Smith+Nephew Second Quarter and First Half 2020 Results

Group well-positioned as markets recover

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Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business, reports results for the second quarter and first half ended 27 June 2020:

Highlights^1,2

• Trading in line with 1 July update as business was impacted by government-led restrictions to control COVID-19
• Performance improved across Q2 as elective surgeries restarted, with underlying revenue declines of c. -47% in April, -27% in May, and -12% in June
  • By quarter-end, elective procedures had resumed across the US and in most European countries
  • China returned to growth for the second quarter
• Operating and trading profit margin lower year-on-year, in line with previous announcements
  • COVID-impact reflected in lower gross margins including from increase in provisions and factory underutilisation, and negative leverage from fixed SG&A costs
  • Discretionary cost saving measures of approximately $150 million delivered in the first half, out of programme to deliver up to $200 million in 2020
• Recently launched products performing strongly, including OR3O^◊ Dual Mobility Hip System and EVOS^◊ in Trauma
• Investment in R&D maintained, with significant new product introductions including new robotics platform
• Interim dividend of 14.4¢ in line with prior year
• Strong balance sheet and good liquidity, with net debt (excluding lease liabilities) of $2.1 billion versus $3.4 billion of committed facilities
• 2020 guidance remains withdrawn due to continuing uncertainty regarding impact of COVID-19

Roland Diggelmann, Chief Executive Officer, said:

“I am proud of the way all at Smith+Nephew have managed the pressure of the COVID-19 crisis. We have continued to serve our customers throughout, and were ready as lockdown restrictions eased, delivering an improving performance across the second quarter.

“At the same time, we have taken measures to ensure the Group emerges from this crisis as strongly as possible. These include maintaining our R&D investment, launching new products, protecting jobs, and managing our cost base.

“There remain many uncertainties as countries continue to battle COVID-19, but with our unique portfolio, proven strategy, strong balance sheet and motivated workforce we are ready to take advantage as markets recover.”

Analyst conference call

An analyst conference call to discuss Smith+Nephew’s second quarter and first half results will be held at 8.30am BST / 3.30am EST on 29 July 2020, details of which can be found on the Smith+Nephew website at http://www.smith-nephew.com/results.

Enquiries

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 2019 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 31 to 34 for a reconciliation of underlying revenue growth to reported revenue growth.
   
   The ‘constant currency exchange effect’ is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales and is measured as the difference between: 1) the increase/decrease in the current year revenue translated into US Dollars at the current year average exchange rate and the prior revenue translated at the prior year rate; and 2) the increase/decrease being measured by translating current and prior year revenues into US Dollars using the prior year closing rate.
   
   The ‘acquisitions and disposals effect’ is the measure of the impact on revenue from newly acquired material business combinations and recent material business disposals. This is calculated by comparing the current year, constant currency actual revenue (which includes acquisitions and excludes disposals from the relevant date of completion) with prior year, constant currency actual revenue, adjusted to include the results of acquisitions and exclude disposals for the commensurate period in the prior year. These sales are separately tracked in the Group’s internal reporting systems and are readily identifiable.

2. Certain items included in ‘trading results’, such as trading profit, trading profit margin, tax rate on trading results, trading cash flow, trading profit to cash conversion ratio, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures reported in this announcement are explained in Other Information on pages 31 to 34 and are reconciled to the most directly comparable financial measure prepared in accordance with IFRS. Reported results represent IFRS financial measures as shown in the Condensed Consolidated Interim Financial Statements.
   

Smith+Nephew Second Quarter Trading and First Half 2020 Results

Second Quarter 2020 Trading Update

Our second quarter revenue was $901 million (2019: $1,283 million). On a reported basis revenue declined -29.8%, including a 100bps benefit from acquisitions and
-150bps foreign exchange headwind. On an underlying basis revenue was down
-29.3%, in line with our announcement of 1 July 2020, as COVID-19 impacted our major markets.  

Q2 2020 comprised 63 trading days, in line with Q2 2019. 

