Smith+Nephew Fourth Quarter and Full
Year 2023 Results
Strong revenue growth and improved trading profit margin in
2023
12-Point Plan on track and starting to deliver financial
outcomes
27 February 2024
Smith+Nephew (LSE:SN, NYSE:SNN), the
global medical technology business, reports results for the fourth
quarter and full year ended 31 December 2023:
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31 Dec
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31 Dec
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Reported
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Underlying
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2023
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2022
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growth
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growth
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$m
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$m
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%
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%
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Fourth Quarter Results1,2
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Revenue
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1,458
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1,365
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6.8
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6.4
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Full Year Results1,2
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Revenue
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5,549
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5,215
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6.4
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7.2
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Operating profit
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425
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450
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Operating profit margin
(%)
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7.7
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8.6
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EPS (cents)
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30.2
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25.5
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Trading profit
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970
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901
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Trading profit margin
(%)
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17.5
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17.3
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EPSA (cents)
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82.8
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81.8
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Q4
Trading Highlights1,2
·
Q4 revenue of $1,458 million (2022: $1,365 million), up 6.4% on an underlying basis.
Reported growth of 6.8% was after 40bps FX
tailwind
Full
Year Financial Highlights1,2
·
Revenue of $5,549 million (2022: $5,215 million),
up 7.2% on an underlying basis, ahead of guidance. Reported growth
of 6.4% was after -80bps FX headwind
o Orthopaedics underlying growth up 5.7%, setting foundations
for further improvement
o Sports Medicine & ENT underlying growth up 10.0%,
including headwind from slow China market
o Advanced Wound Management delivered 6.4% underlying revenue
growth, maintaining momentum from prior year
·
Trading profit up 7.6% on a reported basis to
$970 million (2022: $901 million) with 17.5% trading profit margin
(2022: 17.3%), in line with guidance. Reported operating profit was $425 million (2022: $450
million)
·
Cash generated from operations of $829 million
(2022: $581 million) with improved trading cash flow of $635
million (2022: $444 million)
·
EPSA 82.8¢ (2022: 81.8¢), EPS 30.2¢ (2022:
25.5¢)
·
Full year dividend of 37.5¢ per share (2022: 37.5¢
per share)
Strategic Highlights
·
12-Point Plan on-track with progress starting to
translate into financial outcomes
·
Innovation strategy driving higher growth and
delivering a strong pipeline of new products
·
Acquisition of CartiHeal, strengthening
leadership in Sports Medicine biological healing
Outlook1,2
·
Positive operating leverage and 12-Point Plan
benefits expected to more than offset headwinds including
continuing inflation, -70bps from China Volume Based Procurement
(VBP) within Sports Medicine Joint Repair, and transactional
foreign exchange
·
2024 guidance: underlying revenue growth expected
in the range of 5.0% to 6.0% (4.6% to
5.6% reported), and trading profit margin
expected to be at least 18.0%
·
Midterm targets unchanged
Deepak Nath, Chief Executive Officer, said:
"I am pleased with our overall
performance in 2023, as our actions to transform Smith+Nephew have
begun to translate into meaningful financial outcomes. We delivered
revenue growth ahead of guidance for the full year and made
important improvements to our trading profit margin against a
challenging macro-environment.
"Our 12-Point Plan is on track.
While there is more to do to enhance our performance in US
reconstruction, our Orthopaedics business is progressing along a
clear improvement path. 2023 was another year of good growth for
our Sports Medicine & ENT and Advanced Wound Management
businesses.
"Our investment in innovation
continues to deliver, with almost half of our 2023 growth coming
from products launched in the last five years. We were pleased to
add major launches in robotics, shoulder arthroplasty and negative
pressure wound therapy to the portfolio during the year.
"We have entered 2024 as a
fundamentally stronger business and look forward to delivering
another year of robust growth and further margin
expansion."
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 27 February 2024, details of which
can be found on the Smith+Nephew website at
https://www.smith-nephew.com/en/about-us/investors.
Enquiries
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Investors
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Andrew Swift
Katharine
Rycroft
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+44 (0) 1923 477433
+44 (0) 7811 270734
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Smith+Nephew
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Media
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Charles Reynolds
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+44 (0) 1923 477314
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Smith+Nephew
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Susan Gilchrist / Ayesha
Bharmal
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+44 (0) 20 7404 5959
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Brunswick
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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 2022 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 34 to 38 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
34 to 38 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 2023
Results
Group revenue in 2023 was $5,549
million (2022: $5,215 million), an increase of 7.2% on an
underlying basis. This growth was ahead of our full year guidance
published in February 2023 for growth between 5.0% to 6.0%, and
reflects the strength of the portfolio with all three business
units delivering underlying growth above 5% for the full year.
Group reported growth of 6.4% reflected a -80bps headwind from
foreign exchange primarily due to the strength of the US
Dollar.
Our fourth quarter revenue was
$1,458 million (2022: $1,365 million), up 6.4% on an underlying
basis. Fourth quarter reported revenue growth was 6.8% after a
40bps foreign exchange benefit.
Trading profit for 2023 was up 7.6%
on a reported basis to $970 million (2022: $901 million). The
trading profit margin was 17.5% (2022: 17.3%), an improvement on
the prior year and in line with our full year guidance. The
operating profit was $425 million (2022: $450 million).
The strong revenue growth and
improved trading profit margin in 2023 were built upon the early
benefits from our actions to transform Smith+Nephew. The 12-Point
Plan is on track, with progress beginning to translate into
financial outcomes, and our innovation strategy is delivering a
strong pipeline of new products that we expect to drive future
performance.
Delivering our Strategy for Growth and 12-Point
Plan
Smith+Nephew's Strategy for Growth
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.
In July 2022 we announced our
12-Point Plan to fundamentally change the way Smith+Nephew
operates, accelerating delivery of our Strategy for Growth and
transforming to a consistently higher-growth company. The 12-Point
Plan supports the first two pillars of the Strategy for Growth and
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 business units.
Since inception we have measured our
progress across the 12-Point Plan through a set of internal KPIs to
drive accountability.
The 12-Point Plan is on track and
starting to deliver financial outcomes. Work will continue in 2024,
with further financial progress expected to follow across the year
and in 2025.
Fixing
Orthopaedics
We have made solid progress on
fixing much of Orthopaedics, and laid the foundations for further
improvement. Overall, 2023 full year
business unit growth was 5.7% underlying (4.8% reported), strongly
ahead of last year's growth, which was 1.9% underlying (-2.0%
reported). Performance has improved in Hip
and Knee Implants outside of the US, and globally in Other
Reconstruction (which includes robotics) and Trauma &
Extremities. Recovery has been slower to come through in US
Reconstruction, especially in US Knee Implants.
Product availability has been
central to these variances in performance. By year end, across
Orthopaedics, on the percentage of customer order lines filled
(measured by line-item fill rates
(LIFR)), we had closed more than 95% of the
gap between the low point and our target of being in line with
industry standard. Within this, in US Reconstruction
there are still some areas of inconsistent
product availability, which, together with slower than anticipated set
deployments and some expected impact from sales force change,
limited our ability to win new business. Through the 12-Point Plan
we are continuing to address the
factors that have undermined performance in US Reconstruction.
We are making headway on inventory
through better sales and operations planning, improving forecasting
and bringing the mix of what we manufacture into line with demand.
By the end of 2023, inventory levels for all business units were
starting to come down as we expanded recent product launches,
consumed raw materials and completed and deployed new instrument
sets. We turned a corner in 2023, and brought Days Sales of
Inventory down by 5% for the year, after
several years of increase, and expect to continue to drive
improvement in 2024 and beyond.
A significant driver of the overall
Orthopaedics improvements has been the new demand and supply
planning process which has brought a deeper level of specificity
and collaboration between our operations and commercial teams. We
are also benefiting from our actions to improve logistics and
redeploy implants and instrument sets from lower to
higher-utilisation customers.
