Meeting our 2021 guidance with a clear Strategy for Growth
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business, reports results for the fourth quarter and full year ended 31 December 2021:
Download a copy of the announcement in full (pdf)
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| 31 Dec | 31 Dec | Reported | Underlying |
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| 2021 | 2020 | growth | growth |
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| $m | $m | % | % |
| Fourth Quarter Results1,2 |
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| Revenue | 1,346 | 1,326 | 1.5 | 0.3 |
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| Full Year Results1,2 |
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| Revenue | 5,212 | 4,560 | 14.3 | 10.3 |
| Operating profit | 593 | 295 |
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| Operating profit margin (%) | 11.4 | 6.5 |
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| EPS (cents) | 59.8 | 51.3 |
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| Trading profit | 936 | 683 |
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| Trading profit margin (%) | 18.0 | 15.0 |
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| EPSA (cents) | 80.9 | 64.6 |
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Full Year Financial Highlights1,2
- Revenue of $5,212 million (2020: $4,560 million), up 14.3% on a reported basis and 10.3% on an underlying basis
- Sports Medicine & ENT and Advanced Wound Management revenue above pre-COVID levels
- Performance in Orthopaedics impacted by supply chain constraints
- Operating profit of $593 million (2020: $295 million), up 101%
- Trading profit of $936 million (2020: $683 million) with trading profit margin of 18.0% (2020: 15.0%)
- 300bps margin uplift reflects improved trading impact and discretionary cost control offset by higher logistics costs
- Cash generated from operations of $1,048 million (2020: $972 million) with trading cash flow of $828 million (2020: $690 million)
- EPS up 17% to 59.8¢, EPSA up 25% to 80.9¢
- Full year dividend of 37.5¢ per share, in line with 2020 and 2019
Appointment of New Chief Executive Officer
- Smith+Nephew today announced that Dr Deepak Nath has been appointed as the Company’s new Chief Executive Officer, succeeding Roland Diggelmann, who will step down by mutual agreement. Deepak will take up the role on 1 April 2022 and Roland will leave on 31 March 2022. See separate announcement issued today for further information.
2021 Strategic Highlights
- Strategy for Growth launched, driven by improved productivity and commercial execution, innovation and acquisitions
- Increased investment in R&D enabled significant new product launches, including cementless knee system, expansion of robotics platform, meniscal repair system and sports medicine tower upgrade
- Strengthened commercial model with Orthopaedics and Sports Medicine & ENT franchises brought under one leadership team to better address higher growth opportunities
- Commitment to achieve net zero emissions across our operations globally by 2045
- Updated capital allocation framework maintaining higher investment in innovation to drive growth and returns to shareholders with a progressive dividend policy and new regular annual share buy-backs commencing in 2022.
Outlook1,2
- Through our Strategy for Growth we are targeting consistent 4% to 6% underlying revenue growth by 2024, structurally ahead of historical levels, and a trading profit margin of at least 21% by 2024 with further improvements thereafter
- For 2022 we are targeting underlying revenue growth in the range 4.0% to 5.0% (around 2.6% to 3.6% reported)
- Guidance assumes some ongoing impact from COVID, with Omicron a Q1 headwind and hospital staffing shortages likely to continue throughout 2022
- Global supply constraints also likely to continue
- Growth expected to be stronger in the second half than the first half of 2022
- For trading profit margin we are targeting around 50bps of expansion in 2022, reflecting efficiencies from operating leverage, productivity and improvement in the margin of acquired assets partially offset by headwinds of around 125bps from input cost inflation and around 60bps from implementation of volume-based procurement in China
- Tax rate on trading results expected to be in the range of 17% to 18%
Q4 Trading Highlights1,2
- Q4 revenue of $1,346 million (2020: $1,326 million), up 1.5% on a reported basis and 0.3% on an underlying basis
- Q4 performance reflects four fewer trading days than Q4 2020 (2021: 60 days) and COVID Omicron variant impact on elective surgeries
- Growth in Sports Medicine & ENT and Advanced Wound Management franchises offset by Orthopaedics, in line with recent quarters
Roland Diggelmann, Chief Executive Officer, said:
“We finished 2021 with a solid fourth quarter, despite nearly a week less trading than in 2020 and the impact of Omicron, which affected the typical quarter-end pick up in average daily sales.
