REG - Smith & Nephew Plc - Half-year Report
01/08/2024 07:00
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RNS Number : 6846Y Smith & Nephew Plc 01 August 2024
Smith+Nephew Second Quarter and First Half 2024 Results
12-Point Plan driving first half revenue growth, trading margin expansion and
stronger cash flow. Full year guidance unchanged
1 August 2024
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology company,
reports results for the second quarter and first half ended 29 June 2024:
29 June 1 July Reported Underlying
2024 2023 growth growth
$m $m % %
Second Quarter Results(1,2)
Revenue 1,441 1,379 4.6 5.6
Half Year Results(1,2)
Revenue 2,827 2,734 3.4 4.3
Operating profit 328 275 19.5
Operating profit margin (%) 11.6 10.0
EPS (cents) 24.5 19.7 24.6
Trading profit 471 417 12.8
Trading profit margin (%) 16.7 15.3
EPSA (cents) 37.6 34.9 7.7
Q2 Trading Highlights(1,2)
· Q2 revenue of $1,441 million (Q2 2023: $1,379 million), up 5.6% (4.6%
on a reported basis including -100bps FX headwind)
· Orthopaedics revenue up 5.8% (4.9% reported), with good growth across
Hip and Knee Implants outside the US, Other Reconstruction and Trauma &
Extremities; further progress in addressing performance in US Hip and Knee
Implants
· Sports Medicine & ENT up 7.6% (6.3% reported), with strong growth
across all segments; continued headwind from China sports medicine VBP
· Advanced Wound Management up 3.3% (2.3% reported), returning to
growth with all segments contributing
H1 Highlights(1,2)
· H1 revenue of $2,827 million (H1 2023: $2,734 million), up 4.3% (3.4%
on a reported basis including -90bps FX headwind)
· Operating profit of $328 million (H1 2023: $275 million), up 19.5%
reported
· Trading profit up 12.8% to $471 million (H1 2023: $417 million)
· Trading profit margin expansion to 16.7% (H1 2023: 15.3%), around the
top of our guided range, reflecting positive operating leverage and 12-Point
Plan benefits
· Cash generated from operations $368 million (H1 2023: $215 million)
· Significant improvement in trading cash flow conversion at 60% (H1
2023: 26%), trading cash flow increased to $284 million (H1 2023: $110
million)
· Adjusted earnings per share ('EPSA') up 7.7% to 37.6¢ (H1 2023:
34.9¢). Basic earnings per share ('EPS') was 24.5¢ (H1 2023: 19.7¢)
· Interim dividend of 14.4¢, in line with prior year
Outlook(1,2)
· 2024 guidance unchanged: underlying revenue growth expected in the
range of 5.0% to 6.0% (4.4% to 5.4% reported), and trading profit margin
expected to be at least 18.0%
· Midterm targets unchanged
Strategic Highlights(1,2)
· 12-Point Plan benefits driving improved financial performance:
o Orthopaedics turnaround delivering strong results across Trauma &
Extremities, Other Reconstruction and Hip and Knee Implants outside of the US.
Performance from Hip and Knee Implants in the US expected to improve through
the second half of 2024
o Productivity improvements supporting trading margin expansion; further
savings identified
o Advanced Wound Management and Sports Medicine & ENT on track for
another year of strong growth
· Sustained high cadence of new product launches to drive future higher
growth
Deepak Nath, Chief Executive Officer, said:
"Today's results are further evidence of the good progress we are making
transforming Smith+Nephew into a higher growth and more profitable business.
"Across the majority of Orthopaedics, which was our underperforming business
unit, we are now consistently achieving growth rates well above historical
levels. The methods we employed in achieving these successes give me
confidence that we will also turn around US Hip and Knee Implants and we
expect to see a step up through the second half of the year.
"Our investment in innovation continues to deliver. In the first half of 2024,
we delivered several major launches and product enhancements. For example, we
continued to expand our CORI(◊) Surgical System, which is now a recognised
leader in robotics-assisted surgery. We also achieved full commercial launch
of our AETOS(◊) Shoulder System, addressing one of the fastest growing
segments in Orthopaedics, and US regulatory approval for our new
CATALYSTEM(◊) Hip System.
"Our progress is also showing through in our double-digit trading profit
growth and margin expansion, driven by positive operating leverage and
efficiency initiatives. I am pleased to see this profit growth translate into
cash flow, with our first-half trading cash flow up more than 150%
year-on-year.
"Our guidance for the full year remains unchanged. There is still more work to
be done and we expect to see further progress in the second half of the year."
Analyst conference call
An analyst conference call to discuss Smith+Nephew's second quarter and first
half results will be held today at 8.30am BST / 3.30am EDT, details of which
are available on the Smith+Nephew website at
https://www.smith-nephew.com/en/who-we-are/investors
(https://www.smith-nephew.com/en/who-we-are/investors) .
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 2023 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. See Other Information on
pages 33 to 37 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 33 to 37 and are
reconciled to the most directly comparable financial measures prepared in
accordance with IFRS. Reported results represent IFRS financial measures as
shown in the Condensed Consolidated Interim Financial Statements.
Smith+Nephew Second Quarter Trading and First Half 2024 Results
Stepping up performance and meeting our commitments
Smith+Nephew delivered second quarter revenue of $1,441 million (Q2 2023:
$1,379 million), up 5.6% on an underlying basis. On a reported basis, revenue
growth was 4.6%, including a translational foreign exchange headwind of
-100bps. Our second quarter trading performance improved from the first
quarter, as expected, with positive growth across all three business units.
First half revenue was $2,827 million (H1 2023: $2,734 million), up 4.3% on an
underlying basis, and 3.4% on a reported basis including a translational
foreign exchange headwind of -90bps.
Trading profit for the first half was up 12.8% on a reported basis to $471
million
(H1 2023: $417 million). The trading profit margin expansion to 16.7% (H1
2023: 15.3%) was around the top end of our guided range, driven by positive
operating leverage and 12-Point Plan productivity improvements. The operating
profit was $328 million (H1 2023: $275 million). Cash generated from
operations was $368 million (H1 2023: $215 million) and trading cash flow
increased to $284 million (H1 2023: $110 million), with 60% trading cash
conversion (H1 2023: 26%). This is a significant improvement on the prior
year, and trading cash conversion is expected to return to historical levels
of around 85% for the full year.
12-Point Plan driving improved performance
In 2022, we announced our 12-Point Plan to fundamentally change the way we
operate and transform business performance. We continue to make significant
progress across our workstreams, which is translating into improved financial
performance, with more benefits expected to come through in the second half of
2024 and beyond.
The first area of focus for the 12-Point Plan is fixing Orthopaedics, to
regain momentum across hip and knee implants, robotics and trauma, and win
share with our differentiated technology.
Progress has been made in the key areas that had been holding back
performance. We had dramatically improved implant availability by the end of
2023 and, by the end of the second quarter of 2024, instrument set
availability as well. Both were far below industry standards at the start of
the 12-Point Plan, and are now at or above target levels. We are confident
that we are on the right path to reduce Days Sales of Inventory (DSI), and
after an initial build-up of inventory to support product launches in the
early part of 2024, we were starting to see DSI reduce as we exited the first
half.
In terms of commercial execution, we have turned around our Trauma business,
which is now a significant growth driver built upon our new EVOS(◊) Plating
System, and we have entered a high growth category in Orthopaedics with the
launch of the AETOS Shoulder System. We have strengthened our position in
robotics, growing the installed base, including a record quarter of US sales
in the second quarter across a wide customer base, including academic medical
centres and Ambulatory Surgery Centers (ASCs). We have also made significant
progress simplifying our portfolio, with a third of our global hip and knee
brands now phased out.
As a result of the 12-Point Plan, we are now delivering higher growth from our
Orthopaedics business unit, driven by reconstruction outside of the US,
robotics and Trauma.
The improvement has been slower to come through in the US but there are
encouraging signs of progress. The new leadership, appointed at the end of the
first quarter, has proven US commercial turnaround experience. Customer
service and satisfaction have improved, new growth-orientated incentive plans
have been rolled out and employee turnover has returned to low-levels.
Important key product launches have been delivered, including ten new features
on our CORI Surgical System since 2022. We are confident that this last
remaining underperforming area of the business, representing around 15% of the
Group as a whole, is set to deliver an improving performance through the
second half of 2024.
The second area of focus for the 12-Point Plan is improving productivity, to
support trading profit margin expansion.
Since the start of the plan, we have driven portfolio pricing and made
significant procurement savings to help mitigate cost inflation. Our
manufacturing optimisation workstream is progressing, with the benefits from
network simplification and cost and asset efficiencies expected to support our
mid-term margin improvement targets. Our drive to reduce conversion cost,
which is total direct and indirect cost to convert raw materials into finished
goods as a percentage of sales, is ahead of target. From a network perspective
we are reducing excess capacity, having announced the closure of four smaller
orthopaedics facilities.
Our progress across these workstreams has been solid, contributing around
160bps to our 2023 full year trading profit margin and around 190bps to the
2024 first half trading profit margin, offsetting significant margin headwinds
including from inflation and China VBP.
