TIDMSN.
RNS Number : 5064Q
Smith & Nephew Plc
21 February 2023
Smith+Nephew Fourth Quarter and Full Year 2022 Results
Exited year with good momentum as we transform to become a
consistently higher growth company
21 February 2023
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology
business, reports results for the fourth quarter and full year
ended 31 December 2022:
31 Dec 31 Dec Reported Underlying
2022 2021 growth growth
$m $m % %
------ ------ -------- ----------
Fourth Quarter Results(1,2)
Revenue 1,365 1,346 1.4 6.8
------ ------ -------- ----------
Full Year Results(1,2)
Revenue 5,215 5,212 0.1 4.7
Operating profit 450 593
Operating profit margin (%) 8.6 11.4
EPS (cents) 25.5 59.8
Trading profit 901 936
Trading profit margin (%) 17.3 18.0
EPSA (cents) 81.8 80.9
Q4 Trading Highlights (1,2)
-- Q4 revenue of $1,365 million (2021: $1,346 million) up 6.8%
on an underlying basis (1.4% reported growth after 540bps FX
headwind)
-- Strongest quarterly underlying revenue growth of 2022 with
all franchises and geographies contributing
Full Year Financial Highlights (1,2)
-- Revenue of $5,215 million (2021: $5,212 million), up 4.7% on
an underlying basis (0.1% reported growth after 460bps FX
headwind)
-- Trading profit of $901 million (2021: $936 million) with
17.3% trading profit margin (2021: 18.0%) reflecting higher
inflation ( operating profit $450 million (2021: $593 million))
-- Cash generated from operations of $581 million (2021: $1,048
million) with trading cash flow of $444 million (2021: $828
million), primarily due to increased inventory
-- EPSA 81.8c (2021: 80.9c), EPS 25.5c (2021: 59.8c)
-- $150 million of 2022 share buyback programme completed
-- Full year dividend of 37.5c per share (2021: 37.5c per share)
2022 Strategic Highlights
-- Transforming Smith+Nephew with our 12-point plan to improve
execution and drive Strategy for Growth, focused on fixing
Orthopaedics, improving productivity, and accelerating growth in
Advanced Wound Management and Sports Medicine
o Good early progress including reducing overdue orders and
improving
order fulfilment
-- Continued cadence of new product launches contributing to growth
Outlook (1,2)
-- For 2023, we are targeting:
o Underlying revenue growth expected in the range of 5.0% to
6.0% (5.0% to 6.0% reported)
o Trading profit margin expected to be at least 17.5%
-- Midterm targets updated:
o Targeting 5%+ underlying revenue growth driven by return on
innovation investments and execution of 12-point plan; and
o Trading profit margin expansion to at least 20% in 2025 driven
by productivity improvements
Deepak Nath, Chief Executive Officer, said:
"We made good progress during 2022 and ended the year in a much
stronger position than we started. We continued to outperform in
Sports Medicine & ENT and Advanced Wound Management and, even
though we are early in our work to fix Orthopaedics, performance
improved here too.
"With our 12-point plan, we are fundamentally changing the way
Smith+Nephew operates to drive higher growth and improve
productivity. It is starting to deliver, and, as we progress
through the two-year life of the plan, we expect further
operational and financial benefits, including a reduction in
inventory levels and cash conversion to return to historic levels.
We are benefiting from our increased investment in innovation, with
more than 60% of growth in 2022 coming from products launched in
the last five years.
"We will continue to face macroeconomic headwinds in 2023.
However, I believe the drivers of further growth are in place,
including leading technologies across all three franchises and a
clear path to improved execution in Orthopaedics. We expect to
deliver both faster revenue growth and margin expansion in the
coming year, and are setting a solid foundation for our midterm
ambitions as we transform to a consistently higher growth
company."
Analyst conference call
An analyst conference call to discuss Smith+Nephew's fourth
quarter and full year results will be held 8.30am GMT / 3.30am EST
on 21 February 2023, details of which can be found on the
Smith+Nephew website at
https://www.smith-nephew.com/en/about-us/investors/financial-resources#quarterly-reporting
.
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 2021 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 32 to 36
for a reconciliation of underlying revenue growth to reported
revenue growth.
The 'constant currency exchange effect' is a measure of the
increase/decrease in revenue resulting from currency movements on
non-US Dollar sales and is measured as the difference between: 1)
the increase/decrease in the current year revenue translated into
US Dollars at the current year average exchange rate and the prior
revenue translated at the prior year rate; and 2) the
increase/decrease being measured by translating current and prior
year revenues into US Dollars using the prior year closing
rate.
The 'acquisitions and disposals effect' is the measure of the
impact on revenue from newly acquired material business
combinations and recent material business disposals. This is
calculated by comparing the current year, constant currency actual
revenue (which includes acquisitions and excludes disposals from
the relevant date of completion) with prior year, constant currency
actual revenue, adjusted to include the results of acquisitions and
exclude disposals for the commensurate period in the prior year.
These sales are separately tracked in the Group's internal
reporting systems and are readily identifiable.
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 trading cash conversion ratio, EPSA,
leverage ratio and underlying growth are non-IFRS financial
measures. The non-IFRS financial measures reported in this
announcement are explained in Other Information on pages 32 to 36
and are reconciled to the most directly comparable financial
measure prepared in accordance with IFRS. Reported results
represent IFRS financial measures as shown in the Condensed
Consolidated Financial Statements.
Smith+Nephew Fourth Quarter Trading and Full Year 2022
Results
Group revenue in 2022 was $5,215 million, an increase of 4.7% on
an underlying basis (reported growth of 0.1% after 460bps headwind
from foreign exchange primarily due to the strength of the US
Dollar).
We exited the year with good momentum, with fourth quarter
revenue up 6.8% on an underlying basis (reported growth of 1.4%
including a 540bps foreign exchange headwind). All three global
franchises contributed to this strong finish to the year, and all
accelerated revenue growth over the first nine months.
Trading profit for 2022 was $901 million (2021: $936 million)
with the trading profit margin of 17.3% (2021: 18.0%) reflecting
the higher inflation that impacted the business across the year and
the previously disclosed China volume-based-procurement (VBP)
programme. The operating profit was $450 million (2021: $593
million).
In July 2022 we announced our new 12-point plan to accelerate
delivery of our Strategy for Growth and realise our ambition to
transform to a consistently higher-growth company. We are making
good progress embedding the plan and are seeing early improvements.
We also continued to launch innovative new products to drive future
growth.
Delivering our Strategy for Growth
Smith+Nephew's Strategy for Growth, announced in December 2021,
is based on three pillars.
-- First, Strengthen the foundations of Smith+Nephew. A solid
base in commercial and manufacturing will enable us to serve
customers sustainably and efficiently, and deliver the best from
our core portfolio.
-- Second, Accelerate our growth profitably, through more robust
prioritisation of resources and investment, and with continuing
customer focus.
-- Third, continue to Transform ourselves for higher long-term
growth, through investment in innovation and acquisitions.
The 12-point plan supports the first two pillars of the Strategy
for Growth and will improve business performance by maximising the
opportunities we have built, and addressing the challenges. Through
the 12-point plan we are fundamentally changing the way we operate
and deliver results.
The 12-point plan is focused on:
-- Fixing Orthopaedics , to regain momentum across hip and knee
implants, robotics and trauma, and win share with our
differentiated technology;
-- Improving productivity , to support trading profit margin expansion; and
-- Further accelerating growth in our already well-performing
Advanced Wound Management and Sports Medicine & ENT
franchises.
Since July we have embedded the teams and structures to drive
this work, established internal KPIs to drive accountability, and
have made meaningful early progress in delivery. We expect to
continue to accumulate operational and financial benefits as we
progress through the two-year life of the plan during which we are
changing how we approach our customers, overhauling our supply
chain, managing costs differently and driving better
accountability.
Looking beyond the 12-point plan, from 2025 we will have
strengthened our foundations and we expect to be delivering a
consistently higher level of revenue growth. This step change in
performance has been the goal of our strategy and investments in
recent years. This will provide a platform from which we can make
choices regarding future levels of investment to drive growth
and/or further margin expansion.
Fixing Orthopaedics
In recent years our Orthopaedics performance has been held back
by poor operational systems and commercial execution. Through the
12-point plan we are focused on addressing these challenges,
including improving logistics and updating our demand and supply
planning process to bring a deeper level of specificity and
collaboration between our operations and commercial teams.
Commercially, we are focused on winning share with our current
portfolio through greater focus on differentiated products and
procedural innovations, such as the robotics assisted CORI Surgical
System and our OXINIUM portfolio of hip and knee implants.
While there is still much work to be done, we are pleased with
our progress, including reducing our overdue orders by 35% from the
peak in the first half of the year and improving the percentage of
customer orders that are completely filled, measured by line-item
fill rates (LIFR). In the US we have made a significant step to
move non-instrument set LIFR towards a more normal industry level,
with 16 percentage points of progress year-on-year.