“For the full year we delivered on our guidance commitments on both the top and bottom line. We are beginning to see our step up in R&D investment bear fruit, and all three franchises contributed to our double-digit revenue growth. Pleasingly, our Sports Medicine & ENT and Advanced Wound Management franchises delivered revenue above pre-COVID 2019 levels. Performance was held back by global supply chain challenges, which particularly impacted our Orthopaedics franchise.
“Looking to the future, we have set out our new Strategy for Growth with an ambition to transform to a structurally higher growth company, including clear medium-term revenue and trading profit margin targets. 2022 will be an important step on this journey as we continue to strengthen the business and invest behind innovation, while working to offset near-term headwinds. Smith+Nephew is well placed to continue to take advantage of the opportunities we see to drive shareholder returns, including through a new share buy-back programme.”
Analyst conference call
An analyst conference call to discuss Smith+Nephew’s fourth quarter and full year results will be held at 8.30am BST / 3.30am EST on 22 February 2022, details of which can be found on the Smith+Nephew website at www.smith-nephew.com/financialresults.
Enquiries
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| Investors |
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| Andrew Swift | +44 (0) 1923 477433 |
| Smith+Nephew |
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| Media |
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| Charles Reynolds | +44 (0) 1923 477314 |
| Smith+Nephew |
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| Susan Gilchrist / Ayesha Bharmal | +44 (0) 20 7404 5959 |
| Brunswick |
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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 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 33 to 36 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 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 trading 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 Other Information on pages 33 to 36 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.
Smith+Nephew Fourth Quarter Trading and Full Year 2021 Results
Overview of 2021
Group revenue in 2021 was $5,212 million, an increase of 14.3% on a reported basis and 10.3% on an underlying basis.
Whilst we saw some recovery, the COVID pandemic continued to impact the business throughout the year. The US market is getting closer to pre-COVID levels and other markets are recovering at varying paces, mostly depending on their healthcare structure and COVID waves.
All three of our global franchises delivered revenue growth in 2021. Our Sports Medicine & ENT and Advanced Wound Management franchises, representing almost 60% of our 2021 revenue, also both achieved revenue above pre-COVID levels. The growth in these franchises in 2021 was driven by strong commercial execution, investment in innovation and acquisitions.
The performance of Sports Medicine & ENT and Advanced Wound Management helped offset the near-term challenges in our Orthopaedics franchise. These included supply chain constraints and channel adjustments ahead of the volume-based procurement (VBP) implementation for hip and knee implants in China. We are stabilising the Smith+Nephew-specific supply chain challenges and closely managing the widely reported global shortages of some raw materials and components which we expect to continue in 2022.
From a strategic perspective, we announced our Strategy for Growth, launched multiple new products, refined our commercial model and updated our capital allocation framework in 2021.
Fourth Quarter 2021 Trading Update
Our fourth quarter revenue was $1,346 million (2020: $1,326 million), representing reported revenue growth of 1.5% including a 200bps benefit from acquisitions and 80bps foreign exchange headwind.
On an underlying basis revenue was up 0.3% year-on-year, principally reflecting four fewer trading days than the comparable period (2021: 60 trading days), resulting in nearly one week’s less trading at a traditionally busy time of the year than the comparable quarter last year.
Performance was also impacted by the Omicron variant. Infection levels rose in Europe and the US as the quarter went on, with new restrictions in many countries alongside widely reported staffing shortages in healthcare systems. As a result, we saw a slow-down in elective procedures from November in Europe, and December in the US, with the usual strong finish to the year impacted across our surgical businesses, particularly in joint replacement.
Compared to 2019, revenue was down -6.7% on an underlying basis also reflecting the impact of Omicron and two fewer trading days (2019: 62 trading days).