We continue to seek opportunities to make our business more efficient,
offsetting ongoing margin headwinds such as persistent inflation, foreign
exchange movements and China VBP. Building on the existing work of the
12-Point Plan, we have identified further saving opportunities. Including the
initial $200 million of 12-Point Plan savings announced in 2023, total saving
opportunities are now between $325 million and $375 million, phased from 2023
through to 2027. These savings are across all areas of our business, from
manufacturing and procurement to warehouse and distribution, to business
support and sales and marketing. There are over 40 initiatives, across seven
workstreams, embedded into our future plans. These savings initiatives will
contribute to delivering our commitment to expanding our trading profit margin
in 2024 and 2025.
The third and final area of focus for the 12-Point Plan is further
accelerating growth in our already well-performing Advanced Wound Management
and Sports Medicine & ENT business units. These businesses, which together
represent around 60% of Group revenue, have multi-year track records of market
out-performance.
Through the 12-Point Plan we have brought additional resource to support
expansion of our Negative Pressure Wound Therapy business, and delivered a
major new platform in RENASYS(◊) EDGE.
We have also accelerated cross-business unit deals between our Orthopaedics
and Sports Medicine businesses. Under the 12-Point Plan we have developed a
coordinated approach overseen by a dedicated strategic sales team targeting
ASCs. The pace of cross division deals has more than trebled since 2022, and
the total number of deals closed in the first half was ahead of our target.
In July we announced an exclusive partnership with Healthcare Outcomes
Performance Company (HOPCo), a leader in musculoskeletal (MSK) value-based
care and outcomes management to support ASC customers across our Orthopaedic
and Sports Medicine businesses with digital health and AI-powered analytics
platforms. Planned integration with intraoperative data from our CORI Surgical
System will provide surgeons and healthcare providers with enhanced analytics
enabling personalised surgical planning, intra-operative decision-making, and
PROMS tracking and optimisation.
Improving organisational effectiveness
In 2023, we reorganised our global commercial operating model around our three
business units of Orthopaedics, Sports Medicine & ENT, and Advanced Wound
Management in order to drive more agile decision making and greater
accountability. We have started to see the benefits of this move.
Annual central corporate costs in 2023, covering Finance, IT, Human
Resources, Global Business Services and Legal (as well as other central
departments), were $403 million. Following the reorganisation, from the second
half of 2024 central costs directly attributable to business units will be
directly allocated to each business unit, with the objective of driving
greater business unit accountability and efficiency. A small proportion of the
corporate costs will continue to be held centrally, reflecting the centralised
infrastructure required to support the Group and run a public limited
company.
Sustaining our high cadence of innovation
Our investment in innovation is another major driver of our sustained higher
revenue growth. In 2023 almost half of our growth came from products launched
in the last five years. In the first half of 2024 we continued to expand our
portfolio with major new platforms and product enhancements that address unmet
clinical needs and support our higher growth ambitions.
In Orthopaedics, we continued to expand our portfolio, including new implant
systems for hips and shoulder, and building out our robotics-assisted CORI
Surgical System.
We announced 510(k) clearance for the CATALYSTEM Primary Hip System. The
system is designed to address the evolving demands of primary hip surgery
including the increased adoption of anterior approach procedures and the
expanding role of ASCs. Commercial launch is scheduled for the second half of
2024.
We announced new CORIOGRAPH(◊) Pre-Operative Planning and Modeling Services,
making CORI the only orthopaedic robotic-assisted system to offer either
intraoperative image-free or image-based registration for knee implants,
enabling the surgeon to choose whether or not to perform a pre-operative MRI
scan. This is one of a number of distinct features for CORI, including
supporting revision knee procedures and offering both burr and saw cutting
options.
We moved to full commercial launch of the AETOS Shoulder System in the US, and
announced 510(k) clearance for its use with ATLASPLAN(◊) 3D Planning
Software and Patient Specific Instrumentation for total shoulder arthroplasty.
AETOS will enable Smith+Nephew to compete effectively in the $1.7 billion
shoulder market, which, at around 9% CAGR, is one of the fastest growing
segments in Orthopaedics.
In Sports Medicine, we completed the acquisition of CartiHeal, the developer
of the CARTIHEAL AGILI-C(◊) Cartilage Repair Implant, a novel sports
medicine technology for cartilage regeneration in the knee. The integration of
the CARTIHEAL AGILI-C business is on track, including progress across sales
force training, medical education and reimbursement.
We continue to invest behind our Arthroscopic Enabling Technology. During the
second quarter we introduced the INTELLIO(◊) SHIFT System, which combines
our leading COBLATION(◊) and DYONICS(◊) resection technologies into a
single controller and a multifunctional foot pedal, simplifying the operating
room experience for surgeons. We also launched an updated INTELLIO cart,
updated software for the INTELLIO Tablet, which serves as both a control
device and image storage for the INTELLIO Tower, and introduced the EVO(◊)
4K Image Management System.
In ENT, we launched the ARIS(◊) COBLATION Turbinate Reduction Wand. This
utilises Smith+Nephew's advanced COBLATION Plasma Technology to provide a
minimally invasive way to reduce hypertrophic turbinates, a condition that
requires 350,000 procedures per annum in the US.
In Advanced Wound Management, we launched the RENASYS EDGE Negative Pressure
Wound Therapy System. This is designed to reduce inefficiency and complexity
and features an improved user interface for enhanced intuitiveness and
simplicity and a durable pump built to offer virtually maintenance-free use.
The launch commenced in the US and will be expanded to Europe in the second
half.
We also continued our high cadence of incremental innovation in skin
substitutes, with the launch of GRAFIX(◊) PLUS in the second quarter, an
easier-to-handle new version in our lead product family, targeting the growing
post-acute market.
Second quarter 2024 trading update
Our second quarter revenue was $1,441 million (Q2 2023: $1,379 million), up
5.6% year-on-year on an underlying basis. On a reported basis this represented
growth of 4.6%, including a translational -100bps headwind from foreign
exchange (primarily due to the strength of the US Dollar). The second quarter
comprised 64 trading days, one more than the equivalent period in 2023.
Consolidated revenue analysis for the second quarter
29 June 1 July Reported Underlying Acquisitions Currency
2024 2023 growth growth((i)) /disposals impact
Consolidated revenue by business unit by product $m $m % % % %
Orthopaedics 581 554 4.9 5.8 - (0.9)
Knee Implants 240 238 1.0 2.1 - (1.1)
Hip Implants 156 152 2.8 4.0 - (1.2)
Other Reconstruction((ii)) 32 27 17.1 17.8 - (0.7)
Trauma & Extremities 153 137 11.4 11.8 - (0.4)
Sports Medicine & ENT 448 422 6.3 7.6 - (1.3)
Sports Medicine Joint Repair 239 229 4.7 6.0 - (1.3)
Arthroscopic Enabling Technologies 155 145 7.3 8.7 - (1.4)
ENT (Ear, Nose and Throat) 54 48 10.8 11.6 - (0.8)
Advanced Wound Management 412 403 2.3 3.3 - (1.0)
Advanced Wound Care 183 181 1.6 3.0 - (1.4)
Advanced Wound Bioactives 139 138 0.7 0.7 - -
Advanced Wound Devices 90 84 6.6 8.0 - (1.4)
Total 1,441 1,379 4.6 5.6 - (1.0)
Consolidated revenue by geography
US 760 734 3.6 3.6 - -
Other Established Markets((iii)) 421 403 4.4 6.9 - (2.5)
Total Established Markets 1,181 1,137 3.9 4.8 - (0.9)
Emerging Markets 260 242 7.6 9.5 - (1.9)
Total 1,441 1,379 4.6 5.6 - (1.0)
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint
reconstruction business and cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
Orthopaedics
Revenue from our Orthopaedics business unit was up 5.8% (4.9% reported) in the
second quarter, driven by our actions to improve operational performance.
Knee Implants grew 2.1% (1.0% reported) and Hip Implants grew 4.0% underlying
(2.8% reported).
In Knee Implants, growth was driven by our cementless, revision and partial
knee systems and Hip growth was led by our POLAR3(◊) Total Hip Solution and
R3(◊) Acetabular System.
We continue to deliver strong growth outside of the US across both segments,
even against tougher comparative periods, with underlying growth of 6.6% in
Knee Implants and 7.7% in Hip Implants in the second quarter. In the US, Knees
declined
-1.7% while Hips returned to growth, up 1.0%. As stated above, we have made
good progress with the remaining operational and commercial challenges in the
US and expect performance to improve through the second half of the year.
Other Reconstruction revenue growth was 17.8% (17.1% reported), led by the
strongest quarter of US sales yet from our robotics-assisted CORI Surgical
System, including into both academic medical centres and ASCs.
Trauma & Extremities revenue growth was 11.8% (11.4% reported), with
double-digit growth in the US led by the EVOS Plating System. The launch of
the new AETOS Shoulder System is progressing well.
Sports Medicine & ENT
Sports Medicine & ENT delivered revenue growth of 7.6% (6.3% reported).