Second Quarter Consolidated Revenue Analysis

1. Included within the Q2 2019 analysis is a reclassification of $3 million of revenue formerly included in the Advanced Wound Care franchise which is now included in the Advanced Wound Bioactives franchise in order to present consistent analysis to the Q2 2020 results. There has been no change in total revenue for the quarter ended 29 June 2019

2. Underlying growth is defined in Note 1 on page 2

3. Other Reconstruction includes robotics capital sales, the joint reconstruction business acquired from Brainlab and cement

4. Other Established Markets are Europe, Canada, Japan, Australia and New Zealand

Overview of the second quarter

Performance improved across the quarter, with underlying revenue declines of approximately -47% in April, -27% in May, and -12% in June. Performance correlated strongly with the easing of lockdown restrictions as we stepped back up to serve customers as elective surgeries resumed across our markets.

Geographically, by the quarter-end elective procedures had resumed across the US and in most European countries. Overall our Established Markets declined -31.4%
(-31.1% reported) in the second quarter, with the US down -31.8% (-30.7% reported) and Other Established Markets down -30.8% (-31.7% reported).

China, the first market impacted by COVID-19, returned to growth for the quarter. Overall, Emerging Markets revenue was down -20.2% (-24.1% reported).

By franchise, the impact of the COVID-19 pandemic was most pronounced on our Orthopaedic Reconstruction, Sports Medicine and ENT businesses, driven by lower levels of elective surgery. Our Advanced Wound Management and Trauma businesses were more resilient.

Orthopaedics

Revenue declined -34.0% (-34.1% reported) in our Orthopaedics franchise in the second quarter. Within this, Knee Implants was down -46.9% (-47.8% reported) and Hip Implants down -26.9% (-28.1% reported). We saw a good performance from our recently launched OR3O Dual Mobility Hip System, and are now starting to make this system available outside of the US. Other Reconstruction revenue was down -51.5% (-23.9% reported) as non-COVID-related capital investment was placed on hold in many healthcare facilities. The reported decline included the benefit of acquisitions. Trauma, which is less exposed to elective surgery, experienced an -11.1% decline in revenue (-12.8% reported), with the EVOS System generating double–digit growth.

Sports Medicine & ENT

Revenue from our Sports Medicine & ENT franchise was down -33.3% (-34.8% reported) in the quarter as procedures were deferred, with Sports Medicine Joint Repair -32.0% (-33.6% reported), Arthroscopic Enabling Technologies -32.1% (-33.8% reported) and ENT -44.0% (-44.9% reported). During the quarter we signed an agreement with Fiagon, a technology leader in electromagnetic surgical navigation solutions, to distribute its ENT portfolio in the Asia Pacific region.

Advanced Wound Management

Revenue from our Advanced Wound Management franchise declined -17.6% (-17.6% reported) driven in part by the deferral of elective surgery, but also by the temporary closures of wound clinics and falling numbers in long term care facilities as they closed to new residents during the crisis. Advanced Wound Care declined by -14.6% (-17.2% reported), Advanced Wound Bioactives by -18.7% (-13.9% reported) and Advanced Wound Devices by -23.7% (-25.8% reported).

First Half 2020 Consolidated Analysis

Smith+Nephew results for the first half ended 27 June 2020:

1. See Other Information on pages 31 to 34

First Half 2020 Analysis

Our first half revenue was $2,035 million (H1 2019: $2,485 million), down 18.1% on a reported growth basis including a foreign exchange headwind of 140bps and 200bps benefit from acquisitions. Revenue was down 18.7% on an underlying basis.

The Group reported an operating loss of -$5 million (H1 2019: operating profit of $419 million) after restructuring and rationalisation costs, as well as acquisition and disposal related items, amortisation of acquisition intangibles and legal and other items incurred in the first half (see Other Information on pages 31 to 34).

Trading profit was $172 million in the first half (H1 2019: $532 million). The trading profit margin, at 8.5% (H1 2019: 21.4%), was down significantly year-on year as previously guided.

The trading profit margin reflected a number of COVID-related factors, including negative leverage effect from the fixed components of our cost base and the impact of reduced production volumes, as well as additional charges of approximately $50 million to provisions for inventory excess and obsolescence and trade receivables (see Note 1 to the Interim Financial Statements).

These factors were partially offset by approximately $150 million of discretionary cost saving measures achieved in the first half, from our programme to realise up to $200 million of savings in 2020 to offset the impact of COVID-19.

The Accelerating Performance and Execution (APEX) programme and the Operations and Commercial Excellence programme incurred restructuring costs of $56 million in the first half, with incremental benefits recognised of around $20 million compared to H1 2019.