Improving Productivity
The efficiency and productivity elements of the 12-point plan
bring in a range of actions across the areas of cost of goods from
our Global Operations and sales & marketing and general &
administrative costs from our commercial and corporate
activities.
In our global operations we opened a new high technology
orthopaedics manufacturing facility in Malaysia. We also announced
plans for a new Advanced Wound Management facility in the UK.
Further benefits are expected to come from driving lean
methodologies across our manufacturing operations and pursuing
opportunities for additional network optimisation reducing
overcapacity and direct procurement savings.
Areas of commercial opportunity include market exits from some
structurally unattractive markets, such as trauma in China which we
exited in 2022, causing a one-year headwind to growth but improving
our value creation as a result. We are targeting efficiencies
across our commercial and corporate structures as well as savings
from indirect procurement and distribution.
In aggregate, the benefits from these actions are expected to
result in more than $200 million of annual savings by 2025. The
work to finalise the associated cost is ongoing and will be
reported alongside our Q1 results on 26 April 2023.
Further accelerating growth in Advanced Wound Management and
Sports Medicine & ENT
Our Advanced Wound Management franchise has delivered above
market performance since 2021 following extensive work to improve
commercial execution, and we expect to build on this strong
position going forward. Growth drivers include the depth of our
portfolio and extensive evidence-base. Both are differentiators and
we see significant opportunities for further growth, particularly
in Negative Pressure Wound Therapy, where we are focusing resource
under the 12-point plan.
Our Sports Medicine franchise has delivered above market growth
consistently for many years, building on our reputation for
innovation and breadth of portfolio. Many of the drivers for
further growth are already in place. In Sports Medicine, these
include expanding both our REGENETEN biologics platform into new
indications and our technology leadership by adding capability onto
our surgical tower. For ENT, we have a favourably positioned tonsil
and adenoid business and are in the early stages of the roll out of
our unique Tula System for in-office delivery of ear tubes.
Transforming through Innovation
Our commitment to innovation is central to our Strategy for
Growth Transform pillar. More than 60% of revenue growth in 2022
came from products launched in the last five years. In 2022 we
continued to launch new products and invest behind our R&D
programme and clinical evidence to support future growth.
In Orthopaedics, we expanded our robotics-enabled CORI Surgical
System by bringing both cementless total knee and total hip
arthroplasty onto the platform. We also became the first company to
receive FDA 510(k) clearance for a revision knee indication using a
robotics-assisted platform and completed the first cases on CORI.
Revisions account for around 10% of all knee procedures in the
US.
In Sports Medicine, we announced encouraging evidence supporting
our REGENETEN Bioinductive Implant, which delivered an 86%
reduction in rotator cuff re-tear rates at 12 months in interim
results from a randomised controlled trial.
In Advanced Wound Management, we introduced the WOUND COMPASS
Clinical Support App, a digital support tool for healthcare
professionals that helps reduce practice variation. We also
launched our DURAMAX S Silicon Super Absorbent Dressing for high
exuding wounds in Europe, where superabsorbers are one of the
fastest growing categories of dressings.
We continued to make acquisitions, bringing novel and disruptive
technologies into our portfolio. In January 2022 we acquired Engage
Surgical, owner of the only cementless partial knee system
commercially available in the US. The system will have an
application on CORI in the future.
Finally, we made further investment behind medical education,
including opening of a new Smith+Nephew Academy in Singapore. Our
Academies in the US, Europe and now Asia Pacific, as well as our
online resources, provide tens of thousands of surgeons and nurses
with opportunities to evaluate the latest evidence, and learn
innovative clinical techniques and effective use of our products
through hands-on and state-of-the-art digital interactive learning
experiences each year.
Supporting Net Zero
Our Strategy for Growth also embraces sustainability, and in
2022 we made progress against our commitment to achieve net zero
carbon emissions by 2045. Our Scope 1 and Scope 2 greenhouse gas
emissions were independently assured in 2022 and we have reported
our 2021 baseline Scope 3 emissions for eight categories. We are
developing our Scope 3 emissions reduction roadmap in preparation
for submitting this to the Science Based Target Initiative (SBTi)
for validation.
Fourth Quarter 2022 Trading Update
Our fourth quarter revenue was $1,365 million (2021: $1,346
million), up 6.8% on an underlying basis (reported revenue growth
of 1.4% after 540bps foreign exchange headwind). There were the
same number of trading days as in the comparable period (2022: 60
trading days).
Fourth Quarter Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2022 2021 growth growth(i) /disposals impact
Consolidated revenue by
franchise $m $m % % % %
------------------------------- ----------- ----------- -------- ---------- ------------ --------
Orthopaedics 549 552 -0.4 4.1 - -4.5
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Knee Implants 234 232 0.6 5.5 - -4.9
Hip Implants 150 151 -0.2 4.9 - -5.1
Other Reconstruction(ii) 26 25 3.5 7.7 - -4.2
Trauma & Extremities 139 144 -3.0 0.6 - -3.6
Sports Medicine & ENT 430 416 3.2 9.2 - -6.0
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 235 223 5.2 11.5 - -6.3
Arthroscopic Enabling
Technologies 154 157 -1.7 4.2 - -5.9
ENT (Ear, Nose and Throat) 41 36 12.3 17.0 - -4.7
Advanced Wound Management 386 378 1.9 8.0 - -6.1
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Advanced Wound Care 179 181 -1.1 7.9 - -9.0
Advanced Wound Bioactives 133 128 3.8 4.3 - -0.5
Advanced Wound Devices 74 69 6.6 14.9 - -8.3
Total 1,365 1,346 1.4 6.8 - -5.4
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Consolidated revenue by
geography
------------------------------- ----------- ----------- -------- ---------- ------------ --------
US 742 708 4.8 4.8 - -
Other Established Markets(iii) 385 409 -5.8 7.3 - -13.1
Total Established Markets 1,127 1,117 0.9 5.7 - -4.8
Emerging Markets 238 229 3.6 12.1 - -8.5
Total 1,365 1,346 1.4 6.8 - -5.4
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our
joint navigation business and cement
(iii) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
Fourth Quarter Franchise Performance
Orthopaedics
Our Orthopaedics franchise delivered revenue growth of 4.1%
underlying (-0.4% reported) in the quarter. Excluding China, where
growth continued to be impacted by the implementation of the
previously disclosed hip and knee VBP programme, Orthopaedics grew
by 5.3% underlying. This headwind to growth from VBP will continue
until Q2 2023.
Knee Implants grew 5.5% (0.6% reported) and Hip Implants
returned to growth, up 4.9% underlying (-0.2% reported). Knee
performance was led by our JOURNEY II knee system, and our new
cementless total knee LEGION CONCELOC continued to build momentum
as we extended the launch to new customers. Hip growth was led by
our POLAR3 Total Hip Solution and OR3O Dual Mobility Hip System.
Other Reconstruction revenue was up 7.7% underlying (3.5% reported)
although component supply constraints continued to impact this
segment. Trauma & Extremities delivered its first quarter of
growth in 2022, with revenue up 0.6% underlying (-3.0% reported)
despite the continuing headwind from our decision not to
participate in the broader roll-out of provincial trauma tenders in
China.
Sports Medicine & ENT
Our Sports Medicine & ENT franchise delivered underlying
revenue growth of 9.2% (3.2% reported) in the quarter.
Within this, Sports Medicine Joint Repair delivered 11.5%
underlying revenue growth (5.2% reported) with double-digit growth
from both our knee and shoulder repair portfolios. A rthroscopic
Enabling Technologies revenue was up 4.2% underlying (-1.7%
reported), representing improved performance on recent quarters
driven by double-digit growth from our COBLATION resection range.
Revenue from ENT was up 17.0% underlying (12.3% reported) driven by
our tonsil and adenoid business.
Advanced Wound Management
Our Advanced Wound Management franchise delivered underlying
revenue growth of 8.0% (1.9% reported).
Advanced Wound Care revenue was up 7.9% underlying (-1.1%
reported) with growth coming from across product categories.
Advanced Wound Bioactives revenue was up 4.3% underlying (3.8%
reported), with sustained good growth from our skin substitutes
portfolio. Advanced Wound Devices revenue was up 14.9% underlying
(6.6% reported) driven by strong double-digit growth from our PICO
Single Use Negative Pressure Wound Therapy System.
Fourth Quarter Geographic Performance
Geographically, revenue from our Established Markets was up 5.7%
(0.9% reported). Within this, the US was up 4.8% underlying (4.8%
reported) and Other Established Markets was up 7.3% underlying
against a weak comparable period (-5.8% reported). Emerging Markets
revenue was up 12.1% underlying (3.6% reported).