Excluding China, Sports Medicine & ENT grew 11.0% on an underlying basis
(9.9% reported). Here the sector faces a headwind from the Volume Based
Procurement (VBP) programme in China, which commenced in May 2024, with 29 of
31 Provinces having implemented by quarter end. We expect the VBP headwind to
persist throughout the second half of the year.
Sports Medicine Joint Repair revenue was up 6.0% (4.7% reported) with good
growth across our knee repair portfolio and strong double-digit growth from
our REGENETEN(◊) Bioinductive Implant. Excluding China, Sports Medicine
Joint Repair grew 11.8% underlying (10.7% reported).
Arthroscopic Enabling Technologies revenue grew 8.7% (7.3% reported), driven
by our WEREWOLF(◊) FASTSEAL COBLATION system fluid management, and better
video capital sales on improved third-party supply, as expected.
ENT revenue was up 11.6% (10.8% reported), reflecting strong tonsil and
adenoid procedure volumes.
Advanced Wound Management
Advanced Wound Management revenue growth was 3.3% (2.3% reported).
Advanced Wound Care revenue was up 3.0% (1.6% reported), including good growth
from our foams and infection management portfolios and a strong quarter in the
Middle East and Emerging Markets.
Advanced Wound Bioactives revenue was up 0.7% (0.7% reported). Growth came
from a sequential recovery in SANTYL(◊), along with a more normalised prior
year comparator. As previously stated, quarter-to-quarter variability has been
a long-term feature of SANTYL, and we expect further improvement for the rest
of the year. Offsetting SANTYL was a slower second quarter for skin substitute
product GRAFIX, ahead of the launch of GRAFIX PLUS.
Advanced Wound Devices revenue was up 8.0% (6.6% reported), led by strong
growth from our single-use PICO(◊) Negative Pressure Wound Therapy System,
LEAF(◊) Patient Monitoring System and VERSAJET(◊) Hydrosurgery System.
Growth by Region
Revenue growth in our Established Markets was up 4.8% (3.9% reported). Within
this, the US delivered 3.6% revenue growth (3.6% reported) and Other
Established Markets 6.9% revenue growth (4.4% reported). Emerging Markets
revenue was up 9.5% (7.6% reported), with strong double-digit growth across
the Middle East, India and Latin America.
First Half 2024 Consolidated Analysis
Smith+Nephew results for the first half ended 29 June 2024:
Half year Half year Reported
2024 2023 growth
$m $m %
Revenue 2,827 2,734 3.4
Operating profit 328 275 19.5
Acquisition and disposal related items - (17)
Restructuring and rationalisation costs 62 46
Amortisation and impairment of acquisition intangibles 87 102
Legal and other (6) 11
Trading profit((i)) 471 417 12.8
¢ ¢
Earnings per share ('EPS') 24.5 19.7
Acquisition and disposal related items 0.2 0.1
Restructuring and rationalisation costs 5.8 4.6
Amortisation and impairment of acquisition intangibles 7.8 9.1
Legal and other (0.7) 1.4
Adjusted Earnings per share ('EPSA')((i)) 37.6 34.9 7.7
(i) See Other Information on pages 33 to 37
First Half 2024 Analysis
Our first half revenue was $2,827 million (H1 2023: $2,734 million), up 4.3%
on an underlying basis and up 3.4% on a reported basis, including a
translational foreign exchange headwind of -90bps. The first half comprised
127 trading days, in line with the equivalent period in 2023.
Operating profit was $328 million (H1 2023: $275 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 37).
Trading profit for the first half was up 12.8% on a reported basis to $471
million (H1 2023: $417 million). The trading profit margin strengthened by
140bps to 16.7% (H1 2023: 15.3%), driven by positive operating leverage from
revenue growth and productivity improvements and cost saving initiatives from
the 12-Point Plan which more than offset headwinds from continuing inflation,
China VBP within Sports Medicine Joint Repair, transactional foreign exchange
and the acquisition of CartiHeal (see Note 2 to the Interim Financial
Statements for global business unit trading profit).
Restructuring costs related to the efficiency and productivity work underway
across the Group totalled $62 million (see Note 2 to the Interim Financial
Statements). Going forward, and beyond the guided total restructuring costs of
around $275 million associated with the 12-Point Plan, restructuring costs are
anticipated to be significantly lower.
The business is increasingly focused on cash and working capital improvement.
Cash generated from operations was $368 million (H1 2023: $215 million) and
trading cash flow was $284 million (H1 2023: $110 million), with the year on
year increase primarily driven by favourable working capital movement (see
Other Information on pages 33 to 37 for a reconciliation between cash
generated from operations and trading cash flow). The trading profit to cash
conversion ratio was 60% in the first half, significantly better than the
prior year period (H1 2023: 26%), and is expected to return to historical
levels of around 85% for the full year due to the expected continued
improvement in working capital. Free cash flow of $39 million (H1 2023:
outflow of $82m) reflects the better trading cash conversion, partially offset
by restructuring costs related to the 12-Point Plan.
Of particular focus is our work on inventory. After an initial build-up of
inventory to support product launches in the early part of the year, we are
starting to see DSI across Orthopaedics and Advanced Wound Management reduce,
and stabilise in Sports Medicine & ENT. In particular, our overall
'Inventory Health' is improving, with a significant reduction in the number of
units of slow-moving SKUs in Orthopaedics, by around 9% since the start of
2024. Our improved Sales, Inventory and Operations Planning process,
introduced in 2023 as part of the 12-Point Plan, has been an important enabler
of this reduction.
There remains a significant amount of work to do to reduce inventory levels
and given this and the relatively slow churn of some products, reduction in
absolute inventory levels will take time. Nonetheless, we expect to see a
material reduction in our DSI by 10-15% by year-end, with absolute inventory
levels being slightly down year-on-year.
The net interest charge within reported results was $61 million (H1 2023: $44
million), with the change due to an increase in net debt year on year and an
increase in the overall weighted average interest rate given the prevailing
higher rate environment. The Group's net debt, including lease liabilities,
increased from $2,776 million at 31 December 2023 to $3,086 million at 29 June
2024 mainly due to the CartiHeal acquisition of around $180 million and
payment of the final dividend ($202 million), partially netted off by free
cash flow generated of $39 million (see Note 6 to the Interim Financial
Statements), with committed facilities of $4.5 billion. The net debt to
adjusted EBITDA ratio at the half year was 2.2x. We expect this ratio to be
around 2.0x at year-end.
Our reported tax for the period ended 29 June 2024 was a charge of $39 million
(H1 2023: $39 million). The first half tax rate on trading results of 17.8%
(H1 2023: 17.4%) was calculated using full year projections, applied to
trading profits for the first half and includes non-recurring tax credits
arising in this period. The applicable rate of corporate income tax has been
applied to the actual non-trading items in the period on an item-by-item
basis. See Note 3 to the Interim Financial Statements and Other Information on
pages 33 to 37 for further details on taxation.
Basic earnings per share ('EPS') was 24.5¢ (49.0¢ per ADS) (H1 2023: 19.7¢
per share). Adjusted earnings per share ('EPSA') was 37.6¢ (75.2¢ per ADS)
(H1 2023: 34.9¢ per share).
Interim Dividend
The interim dividend is 14.4¢ per share (28.8¢ per ADS), in line with
2023. This dividend is payable on 8 November 2024 to shareholders whose names
appear on the register at the close of business on 4 October 2024 (see Note 4
to the Interim Financial Statements for further detail).
Capital Allocation Framework
Reflecting the progress made under the 12-Point Plan and the improving outlook
for the Group, we are today announcing an updated Capital Allocation
Framework, which we use to prioritise the use of cash and inform our
investment decisions.
Our first priority remains investing in the business to drive organic growth
and meet our sustainability targets.
There is increasing visibility and focus on improving our Return on Invested
Capital (ROIC) at the business unit level through allocation of central costs
and our drive to improve working capital. In particular, there is an
opportunity to improve ROIC for our Orthopaedics business unit, hence
improving ROIC at a Group level. We anticipate improved returns year-on-year
at the end of 2024, with more to come in 2025 and beyond. We will continue to
prioritise investment in those areas where we expect to see the highest
incremental returns on invested capital.
The second priority is also unchanged, and is to invest in acquisitions,
targeting new technologies in high growth segments with strong strategic fit
that meet our financial criteria.
Our first two priorities will ensure continued investment in innovation and
sustained higher revenue growth.
The third priority is to maintain an optimal balance sheet and appropriate
dividend. Here we will continue to target investment grade credit ratings. We
are updating our target leverage ratio to around 2x net debt to adjusted
EBITDA (previously 2.0x to 2.5x). We have a progressive dividend policy and
from 2025 onwards we expect a payout of around 35% to 40% of EPSA. The interim
payment will be 40% of the prior full year. We expect the 2024 total dividend
to be flat year-on-year.
Our final priority remains to return any surplus capital to shareholders, via
a share buyback subject to the above balance sheet metrics.
Outlook
Our guidance for 2024 is unchanged.
For revenue, we expect to deliver another year of strong growth in the range
of 5.0% to 6.0% underlying. On a reported basis the guidance equates to a
range of around 4.4% to 5.4% based on exchange rates prevailing on 26 July
2024.