Fourth Quarter Consolidated Revenue Analysis
Q4 2021 compared to Q4 2020
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| 31 December | 31 December | Reported | Underlying | Acquisitions | Currency |
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| 2021 | 2020 | growth | growth(i) | /disposals | impact |
| Consolidated revenue by franchise | $m | $m | % | % | % | % |
| Orthopaedics | 552 | 545 | 1.2 | -2.6 | 4.6 | -0.8 |
| Knee Implants | 232 | 237 | -2.0 | -1.1 | - | -0.9 |
| Hip Implants | 151 | 162 | -7.0 | -6.1 | - | -0.9 |
| Other Reconstruction(ii) | 25 | 16 | 54.4 | 56.7 | - | -2.3 |
| Trauma & Extremities | 144 | 130 | 10.5 | -7.4 | 18.4 | -0.5 |
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| Sports Medicine & ENT | 416 | 408 | 2.1 | 2.4 | - | -0.3 |
| Sports Medicine Joint Repair | 223 | 223 | 0.1 | 0.4 | - | -0.3 |
| Arthroscopic Enabling Technologies | 157 | 158 | -0.4 | 0.1 | - | -0.5 |
| ENT (Ear, Nose and Throat) | 36 | 27 | 33.2 | 33.0 | - | 0.2 |
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| Advanced Wound Management | 378 | 373 | 1.5 | 2.4 | - | -0.9 |
| Advanced Wound Care | 181 | 183 | -0.7 | 0.7 | - | -1.4 |
| Advanced Wound Bioactives | 128 | 122 | 4.4 | 4.5 | - | -0.1 |
| Advanced Wound Devices | 69 | 68 | 2.1 | 3.4 | - | -1.3 |
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| Total | 1,346 | 1,326 | 1.5 | 0.3 | 2.0 | -0.8 |
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| Consolidated revenue by geography |
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| US | 708 | 689 | 2.8 | -0.4 | 3.2 | - |
| Other Established Markets(iii) | 409 | 425 | -3.9 | -2.4 | 0.9 | -2.4 |
| Total Established Markets | 1,117 | 1,114 | 0.3 | -1.2 | 2.3 | -0.8 |
| Emerging Markets | 229 | 212 | 8.3 | 8.0 | 0.1 | 0.2 |
| Total | 1,346 | 1,326 | 1.5 | 0.3 | 2.0 | -0.8 |
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint navigation business and bone cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New Zealand
Q4 2021 compared to Q4 2019
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| 31 December | 31 December | Reported | Underlying | Acquisitions | Currency |
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| 2021 | 2019 | growth | growth(i) | /disposals | impact |
| Consolidated revenue by franchise | $m | $m | % | % | % | % |
| Orthopaedics | 552 | 600 | -8.0 | -12.1 | 3.7 | 0.4 |
| Sports Medicine & ENT | 416 | 424 | -1.8 | -2.7 | - | 0.9 |
| Advanced Wound Management | 378 | 383 | -1.3 | -2.2 | - | 0.9 |
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| Total | 1,346 | 1,407 | -4.3 | -6.7 | 1.7 | 0.7 |
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| Consolidated revenue by geography |
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| US | 708 | 724 | -2.2 | -5.0 | 2.8 | - |
| Other Established Markets(ii) | 409 | 431 | -5.1 | -8.6 | 1.0 | 2.5 |
| Total Established Markets | 1,117 | 1,155 | -3.3 | -6.4 | 2.1 | 1.0 |
| Emerging Markets | 229 | 252 | -9.0 | -8.0 | - | -1.0 |
| Total | 1,346 | 1,407 | -4.3 | -6.7 | 1.7 | 0.7 |
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Established Markets are Europe, Canada, Japan, Australia and New Zealand
Fourth Quarter Franchise Performance
Orthopaedics
Revenue declined -2.6% (+1.2% reported) in our Orthopaedics franchise in the quarter.
Within this Knee Implants declined -1.1% (-2.0% reported) and Hip Implants declined -6.1% (-7.0% reported), reflecting the impact of Omicron and, as previously disclosed, global supply constraints and distributor ordering patterns in China. We launched our LEGION CONCELOC◊ Cementless Total Knee System in the US during the quarter, broadening our knee portfolio. Other Reconstruction revenue was up 56.7% (54.4% reported), with sustained good sales momentum from our robotics platform the CORI◊ Surgical System. After the quarter end we announced the expansion of CORI as we brought RI.HIP NAVIGATION, our computer-guided technology for total hip arthroplasty, on board. Trauma & Extremities declined
-7.4% (+10.5% reported including +18.4% benefit from the Extremity Orthopaedics acquisition) as trading was impacted by the deferral of elective surgeries, particularly in extremities and limb restoration.