Full Year 2022 Consolidated Analysis
Smith+Nephew results for the year ended 31 December 2022:
Reported
2022 2021 growth
$m $m %
--------------------------------------------------------- ------ ------ --------
Revenue 5,215 5,212 0.1
------ ------ --------
Operating profit 450 593
Acquisition and disposal related items 4 7
Restructuring and rationalisation costs 167 113
Amortisation and impairment of acquisition intangibles 205 172
Legal and other 75 51
------ ------ --------
Trading profit(i) 901 936 -4
------ ------ --------
c c
Earnings per share ('EPS') 25.5 59.8 -57
Acquisition and disposal related items 15.1 (8.8)
Restructuring and rationalisation costs 15.8 10.3
Amortisation and impairment of acquisition intangibles 18.4 15.4
Legal and other 7.0 4.2
------ ------ --------
Adjusted Earnings per share ('EPSA')(i) 81.8 80.9 1
------ ------ --------
(i) See Other Information on pages 32 to 36
Full Year 2022 Analysis
Our full year revenue was $5,215 million (2021: $5,212 million),
up 4.7% on an underlying basis. Reported growth was 0.1% including
a foreign exchange headwind of 460bps.
The reported gross profit was $3,675 million (2021: $3,669
million) with gross margin 70.5% (2021: 70.4%). Operating profit
was $450 million (2021: $593 million) after acquisition and
disposal related items, restructuring and rationalisation costs,
amortisation and impairment of acquisition intangibles and legal
and other items (see Other Information on pages 32 to 36).
Trading profit was $901 million (2021: $936 million), with a
trading profit margin of 17.3% (2021: 18.0%). The margin decline
reflects higher inflation in freight and logistics, the impact of
China VBP, as well as sales and marketing expenditure levels
returning to more normal levels (see Note 2 to the Financial
Statements for global franchise trading profit).
Restructuring costs, primarily related to the Operations and
Commercial Excellence programme and the other efficiency and
productivity work underway, totalled $167 million, with incremental
benefits recognised of around $80 million.
Cash generated from operations was $581 million (2021: $1,048
million) and trading cash flow was $444 million (2021: $828
million). This reflected adverse working capital movements driven
primarily by inventory, and capital expenditure which included
progressing changes to our manufacturing network. Inventory
included strategic raw material buys, as part of managing
disruption to certain global raw material and component supply,
inflation raising the average value of our inventory, and increased
inventory to support growth including new product launches, safety
stock, or in markets where we expect growth acceleration (see Other
Information on pages 32 to 36 for a reconciliation between cash
generated from operations and trading cash flow). As a result of
the working capital movement, the trading profit to cash conversion
ratio deteriorated to 49% (2021: 88%). We expect a reduction in
inventory levels, and for cash conversion to return to historic
levels, as we deliver the 12-point plan.
The net interest charge within reported results was $66 million
(2021: $74 million) which reflects higher interest on cash deposits
and the maturity of private placement debt in both 2022 and 2021.
In 2022 the Group repaid its EUR269 million, EUR223 million, and
EUR265 million EUR term loan facilities. Additionally, $125 million
of private placement debt matured in 2022. The repayment of the EUR
term loan facilities was in part financed by the issuance of a
debut EUR seven-year Corporate Bond (EUR500 million at 4.565%) in
October 2022. The Group's net debt, excluding lease liabilities, at
31 December 2022 was $2,339 million (see Note 7 to the Financial
Statements) with committed facilities of $3.7 billion.
Included within share of results of associates is an impairment
charge of $109 million (2021: $nil) related to the Group's interest
in Bioventus primarily due to a significant decrease in its share
price (see Note 3 to the Financial Statements for further detail).
In 2021 a $75 million gain on disposal of interest in associate was
recorded resulting from two dilution gains in the Group's interest
in Bioventus. Both the impairment charge and dilution gain are
excluded from trading results (see Other Information on pages 32 to
36 for further detail).
Reported tax for the year to 31 December 2022 was a charge of
$12 million (2021: charge of $62 million) with the low charge being
attributed to tax credits on significant non-trading items such as
the Bioventus impairment and amortisation of acquisition
intangibles. The tax rate on trading results for the year to 31
December 2022 was 16.3% (2021: 17.2%) and this is lower than guided
due to adjustments in respect of prior periods (See Note 4 to the
Financial Statements and Other Information on pages 32 to 36 for
further details on taxation).
Adjusted earnings per share ('EPSA') was 81.8c (163.6c per ADS)
(2021: 80.9c). Basic earnings per share ('EPS') was 25.5c (51.0c
per ADS) (2021: 59.8c), reflecting restructuring costs, acquisition
and disposal related items, amortisation and impairment of
acquisition intangibles and legal and other items incurred.
Share Buyback
In December 2021 we announced an updated capital allocation
policy to prioritise the use of cash. The 2022 share buyback
programme commenced on 23 February 2022 and $150 million was
completed by 12 August 2022. As macroeconomic conditions continued
to be uncertain, including higher inflation, the Board decided it
was prudent to delay further buybacks until conditions improved. We
remain committed to returning surplus cash to shareholders over
time.
Dividend
The Board is recommending a Final Dividend of 23.1c per share
(46.2c per ADS) (2021: 23.1c per share). Together with the Interim
Dividend of 14.4c per share (28.8c per ADS), this will give a total
distribution of 37.5c per share (75.0c per ADS), unchanged from
2021. Subject to confirmation at our Annual General Meeting, the
Final Dividend will be paid on 17 May 2023 to shareholders on the
register at the close of business on 31 March 2023.
Outlook
The Group is today providing guidance for 2023 and updated
midterm targets.
2023 Guidance
For 2023 we are targeting both revenue growth and trading profit
margin above 2022 levels.
For revenue, we expect to deliver underlying revenue growth in
the range of 5.0% to 6.0%. Within this, we expect continued strong
growth from our Sports Medicine & ENT and Advanced Wound
Management franchises, and further improvement in Orthopaedics as
we continue to execute on the 12-point plan. On a reported basis
the guidance equates to a range of around 5.0% to 6.0% based on
exchange rates prevailing on 13 February 2023.
In terms of phasing, we expect the first quarter to be impacted
by the renewed Covid waves in China reducing surgical-volumes, as
well as the continuing headwind of VBP in Orthopaedics. We expect
the business to accelerate from the second quarter for the
remainder of the year.
For trading profit margin, we expect to deliver at least 17.5%
as the positive operating leverage from revenue growth,
productivity improvements and the early benefits of our cost saving
initiatives more than offset continuing macroeconomic headwinds
from raw material cost inflation, higher wages and a 100bps
headwind from transactional foreign exchange.
The tax rate on trading results for 2023 is forecast to be
around 19% subject to any material changes to tax law or other
one-off items.
Midterm targets
For the midterm, the Group is focused on consistently delivering
higher revenue growth while also expanding its trading profit
margin.
Today we are updating our midterm targets, previously announced
in December 2021, to reflect both our confidence in revenue growth
and the actions underway to offset the current macroeconomic
pressures and drive performance.
We are now targeting underlying revenue growth consistently 5%+
(previously 4-6%), driven by return on innovation investments and
execution of the 12-point plan, and trading profit margin expansion
to at least 20% in 2025, driven by productivity improvements
(previously 21% in 2024).
Forward calendar
The Q1 Trading Report will be released on 26 April 2023.
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 19,000 employees deliver this mission
every day, making a difference to patients' lives through the
excellence of our product portfolio, and the invention and
application of new technologies across our three global franchises
of Orthopaedics, Sports Medicine & ENT and Advanced Wound
Management.
Founded in Hull, UK, in 1856, we now operate in more than 100
countries, and generated annual sales of $5.2 billion in 2022.
Smith+Nephew is a constituent of the FTSE100 (LSE:SN, NYSE:SNN).
The terms 'Group' and 'Smith+Nephew' are used to refer to Smith
& Nephew plc and its consolidated subsidiaries, unless the
context requires otherwise.
For more information about Smith+Nephew, please visit
www.smith-nephew.com and follow us on Twitter , LinkedIn ,
Instagram or Facebook .
Forward-looking Statements
This document may contain forward-looking statements that may or
may not prove accurate. For example, statements regarding expected
revenue growth and trading margins, market trends and our product
pipeline are forward-looking statements. Phrases such as "aim",
"plan", "intend", "anticipate", "well-placed", "believe",
"estimate", "expect", "target", "consider" and similar expressions
are generally intended to identify forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual
results to differ materially from what is expressed or implied by
the statements. For Smith+Nephew, these factors include: risks
related to the impact of Covid, such as the depth and longevity of
its impact, government actions and other restrictive measures taken
in response, material delays and cancellations of elective
procedures, reduced procedure capacity at medical facilities,
restricted access for sales representatives to medical facilities,
or our ability to execute business continuity plans as a result of
Covid; economic and financial conditions in the markets we serve,
especially those affecting healthcare providers, payers and
customers (including, without limitation, as a result of Covid);
price levels for established and innovative medical devices;
developments in medical technology; regulatory approvals,
reimbursement decisions or other government actions; product
defects or recalls or other problems with quality management
systems or failure to comply with related regulations; litigation
relating to patent or other claims; legal and financial compliance
risks and related investigative, remedial or enforcement actions;
disruption to our supply chain or operations or those of our
suppliers (including, without limitation, as a result of Covid);
competition for qualified personnel; strategic actions, including
acquisitions and dispositions, our success in performing due
diligence, valuing and integrating acquired businesses; disruption
that may result from transactions or other changes we make in our
business plans or organisation to adapt to market developments;
relationships with healthcare professionals; reliance on
information technology and 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.