We expect higher revenue growth in the second half than the first. Within
this, we expect a stronger second half from Orthopaedics, underpinned by an
improvement in US Hip and Knee Implants. We expect Sports Medicine to continue
to deliver strong growth outside of China, with VBP remaining a headwind. ENT
growth will reflect a strong H2 2023 comparator. We expect an improvement in
Advanced Wound Management with further growth recovery from Advanced Wound
Bioactives. In terms of phasing, there are two additional trading days in the
fourth quarter over the same prior year period, albeit we expect the impact of
these additional days to be less than proportionate given their timing.
We expect to expand our trading profit margin to at least 18.0%. Within this,
headwinds include continuing inflation, a -70bps impact from China VBP within
Sports Medicine Joint Repair, and around -50bps from foreign exchange, plus a
small impact from the acquisition of CartiHeal. We expect to more than offset
these headwinds through positive operating leverage from revenue growth and
productivity improvements and cost saving initiatives from the 12-Point Plan.
As in prior years, we expect the trading profit margin to be higher in the
second half than in the first half, although with a less marked step up than
in 2023.
The tax rate on trading results for 2024 is forecast to be in the range of 19%
to 20%, subject to any material changes to tax law or other one-off items.
Midterm targets
Our midterm targets are unchanged. The Group is focused on delivering
underlying revenue growth of consistently 5%+ and expanding our trading profit
margin.
We continue to target at least 20% trading profit margin in 2025. While
headwinds such as persistent inflation, foreign exchange movements and China
VBP in Sports Medicine Joint Repair make that a demanding target, we do expect
to see an increasing impact from the 12-Point Plan, including the benefits of
our manufacturing optimisation programme and other productivity improvements,
which are expected to flow through in 2025.
Forward calendar
The Q3 Trading Report will be released on 31 October 2024.
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 business units 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 $5.5 billion in 2023. 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
(http://www.smith-nephew.com/) and follow us on X
(http://www.twitter.com/smithnephewplc) , LinkedIn
(http://www.linkedin.com/company/smith-%26-nephew) , Instagram
(https://www.instagram.com/smithnephewmeded/) or Facebook
(http://www.facebook.com/smithnephewplc) .
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 profit 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: conflicts in Europe and
the Middle East, economic and financial conditions in the markets we serve,
especially those affecting healthcare 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 and financial 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 disposals, 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
cybersecurity; disruptions due to natural disasters, weather and climate
change related events; changes in customer and other stakeholder
sustainability expectations; changes in taxation regulations; effects of
foreign exchange volatility; 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, which is available on the SEC's website at www. sec.gov,
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 in US Patent and
Trademark Office.
Consolidated revenue analysis for the first half
29 June 1 July Reported Underlying Acquisitions Currency
2024 2023 growth Growth((i)) /disposals impact
Consolidated revenue by business unit by product $m $m % % % %
Orthopaedics 1,149 1,102 4.2 5.1 - (0.9)
Knee Implants 480 475 1.0 1.9 - (0.9)
Hip Implants 311 303 2.4 3.7 - (1.3)
Other Reconstruction((ii)) 59 51 17.2 17.9 - (0.7)
Trauma & Extremities 299 273 9.4 9.8 - (0.4)
Sports Medicine & ENT 888 843 5.4 6.5 - (1.1)
Sports Medicine Joint Repair 483 457 5.8 6.9 - (1.1)
Arthroscopic Enabling Technologies 304 293 3.6 4.8 - (1.2)
ENT (Ear, Nose and Throat) 101 93 9.4 10.4 - (1.0)
Advanced Wound Management 790 789 0.1 0.7 - (0.6)
Advanced Wound Care 357 356 0.3 1.3 - (1.0)
Advanced Wound Bioactives 262 274 (4.5) (4.5) - -
Advanced Wound Devices 171 159 7.3 8.3 - (1.0)
Total 2,827 2,734 3.4 4.3 - (0.9)
Consolidated revenue by geography
US 1,493 1,471 1.5 1.5 - -
Other Established Markets((iii)) 841 807 4.2 5.8 - (1.6)
Total Established Markets 2,334 2,278 2.5 3.0 - (0.5)
Emerging Markets 493 456 8.0 10.5 - (2.5)
Total 2,827 2,734 3.4 4.3 - (0.9)
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint
reconstruction business and cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
2024 HALF YEAR CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Unaudited Group Income Statement for the Half Year ended 29 June 2024
Half year Half year
2024 2023
Notes $m $m
Revenue 2 2,827 2,734
Cost of goods sold (853) (836)
Gross profit 1,974 1,898
Selling, general and administrative expenses (1,509) (1,457)
Research and development expenses (137) (166)
Operating profit 2 328 275
Interest income 9 18
Interest expense (70) (62)
Other finance costs (12) -
Share of results of associates (2) (20)
Profit before taxation 253 211
Taxation 3 (39) (39)
Attributable profit(A) 214 172
Earnings per share(A)
Basic 24.5 19.7
Diluted 24.5 19.7
Unaudited Group Statement of Comprehensive Income for the Half Year ended 29
June 2024
Half year Half year
2024 2023
$m $m
Attributable profit(A) 214 172
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 9 (61)
Taxation on other comprehensive income (2) 17
Total items that will not be reclassified to income statement 7 (44)
Items that may be reclassified subsequently to income statement
Cash flow hedges - forward exchange contracts
Gains arising in the period 33 27
Gains reclassified to income statement in the period (18) (15)
Exchange differences on translation of foreign operations (82) 27
Net investment hedge 17 (11)
Taxation on other comprehensive income (2) (2)
Total items that may be reclassified subsequently to income statement (52) 26
Other comprehensive loss for the period, net of taxation (45) (18)
Total comprehensive income for the period(A) 169 154
A Attributable to the equity holders of the parent and wholly derived
from continuing operations.
Unaudited Group Balance Sheet as at 29 June 2024
29 June 31 December 1 July
2024 2023 2023
Notes $m $m $m
ASSETS
Non-current assets
Property, plant and equipment 1,441 1,470 1,421
Goodwill 3,104 2,992 3,049
Intangible assets 1,112 1,110 1,180
Investments 9 8 8
Investment in associates 15 16 27
Other non-current assets 17 18 9
Retirement benefit assets 67 69 84
Deferred tax assets 319 274 188
6,084 5,957 5,966
Current assets
Inventories 2,491 2,395 2,411
Trade and other receivables 1,355 1,300 1,269
Current tax receivable 44 33 8
Cash at bank 6 568 302 190
4,458 4,030 3,878
TOTAL ASSETS 10,542 9,987 9,844
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 175 175 175
Share premium 615 615 615
Capital redemption reserve 20 20 20
Treasury shares (82) (94) (107)
Other reserves (457) (405) (433)
Retained earnings 4,934 4,906 4,963
Total equity 5,205 5,217 5,233
Non-current liabilities
Long-term borrowings and lease liabilities 6 3,275 2,319 2,633
Retirement benefit obligations 82 88 67
Other payables 96 35 49
Provisions 71 48 88
Deferred tax liabilities 36 9 7
3,560 2,499 2,844
Current liabilities
Bank overdrafts, borrowings and lease liabilities 6 380 765 407
Trade and other payables 1,024 1,055 955
Provisions 152 233 219
Current tax payable 221 218 186
1,777 2,271 1,767
Total liabilities 5,337 4,770 4,611
TOTAL EQUITY AND LIABILITIES 10,542 9,987 9,844
Unaudited Group Cash Flow Statement for the Half Year ended 29 June 2024
Half year Half year
2024 2023
$m $m
Cash flows from operating activities
Profit before taxation 253 211
Net interest expense 61 44
Depreciation, amortisation and impairment 273 286
Loss on disposal of property, plant and equipment and software 6 11
Share-based payments expense (equity-settled) 20 19
Share of results of associates 2 20
Net movement in post-retirement obligations 7 (3)
Increase in inventories (119) (204)
(Increase)/decrease in trade and other receivables (44) 3
Decrease in trade and other payables and provisions (91) (172)
Cash generated from operations 368 215
Interest received 6 6
Interest paid (65) (45)
Income taxes paid (71) (63)
Net cash inflow from operating activities 238 113
Cash flows from investing activities
Acquisitions, net of cash acquired (186) (15)
Capital expenditure (172) (167)
Purchase of investments (1) -
Investment in associates (1) -
Net cash used in investing activities (360) (182)
Net cash outflow before financing activities (122) (69)
Cash flows from financing activities
Payment of capital element of lease liabilities (27) (28)
Proceeds from borrowings due within one year - 146
Settlement of borrowings due within one year (400) -
Proceeds from borrowings due after one year 1,000 -
Proceeds from own shares 1 1
Settlement of currency swaps - (4)
Equity dividends paid (202) (201)
Net cash inflow/(outflow) from financing activities 372 (86)
Net increase/(decrease) in cash and cash equivalents 250 (155)
Cash and cash equivalents at beginning of year 300 344
Exchange adjustments (5) (6)
Cash and cash equivalents at end of period(B) 545 183
B Cash and cash equivalents at the end of the period are net of
overdrafts of $23m (1 July 2023: $7m).