Sports Medicine & ENT
Our Sports Medicine & ENT franchise delivered revenue growth of 2.4% (2.1% reported) in the quarter.
Within this, Sports Medicine Joint Repair delivered 0.4% revenue growth (0.1% reported) as this segment was also impacted by Omicron. Arthroscopic Enabling Technologies revenue was up 0.1% (-0.4% reported). Across these segments recent launches including the FAST-FIX◊ FLEX Meniscal Repair System and WEREWOLF FASTSEAL◊ 6.0 Hemostasis Wand are being well received. Revenue from ENT was up 33.0% (33.2% reported) driven by our tonsil and adenoid business as adult procedure volumes continued to recover from the impact of COVID.
Advanced Wound Management
Our Advanced Wound Management franchise delivered revenue growth of 2.4% (1.5% reported).
Advanced Wound Care revenue was up 0.7% (-0.7% reported) with sustained good growth in the US led by ALLEVYN◊ Life foam dressings offset by a slower quarter in Europe. Advanced Wound Bioactives revenue was up 4.5% (4.4% reported), with consistent growth from our enzymatic debrider SANTYL◊ and improved sequential growth from our skin substitute portfolio. Advanced Wound Devices revenue was up 3.4% (2.1% reported) driven by our PICO◊ Single Use Negative Pressure Wound Therapy System, particularly in the US.
Fourth Quarter Geographic Performance
Geographically, revenue from our Established Markets was down -1.2% (+0.3% reported). Within this, the US was down -0.4% (+2.8% reported) and Other Established Markets was down -2.4% (-3.9% reported). Emerging Markets revenue was up 8.0% (8.3% reported).
Full Year 2021 Consolidated Analysis
Smith+Nephew results for the year ended 31 December 2021:
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| $m | $m | % |
| Revenue | 5,212 | 4,560 | 14.3 |
| Operating profit | 593 | 295 | 101 |
| Acquisition and disposal related items | 7 | 4 |
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| Restructuring and rationalisation costs | 113 | 124 |
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| Amortisation and impairment of acquisition intangibles | 172 | 171 |
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| Legal and other | 51 | 89 |
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| Trading profit(i) | 936 | 683 | 37 |
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| Earnings per share ('EPS') | 59.8 | 51.3 | 17 |
| Acquisition and disposal related items | (8.8) | (0.1) |
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| Restructuring and rationalisation costs | 10.3 | 9.6 |
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| Amortisation and impairment of acquisition intangibles | 15.4 | 14.3 |
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| Legal and other | 4.2 | 5.7 |
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| UK tax litigation | - | (16.2) |
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| Adjusted Earnings per share ('EPSA')(i) | 80.9 | 64.6 | 25 |
(i) See Other Information on pages 33 to 36
Full Year 2021 Analysis
Our full year revenue was $5,212 million (2020: $4,560 million), up 14.3% on a reported basis including a foreign exchange tailwind of 210bps and 190bps benefit from acquisitions. Revenue was up 10.3% on an underlying basis.
The reported gross profit was $3,669 million (2020: $3,164 million). Gross margin improved from 69.4% to 70.4%. This reflects improved operating leverage from revenue growth partially offset by higher input costs, supply chain costs and channel adjustments ahead of China VBP implementation. The prior year also included the impact of COVID with lower gross margins resulting from factory underutilisation and an increase in inventory provisions.
The Group reported an operating profit of $593 million (2020: $295 million) after acquisition and disposal related items, restructuring and rationalisation costs, amortisation and impairment of acquisition intangibles and legal and other items incurred in the first half (see Other Information on pages 33 to 36).