Full Year Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2022 2021 growth Growth(i) /disposals impact
Consolidated revenue by
franchise $m $m % % % %
------------------------------- ----------- ----------- -------- ---------- ------------ --------
Orthopaedics 2,113 2,156 -2.0 1.9 - -3.9
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Knee Implants 899 876 2.5 6.8 - -4.3
Hip Implants 584 612 -4.4 -0.2 - -4.2
Other Reconstruction(ii) 87 92 -5.6 -1.8 - -3.8
Trauma & Extremities 543 576 -5.7 -2.6 - -3.1
Sports Medicine & ENT 1,590 1,560 1.9 6.7 - -4.8
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 870 839 3.6 8.7 - -5.1
Arthroscopic Enabling
Technologies 567 590 -3.8 0.9 - -4.7
ENT (Ear, Nose and Throat) 153 131 17.1 20.4 - -3.3
Advanced Wound Management 1,512 1,496 1.1 6.4 - -5.3
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Advanced Wound Care 712 731 -2.6 5.2 - -7.8
Advanced Wound Bioactives 520 496 4.9 5.4 - -0.5
Advanced Wound Devices 280 269 4.3 11.6 - -7.3
Total 5,215 5,212 0.1 4.7 - -4.6
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Consolidated revenue by
geography
------------------------------- ----------- ----------- -------- ---------- ------------ --------
US 2,764 2,658 4.0 4.0 - -
Other Established Markets(iii) 1,504 1,638 -8.2 3.3 - -11.5
Total Established Markets 4,268 4,296 -0.7 3.7 - -4.4
Emerging Markets 947 916 3.5 9.1 - -5.6
Total 5,215 5,212 0.1 4.7 - -4.6
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our
joint navigation business and bone cement
(iii) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
2022 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Group Income Statement for the year ended 31 December 2022
2022 2021
Notes $m $m
----------------------------------------------- ----- -------- --------
Revenue 2 5,215 5,212
Cost of goods sold (1,540) (1,543)
------------------------------------------------ ----- -------- --------
Gross profit 3,675 3,669
Selling, general and administrative expenses (2,880) (2,720)
Research and development expenses (345) (356)
------------------------------------------------ ----- -------- --------
Operating profit 2 450 593
Interest income 14 6
Interest expense (80) (80)
Other finance costs (8) (17)
Share of results of associates 3 (141) 9
Gain on disposal of interest in associate 3 - 75
------------------------------------------------ ----- -------- --------
Profit before taxation 235 586
Taxation 4 (12) (62)
------------------------------------------------ ----- -------- --------
Attributable profit(A) 223 524
------------------------------------------------ ----- -------- --------
Earnings per share(A)
Basic 25.5c 59.8c
Diluted 25.5c 59.7c
------------------------------------------------ ----- -------- --------
Group Statement of Comprehensive Income for the year ended 31
December 2022
2022 2021
$m $m
------------------------------------------------------------------------ ------ -----
Attributable profit(A) 223 524
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 30 79
Taxation on other comprehensive income (7) (22)
------------------------------------------------------------------------- ------ -----
Total items that will not be reclassified to income statement 23 57
------------------------------------------------------------------------- ------ -----
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations (102) (53)
Net (gains)/losses on cash flow hedges (13) 41
Taxation on other comprehensive income 2 (5)
------------------------------------------------------------------------- ------ -----
Total items that may be reclassified subsequently to income statement (113) (17)
------------------------------------------------------------------------- ------ -----
Other comprehensive (loss)/income for the year, net of taxation (90) 40
------------------------------------------------------------------------- ------ -----
Total comprehensive income for the year(A) 133 564
------------------------------------------------------------------------- ------ -----
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Group Balance Sheet as at 31 December 2022
2022 2021
Notes $m $m
----------------------------------------------------------- ----- ------ -------
ASSETS
Non-current assets
Property, plant and equipment 1,455 1,513
Goodwill 3,031 2,989
Intangible assets 1,236 1,398
Investments 12 10
Investment in associates 46 188
Other non-current assets 12 15
Retirement benefit assets 141 182
Deferred tax assets 177 201
------------------------------------------------------------ ----- ------ -------
6,110 6,496
----------------------------------------------------------- ----- ------ -------
Current assets
Inventories 2,205 1,844
Trade and other receivables 1,264 1,184
Current tax receivable 37 106
Cash at bank 7 350 1,290
------------------------------------------------------------ ----- ------ -------
3,856 4,424
----------------------------------------------------------- ----- ------ -------
TOTAL ASSETS 9,966 10,920
------------------------------------------------------------ ----- ------ -------
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 175 177
Share premium 615 614
Capital redemption reserve 20 18
Treasury shares (118) (120)
Other reserves (459) (346)
Retained earnings 5,026 5,225
------------------------------------------------------------ ----- ------ -------
Total equity 5,259 5,568
------------------------------------------------------------ ----- ------ -------
Non-current liabilities
Long-term borrowings and lease liabilities 7 2,712 2,848
Retirement benefit obligations 70 127
Other payables 90 67
Provisions 84 35
Deferred tax liabilities 36 144
------------------------------------------------------------ ----- ------ -------
2,992 3,221
----------------------------------------------------------- ----- ------ -------
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 7 160 491
Trade and other payables 1,098 1,096
Provisions 243 322
Current tax payable 214 222
------------------------------------------------------------ ----- ------ -------
1,715 2,131
----------------------------------------------------------- ----- ------ -------
Total liabilities 4,707 5,352
------------------------------------------------------------ ----- ------ -------
TOTAL EQUITY AND LIABILITIES 9,966 10,920
------------------------------------------------------------ ----- ------ -------
Condensed Group Cash Flow Statement for the year ended 31
December 2022
2022 2021
$m $m
-------------------------------------------------------- ------ ------
Cash flows from operating activities
Profit before taxation 235 586
Net interest expense 66 74
Depreciation, amortisation and impairment 628 581
Share of results of associates 141 (9)
Gain on disposal of interest in associate - (75)
Share-based payments expense (equity-settled) 40 41
Net movement in post-retirement obligations 6 -
Movement in working capital and provisions (535) (150)
--------------------------------------------------------- ------ ------
Cash generated from operations 581 1,048
Net interest and finance costs paid (66) (74)
Income taxes paid (47) (97)
--------------------------------------------------------- ------ ------
Net cash inflow from operating activities 468 877
--------------------------------------------------------- ------ ------
Cash flows from investing activities
Acquisitions, net of cash acquired (113) (285)
Capital expenditure (358) (408)
Purchase of investments (2) (2)
Distribution from associate 1 4
--------------------------------------------------------- ------ ------
Net cash used in investing activities (472) (691)
--------------------------------------------------------- ------ ------
Net cash (outflow)/inflow before financing activities (4) 186
--------------------------------------------------------- ------ ------
Cash flows from financing activities
Proceeds from issue of ordinary share capital 1 2
Proceeds from own shares 5 12
Purchase of own shares (158) -
Payment of capital element of lease liabilities (54) (59)
Equity dividends paid (327) (329)
Cash movements in borrowings (396) (267)
Settlement of currency swaps 3 (4)
--------------------------------------------------------- ------ ------
Net cash used in financing activities (926) (645)
--------------------------------------------------------- ------ ------
Net decrease in cash and cash equivalents (930) (459)
Cash and cash equivalents at beginning of year 1,285 1,751
Exchange adjustments (11) (7)
--------------------------------------------------------- ------ ------
Cash and cash equivalents at end of year(B) 344 1,285
--------------------------------------------------------- ------ ------
B Cash and cash equivalents at the end of the period are net of
bank overdrafts of $6m (2021: $5m).