We have invested in improving our
commercial execution. In 2023 we repositioned our offering and
undertook deeper sales training for the Orthopaedics team, and
enhanced our incentive plans to better align reward with
performance, sales mix, robotic placement and implant
pull-through.
These steps are expected to help us
address the performance in Hip and Knee Implants in the US, which
remains a priority. At the same time, they will also ensure we
sustain the progress we have delivered elsewhere.
In Trauma & Extremities, where
we have successfully addressed availability of product and
instrument sets for our EVOS◊ Plating system, we are focused
on maintaining the improved growth delivered in the second half of
2023.
Improving
Productivity
We have made good progress on our
actions to improve productivity, contributing around 160bps to our 2023 trading profit margin. Actions have
included updating and standardising pricing strategies across our
portfolio and reducing days sales outstanding. We are also making
procurement savings to help mitigate cost inflation and drive
productivity. During 2023 we deployed an enhanced supplier
selection process to identify and award business to suppliers that
better align to the global business unit strategies and long-term
performance metrics, and better aligned global category strategies
to unlock the Smith+Nephew buying power and leverage, helping to
drive volume to the most preferred suppliers and reduce
cost.
In line with our plan, work on
manufacturing optimisation is at an early stage, with the benefits
from network simplification and cost and asset efficiencies
expected to support our mid-term margin improvement targets. The
underlying work is progressing, with KPIs tracking accordingly. For
instance, conversion cost, which is total direct and indirect cost
to convert raw materials into finished goods as a percentage of
sales, started to come down in the second half of 2023.
A better aligned supply and demand
process has enabled us to critically assess our manufacturing
capacity. From a network perspective we are
reducing excess capacity, having exited one
small site in France and announced the closures of two more in
China and Germany. Over the last two years we have also reduced
hiring and our reliance on contingent workers.
Further accelerating growth
in Advanced Wound Management and Sports Medicine &
ENT
The important third pillar of the
12-Point Plan is focused on building on the consistent above-market
performance of our Advanced Wound Management and Sports Medicine
& ENT business units. Progress is also coming through across
this workstream.
Our negative pressure wound therapy
business is benefitting from focused additional resource behind our
sales force, delivering strong growth in 2023 across both our
traditional RENASYS◊ Negative Pressure Wound Therapy
System and our single-use PICO◊ Negative Pressure Wound
Therapy System.
We are pleased with our progress
across Ambulatory Surgical Centers (ASCs), as we more than tripled
the pace of cross-business unit deals between our Orthopaedics and
Sports Medicine businesses in 2023. Under the 12-Point Plan we have
developed a coordinated approach across these business units
overseen by a dedicated strategic sales team. We are building on
the strong position established by our Sports Medicine business,
which is already the preferred choice for a large proportion of the
ASC market, and successfully introducing our Orthopaedics
portfolio. The CORI Surgical System offers a broad range of indications and
specialised tools to help accommodate the high growth of
outpatient/ASC hip and knee implant procedures, with around a
quarter of US placements of our CORI◊ Surgical System in
2023 being with ASC customers.
Creating value through Innovation
Innovation through our R&D
programme is central to our higher growth ambitions. In 2023,
approaching half of our full year underlying revenue growth came
from products launched in the last five years. Encouragingly, some
of our key growth platforms like our robotics-enabled
CORI◊ Surgical System, our EVOS◊ trauma
plating platform and our REGENETEN◊ Bioinductive Implant
for biological healing are not only contributing to growth today,
but also have multi-year runways still ahead of them as we expand
applications and launch in new markets.
In 2023 we delivered a good cadence
of new product launches, completing 20 with development finished on
a further two ahead of launch in 2024.
We delivered a number of important
enhancements to our robotics-assisted CORI Surgical System. The
CORI Digital Tensioner, a proprietary device for soft tissue
balancing in knee replacement, and the only tensioner for
robotics-assisted surgery, helps make planning more objective and
eliminates inconsistencies in surgery from current manual or
mechanical tools. Personalized Planning powered by AI and the
RI.INSIGHTS◊ Data Visualization Platform gives surgeons
a better understanding of how pre-operative surgical plans and
intra-operative decision-making link to post-operative outcomes. A
saw solution added versatility to appeal to a broader range of
surgeons, making CORI the only solution to offer robotics-assisted
burring and saw bone-cutting options and an application for
revision knee surgery.
We introduced our AETOS◊
Shoulder System, an important part of our growth plans for Trauma
& Extremities which will enable Smith+Nephew to compete
effectively in the $1.7 billion shoulder market, which, at around
9% CAGR, is one of the fastest growing segments in
Orthopaedics.
In Advanced Wound Management, we are
at the early stages of rolling out the new RENASYS◊
EDGE Negative Pressure Wound Therapy
System. RENASYS EDGE brings an important
new option to customers looking for enhanced intuitiveness,
simplicity and durability, especially important for home-care
settings.
We also continued to invest behind
our Sports Medicine portfolio, for instance launching REGENETEN in
China, India and Japan.
Acquisition of CARTIHEAL◊ AGILI-C◊
Cartilage Repair Implant
Our M&A programme focuses on
augmenting our R&D programmes with acquisitions of exciting
technologies to enhance the product portfolio. During the year we
announced the acquisition of CartiHeal, the developer of the
CARTIHEAL AGILI-C Cartilage Repair
Implant, a novel sports medicine technology for
cartilage regeneration in the knee. We announced the completion of
this acquisition on 10 January 2024, paying $180 million, with up
to a further $150 million contingent on future financial
performance.
CARTIHEAL AGILI-C is an off-the-shelf one-step treatment for osteochondral (bone
and cartilage) lesions with a broader indication than existing
treatments. It is indicated to treat a wide patient population,
including those with lesions in knees with mild to moderate
osteoarthritis, a previously unaddressed condition, as well as the
approximately 700,000 patients that receive cartilage repair
annually in the US.
The combination of REGENETEN
and CARTIHEAL AGILI-C strengthens our leadership in Sports Medicine products that
enable biological healing. We expect to use our market development
and commercialisation expertise, including that built through
REGENETEN and our successful knee repair business, to establish a
new standard of care with this novel technology.
Fourth Quarter 2023 Trading Update
Our fourth quarter revenue was
$1,458 million (2022: $1,365 million), up 6.4% on an underlying
basis (reported revenue growth of 6.8% after 40bps foreign exchange
tailwind). There were 60 trading days in the quarter, in-line with
2022.
Fourth Quarter Consolidated Revenue Analysis
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31
December
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31
December
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Reported
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Underlying
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Acquisitions
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Currency
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2023
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2022
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growth
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growth(i)
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/disposals
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impact
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Consolidated revenue by business unit by
product
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$m
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$m
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%
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%
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%
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%
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Orthopaedics
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576
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549
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4.9
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4.9
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-
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-
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Knee Implants
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242
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234
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3.6
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3.6
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-
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-
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Hip Implants
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155
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150
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3.0
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3.6
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-
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(0.6)
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Other
Reconstruction(ii)
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31
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26
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19.9
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19.0
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-
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0.9
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Trauma & Extremities
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148
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139
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6.2
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5.8
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-
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0.4
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Sports Medicine & ENT
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462
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430
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7.3
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7.1
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-
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0.2
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Sports Medicine Joint
Repair
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256
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235
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8.9
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8.8
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-
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0.1
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Arthroscopic Enabling
Technologies
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161
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154
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4.0
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3.7
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-
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0.3
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ENT (Ear, Nose and
Throat)
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45
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41
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10.7
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10.7
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-
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-
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Advanced Wound Management
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420
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386
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9.0
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7.8
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-
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1.2
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Advanced Wound Care
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185
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179
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3.3
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1.4
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-
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1.9
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Advanced Wound
Bioactives
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149
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133
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12.8
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12.5
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-
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0.3
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Advanced Wound Devices
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86
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74
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16.1
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14.9
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-
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1.2
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Total
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1,458
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1,365
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6.8
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6.4
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-
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0.4
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Consolidated revenue by geography
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US
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788
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742
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6.2
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6.2
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-
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-
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Other Established
Markets(iii)
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420
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385
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9.0
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6.1
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-
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2.9
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Total Established Markets
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1,208
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1,127
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7.2
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6.2
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-
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1.0
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Emerging Markets
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250
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238
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5.1
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7.6
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-
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(2.5)
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Total
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1,458
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1,365
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6.8
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6.4
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-
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0.4
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(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
Fourth Quarter Business Unit Performance
Orthopaedics
Our Orthopaedics business unit
delivered revenue growth of 4.9% underlying (4.9% reported) in the
quarter.