Trading profit was $936 million (2020: $683 million), with a trading profit margin of 18.0% (2020: 15.0%). The margin expansion reflects improved trading compared to 2020, along with discretionary cost control resulting in positive leverage on both cost of goods sold and selling, general and administrative expense. Compared to pre-COVID levels, there were headwinds from higher logistics and freight costs, ongoing COVID-related negative leverage from fixed costs and China VBP. In addition, we have made clear strategic choices to invest in R&D, bolt-on acquisitions and new product launches.
Our Sports Medicine & ENT and Advanced Wound Management franchises delivered higher trading profit than 2020; with Advanced Wound Management also showing significant growth over 2019. The trading profit of our Orthopaedics franchise is below 2020 as a result of the headwinds noted above and our investment choices which impacted the trading profit margin in Orthopaedics proportionally more (see Note 2 to the Condensed Consolidated Financial Statements (Financial Statements) for further detail).
Restructuring costs, primarily related to the Operations and Commercial Excellence programme, totalled $113 million, with incremental benefits recognised of around $40 million.
The net interest charge within reported results was $74 million (2020: $56 million). The higher net interest charge reflects interest on the corporate bond issued in October 2020 and a full year of interest on the $550 million of private placement notes drawn in June 2020.
A $75 million (2020: $nil) gain on disposal of interest in associate was recorded in 2021 resulting from two dilution gains in the Group’s interest in Bioventus, which commenced trading on the Nasdaq Global Select Market on 11 February 2021 via its holding company, Bioventus Inc. (see Note 3 to the Financial Statements for further detail). This gain on disposal has been excluded from trading results (see Other Information on pages 33 to 36 for further detail).
Reported tax for the year to 31 December 2021 was a charge of $62 million (2020: credit of $202 million which reflected lower profits, the successful UK tax litigation outcome, and provision releases following tax audit closures). The tax rate on trading results for the year to 31 December 2021 was 17.2% (2020: 11.3% including a one-off benefit from the releases of tax provisions). (See Note 4 to the Financial Statements and Other Information on pages 33 to 36 for further details on taxation).
Adjusted earnings per share (‘EPSA’) was 80.9¢ (161.8¢ per ADS) (2020: 64.6¢). Basic earnings per share (‘EPS’) was 59.8¢ (119.6¢ per ADS) (2020: 51.3¢), reflecting restructuring costs, acquisition and disposal related items, amortisation and impairment of acquisition intangibles and legal and other items incurred.
Cash generated from operations was $1,048 million (2020: $972 million) and trading cash flow was $828 million (2020: $690 million) as we continued to invest in capital expenditure, including progressing changes to our manufacturing network (see Other Information on pages 33 to 36 for a reconciliation between cash generated from operations and trading cash flow). The trading profit to trading cash conversion ratio was 88% (2020: 101%).
At 31 December 2021, the Group had net debt of $1,852 million (excluding lease liabilities), compared to committed facilities of $4.1 billion (see Note 7 to the Financial Statements for a reconciliation of net debt). The leverage ratio was 1.6x (2020: 1.8x) (see Other Information on pages 33 to 36).
On 4 January 2021 the Group completed the acquisition of the Extremity Orthopaedics business of Integra LifeSciences Holdings Corporation for $236 million (see Note 6 to the Financial Statements for further detail). On 18 January 2022 the Group completed the acquisition of Engage Uni, LLC (doing business as Engage Surgical) for a provisional fair value of consideration of $132 million (see Note 10 to the Financial Statements for further detail).
Dividend
The Board is recommending a Final Dividend of 23.1¢ per share (46.2¢ per ADS). Together with the 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), unchanged from 2020 and 2019. Subject to confirmation at our Annual General Meeting, the Final Dividend will be paid on 11 May 2022 to shareholders on the register at the close of business on 1 April 2022.
Strategy for Growth
In December we announced our Strategy for Growth. Through this we will compound our outperformance in Advanced Wound Management and Sports Medicine & ENT, and regain momentum in Orthopaedics. Our ambition is to transform to a structurally higher growth company.
Our Strategy for Growth is based on three pillars.
- First we will Strengthen the foundations of Smith+Nephew. A solid base in commercial and manufacturing will enable us to serve customers sustainably and simply, and deliver the best from our core portfolio.