Group Statement of Changes in Equity for the year ended 31
December 2022
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
----------------------------------- ------- ------- ---------- -------- -------- -------- ------
At 1 January 2022 177 614 18 (120) (346) 5,225 5,568
Attributable profit(A) - - - - - 223 223
Other comprehensive income(A) - - - - (113) 23 (90)
Equity dividends paid - - - - - (327) (327)
Share-based payments recognised - - - - - 40 40
Taxation on share-based payments - - - - - (3) (3)
Purchase of own shares(C) - - - (158) - - (158)
Cost of shares transferred to
beneficiaries - - - 31 - (26) 5
Cancellation of treasury shares(C) (2) - 2 129 - (129) -
Issue of ordinary share capital - 1 - - - - 1
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 31 December 2022 175 615 20 (118) (459) 5,026 5,259
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
----------------------------------- ------- ------- ---------- -------- -------- -------- ------
At 1 January 2021 177 612 18 (157) (329) 4,958 5,279
Attributable profit(A) - - - - - 524 524
Other comprehensive income(A) - - - - (17) 57 40
Equity dividends paid - - - - - (329) (329)
Share-based payments recognised - - - - - 41 41
Taxation on share-based payments - - - - - (1) (1)
Cost of shares transferred to
beneficiaries - - - 37 - (25) 12
Issue of ordinary share capital - 2 - - - - 2
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 31 December 2021 177 614 18 (120) (346) 5,225 5,568
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
A Attributable to the equity holders of the parent and wholly derived from continuing operations.
C During the year ended 31 December 2022 a total of 10.1m
ordinary shares were purchased at a cost of $158m and 7.8m ordinary
shares were cancelled (2021: no ordinary shares were purchased or
cancelled).
Notes to the Condensed Consolidated 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 financial statements ('Financial Statements'), 'Group'
means the Company and all its subsidiaries. The financial
information herein has been prepared on the basis of the accounting
policies as set out in the Annual Report of the Group for the year
ended 31 December 2021. The Group has prepared its accounts in
accordance with UK-adopted International Accounting Standards. The
Group has also prepared its accounts in accordance with
International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB) effective as at 31
December 2022. 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. 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.
In determining and applying accounting policies, judgement is often
required in respect of items where the choice of specific policy,
accounting estimate or assumption to be followed could materially
affect the reported results or net asset position of the Group; it
may later be determined that a different choice would have been
more appropriate. The Group's significant accounting policies which
require the most use of management's estimation are: valuation of
inventories; liability provisioning; and impairment. There has been
no change in the methodology of applying management estimation in
these policies since the year ended 31 December 2021.
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 in these financial
statements, 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 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 financial statements for the reasons set out
below.
The Group had access to $344m of cash and cash equivalents at 31
December 2022. The Group's net debt, excluding lease liabilities,
at 31 December 2022 was $2,339m with access to committed facilities
of $3.7bn with an average maturity of 5.1 years. At the date of
approving these financial statements the funding position of the
Group has remained unchanged and the cash position is not
materially different.
The Group has $105m of private placement debt due for repayment
in 2023. $1,160m of private placement debt is subject to financial
covenants. The principal covenant on the private placement debt is
a leverage ratio of <3.5 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 economic 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 have a reasonable expectation that the Company and
the Group are well placed to manage their business risks, have
sufficient funds to continue to meet their liabilities as they fall
due and to continue in operational existence for a period of at
least 12 months from the date of the approval of the financial
statements. The financial statements have therefore been prepared
on a going concern basis.
Accordingly, the Directors continue to adopt the going concern
basis (in accordance with the guidance 'Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting' issued by the FRC) in preparing these financial
statements.
The principal risks that the Group is exposed to will be
disclosed in the Group's 2022 Annual Report. These are: business
continuity and business change; commercial execution;
cybersecurity; global supply chain; legal and compliance; mergers
and acquisitions; new product innovation, design and development
including intellectual property; political and economic; pricing
and reimbursement; quality and regulatory; talent management; and
taxation and foreign exchange.
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 for the years ended 31
December 2022 or 2021 but is derived from those accounts. Statutory
accounts for 2021 have been delivered to the registrar of companies
and those for 2022 will be delivered in due course. The auditor has
reported on those accounts; their report was (i) unqualified, (ii)
did not include a reference to any matters to which the auditor
drew attention by way of emphasis without qualifying their report
and (iii) did not contain a statement under section 498 (2) or (3)
of the Companies Act 2006.
New accounting standards effective 2022
A number of new amendments to standards are effective from 1
January 2022 but they do not have a material effect on the Group's
financial statements.
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 2022 and
earlier application is permitted; however, the Group has not early
adopted them in preparing these financial statements.
Critical judgements and estimates
The Group prepares its financial statements in accordance with
IFRS 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
accounting policies do not include any critical judgements. The
Group's accounting policies are set out in Notes 1-23 of the Notes
to the Group accounts. Of those, the policies which require the
most use of management's estimation are outlined below. The
critical estimates are consistent with 31 December 2021. Management
have considered the impact of the uncertainties around the current
challenging economic environment below.
Valuation of inventories
A feature of the Orthopaedics franchise (which accounts for
approximately 60% of the Group's total inventory and approximately
80% of the total provision for excess and obsolete inventory) is
the high level of product inventory required, some of which is
located at customer premises and is available for customers'
immediate use. Complete sets of products, including large and small
sizes, have to be made available in this way. These sizes are used
less frequently than standard sizes and towards the end of the
product life cycle are inevitably in excess of requirements.
Adjustments to carrying value are therefore required to be made to
orthopaedic inventory to anticipate this situation. These
adjustments are calculated in accordance with a formula based on
levels of inventory compared with historical usage. This formula is
applied on an individual product line basis and typically is first
applied when a product group has been on the market for two years.
This method of calculation is considered appropriate based on
experience, but it does require management estimate in respect of
customer demand, effectiveness of inventory deployment, length of
product lives and phase-out of old products.
Current economic environment impact assessment: In assessing the
increase in provision for excess and obsolete inventory, management
have considered the impact of higher input cost inflation on
increased inventory levels. Management have not changed their
accounting policy since 31 December 2021, nor is a change in the
key assumptions underlying the methodology expected in the next 12
months. Primarily due to inventory growth, the provision has
increased from $430m at 31 December 2021 to $504m at 31 December
2022. The provision for excess and obsolete inventory is not
considered to have a range of potential outcomes that is
significantly different to the $504m at 31 December 2022 in the
next 12 months. The provision has a high degree of estimation
uncertainty given the range of products and sizes, with a potential
range of reasonable outcomes that could be material over the longer
term.
Liability provisioning
The recognition of provisions for legal disputes related to
metal-on-metal cases is subject to a significant degree of
estimation. Provision is made for loss contingencies when it is
considered probable that an adverse outcome will occur and the
amount of the loss can be reasonably estimated. In making its
estimates, management takes into account the advice of internal and
external legal counsel. Provisions are reviewed regularly and
amounts updated where necessary to reflect developments in the
disputes. The value of provisions may require future adjustment if
experience such as number, nature or value of claims or settlements
changes. Such a change may be material in 2023 or thereafter. The
ultimate liability may differ from the amount provided depending on
the outcome of court proceedings and settlement negotiations or if
investigations bring to light new facts.
Current economic environment impact assessment: Management
considered whether there had been any changes to the number and
value of claims due to current challenging economic environment and
to date have not identified any significant changes in trends. If
the experience changes in the future, the value of provisions may
require adjustment.
Impairment
In carrying out impairment reviews of intangible assets and
goodwill, a number of significant assumptions have to be made when
preparing cash flow projections. These include the future rate of
market growth, discount rates, the market demand for the products
acquired, the future profitability of acquired businesses or
products, levels of reimbursement and success in obtaining
regulatory approvals. If actual results should differ or changes in
expectations arise, impairment charges may be required which would
adversely impact operating results. There has been a decrease in
the level of headroom in relation to goodwill impairment testing
for the Orthopaedics CGU which is sensitive to a reasonably
possible change in assumptions. For other intangible assets and
goodwill CGUs, this critical estimate is not considered to have a
significant risk of material adjustment in 2023 or thereafter based
on sensitivity analyses undertaken (as outlined below).
Current economic environment impact assessment: Management have
assessed the non-current assets held by the Group at 31 December
2022 to identify any indicators of impairment as a result of
current economic environment. Where an impairment indicator has
arisen, impairment reviews have been undertaken by comparing the
expected recoverable value of the asset to the carrying value of
the asset. The recoverable amounts are based on cash flow
projections using the Group's base case scenario in its going
concern models, which was reviewed and approved by the Board.
Impairments of $39m, related to immaterial product intangible
assets, were identified as a result of the impairment reviews
undertaken.
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 financial statements.
The following considerations were made in respect of the
financial statements:
-- The impact of climate change on the going concern assessment
and the viability of the Group over the next three years.
-- The impact of climate change on the cash flow forecasts used
in the impairment assessments of non-current assets including
goodwill.
-- 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
franchises and the chief operating decision maker monitors
performance, makes operating decisions and allocates resources on a
global franchise basis. Accordingly, the Group has concluded that
there are three reportable segments. Franchise presidents have
responsibility for upstream marketing, driving product portfolio
and technology acquisition decisions, and full commercial
responsibility for their franchises in the US. Regional presidents
in EMEA and APAC are responsible for the implementation of the
global franchise strategy in their respective regions.