Knee Implants grew 3.6% (3.6%
reported) and Hip Implants
grew 3.6% underlying (3.0% reported). Knee performance was led by
our JOURNEY II◊ Knee System. Hip growth was led by our
POLAR3◊ Total Hip Solution and R3 Acetabular System.
Double-digit growth in Knee Implants in Europe and China was offset
by performance in the US, a decline of -3.8%, which reflected some areas of
inconsistent product availability, slower
than anticipated set deployments and the
expected impact from sales force change. In
Hip Implants we delivered double-digit growth in Europe offset by
1.1% growth in the US.
Other Reconstruction delivered
revenue growth of 19.0% underlying (19.9% reported) with strong
growth across robotics including a record quarter of placements of
our CORI Surgical System in the US and following the launch of CORI
in China last quarter.
Trauma & Extremities revenue was up 5.8% underlying (6.2% reported) with
double-digit growth in the US as we
successfully drive greater adoption of the EVOS◊ Plating
System now availability has improved.
Sports Medicine &
ENT
Our Sports Medicine & ENT business unit
delivered underlying revenue growth of 7.1% (7.3% reported) in the
quarter. Excluding China, where the sector faces a headwind from
distributors reducing inventory in anticipation of the Volume Based
Procurement (VBP) programme, Sports Medicine & ENT grew 8.7% on
an underlying basis (9.1% reported).
Sports Medicine Joint Repair delivered 8.8% underlying revenue growth (8.9% reported) led
by strong double-digit growth from REGENETEN. Excluding China,
Sports Medicine Joint Repair grew 12.0% underlying (12.5% reported).
Arthroscopic Enabling Technologies revenue grew 3.7% underlying (4.0% reported), with good growth
from our COBLATION◊ resection range and patient
positioning portfolio.
ENT revenue was up 10.7%
underlying (10.7% reported) led by our tonsil and adenoid business
where we have seen a return to more normalised procedure volumes
after Covid.
Advanced Wound
Management
Our Advanced Wound Management business unit
delivered underlying revenue growth of 7.8% (9.0%
reported).
Advanced Wound Care revenue
grew 1.4% underlying (3.3% reported) with good growth across our
foam dressing and infection management portfolios offset by skin
care.
Advanced Wound Bioactives delivered revenue growth of 12.5% underlying (12.8% reported),
with strong growth from SANTYL◊ as our channel restocked
following the temporary delay to shipments reported last
quarter.
Advanced Wound Devices revenue
was up 14.9% underlying (16.1% reported) driven by double-digit
growth from both our traditional RENASYS◊ Negative
Pressure Wound Therapy System and our single-use PICO◊
Negative Pressure Wound Therapy System.
Fourth Quarter Geographic Performance
Geographically, revenue from our
Established Markets was up 6.2% underlying (7.2% reported). Within
this, the US was up 6.2% underlying (6.2% reported) and Other
Established Markets was up 6.1% underlying (9.0% reported).
Emerging Markets revenue growth of 7.6% underlying (5.1% reported)
included the impact of the VBP headwind in Sports Medicine in
China.
Full Year 2023 Consolidated
Analysis
Smith+Nephew results for the year
ended 31 December 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
|
2023
|
|
2022
|
|
growth
|
|
|
|
$m
|
|
$m
|
|
%
|
|
Revenue
|
|
5,549
|
|
5,215
|
|
6.4
|
|
Operating profit
|
|
425
|
|
450
|
|
|
|
Acquisition and disposal related
items
|
|
60
|
|
4
|
|
|
|
Restructuring and rationalisation
costs
|
|
220
|
|
167
|
|
|
|
Amortisation and impairment of
acquisition intangibles
|
|
207
|
|
205
|
|
|
|
Legal and other
|
|
58
|
|
75
|
|
|
|
Trading profit(i)
|
|
970
|
|
901
|
|
7.6
|
|
|
|
¢
|
|
¢
|
|
|
|
Earnings per share ('EPS')
|
|
30.2
|
|
25.5
|
|
18.2
|
|
Acquisition and disposal related
items
|
|
7.3
|
|
15.1
|
|
|
|
Restructuring and rationalisation
costs
|
|
20.7
|
|
15.8
|
|
|
|
Amortisation and impairment of
acquisition intangibles
|
|
18.6
|
|
18.4
|
|
|
|
Legal and other
|
|
6.0
|
|
7.0
|
|
|
|
Adjusted Earnings per share
('EPSA')(i)
|
|
82.8
|
|
81.8
|
|
1.3
|
|
|
|
|
|
|
|
|
|
(i)
See Other Information on pages
34 to 38
Full Year 2023 Analysis
Our full year revenue was $5,549
million (2022: $5,215 million), up 7.2% on an underlying basis.
Reported growth was 6.4% including a foreign exchange headwind of
-80bps.
The gross profit was $3,819 million
(2022: $3,675 million) with gross margin 68.8% (2022: 70.5%).
Operating profit was $425 million (2022: $450 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 34 to 38).
Trading profit was up 7.6% on a
reported basis to $970 million (2022: $901 million), with a trading
profit margin of 17.5% (2022: 17.3%). The 20bps margin expansion
reflects benefits of c. 160bps from productivity improvements and
c. 110bps from revenue growth leverage offset by headwinds of c.
-130bps from input cost inflation and c. -120bps from transactional foreign exchange
(see Note 2 to the Financial Statements for global
business unit trading profit).
Acquisition and disposal-related
items primarily relate to the acquisition of CartiHeal and
impairment of Engage Surgical's goodwill, partially offset by
credits relating to remeasurement of contingent consideration from
prior year acquisitions. During 2023, management evaluated the
commercial viability of Engage's partial
knee system products and concluded
that they should be discontinued. A total
of $109 million of Engage's assets and liabilities were written off
as a result of this action (see Note 2 to the Financial
Statements).
Restructuring costs totalled $220
million, including costs related to the efficiency and productivity
work underway across the Group under the 12-Point Plan.
Overall, incremental benefits of around $68
million were recognised during the year.
The net interest charge within
reported results was $98 million (2022: $66 million) which reflects
a full year of interest expense on our debut €500 million Euro bond
issued in October 2022 and higher drawings on the Group's revolving
credit facility.
Reported tax for the year to 31
December 2023 was a charge of $27 million (2022: charge of $12
million) with the low charge being attributed to tax credits on
non-trading items such as restructuring and rationalisation
expenses and amortisation of acquisition intangibles. The tax rate
on trading results for the year to 31 December 2023 was 16.2%
(2022: 16.3%) (see Note 4 to the Financial Statements and Other
Information on pages 34 to 38 for further details on
taxation).
Adjusted earnings per share ('EPSA')
was 82.8¢ (165.6¢ per ADS) (2022: 81.8¢ per share). Basic earnings
per share ('EPS') was 30.2¢ (60.4¢ per ADS) (2022: 25.5¢ per
share), reflecting restructuring costs, acquisition and disposal
related items, amortisation and impairment of acquisition
intangibles and legal and other items incurred.
