hip arthroplasty in Q4.
Other Reconstruction (which includes robotics capital sales, the orthopaedic joint reconstruction business acquired from Brainlab, and cement) delivered revenue growth of 31.6% from strong end-of-year capital sales.
Trauma revenue grew 7.0% as we continued to roll-out the EVOS◊ System and sustained double-digit growth from the INTERTAN◊ Intertrochanteric Antegrade Nail.
Sports Medicine & ENT
Our Sports Medicine & ENT franchise delivered 10.1% revenue growth, the first quarter of double-digit growth from this global franchise.
Sports Medicine Joint Repair delivered 14.0% revenue growth. Performance was good and broad-based across our knee and shoulder repair ranges.
Arthroscopic Enabling Technologies revenue growth was 5.1%, an improved performance from this franchise. Recent product launches including the WEREWOLF◊ FLOW 90◊ Wand with FLOW~IQ◊ Technology, new mechanical resection blades, and the LENS◊ 4K Surgical Imaging System, all contributed.
ENT delivered 10.7% revenue growth as we continued to successfully convert surgeons to the use of COBLATION◊ technology in tonsil and adenoid procedures. During the quarter, we received US regulatory clearance for the next-generation COBLATION technology for tonsil & adenoid surgery, with launch starting in 2020.
In Q1 2020 we acquired Tusker Medical, Inc., the developer of Tula, a new system for in-office delivery of ear tubes to treat recurrent or persistent ear infections. This FDA-approved ‘Breakthrough-designated Device’ is the first system that can be used to place ear tubes in young children using local anaesthesia in the physician-office setting. Tula is highly complementary to our existing ENT portfolio, with the same customer and patient populations.
Advanced Wound Management
Our Advanced Wound Management franchise delivered 1.9% revenue growth, with the performance in Advanced Wound Devices again the highlight.
Advanced Wound Care delivered revenue growth of 0.7%. This was a sequential improvement over the previous quarter driven by our European business returning to growth for the first time in more than three years. The price pressure experienced in the US last quarter continued in Q4.
Advanced Wound Bioactives revenue declined -2.2%, reflecting a strong prior year comparable for the acquired Osiris Therapeutics business as we began to lap the launch of GRAFIX◊ PL Prime in Q4 2018. SANTYL◊ end market demand remained stable in the quarter.
Advanced Wound Devices delivered revenue above-market growth of 15.2%. This reflected continued strong growth from the Single Use Negative Pressure Wound Therapy System PICO◊ and an increasing contribution from our traditional system RENASYS◊.
Regional Performance in the Fourth Quarter
All regions contributed to the growth acceleration over the third quarter of 2019.
We delivered revenue growth of 3.5% from Established Markets. Within this, revenue from the US, our largest single market, was up 4.2%, and the Other Established Markets returned to growth, up 2.4%.
The Emerging Markets continued to deliver a strong performance, up 16.6% in the quarter.
Full Year 2019 Results
Smith+Nephew results for the Full Year ended 31 December 2019:
|
|
|
| Reported |
|
| 2019 | 2018 | growth |
|
| $m | $m | % |
| Revenue | 5,138 | 4,904 | 4.8 |
| Operating profit | 815 | 863 | -6 |
| Acquisition and disposal related items | 32 | (7) |
|
| Restructuring and rationalisation costs | 134 | 120 |
|
| Amortisation and impairment of acquisition intangibles | 143 | 113 |
|
| Legal and other | 45 | 34 |
|
| Trading profit(i) | 1,169 | 1,123 | 4 |
|
| ¢ | ¢ |
|
| Earnings per share ('EPS') | 68.6 | 76.0 | -10 |
| Acquisition and disposal related items | 3.4 | (0.7) |
|
| Restructuring and rationalisation costs | 12.5 | 11.0 |
|
| Amortisation and impairment of acquisition intangibles | 12.6 | 10.3 |
|
| Legal and other | 5.1 | 4.3 |
|
| Adjusted Earnings per share ('EPSA')(i) | 102.2 | 100.9 | 1 |
|
|
|
|
|
(i) See Note 8 to the Condensed Consolidated Financial Statements
Full Year 2019 Analysis
Our full year revenue was $5,138 million (2018: $4,904 million), up 4.4% on an underlying basis. Reported growth of 4.8% includes a foreign exchange headwind of
-220bps and 260bps benefit from acquisitions.