The Executive Committee ('ExCo') comprises the Chief Financial
Officer ('CFO'), the franchise presidents, the regional presidents
and certain heads of function, and is chaired by the Chief
Executive Officer ('CEO'). ExCo is the body through which the CEO
uses the authority delegated to him by the Board of Directors to
manage the operations and performance of the Group. All significant
operating decisions regarding the allocation and prioritisation of
the Group's resources and assessment of the Group's performance are
made by ExCo, and whilst the members have individual responsibility
for the implementation of decisions within their respective areas,
it is at the ExCo level that these decisions are made. Accordingly,
ExCo is considered to be the Group's chief operating decision maker
as defined by IFRS 8 Operating Segments.
In making decisions about the prioritisation and allocation of
the Group's resources, ExCo reviews financial information for the
three franchises (Orthopaedics, Sports Medicine & ENT, and
Advanced Wound Management) and determines the best allocation of
resources to the franchises. Financial information for corporate
costs is presented on a Group-wide basis. The ExCo is not provided
with total assets and liabilities by segment, and therefore these
measures are not included in the disclosures below. The results of
the segments are shown below.
2a. Revenue by business segment and geography
Revenue is recognised as the performance obligations to deliver
products or services are satisfied and is recorded based on the
amount of consideration expected to be received in exchange for
satisfying the performance obligations. Revenue is recognised
primarily when control is transferred to the customer, which is
generally when the goods are shipped or delivered in accordance
with the contract terms, with some transfer of services taking
place over time. Substantially all performance obligations are
performed within one year. There is no significant revenue
associated with the provision of services.
P ayment terms to our customers are based on commercially
reasonable terms for the respective markets while also considering
a customer's credit rating. Appropriate provisions for returns,
trade discounts and rebates are deducted from revenue. Rebates
primarily comprise chargebacks and other discounts granted to
certain customers. Chargebacks are discounts that occur when a
third party purchases product from a wholesaler at its agreed price
plus a mark-up. The wholesaler in turn charges the Group for the
difference between the price initially paid by the wholesaler and
the agreed price. The provision for chargebacks is based on
expected sell-through levels by the Group's wholesalers to such
customers, as well as estimated wholesaler inventory levels.
Orthopaedics and Sports Medicine & ENT (Ear, Nose &
Throat)
Orthopaedics and Sports Medicine & ENT consists of the
following businesses: Knee Implants, Hip Implants, Other
Reconstruction, Trauma & Extremities, Sports Medicine Joint
Repair, Arthroscopic Enabling Technologies and ENT. Sales of
inventory located at customer premises and available for customers'
immediate use are recognised when notification is received that the
product has been implanted or used. Substantially all other revenue
is recognised when control is transferred to the customer, which is
generally when the goods are shipped or delivered in accordance
with the contract terms. Revenue is recognised for the amount of
consideration expected to be received in exchange for transferring
the products or services.
In general our business in Established Markets is direct to
hospitals and ambulatory surgery centers whereas in the Emerging
Markets we generally sell through distributors.
Advanced Wound Management
Advanced Wound Management consists of the following businesses:
Advanced Wound Care, Advanced Wound Bioactives and Advanced Wound
Devices. Substantially all revenue is recognised when control is
transferred to the customer, which is generally when the goods are
shipped or delivered in accordance with the contract terms. Revenue
is recognised for the amount of consideration expected to be
received in exchange for transferring the products or services.
Appropriate provisions for returns, trade discounts and rebates are
deducted from revenue, as explained above.
The majority of our Advanced Wound Management business, and in
particular products used in community and homecare facilities, is
through wholesalers and distributors. When control is transferred
to a wholesaler or distributor, revenue is recognised accordingly.
The proportion of sales direct to hospitals is higher in our
Advanced Wound Devices business in Established Markets.
Segment revenue reconciles to statutory revenue from continuing
operations as follows:
2022 2021
$m $m
---------------------------------- ------ ------
Segment revenue
Orthopaedics 2,113 2,156
Sports Medicine & ENT 1,590 1,560
Advanced Wound Management 1,512 1,496
----------------------------------- ------ ------
Revenue from external customers 5,215 5,212
----------------------------------- ------ ------
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by
product franchise:
2022 2021
$m $m
------------------------------------- ------ ------
Knee Implants 899 876
Hip Implants 584 612
Other Reconstruction 87 92
Trauma & Extremities 543 576
-------------------------------------- ------ ------
Orthopaedics 2,113 2,156
-------------------------------------- ------ ------
Sports Medicine Joint Repair 870 839
Arthroscopic Enabling Technologies 567 590
ENT (Ear, Nose & Throat) 153 131
-------------------------------------- ------ ------
Sports Medicine & ENT 1,590 1,560
-------------------------------------- ------ ------
Advanced Wound Care 712 731
Advanced Wound Bioactives 520 496
Advanced Wound Devices 280 269
-------------------------------------- ------ ------
Advanced Wound Management 1,512 1,496
-------------------------------------- ------ ------
Total 5,215 5,212
-------------------------------------- ------ ------
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 franchises
are sold to wholesalers and intermediaries, while products in the
other franchises 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 product
franchises, 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.
2022 2021
Established Established
Markets (D) Emerging Markets Total Markets (D) Emerging Markets Total
$m $m $m $m $m $m
----------------- ---------------- ---------------- ------ ---------------- ---------------- ------
Orthopaedics,
Sports Medicine
& ENT 2,949 754 3,703 2,969 747 3,716
Advanced Wound
Management 1,319 193 1,512 1,327 169 1,496
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
Total 4,268 947 5,215 4,296 916 5,212
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
D Established Markets comprises US, Australia, Canada, Europe, Japan and New Zealand.
Sales are attributed to the country of destination. US revenue
for the year was $2,764m (2021: $2,658m), China revenue for the
year was $319m (2021: $352m) and UK revenue for the year was $186m
(2021: $189m).
No single 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, where material, as those to be excluded from operating
profit when arriving at trading profit: acquisition and
disposal-related items; significant restructuring programmes;
amortisation and impairment of acquisition intangibles; gains and
losses arising from legal disputes; and other significant
items.
Segment trading profit is reconciled to the statutory measure
below:
2022 2021
$m $m
--------------------------------------------------------- ------ ------
Segment profit
Orthopaedics 383 367
Sports Medicine & ENT 472 459
Advanced Wound Management 436 474
---------------------------------------------------------- ------ ------
Segment trading profit 1,291 1,300
Corporate costs (390) (364)
---------------------------------------------------------- ------ ------
Group trading profit 901 936
Acquisition and disposal related items (4) (7)
Restructuring and rationalisation expenses (167) (113)
Amortisation and impairment of acquisition intangibles (205) (172)
Legal and other (75) (51)
---------------------------------------------------------- ------ ------
Group operating profit 450 593
---------------------------------------------------------- ------ ------
Acquisition and disposal related items
For the year to 31 December 2022, costs primarily relate to the
acquisition of Engage and prior year acquisitions, partially offset
by credits relating to remeasurement of deferred and contingent
consideration for prior year acquisitions.
For the year to 31 December 2021, costs primarily relate to the
acquisition of Extremity Orthopaedics business of Integra
LifeSciences Holdings Corporation and prior year acquisitions,
partially offset by credits relating to remeasurement of contingent
consideration for prior year acquisitions.
Restructuring and rationalisation costs
For the year ended 31 December 2022, these costs include
efficiency and productivity elements of the 12-point plan.
For the years ended 31 December 2022 and 2021, these costs also
relate to the Operations and Commercial Excellence programme. For
the year ended 31 December 2021, the costs also include the
implementation of the Accelerating Performance and Execution (APEX)
programme that was announced in February 2018.
Amortisation and impairment of acquisition intangibles
For the years ended 31 December 2022 and 2021 these costs relate
to the amortisation and impairment of intangible assets acquired in
material business combinations.
Legal and other
For the year ended 31 December 2022 charges primarily relate to
legal expenses for ongoing metal-on-metal hip claims and an
increase of $19m in the provision that reflects the present value
of the estimated costs to resolve all other known and anticipated
metal-on-metal hip claims. These charges in the year to 31 December
2022 were partially offset by a credit of $7m relating to insurance
recoveries for ongoing metal-on-metal hip claims.
For the year ended 31 December 2021 charges primarily relate to
legal expenses for ongoing metal-on-metal hip claims. These charges
in the year to 31 December 2021 were partially offset by a credit
of $35m relating to insurance recoveries for ongoing metal-on-metal
hip claims.
The years ended 31 December 2022 and 2021 also include costs for
implementing the requirements of the EU Medical Device Regulation
which came into effect in May 2021 with a transition period to May
2024.