Cash generated from operations was
$829 million (2022: $581 million) and trading cash flow was $635
million (2022: $444 million). The increase was primarily driven by
reduced working capital outflow as inventory began to fall by
year-end (see Other Information on pages 34 to 38 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 improved to 65% (2022:
49%).
In 2023 the Group concluded a
refinancing of our $1 billion revolving credit facility (RCF). The
RCF maturity has been extended to 2028 with options to extend to
2030. The Group also repaid $130 million of
private placement debt. $405 million of private placement debt will
mature in 2024. The Group's net debt, excluding lease liabilities,
at 31 December 2023 was $2,577 million with committed facilities of
$3.6 billion (see Note 6 to the Financial Statements).
Dividend
The Board is recommending a Final
Dividend of 23.1¢ per share (46.2¢ per ADS) (2022: 23.1¢ per
share). Together with the Interim Dividend of 14.4¢ per share
(28.8¢ per ADS), this will give a total distribution of 37.5¢ per
share (75.0¢ per ADS), unchanged from 2022. Subject to confirmation
at our Annual General Meeting, the Final Dividend will be paid on
22 May 2024 to shareholders on the register at the close of
business on 2 April 2024.
Outlook
The Group is today providing
guidance for 2024 and reconfirming its midterm targets.
2024
Guidance
For 2024 we are targeting another
year of strong revenue growth and a further expansion of trading
profit margin.
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 business units, 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 4.6% to 5.6% based on exchange
rates prevailing on 21 February 2024.
In terms of phasing, we expect the
first quarter revenue growth rate to reflect the tough US
comparator from the good start to 2023, as well as a slower quarter
from Advanced Wound Bioactives following the strong fourth quarter
and one less trading day year-on-year. We expect the business to
return to higher growth across the remainder of the
year.
We expect to deliver a
trading profit margin of at least
18.0%. Within this,
headwinds are expected to include continuing inflation, a
-70bps impact from China VBP within Sports
Medicine Joint Repair, and around -30bps from transactional foreign
exchange, plus a small impact from the acquisition of CartiHeal. We
expect to more than offset these headwinds
through positive operating leverage from
revenue growth and productivity improvements and cost saving
initiatives from the 12-Point Plan.
As in prior years, we expect the
trading profit margin to be higher in the second half than in the
first half, although with a less marked step up than in
2023.
The tax rate on trading results for
2024 is forecast to be in the range of 19% to 20%, subject to any
material changes to tax law or other one-off items.
Midterm
targets
Our midterm targets are
unchanged. The Group is focused on delivering underlying
revenue growth of consistently 5%+ and expanding our trading profit
margin.
We continue to target at least 20%
trading profit margin in 2025. While headwinds such as persistent
inflation, foreign exchange movements and China VBP in Sports
Medicine Joint Repair make that a demanding target, we do expect to
see an increasing impact from the 12-Point Plan, including the
benefits of our manufacturing optimisation programme, which are
expected to flow through strongly in 2025.
Forward calendar
The Q1 2024 Trading Report will be
released on 1 May 2024.
About Smith+Nephew
Smith+Nephew is a portfolio medical
technology business focused on the repair, regeneration and
replacement of soft and hard tissue. We exist to restore people's
bodies and their self-belief by using technology to take the limits
off living. We call this purpose 'Life Unlimited'. Our 18,000
employees deliver this mission every day, making a difference to
patients' lives through the excellence of our product portfolio,
and the invention and application of new technologies
across our three global business units of Orthopaedics, Sports
Medicine & ENT and Advanced Wound Management.
Founded in Hull, UK, in 1856, we now
operate in more than 100 countries, and generated annual sales of
$5.5 billion in 2023. Smith+Nephew is a constituent of the FTSE100
(LSE:SN, NYSE:SNN). The terms 'Group' and 'Smith+Nephew' are used
to refer to Smith & Nephew plc and its consolidated
subsidiaries, unless the context requires otherwise.
For more information about
Smith+Nephew, please visit
www.smith-nephew.com and
follow us on X,
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 profit margins, market trends
and our product pipeline are forward-looking statements. Phrases
such as "aim", "plan", "intend", "anticipate", "well-placed",
"believe", "estimate", "expect", "target", "consider" and similar
expressions are generally intended to identify forward-looking
statements. Forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause
actual results to differ materially from what is expressed or
implied by the statements. For Smith+Nephew, these factors include:
conflicts in Europe and the Middle East, economic and financial
conditions in the markets we serve, especially those affecting
healthcare providers, payers and customers; price levels for
established and innovative medical devices; developments in medical
technology; regulatory approvals, reimbursement decisions or other
government actions; product defects or recalls or other problems
with quality management systems or failure to comply with related
regulations; litigation relating to patent or other claims; legal
and financial compliance risks and related investigative, remedial
or enforcement actions; disruption to our supply chain or
operations or those of our suppliers; competition for qualified
personnel; strategic actions, including acquisitions and disposals,
our success in performing due diligence, valuing and integrating
acquired businesses; disruption that may result from transactions
or other changes we make in our business plans or organisation to
adapt to market developments; relationships with healthcare
professionals; reliance on information technology and
cybersecurity; disruptions due to natural disasters, weather and
climate change related events; changes in customer and other
stakeholder sustainability expectations; changes in taxation
regulations; effects of foreign exchange volatility; and numerous
other matters that affect us or our markets, including those of a
political, economic, business, competitive or reputational nature.
Please refer to the documents that Smith+Nephew has filed with the
U.S. Securities and Exchange Commission under the U.S. Securities
Exchange Act of 1934, as amended, including Smith+Nephew's most
recent annual report on Form 20-F, which is available on the SEC's
website at www. sec.gov, for a discussion of certain of these
factors. Any forward-looking statement is based on information
available to Smith+Nephew as of the date of the statement. All
written or oral forward-looking statements attributable to
Smith+Nephew are qualified by this caution. Smith+Nephew does not
undertake any obligation to update or revise any forward-looking
statement to reflect any change in circumstances or in
Smith+Nephew's expectations.
◊ Trademark of Smith+Nephew.
Certain marks registered in US Patent and Trademark
Office.