Each of the three global franchises contributed to the 2020 trading profit (see Note 2 to the Interim Financial Statements).

Cash generated from operations was $125 million (H1 2019: $543 million) and trading cash flow was $25 million (H1 2019: $405 million) (see Other Information on pages 31 to 34 for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was 14% (H1 2019: 76%). We continued to invest in capital expenditure as we improve our manufacturing site base. The working capital outflow of $153 million includes higher inventory, partially offset by lower growth in receivables due to the decline in revenue in the period.

The net interest charge within reported results was $21 million (H1 2019: $25 million) including $3 million from the application of IFRS 16 Leases (H1 2019: $2 million).

Our reported tax for the period ended 27 June 2020 was a credit of $134 million (H1 2019 reported tax charge: $74 million) predominantly due to the successful outcome of a legal tax case in the UK. The tax rate on trading results for the period ended 27 June 2020 was 17.0% (H1 2019: 19.7%) (see Note 3 to the Interim Financial Statements and Other Information on pages 31 to 34 for further details on taxation).

Basic earnings per share (‘EPS’) was 11.5¢ (23.0¢ per ADS) (H1 2019: 35.3¢ per share). Adjusted earnings per share (‘EPSA’) was 13.4¢ (26.8¢ per ADS) (H1 2019: 45.8¢ per share).

Smith+Nephew has a strong balance sheet with access to significant liquidity and continues to adopt the going concern basis in preparing these Interim Financial Statements (see Note 1 and Note 6 to the Interim Financial Statements for further detail). At the end of the first half, the Group had net debt of $2.1 billion (excluding lease liabilities), compared to committed facilities of $3.4 billion, including $550 million of Senior Notes drawn down in June 2020. The Group has no debt maturing in 2020. The $490 million increase in net debt since the year-end reflects acquisitions, dividend payments, decline in trading performance and working capital movements.

Responding to COVID-19

Smith+Nephew has been responding to COVID-19 since January 2020, first in China, and then across all of our markets globally. Throughout this period we have prioritised the health and safety of employees and protecting jobs, supporting our customers and communities, and ensuring the business is in the best position to respond as elective surgeries return.

Supporting our employees and communities

As restrictions have been eased we have been reopening our offices globally, enabling those employees who need to work from the office to do so. However, we continue to encourage employees to work remotely where they can, and are keeping office occupancy levels low, typically less than 30%.

At all our sites precautionary safety measures are in place and follow requirements of local city, state and country governments and health authorities. This includes social distancing measures, temperature checks, availability of hand sanitisers and other PPE equipment. We also continue to limit business travel and in-person meetings.

We recognise that our duty of care also extends to the broader welfare of employees. Measures taken include enhancing our Employee Assistance Program to make it easier for employees to access resources to support their emotional, mental, physical and financial wellbeing, as well as reviewing all objectives to ensure expectations are achievable and aligned with the business deliverables in the second half.

We have also continued to use our resources to support the fight against COVID-19. Since April our facilities in Memphis and Costa Rica have assembled more than one million faceshields, and in Hull we are supporting the trial of a technology used to minimise close contact between employees working in manufacturing and laboratory environments.

Delivering new innovation

We remain committed to delivering meaningful innovation to our customers with a number of important launches since the start of the second quarter.

In Orthopaedics this was led by a new handheld robotics platform, the CORI^◊ Surgical System, available for both unicompartmental knee arthroplasty and total knee arthroplasty. CORI is the vanguard of our Real Intelligence digital ecosystem which, following applicable regulatory clearance and approval pathways, will include patient engagement, pre-operative planning, digital and robotic surgery, post-operative assessment and outcomes measurement solutions. We also launched the JOURNEY^◊ II Unicompartmental Knee (UK) System, building on the heritage of our partial knees now paired with proprietary OXINIUM^◊ Technology.

In Sports Medicine we introduced the INTELLIO^◊ Connected Tower Solution, which wirelessly connects and remotely controls multiple Sports Medicine systems from outside the sterile field, an ideal solution for both hospitals and Ambulatory Surgery Centers (ASCs) where space is at a premium. We also completed requirements to CE Mark our REGENETEN^◊ Bioinductive Implant and completed the first cases in Europe.