Unaudited Group Statement of Changes in Equity for the Half Year ended 29 June
2024
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves(C) earnings(D) equity
$m $m $m $m $m $m $m
At 1 January 2024 175 615 20 (94) (405) 4,906 5,217
Attributable profit(A) - - - - - 214 214
Other comprehensive income(A) - - - - (52) 7 (45)
Equity dividends paid - - - - - (202) (202)
Share-based payments recognised - - - - - 20 20
Cost of shares transferred to beneficiaries - - - 12 - (11) 1
At 29 June 2024 175 615 20 (82) (457) 4,934 5,205
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves(C) earnings(D) equity
$m $m $m $m $m $m $m
At 1 January 2023 175 615 20 (118) (459) 5,026 5,259
Attributable profit(A) - - - - - 172 172
Other comprehensive income(A) - - - - 26 (44) (18)
Equity dividends paid - - - - - (201) (201)
Share-based payments recognised - - - - - 19 19
Taxation on share-based payments - - - - - 1 1
Cost of shares transferred to beneficiaries - - - 11 - (10) 1
At 1 July 2023 175 615 20 (107) (433) 4,963 5,233
A Attributable to the equity holders of the parent and wholly derived from
continuing operations.
C Other reserves comprises gains and losses on cash flow hedges, net
investment hedges, foreign exchange differences on translation of foreign
operations and net changes on fair value of trade investments. The cumulative
translation loss within Other reserves at 29 June 2024 was $395m (1 January
2024: $313m, 1 July 2023: $360m). Net investment hedge reserve at 29 June 2024
was $66m deficit (1 January 2024: $83m deficit, 1 July 2023: $76m deficit)
D Within retained earnings is a capital reserve of $2,266m (1 January
2024: $2,266m, 1 July 2023: $2,266m).
Notes to the Condensed Consolidated Interim Financial Statements
1. Basis of preparation and accounting policies
Smith & Nephew plc (the 'Company') is a public limited company
incorporated in England and Wales. In these condensed consolidated interim
financial statements ('Interim Financial Statements'), 'Group' means the
Company and all its subsidiaries.
These Interim Financial Statements have been prepared in accordance with IAS
34 Interim Financial Reporting as adopted for use in the UK. As required by
the Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority, these Interim Financial Statements have been prepared applying the
accounting policies and presentation that were applied in the preparation of
the Company's annual accounts for the year ended 31 December 2023 which were
prepared in accordance with UK-adopted International Accounting Standards. The
Group has also prepared its accounts in accordance with IFRS as issued by the
International Accounting Standards Board (IASB) effective as at 31 December
2023. IFRS as adopted in the UK differs in certain respects from IFRS as
issued by the IASB. However, the differences have no impact for the periods
presented.
The uncertainties as to the future impact on the financial performance and
cash flows of the Group as a result of the current challenging economic
environment have been considered as part of the Group's adoption of the going
concern basis for its Interim Financial Statements for the period ended 29
June 2024, in which context the Directors reviewed cash flow forecasts
prepared for a period of at least 12 months from the date of approval of these
Interim Financial Statements. Having carefully reviewed those forecasts, the
Directors concluded that it was appropriate to adopt the going concern basis
of accounting in preparing these Interim Financial Statements for the reasons
set out below.
The Group's net debt, excluding lease liabilities, at 29 June 2024 was $2,902m
(see Note 6) with committed facilities of $4.5bn. The Group has $305m of
private placement debt due for repayment in the second half of 2024. No debt
is due for repayment in the first half of 2025. $930m of private placement
debt is subject to financial covenants. The principal covenant on the private
placement debt is a leverage ratio of <3.5x which is measured on a rolling
12-month basis at half year and year end. There are no financial covenants in
any of the Group's other facilities.
The Directors have considered various scenarios in assessing the impact of the
economic environment on future financial performance and cash flows, with the
key judgement applied being the speed and sustainability of the return to a
normal volume of elective procedures in key markets, including the impact of a
significant global recession, leading to lower healthcare spending across both
public and private systems. Throughout these scenarios, which include a severe
but plausible outcome, the Group continues to have headroom on its borrowing
facilities and financial covenants. The Directors believe that the Group is
well placed to manage its financing and other business risks satisfactorily
and have a reasonable expectation that the Group has sufficient resources to
continue in operational existence for a period of at least 12 months from the
date of approval of these Interim Financial Statements period. Thus they
continue to adopt the going concern basis for accounting in preparing these
Interim Financial Statements.
The financial information contained in this document does not constitute
statutory financial statements as defined in sections 434 and 435 of the
Companies Act 2006. An unqualified opinion was issued that did not contain a
statement under section 498 of the Companies Act 2006 on the Group's statutory
financial statements for the year ended 31 December 2023. The Group's
statutory financial statements for the year ended 31 December 2023 have been
delivered to the Registrar of Companies.
New accounting standards effective 2024
A number of new amendments to standards are effective from 1 January 2024 but
they do not have a material effect on the Group's financial statements.
The Group is adopting the mandatory temporary exception from the recognition
and disclosure of deferred taxes arising from the jurisdictional
implementation of the Pillar Two model rules which took effect for the Group
from 1 January 2024.
Accounting standards issued but not yet effective
A number of new standards and amendments to standards are effective for annual
periods beginning after 1 January 2024 and earlier application is permitted;
however, the Group has not early adopted them in preparing these Interim
Financial Statements.
Critical judgements and estimates
The Group prepares its consolidated financial statements in accordance with
IFRS Accounting Standards as issued by the IASB and IFRS adopted in the UK,
the application of which often requires judgements and estimates to be made by
management when formulating the Group's financial position and results. Under
IFRS, the Directors are required to adopt those accounting policies most
appropriate to the Group's circumstances for the purpose of presenting fairly
the Group's financial position, financial performance and cash flows.
The Group's significant accounting policies which required the most use of
management's estimation in the half year ended 29 June 2024 were: valuation of
inventories; liability provisioning and impairment. The critical estimates are
consistent with those reflected in the Group's consolidated financial
statements for the year ended 31 December 2023.
Climate change considerations
The impact of climate change has been considered as part of the assessment of
estimates and judgements in preparing the Group accounts. The climate change
scenario analyses undertaken this year in line with TCFD recommendations did
not identify any material financial impact.
The following considerations were made in respect of the interim financial
statements:
a. The impact of climate change on the going concern assessment;
b. The impact of climate change on the cash flow forecasts used in the
impairment assessments of non-current assets including goodwill; and
c. The impact of climate change on the carrying value and useful economic
lives of property, plant and equipment.
2. Business segment information
The Group's operating structure is organised around three global business
units (previously referred to as franchises) and the chief operating decision
maker monitors performance, makes operating decisions and allocates resources
on a global business unit basis. Accordingly, as described in Note 2 to the
most recent annual report, the Group has concluded that there are three
reportable segments.
Segment revenue reconciles to statutory revenue from continuing operations as
follows:
Half year Half year
2024 2023
$m $m
Segment revenue
Orthopaedics 1,149 1,102
Sports Medicine & ENT 888 843
Advanced Wound Management 790 789
Revenue from external customers 2,827 2,734
2a. Disaggregation of revenue
The following table shows the disaggregation of Group revenue by product by
business unit:
Half year Half year
2024 2023
$m $m
Knee Implants 480 475
Hip Implants 311 303
Other Reconstruction 59 51
Trauma & Extremities 299 273
Orthopaedics 1,149 1,102
Sports Medicine Joint Repair 483 457
Arthroscopic Enabling Technologies 304 293
ENT (Ear, Nose & Throat) 101 93
Sports Medicine & ENT 888 843
Advanced Wound Care 357 356
Advanced Wound Bioactives 262 274
Advanced Wound Devices 171 159
Advanced Wound Management 790 789
Total 2,827 2,734
The following table shows the disaggregation of Group revenue by geographic
market and product category. The disaggregation of revenue into the two
product categories below reflects that in general the products in the Advanced
Wound Management business unit are sold to wholesalers and intermediaries,
while products in the other business units are sold directly to hospitals,
ambulatory surgery centers and distributors. The further disaggregation of
revenue by Established Markets and Emerging Markets reflects that in general
our products are sold through distributors and intermediaries in the Emerging
Markets while in the Established Markets, with the exception of the Advanced
Wound Care and Bioactives, products are in general sold direct to hospitals
and ambulatory surgery centers. The disaggregation by Established Markets and
Emerging Markets also reflects their differing economic factors including
volatility in growth and outlook.
Half year 2024 Half year 2023
Established Markets(E) Emerging Markets Total Established Markets(E) Emerging Markets Total
$m $m $m $m $m $m
Orthopaedics, Sports Medicine & ENT 1,647 390 2,037 1,584 361 1,945
Advanced Wound Management 687 103 790 694 95 789
Total 2,334 493 2,827 2,278 456 2,734
E Established Markets comprises US, Australia, Canada, Europe, Japan and
New Zealand.
Sales are attributed to the country of destination. US revenue for the half
year was $1,493m (H1 2023: $1,471m), China revenue for the half year was $112m
(H1 2023: $123m) and UK revenue for the half year was $103m (H1 2023: $96m).