Full
Year Consolidated Revenue Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
December
|
|
31
December
|
|
Reported
|
|
Underlying
|
|
Acquisitions
|
|
Currency
|
|
|
|
2023
|
|
2022
|
|
growth
|
|
Growth(i)
|
|
/disposals
|
|
impact
|
|
Consolidated revenue by business unit by
product
|
|
$m
|
|
$m
|
|
%
|
|
%
|
|
%
|
|
%
|
|
Orthopaedics
|
|
2,214
|
|
2,113
|
|
4.8
|
|
5.7
|
|
-
|
|
(0.9)
|
|
Knee Implants
|
|
940
|
|
899
|
|
4.7
|
|
5.5
|
|
-
|
|
(0.8)
|
|
Hip Implants
|
|
599
|
|
584
|
|
2.5
|
|
3.8
|
|
-
|
|
(1.3)
|
|
Other
Reconstruction(ii)
|
|
111
|
|
87
|
|
27.8
|
|
28.0
|
|
-
|
|
(0.2)
|
|
Trauma & Extremities
|
|
564
|
|
543
|
|
3.7
|
|
4.4
|
|
-
|
|
(0.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports Medicine & ENT
|
|
1,729
|
|
1,590
|
|
8.8
|
|
10.0
|
|
-
|
|
(1.2)
|
|
Sports Medicine Joint
Repair
|
|
945
|
|
870
|
|
8.7
|
|
9.9
|
|
-
|
|
(1.2)
|
|
Arthroscopic Enabling
Technologies
|
|
588
|
|
567
|
|
3.7
|
|
4.7
|
|
-
|
|
(1.0)
|
|
ENT (Ear, Nose and
Throat)
|
|
196
|
|
153
|
|
28.1
|
|
29.8
|
|
-
|
|
(1.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced Wound Management
|
|
1,606
|
|
1,512
|
|
6.2
|
|
6.4
|
|
-
|
|
(0.2)
|
|
Advanced Wound Care
|
|
725
|
|
712
|
|
1.8
|
|
2.1
|
|
-
|
|
(0.3)
|
|
Advanced Wound
Bioactives
|
|
553
|
|
520
|
|
6.3
|
|
6.2
|
|
-
|
|
0.1
|
|
Advanced Wound Devices
|
|
328
|
|
280
|
|
17.0
|
|
17.6
|
|
-
|
|
(0.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
5,549
|
|
5,215
|
|
6.4
|
|
7.2
|
|
-
|
|
(0.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue by geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
2,979
|
|
2,764
|
|
7.8
|
|
7.8
|
|
-
|
|
-
|
|
Other Established
Markets(iii)
|
|
1,611
|
|
1,504
|
|
7.1
|
|
7.3
|
|
-
|
|
(0.2)
|
|
Total Established Markets
|
|
4,590
|
|
4,268
|
|
7.5
|
|
7.6
|
|
-
|
|
(0.1)
|
|
Emerging Markets
|
|
959
|
|
947
|
|
1.3
|
|
5.1
|
|
-
|
|
(3.8)
|
|
Total
|
|
5,549
|
|
5,215
|
|
6.4
|
|
7.2
|
|
-
|
|
(0.8)
|
|
(i) Underlying growth
is defined in Note 1 on page 3
(ii) Other Reconstruction
includes robotics capital sales, our joint
navigation business and bone cement
(iii) Other Established Markets
are Europe, Canada, Japan, Australia and New Zealand
2023 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Group Income Statement for the year ended 31 December
2023
|
|
|
|
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
Notes
|
|
$m
|
|
$m
|
Revenue
|
|
2
|
|
5,549
|
|
5,215
|
Cost of goods sold
|
|
|
|
(1,730)
|
|
(1,540)
|
Gross profit
|
|
|
|
3,819
|
|
3,675
|
Selling, general and
administrative expenses
|
|
|
|
(3,055)
|
|
(2,880)
|
Research and development
expenses
|
|
|
|
(339)
|
|
(345)
|
Operating profit
|
|
2
|
|
425
|
|
450
|
Interest income
|
|
|
|
34
|
|
14
|
Interest expense
|
|
|
|
(132)
|
|
(80)
|
Other finance costs
|
|
|
|
(7)
|
|
(8)
|
Share of results of
associates
|
|
|
|
(30)
|
|
(141)
|
Profit before taxation
|
|
|
|
290
|
|
235
|
Taxation
|
|
3
|
|
(27)
|
|
(12)
|
Attributable profitA
|
|
|
|
263
|
|
223
|
Earnings per shareA
|
|
|
|
|
|
|
Basic
|
|
|
|
30.2¢
|
|
25.5¢
|
Diluted
|
|
|
|
30.1¢
|
|
25.5¢
|
Group Statement of Comprehensive Income for the year ended 31
December 2023
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
$m
|
|
$m
|
Attributable profitA
|
|
263
|
|
223
|
Other comprehensive
income
|
|
|
|
|
Items that will not be reclassified to income
statement
|
|
|
|
|
Remeasurement of net retirement
benefit obligations
|
|
(89)
|
|
30
|
Taxation on other comprehensive
income
|
|
18
|
|
(7)
|
Total items that will not be
reclassified to income statement
|
|
(71)
|
|
23
|
|
|
|
|
|
Items that may be reclassified subsequently to income
statement
|
|
|
|
|
Exchange differences on
translation of foreign operations
|
|
56
|
|
(102)
|
Net losses on cash flow
hedges
|
|
(2)
|
|
(13)
|
Taxation on other comprehensive
income
|
|
-
|
|
2
|
Total items that may be
reclassified subsequently to income statement
|
|
54
|
|
(113)
|
Other comprehensive loss for
the year, net of taxation
|
|
(17)
|
|
(90)
|
Total comprehensive income for the
yearA
|
|
246
|
|
133
|
A Attributable
to the equity holders of the parent and wholly derived from
continuing operations.
Group Balance Sheet as at 31 December 2023
|
|
|
|
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
Notes
|
|
$m
|
|
$m
|
ASSETS
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
Property, plant and
equipment
|
|
|
|
1,470
|
|
1,455
|
Goodwill
|
|
|
|
2,992
|
|
3,031
|
Intangible assets
|
|
|
|
1,110
|
|
1,236
|
Investments
|
|
|
|
8
|
|
12
|
Investment in
associates
|
|
|
|
16
|
|
46
|
Other non-current
assets
|
|
|
|
18
|
|
12
|
Retirement benefit
assets
|
|
|
|
69
|
|
141
|
Deferred tax assets
|
|
|
|
274
|
|
177
|
|
|
|
|
5,957
|
|
6,110
|
Current assets
|
|
|
|
|
|
|
Inventories
|
|
|
|
2,395
|
|
2,205
|
Trade and other
receivables
|
|
|
|
1,300
|
|
1,264
|
Current tax receivable
|
|
|
|
33
|
|
37
|
Cash at bank
|
|
6
|
|
302
|
|
350
|
|
|
|
|
4,030
|
|
3,856
|
TOTAL ASSETS
|
|
|
|
9,987
|
|
9,966
|
|
|
|
|
|
|
|
EQUITY AND LIABILITIES
|
|
|
|
|
|
|
Equity attributable to owners of the
Company
|
|
|
|
|
|
|
Share capital
|
|
|
|
175
|
|
175
|
Share premium
|
|
|
|
615
|
|
615
|
Capital redemption
reserve
|
|
|
|
20
|
|
20
|
Treasury shares
|
|
|
|
(94)
|
|
(118)
|
Other reserves
|
|
|
|
(405)
|
|
(459)
|
Retained earnings
|
|
|
|
4,906
|
|
5,026
|
Total equity
|
|
|
|
5,217
|
|
5,259
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
Long-term borrowings and lease
liabilities
|
|
6
|
|
2,319
|
|
2,712
|
Retirement benefit
obligations
|
|
|
|
88
|
|
70
|
Other payables
|
|
|
|
35
|
|
90
|
Provisions
|
|
|
|
48
|
|
84
|
Deferred tax
liabilities
|
|
|
|
9
|
|
36
|
|
|
|
|
2,499
|
|
2,992
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Bank overdrafts, borrowings, loans
and lease liabilities
|
|
6
|
|
765
|
|
160
|
Trade and other
payables
|
|
|
|
1,055
|
|
1,098
|
Provisions
|
|
|
|
233
|
|
243
|
Current tax payable
|
|
|
|
218
|
|
214
|
|
|
|
|
2,271
|
|
1,715
|
Total liabilities
|
|
|
|
4,770
|
|
4,707
|
TOTAL EQUITY AND LIABILITIES
|
|
|
|
9,987
|
|
9,966
|
Condensed Group Cash Flow Statement for the year ended 31
December 2023
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
$m
|
|
$m
|
Cash flows from operating activities
|
|
|
|
|
Profit before taxation
|
|
290
|
|
235
|
Net interest expense
|
|
98
|
|
66
|
Depreciation, amortisation and
impairment
|
|
701
|
|
628
|
Share of results of
associates
|
|
30
|
|
141
|
Share-based payments expense
(equity-settled)
|
|
39
|
|
40
|
Net movement in post-retirement
obligations
|
|
3
|
|
6
|
Movement in working capital and
provisions
|
|
(332)
|
|
(535)
|
Cash generated from
operations
|
|
829
|
|
581
|
Net interest and finance costs
paid
|
|
(96)
|
|
(66)
|
Income taxes paid
|
|
(125)
|
|
(47)
|
Net cash inflow from operating
activities
|
|
608
|
|
468
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
Acquisitions, net of cash
acquired
|
|
(21)
|
|
(113)
|
Capital expenditure
|
|
(427)
|
|
(358)
|
Purchase of investments
|
|
-
|
|
(2)
|
Distribution from
associate
|
|
-
|
|
1
|
Net cash used in investing
activities
|
|
(448)
|
|
(472)
|
Net cash inflow/(outflow) before
financing activities
|
|
160
|
|
(4)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from issue of ordinary
share capital
|
|
-
|
|
1
|
Proceeds from own
shares
|
|
-
|
|
5
|
Purchase of own shares
|
|
-
|
|
(158)
|
Payment of capital element of
lease liabilities
|
|
(52)
|
|
(54)
|
Equity dividends paid
|
|
(327)
|
|
(327)
|
Cash movements in
borrowings
|
|
175
|
|
(396)
|
Settlement of currency
swaps
|
|
4
|
|
3
|
Net cash used in financing
activities
|
|
(200)
|
|
(926)
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(40)
|
|
(930)
|
Cash and cash equivalents at
beginning of year
|
|
344
|
|
1,285
|
Exchange adjustments
|
|
(4)
|
|
(11)
|
Cash and cash equivalents at end of
yearB
|
|
300
|
|
344
|
B Cash and cash
equivalents at the end of the period are net of bank overdrafts of
$2m (2022: $6m).