And in ENT we announced the market introduction and first commercial procedure of the Tula^◊ System, an in-office solution for placement of tympanostomy tubes (commonly known as ear tubes), following our acquisition of Tusker Medical, Inc. in January 2020.

We also continued to invest in evidence to support the use of our products, including a new publication further validating the performance of our proprietary OXINIUM on XLPE (highly cross-linked polyethylene) for total hip arthroplasty, and another demonstrating the cost effectiveness of PICO^◊ Single Use Negative Pressure Wound Therapy System (sNPWT) when compared with traditional NPWT.

We have also continued to develop new service offerings, including for the ASC  segment, which we view as a strategic cross-franchise opportunity. We are seeing an increase in the proportion of joint replacement procedures taking place in ASCs and believe that part of the US healthcare system’s response to COVID has been to accelerate the shift. Smith+Nephew is well positioned to benefit from this trend through our Positive Connections service offering, and with our enabling technology including the launch of CORI.

Cost control measures

Smith+Nephew is on track to deliver discretionary cost savings of up to $200 million in 2020 in response to COVID-19, with approximately $150 million realised by the end of the first half. These savings are coming from areas such as travel, events, advertising, promotion, consultancy, freezing all but crucial new hires, temporarily reducing production at some manufacturing facilities to manage stock levels and slowing some planned capital expenditure. We are protecting the majority of R&D investment and remain committed to developing and launching meaningful innovation this year and beyond.

We continue to monitor market developments, have identified additional potential savings in 2020 if they become required, and retain the option to reinvest the savings back into the business in the second half to accelerate recovery. We have also assessed and continue to monitor the impact of COVID-19 on the Group’s principal risks (see Note 1 to the Interim Financial Statements for further detail).

Interim Dividend

The interim dividend is 14.4¢ per share (28.8¢ per ADS), in line with 2019. This equates to 11.2p per share at prevailing exchange rates as of 27 July 2020. The interim dividend will be paid on 28 October 2020 to shareholders on the register at the close of business on 2 October 2020.

The Board remains committed to Smith+Nephew’s progressive dividend policy, whereby the dividend increases over time broadly in line with underlying earnings, and we look forward to returning to growing the dividend when performance allows.

Outlook

Whilst we are encouraged by the improved performance dynamic across the second quarter, there continues to be significant uncertainty and geographical variation as COVID-19 continues to impact our major markets. As a result, we will not provide updated 2020 guidance at this time.

Looking to the medium-term, we have a proven strategy, strong management team and robust balance sheet. We remain committed to our ambition to consistently outgrow our markets at the same time as delivering ongoing improvements to our trading profit margin.

Forward calendar

The Q3 Trading Report will be released on 29 October 2020.

About Smith+Nephew

Smith+Nephew is a portfolio medical technology business that exists to restore people’s bodies and their self-belief by using technology to take the limits off living. We call this purpose ‘Life Unlimited’. Our 17,500+ employees deliver this mission every day, making a difference to patients’ lives through the excellence of our product portfolio, and the invention and application of new technologies across our three global franchises of Orthopaedics, 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 $5.1 billion in 2019. Smith+Nephew is a constituent of the FTSE100 (LSE:SN, NYSE:SNN). The terms ‘Group’ and ‘Smith+Nephew’ are used to refer to Smith & Nephew plc and its consolidated subsidiaries, unless the context requires otherwise.

For more information about Smith+Nephew, please visit www.smith-nephew.com and follow us on Twitter, LinkedIn, Instagram or Facebook.

^{Forward-looking Statements}

^{This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. For Smith+Nephew, these factors include: risks related to the impact of COVID-19, 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-19; economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers (including, without limitation, as a result of COVID-19); 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-19); competition for qualified personnel; strategic actions, including acquisitions and dispositions, our success in performing due diligence, valuing and integrating acquired businesses; disruption that may result from transactions or other changes we make in our business plans or organisation to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature. Please refer to the documents that Smith+Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith+Nephew's most recent annual report on Form 20-F, for a discussion of certain of these factors. Any forward-looking statement is based on information available to Smith+Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith+Nephew are qualified by this caution. Smith+Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith+Nephew's expectations.}

^{◊ Trademark of Smith+Nephew. Certain marks registered US Patent and Trademark Office.}