No individual customer comprises more than 10% of the Group's external sales.
2b. Trading profit by business segment
Trading profit is a trend measure which presents the profitability of the
Group excluding the impact of specific transactions that management considers
affect the Group's short-term profitability and the comparability of results.
The Group presents this measure to assist investors in their understanding of
trends. The Group has identified the following items as those to be excluded
from operating profit when arriving at trading profit: acquisition and
disposal related items; amortisation and impairment of acquisition
intangibles; significant restructuring programmes; gains and losses arising
from legal disputes; and other significant items.
Segment trading profit is reconciled to the statutory measure below:
Half year Half year
2024 2023
$m $m
Segment profit
Orthopaedics 192 174
Sports Medicine & ENT 275 224
Advanced Wound Management 215 223
Segment trading profit 682 621
Corporate costs (211) (204)
Group trading profit 471 417
Acquisition and disposal related items - 17
Restructuring and rationalisation expenses (62) (46)
Amortisation and impairment of acquisition intangibles (87) (102)
Legal and other 6 (11)
Group operating profit 328 275
Acquisition and disposal related items
For the half year ended 29 June 2024, credits related to the remeasurement of
deferred and contingent consideration for prior year acquisitions were offset
by costs of integration for current and prior year acquisitions.
For the half year ended 1 July 2023, credits relate to the remeasurement of
deferred and contingent consideration for prior year acquisitions. These were
partially offset by costs of integration for prior year acquisitions.
Restructuring and rationalisation costs
For the half year ended 29 June 2024, these costs primarily relate to the
efficiency and productivity elements of the 12-Point Plan.
For the half year ended 1 July 2023, these costs primarily relate to the
efficiency and productivity elements of the 12-Point Plan and the Operations
and Commercial Excellence programme that was announced in February 2020.
Amortisation and impairment of acquisition intangibles
For both the half years ended 29 June 2024 and 1 July 2023, charges relate to
the amortisation and impairment of intangible assets acquired in material
business combinations.
Legal and other
For the half years ended 29 June 2024 and 1 July 2023, charges relate to legal
expenses for ongoing metal-on-metal hip claims. For the half year ended 29
June 2024 these expenses were offset by a decrease of $12m in the provision
that reflects the decrease in the present value of the estimated costs to
resolve all other known and anticipated metal-on-metal hip claims.
The charges for the half year ended 1 July 2023 were partially offset by the
release of a provision for an intellectual property dispute.
The half years ended 29 June 2024 and 1 July 2023 also include costs for
implementing the requirements of the EU Medical Device Regulation that was
effective from May 2021 with a transition period to May 2024.
3. Taxation
Tax rate
Our reported tax for the period ended 29 June 2024 was a charge of $39m, with
an effective tax rate of 15.4% (H1 2023: $39m, effective tax rate of 18.5%).
OECD BEPS 2.0 - Pillar Two
The OECD Pillar Two GloBE Rules (Pillar Two) introduce a global minimum
corporate tax rate of 15% applicable to multinational enterprise groups with
global revenue over €750m. All participating OECD members are required to
incorporate these rules into national legislation. The Pillar Two rules will
apply to the Group for its accounting period commencing 1 January 2024. On 23
May 2023, the International Accounting Standards Board (IASB) amended IAS 12
to introduce a mandatory temporary exception to the accounting for deferred
taxes arising from the jurisdictional implementation of the Pillar Two model
rules. On 19 July 2023, the UK Endorsement Board adopted the IASB amendments
to IAS 12.
The Group has performed an assessment of its potential exposure to Pillar Two
income taxes based on forecast financial data and considers that the rules
will result in an increase in the Group tax rate. It is estimated that the
Pillar Two income tax would increase the Group tax rate by around 2% and would
predominantly arise in Switzerland, Singapore and Costa Rica, countries in
which the Group has significant operations. The final Pillar Two impact in
2024 will depend on factors such as revenues, costs and foreign currency
exchange rate impacts by jurisdiction.
The Group is adopting the mandatory temporary exception from the recognition
and disclosure of deferred taxes arising from the jurisdictional
implementation of the Pillar Two model rules.
The Group does not meet the threshold for application of the Pillar One
transfer pricing rules.
4. Dividends
The 2023 final dividend totaling $202m was paid on 22 May 2024. The 2024
interim dividend of 14.4 US cents per ordinary share was approved by the Board
on 31 July 2024. This dividend is payable on 8 November 2024 to shareholders
whose names appear on the register at the close of business on 4 October 2024.
The sterling equivalent per ordinary share will be set following the record
date. Shareholders may elect to receive their dividend in either Sterling or
US Dollars and the last day for election will be 18 October 2024. Shareholders
may participate in the dividend re-investment plan and elections must be made
by 18 October 2024.
5. Acquisitions
Half year ended 29 June 2024
On 9 January 2024, the Group completed the acquisition of 100% of the share
capital of CartiHeal (2009) Ltd (CartiHeal), the developer of CARTIHEAL
AGILI-C, a novel sports medicine technology for cartilage regeneration in the
knee. The acquisition of this disruptive technology supports our strategy to
invest behind our successful Sports Medicine & ENT business unit.
The fair value of the consideration amounted to $231m. This is comprised of
contingent consideration of $49m, which represents the discounted value of
$150m of consideration contingent upon the achievement of a single future
financial performance milestone in the next 10 years, and initial cash
consideration of $180m adjusted for cash acquired and other liabilities
assumed, of which $18m was transferred in to escrow to be released in equal
instalments to the seller in 12 and 18 months from completion.
The fair value of assets acquired and liabilities assumed are set out below:
CartiHeal (2009) Ltd
$m
Intangible assets - product-related and trade name 84
Inventory 1
Cash 6
Other liabilities (2)
Trade and other payables (1)
Net deferred tax liability (3)
Net assets 85
Goodwill 146
Consideration 231
The goodwill represents the control premium, acquired workforce and the
synergies expected from integrating CartiHeal into the Group's existing
business.
The product-related intangible assets and the trade name were valued using a
relief-from-royalty methodology with the key inputs being revenue, profit and
discount rate.
For half year ended 29 June 2024, the contribution from CartiHeal to the
Group's revenue and profit was immaterial.
The cash outflow from acquisitions in H1 2024 of $186m (H1 2023: $15m)
comprises payments of consideration of $177m net of cash acquired (H1 2023:
nil) relating to acquisitions in the current period and payments of deferred
and contingent consideration of $9m relating to acquisitions completed in
prior periods.
The carrying value of goodwill increased from $2,992m at 31 December 2023 to
$3,104m at 29 June 2024 due to acquisition of CartiHeal, partially offset by
foreign exchange movements.
Year ended 31 December 2023
No acquisitions were completed in the year ended 31 December 2023.
6. Net debt
Net debt as at 29 June 2024 is outlined below. The repayment of lease
liabilities is included in cash flows from financing activities in the cash
flow statement.
29 June 31 December 1 July
2024 2023 2023
$m $m $m
Cash at bank 568 302 190
Long-term borrowings (3,143) (2,175) (2,489)
Bank overdrafts and borrowings due within one year (328) (710) (357)
Net currency swap assets/(liabilities) 1 (1) 1
Net interest rate swap assets/(liabilities) - 7 (1)
Net debt excluding lease liabilities (2,902) (2,577) (2,656)
Non-current lease liabilities (132) (144) (143)
Current lease liabilities (52) (55) (50)
Net debt (3,086) (2,776) (2,849)
The Group has $305m of private placement debt due for repayment in the second
half of 2024 and no debt due for repayment in the first half of 2025.
In March 2024 the Group issued two corporate bonds: $650m (before expenses and
underwriting discounts) of notes bearing an interest rate of 5.4% repayable in
2034; and $350m (before expenses and underwriting discounts) of notes bearing
an interest rate of 5.15% repayable in 2027.
7a. Financial instruments
The following table shows the carrying amounts and fair values of financial
assets and financial liabilities, including their levels in the fair value
hierarchy.
Carrying amount Fair value
29 June 31 December 1 July 29 June 31 December 1 July
2024 2023 2023 2024 2023 2023 Fair value
$m $m $m $m $m $m level
Financial assets at fair value
Forward foreign exchange contacts 34 25 44 34 25 44 Level 2
Investments 9 8 8 9 8 8 Level 3
Contingent consideration receivable 18 18 18 18 18 18 Level 3
Currency swaps 1 2 1 1 2 1 Level 2
Interest rate swaps 7 7 - 7 7 - Level 2
69 60 71 69 60 71
Financial assets not measured at fair value
Trade and other receivables 1,214 1,163 1,122
Cash at bank 568 302 190
1,782 1,465 1,312
Total financial assets 1,851 1,525 1,383
Financial liabilities at fair value
Acquisition consideration - contingent (78) (32) (50) (78) (32) (50) Level 3
Forward foreign exchange contracts (16) (25) (28) (16) (25) (28) Level 2
Currency swaps - (3) - - (3) - Level 2
Interest rate swaps (7) - (1) (7) - (1) Level 2
(101) (60) (79) (101) (60) (79)
Financial liabilities not measured at fair value
Acquisition consideration - deferred (20) (4) (7)
Bank overdrafts (23) (2) (7)
Bank loans - (303) (145)
Corporate bond not in a hedge relationship (1,491) (995) (994)
Corporate bond in a hedge relationship (1,027) (555) (540)
Private placement debt not in a hedge relationship (930) (1,030) (1,160)
Trade and other payables (999) (1,026) (918)
(4,490) (3,915) (3,771)
Total financial liabilities (4,591) (3,975) (3,850)
At 29 June 2024, the book value and market value of the USD corporate bonds
were $1,979m and $1,813m respectively (31 December 2023: $995m and $826m), the
book value and market value of the EUR corporate bond were $539m and $555m,
(31 December 2023: $555m and $586m).