All three global franchises delivered an improved revenue growth performance in 2019 over the prior year. Our orthopaedics franchise delivered 4.0% underlying revenue growth (2018: 3%), Sports Medicine & ENT achieved 7.0% underlying revenue growth (2018: 2%), and Advanced Wound Management delivered 2.2% underlying revenue growth (2018: 0%).
Group trading profit was $1,169 million in 2019 (2018: $1,123 million). The trading profit margin of 22.8% represents a 40bps improvement year-on-year after adjusting for the one-off 50bps benefit from a legal settlement in the prior year (2018: 22.9%), and reflects the increased investment in R&D and dilution from acquisitions offset by savings realised under the Accelerating Performance and Execution (APEX) programme. Each of the three global franchises made a good contribution to the 2019 trading profit (see Note 2 to the Condensed Consolidated Financial Statements for further detail).
APEX, initiated at the end of 2017, incurred restructuring costs of $134 million in 2019, with benefits recognised in the 2019 P&L of around $80 million. This programme is nearing its conclusion and is now expected to deliver annualised benefits of $190 million, $30 million more than originally expected, for a one-off cost of $290 million, $50 million more than originally planned.
Reported operating profit of $815 million (2018: $863 million) was after restructuring costs for APEX, 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 $1,370 million (2018: $1,108 million) and trading cash flow was $970 million (2018: $951 million) (see Note 8 to the Condensed Consolidated Financial Statements for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was again good at 83% (2018: 85%).
The net interest charge within reported results of $55 million included $6 million from the adoption of IFRS 16 Leases on 1 January 2019 (2018: $51 million). Net debt, excluding lease liabilities, increased from $1,104 million at 31 December 2018 to $1,600 million at year end, with the increase primarily due to the impact of acquisitions (see Note 6 for a reconciliation of net debt). The leverage ratio was 1.2x at year-end (see Note 8 to the Condensed Consolidated Financial Statements).
Acquisitions resulted in goodwill and intangible assets increasing by $809 million from 31 December 2018 to $4,356 million at the year end. The adoption of IFRS 16 Leases initially resulted in $164 million of right-of-use assets and lease liabilities being recognised on the balance sheet.
The tax rate on trading results for the year to 31 December 2019 was 19.1%, which is near the lower end of our guided range of 19% to 21% (2018: 16.1% including one-off benefit from a tax provision release). The reported tax rate was 19.2% (2018: 15.1%) (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 1% at 102.2¢ (204.4¢ per ADS) (2018: 100.9¢). Basic earnings per share (‘EPS’) was 68.6¢ (137.2¢ per ADS) (2018: 76.0¢), reflecting the impact of acquisitions completed during the year and restructuring charges related to the APEX programme.
Dividend
The Board is pleased to recommend a Final Dividend of 23.1¢ per share (46.2¢ per ADS). Together with an Interim Dividend of 14.4¢ per share (28.8¢ per ADS), this will give a total distribution of 37.5¢ per share (75.0¢ per ADS) for 2019, representing year-on-year growth of 4% in the declared full year dividend. The Final Dividend will be paid on 6 May 2020 to shareholders on the register at the close of business on 3 April 2020.
2020 Priorities
In 2019 the Group adopted a new global commercial model built around three global franchises, unveiled a new purpose and culture pillars, and introduced five strategic imperatives which form our value creation plan. These important changes underpinned our performance in 2019 as growth momentum built across the year.
In addition, the Group continued to invest in medium-term growth opportunities. We increased our investment in R&D by 19%, up to $292 million, and delivered important new product launches across our franchises. We also completed five acquisitions in 2019. These brought valuable technologies that strengthened our portfolio in higher-growth segments and our R&D expertise and programmes. Our largest acquisition was Osiris Therapeutics, Inc. for $660 million, which completed in April.