- Second, we will Accelerate our growth profitably, through more robust prioritisation of resources and investment, and with continuing customer focus.
- Third we will continue to Transform ourselves for higher long-term growth, through investment in innovation and acquisitions.
The Strategy for Growth will be delivered through the four key value builders of productivity, commercial execution, innovation and acquisitions.
Productivity
Our actions to drive productivity include optimising manufacturing and supply and driving ongoing commercial efficiencies through simplification.
We expect our industry to continue to be impacted by the widely reported global shortages of some raw materials and components, such as electronics. We are closely managing such supply issues on a case-by-case basis, and have simplified our processes to be more agile when additional supply becomes available. We are also stabilising the Smith+Nephew-specific supply-chain challenges.
Beyond this we are building long-term efficiency, including through the Operations and Commercial Excellence programme. The transfer to a specialist third-party logistics partner in Europe is complete, and Memphis is due to complete later this year. The new orthopaedics manufacturing facility in Malaysia is on track to supply ahead of our previous target of the end of 2022, and Costa Rica will shortly move to become a multi-franchise manufacturing facility. These changes will create a more efficient and more resilient network for supplying our customers.
In terms of efficiencies we are working to focus our commercial resources to better balance growth and margins. Smith+Nephew sells into more than 100 countries, but over 80% of revenue comes from the ten largest. Going forward global launches will focus more narrowly on the largest markets first. We also intend to simplify our portfolio, addressing multiple product lines serving the same clinical need as a result of previous acquisitions or legacy products in some categories. Through this we expect to reduce costs, simplify distribution and enable better control of inventory.
Commercial execution
Our actions to drive commercial execution are focused on maximising the value of our strong portfolio, where we already have leading technology across the franchises.
We have a successful track record to build on, including in Advanced Wound Management where we have returned the European business to growth despite the maturity of the market and competition from low-cost regional players.
In Sports Medicine & ENT ‘selling the procedure’ rather than individual products has already been a core part of our strategy and we intend to replicate that success in Orthopaedics. For instance the launch of our uncemented knee gives us a strong suite of primary and revision knee implants supported by enabling technologies.
Innovation
Our commitment to innovation is central to our Strategy for Growth. In recent years we have stepped up our level of investment in R&D from 4.7% of sales in 2017 to more than 6% in 2021.
In 2021 we launched multiple new products across the franchises and segments. In addition to the LEGION CONCELOC Cementless Total Knee System noted above, these included the SMART TSF◊ Circular Fixator introducing digital connectivity to our leading external fixation TAYLOR SPATIAL FRAME◊, the WEREWOLF FASTSEAL 6.0 Hemostasis Wand bringing our leading radio-frequency technology to orthopaedic reconstruction, the FAST-FIX FLEX Meniscal Repair System, building on our leading position in this segment, and new enabling technologies for our INTELLIO◊ Connected Tower Solution with the introduction of the DOUBLEFLO◊ Inflow/Outflow Pump and 4KO◊ (Optimised) Arthroscopes and Laparoscopes.
The delivery in 2021 reflects only the early positive impact of our increased R&D investment. From here, we intend to accelerate our business by launching flawlessly and to scale, and transform our longer-term outlook with investments in disruptive platform technologies with cross-franchise applications such as robotics, biologics and digital surgery.
Acquisitions
The final key value builder is acquisitions. Over recent years we have acquired assets that move a number of our segments to structurally higher growth potential, including adding the Osiris skin substitutes to Advanced Wound Bioactives, the Tula◊ System for in-office delivery of ear tubes to our ENT business, and an Extremity Orthopaedics business to Trauma. We will continue to use bolt-on acquisitions to enhance our portfolio and pipeline.
In January 2022 we acquired Engage Surgical, owner of the only cementless partial knee system commercially available in the US. This acquisition strongly supports our Strategy for Growth and gives us a unique position as the only company offering total and partial cemented and cementless knees in the US, our largest market. The partial knee market is currently worth approximately $300 million in the US (SmartTRAK) and is expected to grow faster than the total knee market and by around 4% per annum through 2029 (Millennium Research Group, Inc). We expect cementless partial knees will grow ahead of overall partial knees, in line with recent patterns seen in the total knee segment.