At 29 June 2024 the book value and fair value of the private placement debt
were $930m and $857m respectively (31 December 2023: $1,030m and $959m).
There were no transfers between Levels 1, 2 and 3 during the half year ended
29 June 2024 and the year ended 31 December 2023. For cash and cash
equivalents, short-term loans and receivables, overdrafts and other short-term
liabilities which have a maturity of less than three months, the book values
approximate the fair values because of their short-term nature. Long-term
borrowings are measured in the balance sheet at amortised cost. The corporate
bonds issued in October 2020, October 2022 and March 2024 are publicly listed
and a market price is available. The Group's other long-term borrowings are
not quoted publicly, their fair values are estimated by discounting future
contractual cash flows to net present values at the current market interest
rates available to the Group for similar financial instruments as at the year
end. The fair value of the private placement notes is determined using a
discounted cash flow model based on prevailing market rates. The fair value of
currency swaps is determined by reference to quoted market spot rates. As a
result, foreign forward exchange contracts and currency swaps are classified
as Level 2 within the fair value hierarchy.
The fair value of contingent acquisition consideration is estimated using a
discounted cash flow model. The valuation model considers the present value of
risk adjusted expected payments, discounted using a risk-free discount rate.
The expected payment is determined by considering the possible scenarios,
which relate to the achievement of established milestones and targets, the
amount to be paid under each scenario and the probability of each scenario. As
a result, contingent acquisition consideration is classified as Level 3 within
the fair value hierarchy.
The fair value of investments is based upon third party pricing models for
share issues. As a result, investments are considered Level 3 in the fair
value hierarchy.
The movements in the half year ended 29 June 2024 and the year ended 31
December 2023 for financial instruments measured using Level 3 valuation
methods are presented below:
29 June 31 December
2024 2023
$m $m
Investments
At 1 January 8 12
Additions 1 -
Fair value remeasurement - (4)
9 8
Contingent consideration receivable
At 1 January 18 18
Receipts - -
18 18
Contingent acquisition consideration liability
At 1 January (32) (78)
Arising on acquisitions (49) -
Payments 9 13
Remeasurements 2 33
Discount unwind (8) -
(78) (32)
7b. Retirement benefit obligations
The discount rates applied to the future pension liabilities of the UK,
Germany and Switzerland pension plans are based on the yield on bonds that
have a credit rating of AA denominated in the currency in which the benefits
are expected to be paid with a maturity profile approximately the same as the
obligations. The UK discount rate has increased since 31 December 2023 by
60bps to 5.1% while the Germany discount rate increased since 31 December 2023
by 50bps to 3.6%. The remeasurement gain of $9m recognised in Other
Comprehensive Income (OCI) was principally made up of a $9m gains on
remeasurement of plan obligations in the UK, US, Germany and Switzerland.
In October 2022, US Pension Plan members were notified that Smith & Nephew
Inc. (SNI) would begin the termination process for the US Plan. In December
2023, Fidelity & Guaranty Life was selected to take over responsibility
for the remaining US Pension Plan obligation and administration upon
termination. A premium amount of $245m was paid in cash by the US Plan on 4
January 2024 to settle the annuity purchase agreement with Fidelity &
Guaranty Life. Certain active employees and terminated vested participants
elected to receive a lump sum in exchange for their plan benefit of $80m. This
resulted in $4m of settlement costs which were recognised in 2023,
representing the difference between defined benefit obligation (DBO) and the
lump sums paid to members in December 2023. A $2m credit was recorded in first
half of 2024 linked to the annuity purchase contract concluded with Fidelity
& Guaranty Life on 4 January 2024.
On 26 February 2024, the remaining liability of $5m was transferred to Pension
Benefit Guaranty Corporation (PBGC) for a payment of $2m. A discount rate of
5.3% based on market conditions on 26 February 2024 was used to calculate the
settlement impact and a further credit of $3m was recorded in first half of
2024.
8. Exchange rates
The exchange rates used for the translation of currencies into US Dollars that
have the most significant impact on the Group results were:
Half year Full year Half year
2024 2023 2023
Average rates
Sterling 1.26 1.24 1.23
Euro 1.08 1.08 1.08
Swiss Franc 1.12 1.11 1.10
Japanese Yen 0.0066 0.0071 0.0074
Period end rates
Sterling 1.27 1.27 1.27
Euro 1.07 1.10 1.09
Swiss Franc 1.11 1.19 1.11
Japanese Yen 0.0062 0.0071 0.0069
9. Contingencies
The Company and its subsidiaries are party to various legal proceedings, some
of which include claims for substantial damages. The outcome of these
proceedings cannot readily be foreseen, but except as described herein
management believes none of them is likely to result in a material adverse
effect on the financial position of the Group. The Group provides for outcomes
that are deemed to be probable and can be reliably estimated. There is no
assurance that losses will not exceed provisions or will not have a
significant impact on the Group's results of operations in the period in which
they are realised.
10. Subsequent events
On 24 July 2024, the Group announced its intention to close the Warwick
manufacturing site. The closure is expected to complete by the end of 2024 and
the Group expects to incur losses amounting to approximately $75m out of which
around $60m relates to impairment of goodwill and will be recorded in the
second half of 2024.
11. Principal risks and uncertainties
The principal risks and uncertainties that the Group is exposed to are
consistent with those as at 31 December 2023. The principal risks and
uncertainties continue to be: legal and compliance; quality and regulatory;
political and economic; foreign exchange; pricing and reimbursement;
cybersecurity; global supply chain; mergers and acquisitions; new product
innovation, design and development including intellectual property; strategy
and commercial execution; and talent management. Further detail on these risks
can be found in the 2023 Annual Report of the Group on pages 69-77.
Directors' Responsibilities Statement
The Directors confirm that to the best of their knowledge:
· this set of condensed consolidated Interim Financial Statements
has been prepared in accordance with IAS 34 Interim Financial Statements as
adopted for use in the UK and IAS 34 Interim Financial Statements as issued by
the International Accounting Standards Board; and
· that the interim management report herein includes a fair review
of the information required by:
a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and
b. DTR 4.2.8R of the Disclosure and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the enterprise during that period, and any changes
in the related party transactions described in the last annual report that
could do so.
Rick Medlock did not submit himself for re-election as a director at the
Company's annual general meeting and ceased to be a director on 30 April 2024.
There have been no other changes to the Board of Directors of Smith &
Nephew plc since the publication of the Smith & Nephew plc 2023 Annual
Report.
By order of the Board:
Chief Executive Officer 31 July 2024
Deepak Nath
John Rogers Chief Financial Officer 31 July 2024
INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW PLC
Conclusion
We have been engaged by the company to review the condensed set of financial
statements in the interim financial report for the period ended 29 June 2024
which comprises the Group Income Statement, the Group Statement of
Comprehensive Income, the Group Balance Sheet, the Group Cash Flow Statement,
the Group Statement of Changes in Equity and related notes 1 to 11.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the interim
financial report for the period ended 29 June 2024 is not prepared, in all
material respects, in accordance with United Kingdom adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency Rules
("the DTR") of the United Kingdom's Financial Conduct Authority ("the UK
FCA").
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim
financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with United Kingdom adopted international accounting
standards. The condensed set of financial statements included in this interim
financial report has been prepared in accordance with United Kingdom adopted
International Accounting Standard 34, "Interim Financial Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This Conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410; however future events or conditions may cause the entity to
cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the interim financial report in
accordance with the DTR of the UK FCA.
In preparing the interim financial report, the directors are responsible for
assessing the group's ability to continue as a going concern, disclosing as
applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the company or
to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the interim financial report, we are responsible for expressing
to the group a conclusion on the condensed set of financial statements in the
interim financial report. Our Conclusion, including our Conclusion Relating to
Going Concern, are based on procedures that are less extensive than audit
procedures, as described in the Basis for Conclusion paragraph of this report.
Use of our report
This report is made solely to the company in accordance with ISRE (UK) 2410.
Our work has been undertaken so that we might state to the company those
matters we are required to state to it in an independent review report and for
no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the company, for our review work,
for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
31 July 2024
Other information
Definitions of and reconciliation to measures included within adjusted
"trading" results
These Interim Financial Statements include financial measures that are not
prepared in accordance with IFRS. These measures, which include trading
profit, trading profit margin, tax rate on trading results, EPSA, ROIC,
trading cash flow, free cash flow, trading profit to trading cash conversion
ratio, leverage ratio, and underlying revenue growth, exclude the effect of
certain cash and non-cash items that Group management believes are not related
to the underlying performance of the Group. These non-IFRS financial measures
are also used by management to make operating decisions because they
facilitate internal comparisons of
performance to historical results.