Group Statement of Changes in Equity for the year ended 31
December 2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2023
|
|
175
|
|
615
|
|
20
|
|
(118)
|
|
(459)
|
|
5,026
|
|
5,259
|
Attributable
profitA
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
263
|
|
263
|
Other comprehensive
incomeA
|
|
-
|
|
-
|
|
-
|
|
-
|
|
54
|
|
(71)
|
|
(17)
|
Equity dividends paid
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(327)
|
|
(327)
|
Share-based payments
recognised
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
39
|
|
39
|
Cost of shares transferred to
beneficiaries
|
|
-
|
|
-
|
|
-
|
|
24
|
|
-
|
|
(24)
|
|
-
|
At 31 December 2023
|
|
175
|
|
615
|
|
20
|
|
(94)
|
|
(405)
|
|
4,906
|
|
5,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
profitA
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
223
|
|
223
|
Other comprehensive
incomeA
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(113)
|
|
23
|
|
(90)
|
Equity dividends paid
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(327)
|
|
(327)
|
Share-based payments
recognised
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
40
|
|
40
|
Taxation on share-based
payments
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(3)
|
|
(3)
|
Purchase of own
sharesC
|
|
-
|
|
-
|
|
-
|
|
(158)
|
|
-
|
|
-
|
|
(158)
|
Cost of shares transferred to
beneficiaries
|
|
-
|
|
-
|
|
-
|
|
31
|
|
-
|
|
(26)
|
|
5
|
Cancellation of treasury
sharesC
|
|
(2)
|
|
-
|
|
2
|
|
129
|
|
-
|
|
(129)
|
|
-
|
Issue of ordinary share
capital
|
|
-
|
|
1
|
|
-
|
|
-
|
|
-
|
|
-
|
|
1
|
At 31 December 2022
|
|
175
|
|
615
|
|
20
|
|
(118)
|
|
(459)
|
|
5,026
|
|
5,259
|
A Attributable to the
equity holders of the parent and wholly derived from continuing
operations.
C
During the year ended 31 December 2023, a total
of nil ordinary shares was purchased at a cost of $nil and nil
ordinary shares were cancelled (2022: 10.1m ordinary shares were
purchased at a cost of $158m and 7.8m ordinary shares were
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 2023. 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 Accounting Standards) as issued by the
International Accounting Standards Board (IASB) effective as at 31
December 2023. IFRS as adopted in the UK differs in certain
respects from IFRS Accounting Standards 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 2022.
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 $300m of
cash and cash equivalents at 31 December 2023. The Group's net
debt, excluding lease liabilities, at 31 December 2023 was $2,577m
with access to committed facilities of $3.6bn with an average
maturity of 5.2 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 $405m of private
placement debt due for repayment in 2024. $1,030m 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 2023 Annual Report.
These are: strategy and 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 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 2023 or 2022 but is derived from those
accounts. Statutory accounts for 2022 have been delivered to the
registrar of companies and those for 2023 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 2023
A number of new amendments to
standards are effective from 1 January 2023 but they do not have a
material effect on the Group's financial statements except for
Deferred Tax related to Assets and Liabilities arising from a
Single Transaction - Amendment to IAS 12, which the Group has
adopted. The amendments narrow the scope of the initial recognition
exemption to exclude transactions that give rise to equal and
offsetting temporary differences such as leases.
The Group previously accounted for
deferred tax on leases where the deferred tax asset or liability
was recognised on a net basis. Following the amendments, the Group
has recognised a separate deferred tax asset in relation to its
lease liabilities and a deferred tax liability in relation to its
right-of-use assets. However, there is no impact on the balance
sheet because the balances qualify for offset under paragraph 74 of
IAS 12. There was also no impact on the opening retained earnings
as at 1 January 2023 as a result of the change. The policy for
recognising and measuring income taxes is consistent with that
applied in the comparative years except for the changes outlined
above as a result of the Group's adoption of the amendments to IAS
12. The change in accounting policy will also be reflected in the
Group's condensed consolidated financial statements for the year
ended 31 December 2023.
Accounting standards issued but not yet
effective
A number of new standards and
amendments to standards are effective for annual periods beginning
after 1 January 2024 and earlier application is permitted; however,
the Group has not adopted them early in preparing these Financial
Statements.
The Group is adopting the mandatory
temporary exception from the recognition and disclosure of deferred
taxes arising from the jurisdictional implementation of the Pillar
Two model rules which will take effect for the Group from 1 January
2024.
Critical judgements and estimates
The Group prepares its financial
statements in accordance with IFRS Accounting Standards as issued
by the IASB and IFRS adopted in the UK, the application of which
often requires judgements and estimates to be made by
management when formulating the Group's financial position and
results. Under IFRS, the Directors are required to adopt those
accounting policies most appropriate to the
Group's circumstances for the purpose of presenting fairly the
Group's financial position, financial performance and cash
flows.
The Group's 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 2022. Management have
considered the impact of the uncertainties around the current
challenging economic environment below.
Valuation of inventories
A feature of the Orthopaedics
business unit (which accounts for approximately 66% of the Group's
total inventory and approximately 82% 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 2022, 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 $504m at 31 December 2022 to $544m at
31 December 2023. The provision for excess and obsolete inventory
is not considered to have a range of potential outcomes that is
significantly different to the $544m at 31 December 2023
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 2024 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 an increase 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. In 2023, the Group
impaired $84m of goodwill and $37m of intangible assets related to
Engage as a result of the impairment review undertaken for the
voluntary product discontinuation.
For other intangible assets and
goodwill CGUs, this critical estimate is not considered to have a
significant risk of material adjustment in 2024 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 2023 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.
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 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 business units and the chief
operating decision maker monitors performance, makes operating
decisions and allocates resources on a global business unit basis.
Accordingly, the Group has concluded that there are three
reportable segments.
Business unit presidents have
responsibility for upstream marketing, driving product portfolio
and technology acquisition decisions, full commercial
responsibility and for the implementation of their business unit
strategy globally.
The Executive Committee ('ExCo')
comprises the Chief Financial Officer ('CFO'), the business unit
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 business units
(Orthopaedics, Sports Medicine & ENT, and Advanced Wound
Management) and determines the best allocation of resources to the
business units. 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 fulfilled within one year. There is no
significant revenue associated with the provision of
services.