New commercial model
Changing customer and market dynamics have created new high-growth opportunities. To take advantage of these, in Q4 2021 we brought our surgical franchises under one leadership team mandated with driving excellence in execution and identifying efficiencies across the franchises. With this new approach we will build on our consistently strong performance in Sports Medicine & ENT and return our Orthopaedics franchise to a growth trajectory reflecting its strong portfolio.
Commitment to net zero
In September 2021 we announced our commitment to achieve net zero emissions across our operations globally by 2045. Our roadmap is to achieve net zero Scope 1 and Scope 2 greenhouse gas emissions (GHGs) by 2040 and Scope 3 GHGs by 2045. We are on track to achieve a 70% reduction in Scope 1 and Scope 2 GHGs by 2025 compared to a 2019 baseline.
Capital allocation framework
In December 2021 we also announced our updated capital allocation framework. This will support delivery of our strategy, whilst also maintaining greater balance sheet efficiency and shareholder returns.
Under the framework we will continue to invest in innovation, our sustainability agenda and in acquisitions. These are in line with our strategic goal to drive revenue, and are essential for the sustainable growth of earnings and free cash flow. We will do this while maintaining our current commitments to our equity and debt holders, with investment grade credit metrics, and continuing our progressive dividend policy.
Our confidence in our growth outlook and strong cash generation means that even after these investments and commitments we expect to have excess financing capacity. We have therefore made a new commitment to return the surplus to shareholders in the form of a regular annual buyback, expected to be between $250 million and $300 million in 2022.
Outlook
In December 2021 we announced a new mid-term financial performance commitment, targeting consistent 4-6% organic revenue growth by 2024, structurally ahead of historical levels, and rebuilding trading margin, targeting at least 21% by 2024 with further improvements thereafter. We will deliver this through our Strategy for Growth by improving productivity and commercial execution, launching new innovative products, and making successful bolt-on acquisitions, as described above.
2022 is an important stage in this journey.
For revenue, for 2022 we are targeting underlying growth of 4.0% to 5.0%. Within this, we expect Orthopaedics momentum to improve through the year, for our Sports Medicine & ENT franchise to again perform strongly including recovery in ENT, and for Advanced Wound Management to deliver growth against a strong comparator. On a reported basis the guidance equates to a range of around 2.6% to 3.6%, with a foreign exchange headwind of 140bps based on exchange rates prevailing on 11 February 2022. Our guidance assumes some ongoing impact from COVID, with Omicron a headwind in Q1 and the hospital staffing shortages likely to continue throughout the year. The global supply constraints are also likely to continue. We expect revenue growth to be stronger in the second half than the first half of 2022.
For trading profit margin we are targeting around 50bps of expansion in 2022. This will be driven by efficiencies from operating leverage and productivity and improvement in the margin of acquired assets that will more than offset significant anticipated headwinds of around 125bps from input cost inflation and around 60bps from China VBP implementation.
The tax rate on trading results for 2022 is forecast to be in the range of 17% to 18% subject to any material changes to tax law or other one-off items.
Forward calendar
The Q1 Trading Report will be released on 28 April 2022.
About Smith+Nephew
Smith+Nephew is a portfolio medical technology business focused on the repair, regeneration and replacement of soft and hard tissue. We exist 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 18,000 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, Sports Medicine & ENT and Advanced Wound Management.
Founded in Hull, UK, in 1856, we now operate in more than 100 countries, and generated annual sales of $5.2 billion in 2021. 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: risks related to the impact of COVID, such as the depth and longevity of its impact, government actions and other restrictive measures taken in response, material delays and cancellations of elective procedures, reduced procedure capacity at medical facilities, restricted access for sales representatives to medical facilities, or our ability to execute business continuity plans as a result of COVID; economic and financial conditions in the markets we serve, especially those affecting healthcare providers, payers and customers (including, without limitation, as a result of COVID); 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 (including, without limitation, as a result of COVID); 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; relationships with healthcare professionals; reliance on information technology and cyber security; 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.