Non-IFRS financial measures are presented in these Interim Financial
Statements as the Group's management believe that they provide investors with
a means of evaluating performance of the business segments and the
consolidated Group on a consistent basis, similar to the way in which the
Group's management evaluates performance, that is not otherwise apparent on an
IFRS basis, given that certain non-recurring, infrequent, non-cash
and other items that management does not otherwise believe are indicative of
the underlying performance of the consolidated Group may not be excluded when
preparing financial measures under IFRS. These non-IFRS measures should not be
considered in isolation
from, as substitutes for, or superior to financial measures prepared in
accordance with IFRS. These non-IFRS measures may also not be directly
comparable to similarly described measures used by other companies.
Underlying revenue growth
'Underlying revenue growth' is used to compare the revenue in a given period
to the previous 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 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 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.
Reported revenue growth, the most directly comparable financial measure
calculated in accordance with IFRS, reconciles to underlying revenue growth as
follows:
Reconciling Items
Half year Half year Reported Underlying Acquisitions Currency
2024 2023 growth growth & disposals impact
$m $m % % % %
Segment revenue
Orthopaedics 1,149 1,102 4.2 5.1 - (0.9)
Sports Medicine & ENT 888 843 5.4 6.5 - (1.1)
Advanced Wound Management 790 789 0.1 0.7 - (0.6)
Revenue from external customers 2,827 2,734 3.4 4.3 - (0.9)
Trading profit, trading profit margin, trading cash flow and trading profit to
cash conversion ratio
Trading profit, trading profit margin (trading profit expressed as a
percentage of revenue), trading cash flow and trading profit to trading cash
conversion ratio (trading cash flow expressed as a percentage of trading
profit) are trend measures, which present the profitability of the Group. The
adjustments made exclude the impact of specific transactions that management
considers affect the Group's short-term profitability and cash flows, and the
comparability of results. The Group has identified the following items, where
material, as those to be excluded from operating profit and cash generated
from operations when arriving at trading profit and trading cash flow,
respectively: acquisition and disposal related items arising in connection
with business combinations, including amortisation of acquisition intangible
assets, impairments and integration costs; restructuring events; and gains and
losses resulting from legal disputes and uninsured losses. In addition to
these items, gains and losses that materially impact the Group's profitability
or cash flows on a short-term or one-off basis are excluded from operating
profit and cash generated from operations when arriving at trading profit and
trading cash flow. The cash contributions to fund defined benefit pension
schemes that are closed to future accrual are excluded from cash generated
from operations when arriving at trading cash flow. Payment of lease
liabilities is included within trading cash flow.
Adjusted earnings per ordinary share ('EPSA')
EPSA is a trend measure, which presents the profitability of the Group
excluding the post-tax impact of specific transactions that management
considers affect the Group's short-term profitability and comparability of
results. The Group presents this measure to assist investors in their
understanding of trends. Adjusted attributable profit is the numerator used
for this measure and is determined by adjusting attributable profit for the
items that are excluded from operating profit when arriving at trading profit
and items that are recognised below operating profit that affect the Group's
short-term profitability. The most directly comparable financial measure
calculated in accordance with IFRS is basic earnings per ordinary share (EPS).
Compound Annual Growth Rate ('CAGR')
CAGR is defined as the compound annual growth rate and shows the annualised
average rate of revenue growth between a number of given years, assuming
growth takes place at an exponentially compounded rate.
Cash
Profit generated
Operating before Attributable from Earnings
Revenue profit(1 ) tax(2 ) Taxation(3 ) profit(4 ) operations(5 ) per share(6 )
$m $m $m $m $m $m ¢
Half year 2024 Reported 2,827 328 253 (39) 214 368 24.5
Acquisition and disposal related items - - 1 - 1 1 0.2
Restructuring and rationalisation costs - 62 63 (13) 50 88 5.8
Amortisation and impairment of acquisition intangibles - 87 87 (19) 68 - 7.8
Legal and other(7) - (6) (5) - (5) 26 (0.7)
Lease liability payments - - - (27) -
Capital expenditure - - - (172) -
Half year 2024 Adjusted 2,827 471 399 (71) 328 284 37.6
Cash
Profit generated
Operating before Attributable from Earnings
Revenue profit(1 ) tax(2 ) Taxation(3 ) profit(4 ) operations(5 ) per share(6 )
$m $m $m $m $m $m ¢
Half year 2023 Reported 2,734 275 211 (39) 172 215 19.7
Acquisition and disposal related items (17) (8) 9 1 6 0.1
Restructuring and rationalisation costs - 46 49 (10) 39 50 4.6
Amortisation and impairment of acquisition intangibles - 102 102 (22) 80 - 9.1
Legal and other(7) - 11 14 (2) 12 34 1.4
Lease liability payments - - - - - (28) -
Capital expenditure - - - - - (167) -
Half year 2023 Adjusted 2,734 417 368 (64) 304 110 34.9
(1 ) Represents a reconciliation of operating profit to
trading profit.
(2 ) Represents a reconciliation of reported profit before
tax to trading profit before tax.
(3 ) Represents a reconciliation of reported tax to trading
tax.
(4 ) Represents a reconciliation of reported attributable
profit to adjusted attributable profit.
(5 ) Represents a reconciliation of cash generated from
operations to trading cash flow.
(6 ) Represents a reconciliation of basic earnings per
ordinary share to adjusted earnings per ordinary share (EPSA).
(7 ) The ongoing funding of defined benefit pension schemes
that are closed to future accrual is not included in management's definition
of trading cash flow as there is no defined benefit service cost for these
schemes.
Acquisition and disposal related items
For the half year ended 29 June 2024, credits related to the remeasurement of
deferred and contingent consideration for prior year acquisitions were offset
by costs of integration for current and prior year acquisitions.
For the half year ended 1 July 2023, credits relate to the remeasurement of
deferred and contingent consideration for prior year acquisitions. These were
partially offset by costs of integration for prior year acquisitions.
Adjusted profit before tax for the half year ended 29 June 2024 and 1 July
2023 additionally excludes acquisition and disposal items related to the
Group's shareholding in Bioventus.
Restructuring and rationalisation costs
For the half year ended 29 June 2024, these costs primarily relate to the
efficiency and productivity elements of the 12-Point Plan.
For the half year ended 1 July 2023, these costs primarily relate to the
efficiency and productivity elements of the 12-Point Plan and the Operations
and Commercial Excellence programme that was announced in February 2020.
Adjusted profit before tax for the half year ended 29 June 2024 and 1 July
2023 additionally excludes restructuring costs related to the Group's
shareholding in Bioventus.
Amortisation and impairment of acquisition intangibles
For both the half years ended 29 June 2024 and 1 July 2023, charges relate to
the amortisation and impairment of intangible assets acquired in material
business combinations.
Legal and other
For the half years ended 29 June 2024 and 1 July 2023, charges relate to legal
expenses for ongoing metal-on-metal hip claims. For the half year ended 29
June 2024 these expenses were offset by a decrease of $12m in the provision
that reflects the decrease in the present value of the estimated costs to
resolve all other known and anticipated metal-on-metal hip claims.
The charges for the half year ended 1 July 2023 were partially offset by the
release of a provision for an intellectual property dispute.
The half years ended 29 June 2024 and 1 July 2023 also include costs for
implementing the requirements of the EU Medical Device Regulation that was
effective from May 2021 with a transition period to May 2024
Free cash flow
Free cash flow is a measure of the cash generated for the Group to use after
capital expenditure according to its Capital Allocation Framework, it is
defined as the cash generated from operations less capital expenditure and
cash flows from interest and income taxes. A reconciliation from cash
generated from operations, the most comparable IFRS measure, to free cash flow
is set out below:
Half year Half year
2024 2023
$m $m
Cash generated from operations 368 215
Capital expenditure (172) (167)
Interest received 6 6
Interest paid (65) (45)
Payment of lease liabilities (27) (28)
Income taxes paid (71) (63)
Free cash flow 39 (82)
Leverage ratio
The leverage ratio is net debt including lease liabilities to adjusted EBITDA.
Net debt is reconciled in Note 6. Adjusted EBITDA is defined as trading profit
before depreciation and impairment of property, plant and equipment and
amortisation and impairment of other intangible assets, goodwill and trade
investments. The calculation of the leverage ratio is set out below:
Half year Full year
2024 2023
$m $m
Net debt including lease liabilities 3,086 2,776
Trading profit 1,023 970
Depreciation of property, plant and equipment 310 306
Amortisation of other intangible assets, impairment of goodwill and trade 137 139
investments
Impairment of property, plant and equipment 31 31
Adjustment for items already excluded from trading profit (120) (119)
Adjusted EBITDA(1) 1,381 1,327
Leverage ratio (x)(1) 2.2 2.1
(1 ) Leverage ratio for half year 2024 has been calculated
based on Adjusted EBITDA for the rolling 12 months ended 29 June 2024.
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