In 2020 our priority is to sustain the improved performance achieved in 2019 while continuing to invest in the business and improve our agility and efficiency, in-line with our strategic imperatives. This will be an important step in realising our medium-term ambition to consistently outgrow our markets at the same time as delivering ongoing improvements to our trading profit margin.
All of our franchises are expected to make further progress in 2020. To achieve this we are continuing to focus on delivering commercial excellence, bringing greater rigour to product launches and portfolio management, and investing more in training our salesforce to ensure we deliver a differentiated level of service.
We are also working to realise benefits from a number of cross-franchise opportunities. These include our strength in Emerging Markets, where we will continue to invest, and the developing orthopaedics segment in ambulatory surgery centers in the US, where we already have a strong presence through our Sports Medicine & ENT franchise. Recent developments in surgical technology, anaesthesia protocols and changes to Medicare reimbursement are expected to increase access to more orthopaedic procedures in such outpatient settings.
Our strategic imperatives also focus our commitment to innovation and to bringing the best technology to customers. In 2020 we plan to invest more in R&D, both to accelerate the cadence of launches, and to position us at the forefront of converging surgical technologies in areas such as digital health and regenerative medicine. We also intend to continue to acquire new technologies that address unmet clinical needs and strengthen our position in fast growing market segments, such as Tusker Medical, completed in early 2020.
Finally, we remain committed to both deepening our talent pool and being the best owner across our value chain. In terms of people, we believe that embedding new ‘winning behaviours’ driven off our culture pillars, as well as placing more emphasis on development, will support sustained success. In terms of our value chain, opportunities include operating an optimal facility footprint, driving lean manufacturing methods across our network, delivering world-class service levels in our supply chain, and building an ever-more efficient functional infrastructure.
2020 Outlook
Smith+Nephew is committed to delivering sustainable and profitable growth.
In 2020 we expect our underlying revenue growth to be in the range of 3.5% to 4.5%. On a reported basis this equates to a range of around 4.0% to 5.0%, with foreign exchange reducing reported growth by around -80bps based on exchange rates prevailing on 14 February 2020, and acquisitions adding 130bps.
We expect to deliver a 2020 trading profit margin at or slightly above 2019 levels.
This is after absorbing a transactional foreign exchange headwind of around -50bps, acquisition-related dilution on announced transactions, and the planned increase in investment in R&D, offset by benefits from the APEX programme.
Smith+Nephew is monitoring the COVID-19 outbreak closely, which introduces additional uncertainty. Our full year outlook assumes that the situation normalises early in Q2. China represented 7% of Group revenue in 2019.
The tax rate on trading results for 2020 is expected to be in the range 18.5% to 19.5%, subject to any material changes to tax law or other one-off items.
Our medium term guidance is unchanged.
Forward calendar
The Q1 Trading Report will be released on 6 May 2020.
About Smith+Nephew
Smith+Nephew is a portfolio medical technology business that exists to restore people’s bodies and their self-belief by using technology to take the limits off living. We call this purpose ‘Life Unlimited’. Our 17,500+ employees deliver this mission every day, making a difference to patients’ lives through the excellence of our product portfolio, and the invention and application of new technologies across our three global franchises of Orthopaedics, Advanced Wound Management and Sports Medicine & ENT. Founded in Hull, UK, in 1856, we now operate in more than 100 countries, and generated annual sales of $5.1 billion in 2019. Smith+Nephew is a constituent of the FTSE100 (LSE:SN, NYSE:SNN). The terms ‘Group’ and ‘Smith+Nephew’ are used to refer to Smith & Nephew plc and its consolidated subsidiaries, unless the context requires otherwise.
For more information about Smith+Nephew, please visit www.smith-nephew.com and follow us on Twitter, LinkedIn, Instagram 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.
◊ Trademark of Smith+Nephew. Certain marks registered US Patent and Trademark Office.