3. Investments in associates
Since its IPO in February 2021, Bioventus's trading share price
has decreased significantly and the company has disclosed a
substantial doubt about their ability to continue as a going
concern. Given these impairment indicators, management
performed an impairment review by comparing the fair value of
Bioventus using its market share price of $2.61 as at 30 December
2022 less costs of disposal to its carrying amount and concluded
that an impairment loss of $109m should be charged (2021:
$nil).
For the year ended 31 December 2021 a $75m gain on disposal of
interest in associate was recorded, resulting from the dilution
gains which arose during the year due to the Bioventus IPO and
their acquisition of Misonix, Inc.
4. Taxation
Reported tax for the year to 31 December 2022 was a charge of
$12m (2021: $62m). The reported tax charge is low due to tax
credits on significant non-trading items such as the Bioventus
impairment and amortisation of acquisition intangibles.
OECD BEPS 2.0 - Pillar Two
The OECD Pillar Two Globe Rules introduce a global minimum
corporate tax rate of 15% applicable to multinational enterprise
(MNE) groups with global revenue over EUR750m. All participating
OECD members are required to incorporate these rules into national
legislation. On 2 February 2023 the OECD published its Agreed
Administrative Guidance for the Pillar Two Globe Rules providing
greater detail on the application of the rules. The Group will be
subject to the Pillar Two Globe Rules which is likely to result in
an increase in our Group tax rate from 2024 onwards. The Group does
not meet the threshold for application of the Pillar One transfer
pricing rules.
5. Dividends
The 2021 final dividend of 23.1 US cents per ordinary share
totalling $202m was paid on 11 May 2022. The 2022 interim dividend
of 14.4 US cents per ordinary share totalling $125m was paid on 26
October 2022.
A final dividend for 2022 of 23.1 US cents per ordinary share
has been proposed by the Board and will be paid, subject to
shareholder approval, on 17 May 2023 to shareholders whose names
appear on the Register of Members on 31 March 2023 (the record
date). The sterling equivalent per ordinary share will be set
following the record date. The ex-dividend date is 30 March 2023
and the final day for currency and dividend reinvestment plan
('DRIP') elections is 24 April 2023.
6. Acquisitions
Year ended 31 December 2022
On 18 January 2022, the Group completed the acquisition of 100%
of the share capital of Engage Uni, LLC (doing business as Engage
Surgical), owner of the only cementless unicompartmental (partial)
knee system commercially available in the US. This acquisition
strongly supports Smith+Nephew's Strategy for Growth by
transforming our business through innovation and acquisition, while
also providing differentiation for our customers.
The maximum consideration, all payable in cash, is $135m and the
provisional fair value consideration is $131m and includes $32m of
contingent consideration. The goodwill represents the control
premium, the acquired workforce and the synergies expected from
integrating Engage Surgical into the Group's existing business. The
majority of the consideration is expected to be deductible for tax
purposes
The fair value of assets acquired and liabilities assumed are
set out below:
Engage Surgical
$m
-------------------------------------------- ---------------
Intangible assets - Product-related 44
Property, plant & equipment 2
Inventory 2
Trade and other payables (1)
--------------------------------------------- ---------------
Net assets 47
Goodwill 84
--------------------------------------------- ---------------
Consideration (net of $nil cash acquired) 131
--------------------------------------------- ---------------
The product-related intangible assets were valued using a
relief-from-royalty methodology with the key inputs being revenue,
profit and discount rate. The cash outflow from acquisitions of
$113m (2021: $285m) comprises payments of consideration of $89m
(2021: $236m) relating to acquisitions in the current period and
payments of deferred and contingent consideration of $24m (2021:
$49m) relating to acquisitions completed in prior periods.
The carrying value of goodwill increased from $2,989m at 31
December 2021 to $3,031m at 31 December 2022. The acquisition in
the year ended 31 December 2022 increased goodwill by $84m, this
was partially offset by foreign exchange movements of $42m.
For the year ended 31 December 2022 the contribution from Engage
Surgical to revenue and to profit was immaterial. If the business
combination had occurred at the beginning of the year the
contribution to revenue and profit would not have been materially
different.
Year ended 31 December 2021
On 4 January 2021, the Group completed the acquisition of the
Extremity Orthopaedics business of Integra LifeSciences Holdings
Corporation ('Extremity Orthopaedics'). The acquisition
significantly strengthens the Group's extremities business by
adding a
combination of a focused sales channel, complementary shoulder
replacement and upper and lower extremities portfolio, and a new
product pipeline. The transaction comprised the acquisition of the
entire issued share capital of two wholly owned US subsidiaries of
Integra LifeSciences Holdings Corporation group and certain assets
of the Extremity Orthopaedics business held both in and outside the
US. The maximum consideration is $240m and the fair value of
consideration is $236m and includes no deferred or contingent
consideration.
The goodwill represents the control premium, the acquired
workforce and the synergies expected from integrating Extremity
Orthopaedics into the Group's existing business, and is expected to
be partly deductible for tax purposes.
The fair value of assets acquired and liabilities assumed are
set out below:
Extremity Orthopaedics
$m
-------------------------------------------- ----------------------
Intangible assets - Product-related 101
Intangible assets - Customer-related 11
Property, plant & equipment 22
Inventory 41
Other payables (23)
Net deferred tax liability (12)
--------------------------------------------- ----------------------
Net assets 140
Goodwill 96
--------------------------------------------- ----------------------
Consideration (net of $nil cash acquired) 236
--------------------------------------------- ----------------------
The product-related intangible assets were valued using an
excess earnings methodology with the key inputs being revenue,
profit and discount rate.
For the year ended 31 December 2021, the contribution to revenue
from Extremity Orthopaedics was $82m and to profit was immaterial.
If the business combinations had occurred at the beginning of the
year, the contribution to revenue and profit would not have been
materially different.
7. Net debt
Net debt as at 31 December 2022 is outlined below. The repayment
of lease liabilities is included in cash flows from financing
activities in the cash flow statement.
2022 2021
$m $m
------------------------------------------------------------------------------------ -------- --------
Cash at bank 350 1,290
Long-term borrowings (2,565) (2,707)
Bank overdrafts, borrowings and loans due within one year (111) (435)
Net interest rate swap liability (13) -
------------------------------------------------------------------------------------ -------- --------
Net debt (2,339) (1,852)
------------------------------------------------------------------------------------- -------- --------
Non-current lease liabilities (147) (141)
Current lease liabilities (49) (56)
------------------------------------------------------------------------------------- -------- --------
Net debt including lease liabilities (2,535) (2,049)
------------------------------------------------------------------------------------- -------- --------
Reconciliation of net cash flow to movement in net debt including lease liabilities
Net cash flow from cash net of overdrafts (930) (459)
Settlement of currency swaps (3) 4
Net cash flow from borrowings 396 267
------------------------------------------------------------------------------------- -------- --------
Change in net debt from net cash flow (537) (188)
IFRS 16 lease liabilities 1 7
Exchange adjustment 47 59
Corporate bond issuance expense 3 (1)
------------------------------------------------------------------------------------- -------- --------
Change in net debt in the year (486) (123)
Opening net debt (2,049) (1,926)
------------------------------------------------------------------------------------- -------- --------
Closing net debt (2,535) (2,049)
------------------------------------------------------------------------------------- -------- --------
The Group has available committed facilities of $3.7bn (2021:
$4.1bn). During 2022, the Group issued its debut EUR Corporate
Bond, in the form of a EUR500m (before expenses and underwriting
discounts) of notes bearing an interest rate of 4.565% repayable in
2029. In addition, the Group repaid its EUR269m, EUR223m and
EUR265m EUR term loan facilities, as well as $125m of private
placement debt.
The Group has $105m of private placement debt due for repayment
in the second half of 2023.
8a. 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
------------------ --------------
2022 2021 2022 2021 Fair value
$m $m $m $m level
--------------------------------------------------- -------- -------- ------ ------ ----------
Financial assets at fair value
Forward foreign exchange contacts 46 37 46 37 Level 2
Investments 12 10 12 10 Level 3
Contingent consideration receivable 18 20 18 20 Level 3
Currency swaps 1 2 1 2 Level 2
---------------------------------------------------- -------- -------- ------ ------
77 69 77 69
--------------------------------------------------- -------- -------- ------ ------
Financial assets not measured at fair value
Trade and other receivables 1,123 1,046
Cash at bank 350 1,290
---------------------------------------------------- -------- --------
1,473 2,336
--------------------------------------------------- -------- --------
Total financial assets 1,550 2,405
---------------------------------------------------- -------- --------
Financial liabilities at fair value
Acquisition consideration (78) (84) (78) (84) Level 3
Forward foreign exchange contracts (42) (17) (42) (17) Level 2
Currency swaps (1) (2) (1) (2) Level 2
Interest rate swaps (13) - (13) - Level 2
---------------------------------------------------- -------- -------- ------ ------
(134) (103) (134) (103)
--------------------------------------------------- -------- -------- ------ ------
Financial liabilities not measured at fair value
Acquisition consideration (14) (7)
Bank overdrafts (6) (5)
Bank loans - (859)
Corporate bond not in a hedge relationship (994) (993)
Corporate bond in a hedge relationship (516) -
Private placement debt not in a hedge relationship (1,160) (1,285)
Trade and other payables (1,040) (1,053)
---------------------------------------------------- -------- --------
(3,730) (4,202)
--------------------------------------------------- -------- --------
Total financial liabilities (3,864) (4,305)
---------------------------------------------------- -------- --------
At 31 December 2022, the book value and market value of the USD
corporate bond were $994m and $783m respectively (2021: $993m and
$962m), the book value and market value of the EUR Corporate bond
were $516m and $531m respectively. The book value and fair value of
the private placement debt were $1,160m and $987m respectively
(2021: $1,285m and $1,316m).