Payment
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:
|
|
|
|
|
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
$m
|
|
$m
|
Segment revenue
|
|
|
|
|
Orthopaedics
|
|
2,214
|
|
2,113
|
Sports Medicine &
ENT
|
|
1,729
|
|
1,590
|
Advanced Wound
Management
|
|
1,606
|
|
1,512
|
Revenue from external
customers
|
|
5,549
|
|
5,215
|
|
|
|
|
|
Disaggregation of revenue
The following table shows the
disaggregation of Group revenue by product by business
unit:
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
$m
|
|
$m
|
Knee Implants
|
|
940
|
|
899
|
Hip Implants
|
|
599
|
|
584
|
Other Reconstruction
|
|
111
|
|
87
|
Trauma &
Extremities
|
|
564
|
|
543
|
Orthopaedics
|
|
2,214
|
|
2,113
|
Sports Medicine Joint
Repair
|
|
945
|
|
870
|
Arthroscopic Enabling
Technologies
|
|
588
|
|
567
|
ENT (Ear, Nose &
Throat)
|
|
196
|
|
153
|
Sports Medicine & ENT
|
|
1,729
|
|
1,590
|
Advanced Wound Care
|
|
725
|
|
712
|
Advanced Wound
Bioactives
|
|
553
|
|
520
|
Advanced Wound Devices
|
|
328
|
|
280
|
Advanced Wound Management
|
|
1,606
|
|
1,512
|
Total
|
|
5,549
|
|
5,215
|
The following table shows the
disaggregation of Group revenue by geographic market and product
category. The disaggregation of revenue into the two product
categories below reflects that in general the products in the
Advanced Wound Management business unit are sold to wholesalers and
intermediaries, while products in the other business units are sold
directly to hospitals, ambulatory surgery centers and distributors.
The further disaggregation of revenue by Established Markets and
Emerging Markets reflects that in general our products are sold
through distributors and intermediaries in the Emerging Markets
while in the Established Markets, with the exception of the
Advanced Wound Care and Bioactives products, which 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
Established Markets
(D)
|
|
Emerging
Markets
|
|
Total
|
|
Established Markets
(D)
|
|
Emerging
Markets
|
|
Total
|
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
Orthopaedics, Sports Medicine
& ENT
|
|
3,184
|
|
759
|
|
3,943
|
|
2,949
|
|
754
|
|
3,703
|
Advanced Wound
Management
|
|
1,406
|
|
200
|
|
1,606
|
|
1,319
|
|
193
|
|
1,512
|
Total
|
|
4,590
|
|
959
|
|
5,549
|
|
4,268
|
|
947
|
|
5,215
|
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 $2,979m (2022:
$2,764m), China revenue for the year was $275m (2022: $319m) and UK
revenue for the year was $201m (2022: $186m).
No single customer comprises more
than 10% of the Group's external sales.
2b. Trading and operating 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:
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
$m
|
|
$m
|
Segment profit
|
|
|
|
|
Orthopaedics
|
|
398
|
|
383
|
Sports Medicine &
ENT
|
|
503
|
|
472
|
Advanced Wound
Management
|
|
472
|
|
436
|
Segment trading profit
|
|
1,373
|
|
1,291
|
Corporate costs
|
|
(403)
|
|
(390)
|
Group trading profit
|
|
970
|
|
901
|
Acquisition and disposal related
items1
|
|
(60)
|
|
(4)
|
Restructuring and rationalisation
expenses
|
|
(220)
|
|
(167)
|
Amortisation and impairment of
acquisition intangibles1
|
|
(207)
|
|
(205)
|
Legal and
other1
|
|
(58)
|
|
(75)
|
Group operating profit
|
|
425
|
|
450
|
|
|
|
|
|
1 During 2023,
management evaluated the commercial viability of Engage products
and concluded that they should be discontinued. A total of $109m of
Engage's assets and liabilities were written off as a result of
this action, which includes goodwill of $84m (included in
acquisition and disposal related items), intangible assets of $37m
(included in amortisation and impairment of acquisition
intangibles), inventory of $21m (included in legal and other),
partially offset by the remeasurement of contingent consideration
of $33m (included in acquisition and disposal related
items).
Acquisition and disposal related items
For the year ended 31 December
2023, costs primarily relate to the acquisition of CartiHeal and
impairment of Engage goodwill, partially offset by credits
relating to remeasurement of contingent consideration for prior
year acquisitions.
For the year ended 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.
Restructuring and rationalisation costs
For the years ended 31 December
2023 and 2022, these costs include efficiency and productivity
elements of the 12-Point Plan and the Operations and Commercial
Excellence programme.
Amortisation and impairment of acquisition
intangibles
For the years ended 31 December
2023 and 2022, 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
2023, charges primarily relate to legal expenses for ongoing
metal-on-metal hip claims partially offset by a decrease of $8m in
the provision that reflects the decrease in the present value of
the estimated costs to resolve all other known and anticipated
metal-on-metal hip claims and by the release of a provision for an
intellectual property dispute.
For the year ended 31 December
2022, charges primarily relate to legal expenses for ongoing
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.
The years ended 31 December 2023
and 2022 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. Taxation
Reported tax for the year ended 31
December 2023 was a charge of $27m (2022: $12m charge). The
reported tax charge is low due to tax credits on significant
non-trading items such as restructuring and rationalisation
expenses and amortisation of acquisition intangibles.
Pillar Two
The OECD Pillar Two GloBE Rules
(Pillar Two) introduce a global minimum corporation tax rate of 15%
applicable to multinational enterprise groups with global revenue
over €750m. All participating OECD members are required to
incorporate these rules into national legislation. The Pillar Two
rules will apply to the Group for its accounting period commencing
1 January 2024. On 23 May 2023, the International Accounting
Standards Board (IASB) amended IAS 12 to introduce a mandatory
temporary exception to the accounting for deferred taxes arising
from the jurisdictional implementation of the Pillar Two model
rules. On 19 July 2023 the UK Endorsement Board adopted the IASB
amendments to IAS 12.
The Group has performed an
assessment of its potential exposure to Pillar Two income taxes
based on 2023 financial data and considers that the rules will
result in an increase in the Group tax rate. The main jurisdictions
which would give rise to Pillar Two income tax are Switzerland,
Singapore and Costa Rica; all jurisdictions in which the Group has
substantial operations. It is estimated that the Pillar Two income
tax would increase the Group tax rate by around 1.5%. The actual
Pillar Two impact in 2024 will depend on factors such as revenues,
costs and foreign currency exchange rate impacts by
jurisdiction.
The Group is adopting the
mandatory temporary exception from the recognition and disclosure
of deferred taxes arising from the jurisdictional implementation of
the Pillar Two model rules.
The Group does not meet the
threshold for application of the Pillar One transfer pricing
rules.
4. Dividends
The 2022 final dividend of 23.1 US
cents per ordinary share totalling $201m was paid on 17 May 2023.
The 2023 interim dividend of 14.4 US cents per ordinary share
totalling $126m was paid on 1 November 2023.
A final dividend for 2023 of 23.1
US cents per ordinary share has been proposed by the Board and will
be paid, subject to shareholder approval, on 22 May 2024 to
shareholders whose names appear on the Register of Members on 2
April 2024. The sterling equivalent per ordinary share will be set
following the record date. The ex-dividend date is 28 March 2024
and the final day for currency and dividend reinvestment plan
('DRIP') elections is 30 April 2024.
5. Acquisitions
Year ended 31 December 2023
No acquisitions were completed in
the year ended 31 December 2023.
During 2023, management evaluated
the commercial viability of Engage products and concluded that they
should be discontinued. Refer to note 2b for further
details.
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.
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 is 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.
6. Net debt
Net debt as at 31 December 2023 is
outlined below. The repayment of lease liabilities is included in
cash flows from financing activities in the cash flow
statement.