There were no transfers between Levels 1, 2 and 3 during the
year ended 31 December 2022 and the year ended 31 December 2021.
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 and October 2022 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 expected payment, discounted using a
risk-adjusted 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 year
ended 31 December 2022 and the year ended 31 December 2021 for
financial instruments measured using Level 3 valuation methods are
presented below:
2022 2021
$m $m
------------------------------------ ----- ------
Investments
At 1 January 10 9
Additions 2 2
Fair value remeasurement - (1)
------------------------------------ ----- ------
12 10
------------------------------------ ----- ------
Contingent consideration receivable
At 1 January 20 37
Remeasurements - 1
Receipts (2) (18)
------------------------------------ ----- ------
18 20
------------------------------------ ----- ------
Acquisition consideration liability
At 1 January (84) (128)
Arising on acquisitions (32) -
Payments 20 23
Remeasurements 19 21
Discount unwind (1) -
------------------------------------ ----- ------
(78) (84)
------------------------------------ ----- ------
8b. Retirement benefit obligations
The discount rates applied to the future pension liabilities of
the UK and US 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. These have risen since
31 December 2021 by 290bps to 4.8% and 260bps to 5.3% respectively.
This gain was accompanied by a remeasurement loss from asset
performances.
9. 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:
2022 2021
------------------- ----- -----
Average rates
------------------- ----- -----
Sterling 1.23 1.38
Euro 1.05 1.18
Swiss Franc 1.05 1.09
-------------------- ----- -----
Period end rates
------------------- ----- -----
Sterling 1.21 1.35
Euro 1.07 1.13
Swiss Franc 1.08 1.10
-------------------- ----- -----
Other information
Definitions of and reconciliation to measures included within
adjusted "trading" results
These Financial Statements include financial measures that are
not prepared in accordance with IFRS. These measures, which include
trading profit, trading profit margin, trading profit before tax,
adjusted attributable profit, tax rate on trading results (trading
tax expressed as a percentage of trading profit before tax),
Adjusted Earnings Per Ordinary Share (EPSA), trading 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 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.
Underlying revenue growth
'Underlying revenue growth' is used to compare the revenue in a
given period to the comparative period on a like-for-like basis.
Underlying revenue growth reconciles to reported revenue growth,
the most directly comparable financial measure calculated in
accordance with IFRS, by making 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
Reported Underlying Acquisitions Currency
2022 2021 growth growth & disposals impact
$m $m % % % %
---------------------------------- ------ ------ -------- ---------- ------------ -------
Segment revenue
Orthopaedics 2,113 2,156 (2.0) 1.9 - (3.9)
Sports Medicine & ENT 1,590 1,560 1.9 6.7 - (4.8)
Advanced Wound Management 1,512 1,496 1.1 6.4 - (5.3)
----------------------------------- ------ ------ -------- ---------- ------------ --------
Revenue from external customers 5,215 5,212 0.1 4.7 - (4.6)
----------------------------------- ------ ------ -------- ---------- ------------ --------
Trading profit, trading profit margin, trading cash flow and
trading profit to trading 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, the most directly
comparable IFRS measures, 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').
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 c
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2022 Reported 5,215 450 235 (12) 223 581 25.5
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition and
disposal related
items - 4 162 (31) 131 22 15.1
Restructuring and
rationalisation
costs - 167 168 (30) 138 120 15.8
Amortisation and
impairment of
acquisition
intangibles - 205 205 (45) 160 - 18.4
Legal and other(7) - 75 82 (21) 61 133 7.0
Lease liability
payments - - - - - (54) -
Capital
expenditure - - - - - (358) -
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2022 Adjusted 5,215 901 852 (139) 713 444 81.8
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
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 c
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2021 Reported 5,212 593 586 (62) 524 1,048 59.8
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition and
disposal related
items - 7 (73) (3) (76) 28 (8.8)
Restructuring and
rationalisation
costs - 113 113 (22) 91 108 10.3
Amortisation and
impairment of
acquisition
intangibles - 172 172 (38) 134 - 15.4
Legal and other(7) - 51 59 (22) 37 111 4.2
Lease liability
payments - - - - - (59) -
Capital
expenditure - - - - - (408) -
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2021 Adjusted 5,212 936 857 (147) 710 828 80.9
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
(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 year to 31 December 2022, costs primarily relate to the
acquisition of Engage and prior year acquisitions, partially offset
by credits relating to remeasurement of deferred and contingent
consideration for prior year acquisitions. Adjusted profit before
tax additionally excludes losses of $158m related to the Group's
shareholding in Bioventus. This primarily relates to an impairment
charge of $109m and the Group's share of impairment recognised by
Bioventus in its financial statements.
For the year to 31 December 2021 costs primarily relate to the
acquisition of Extremity Orthopaedics and prior year acquisitions,
partially offset by credits relating to remeasurement of deferred
and contingent consideration for prior year acquisitions. Adjusted
profit before tax additionally excludes gains of $75m associated
with the two transactions resulting in the dilution of the Group's
shareholding in Bioventus and $5m of other gains relating to the
Bioventus IPO.
Restructuring and rationalisation costs
For the year ended 31 December 2022 these costs include
efficiency and productivity elements of the 12-point plan. For the
years ended 31 December 2022 and 31 December 2021, these costs also
relate to the Operations and Commercial Excellence programme
announced in February 2020. For the year ended 31 December 2021 the
costs also include the implementation of the Accelerating
Performance and Execution (APEX) programme that was announced in
February 2018.
For the year ended 31 December 2022 adjusted profit before tax
additionally excludes $1m of restructuring costs related to the
Group's share of results of associates.
Amortisation and impairment of acquisition intangibles
For the years ended 31 December 2022 and 2021 these costs relate
to the amortisation and impairment of intangible assets acquired in
material business combinations.
Legal and other
For the year ended 31 December 2022, charges primarily relate to
legal expenses for ongoing metal-on-metal hip claims and an
increase of $19m in the provision that reflects the present value
of the estimated costs to resolve all other known and anticipated
metal-on-metal hip claims. These charges in the year to 31 December
2022 were partially offset by a credit of $7m relating to insurance
recoveries for ongoing metal-on-metal hip claims.
For the year ended 31 December 2021, charges primarily relate to
legal expenses for ongoing metal-on-metal hip claims. These charges
in the year to 31 December 2021, were partially offset by a credit
of $35m relating to insurance recoveries for ongoing metal-on-metal
hip claims.
For the years ended 31 December 2022 and 2021 charges also
include the costs for implementing the requirements of the EU
Medical Device Regulation that was effective from May 2021 with a
transition period to May 2024.
For the year ended 31 December 2021 trading cash flow
additionally excludes $7m of cash funding to closed defined benefit
schemes. Taxation also includes the effect of an increase in
deferred tax assets on non-trading items resulting from the
prospective UK tax rate increase from 19% to 25% effective from 1
April 2023.
Leverage ratio
The leverage ratio is net debt including lease liabilities to
adjusted EBITDA. Net debt is reconciled in Note 7 to the Financial
Statements. Adjusted EBITDA is defined as trading profit before
depreciation and impairment of property, plant and equipment and
amortisation and impairment of other intangible assets. The
calculation of the leverage ratio is set out below:
2022 2021
$m $m
---------------------------------------------------------- ------ ------
Net debt including lease liabilities 2,535 2,049
Trading profit 901 936
Depreciation of property, plant and equipment 319 326
Amortisation of other intangible assets 56 65
Impairment of property, plant and equipment(1) 30 -
Impairment of other intangible assets(1) 7 -
Adjustment for items already excluded from trading profit (31) (11)
----------------------------------------------------------- ------ ------
Adjusted EBITDA 1,282 1,316
----------------------------------------------------------- ------ ------
Leverage ratio (x) 2.0 1.6
----------------------------------------------------------- ------ ------
(1) Impairments in 2021 were immaterial and did not impact the
leverage ratio.
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END
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February 21, 2023 02:00 ET (07:00 GMT)
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