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
$m
|
|
$m
|
Cash at bank
|
|
302
|
|
350
|
Long-term borrowings
|
|
(2,175)
|
|
(2,565)
|
Bank overdrafts, borrowings and
loans due within one year
|
|
(710)
|
|
(111)
|
Net currency swap
(liabilities)/assets
|
|
(1)
|
|
-
|
Net interest rate swap
assets/(liabilities)
|
|
7
|
|
(13)
|
Net debt
|
|
(2,577)
|
|
(2,339)
|
Non-current lease
liabilities
|
|
(144)
|
|
(147)
|
Current lease
liabilities
|
|
(55)
|
|
(49)
|
Net debt including lease
liabilities
|
|
(2,776)
|
|
(2,535)
|
|
|
|
|
|
Reconciliation of net cash flow to movement in net debt
including lease liabilities
|
|
|
|
|
Net cash flow from cash net of
overdrafts
|
|
(40)
|
|
(930)
|
Settlement of currency
swaps
|
|
(4)
|
|
(3)
|
Net cash flow from
borrowings
|
|
(175)
|
|
396
|
Change in net debt from net cash
flow
|
|
(219)
|
|
(537)
|
IFRS 16 lease
liabilities
|
|
(3)
|
|
1
|
Exchange adjustment
|
|
(20)
|
|
47
|
Corporate bond issuance
expense
|
|
1
|
|
3
|
Change in net debt in the
year
|
|
(241)
|
|
(486)
|
Opening net debt
|
|
(2,535)
|
|
(2,049)
|
Closing net debt
|
|
(2,776)
|
|
(2,535)
|
The Group has available committed
facilities of $3.6bn (2022: $3.7bn). In Q4 2023, the Group
refinanced its $1bn Revolving Credit Facility, which extends the
facility maturity to 2028, with options to extend the maturity to
2030.
During 2022, the Group issued its
debut EUR Corporate Bond, in the form of a €500m (before expenses
and underwriting discounts) of notes bearing an interest rate
of 4.565% repayable in 2029.
The Group has $405m of private
placement debt due for repayment in 2024.
7a. Financial instruments
The following table shows the
carrying amounts and fair values of financial assets and financial
liabilities, including their levels in the fair value
hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount
|
|
Fair value
|
|
|
|
|
2023
|
|
2022
|
|
2023
|
|
2022
|
|
Fair value
|
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
level
|
Financial assets at fair value
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange
contacts
|
|
25
|
|
46
|
|
25
|
|
46
|
|
Level
2
|
Investments
|
|
8
|
|
12
|
|
8
|
|
12
|
|
Level
3
|
Contingent consideration
receivable
|
|
18
|
|
18
|
|
18
|
|
18
|
|
Level
3
|
Currency swaps
|
|
2
|
|
1
|
|
2
|
|
1
|
|
Level
2
|
Interest rate swaps
|
|
7
|
|
-
|
|
7
|
|
-
|
|
Level
2
|
|
|
60
|
|
77
|
|
60
|
|
77
|
|
|
Financial assets not measured at fair value
|
|
|
|
|
|
|
|
|
|
|
Trade and other
receivables
|
|
1,163
|
|
1,123
|
|
|
|
|
|
|
Cash at bank
|
|
302
|
|
350
|
|
|
|
|
|
|
|
|
1,465
|
|
1,473
|
|
|
|
|
|
|
Total financial assets
|
|
1,525
|
|
1,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities at fair value
|
|
|
|
|
|
|
|
|
|
|
Acquisition
consideration
|
|
(32)
|
|
(78)
|
|
(32)
|
|
(78)
|
|
Level
3
|
Forward foreign exchange
contracts
|
|
(25)
|
|
(42)
|
|
(25)
|
|
(42)
|
|
Level
2
|
Currency swaps
|
|
(3)
|
|
(1)
|
|
(3)
|
|
(1)
|
|
Level
2
|
Interest rate swaps
|
|
-
|
|
(13)
|
|
-
|
|
(13)
|
|
Level
2
|
|
|
(60)
|
|
(134)
|
|
(60)
|
|
(134)
|
|
|
Financial liabilities not measured at fair
value
|
|
|
|
|
|
|
|
|
|
|
Acquisition
consideration
|
|
(4)
|
|
(14)
|
|
|
|
|
|
|
Bank overdrafts
|
|
(2)
|
|
(6)
|
|
|
|
|
|
|
Bank loans
|
|
(303)
|
|
-
|
|
|
|
|
|
|
Corporate bond not in a hedge
relationship
|
|
(995)
|
|
(994)
|
|
|
|
|
|
|
Corporate bond in a hedge
relationship
|
|
(555)
|
|
(516)
|
|
|
|
|
|
|
Private placement debt not in a
hedge relationship
|
|
(1,030)
|
|
(1,160)
|
|
|
|
|
|
|
Trade and other payables
|
|
(1,026)
|
|
(1,040)
|
|
|
|
|
|
|
|
|
(3,915)
|
|
(3,730)
|
|
|
|
|
|
|
Total financial liabilities
|
|
(3,975)
|
|
(3,864)
|
|
|
|
|
|
|
At 31 December 2023, the book value
and market value of the USD corporate bond were $995m and $826m
respectively (2022: $994m and $783m), the book value and
market value of the EUR Corporate bond were $555m and $586m
respectively (2022: $516m and $531m). The book value and fair value
of the private placement debt were $1,030m and $959m respectively
(2022: $1,160m and $987m).
There were no transfers between
Levels 1, 2 and 3 during the year ended 31 December 2023 and the
year ended 31 December 2022. 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 2023 and the
year ended 31 December 2022 for financial instruments measured
using Level 3 valuation methods are presented below:
|
|
|
|
2023
|
2022
|
|
$m
|
$m
|
Investments
|
|
|
At 1 January
|
12
|
10
|
Additions
|
-
|
2
|
Fair value
remeasurement
|
(4)
|
-
|
|
8
|
12
|
|
|
|
Contingent consideration receivable
|
|
|
At 1 January
|
18
|
20
|
Receipts
|
-
|
(2)
|
|
18
|
18
|
|
|
|
Acquisition consideration liability
|
|
|
At 1 January
|
(78)
|
(84)
|
Arising on acquisitions
|
-
|
(32)
|
Payments
|
13
|
20
|
Remeasurements
|
33
|
19
|
Discount unwind
|
-
|
(1)
|
|
(32)
|
(78)
|
7b. 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. The
actuarial loss on obligation of $25m primarily relates to the
decrease in discount rates since 31 December 2022 by 30bps to 4.5%
and 5.0% for the UK Plan and US Plan respectively. There is also an
actuarial loss from the return on plan assets of $64m mainly due to
the impact of UK Plan buy-in.
In June 2023, the Trustee with the
support of the Company concluded a full buy-in of the Main Fund
with Rothesay Life. However, no decision on a future buy-out had
been reached by the Company yet. Whilst the contract between the
Life Insurer (Rothesay) and the Trustee allows for a buy-out, a
number of steps would need to be concluded before this could be
achieved. Not least, the conclusion of the due diligence process
with the Life Insurer is expected to continue into the second half
of 2024. Thereafter, the Trustee and the Company could not act
unilaterally to move to a buy-out and the UK Fund governance
structure lays out several steps the Company would be required to
conclude for a buy-out decision. The transaction resulted in a $58m
loss being recognised in OCI with $nil cash impact.
In October 2022, US Pension plan
members were notified that Smith & Nephew Inc. (SNI) would
begin the termination process for the plan. In December 2023,
Fidelity & Guaranty Life was selected to take over
responsibility for the remaining US pension plan obligation and
administration upon termination. A premium amount of $245m was paid
in cash by the US Plan on 4 January 2024. Certain active employees
and terminated vested participants elected to receive a lump sum in
exchange for their plan benefit of $80m. This resulted in a $4m
settlement costs which were recognised in 2023, representing the
difference between the Defined Benefit Obligations and the lump
sums paid to members in December 2023. Following this transaction,
members move to have a direct relationship with Fidelity &
Guaranty Life with SNI no longer retaining an obligation for the
settlement of accrued member benefits following short
administrative transition and due diligence process.
8. Exchange rates
The exchange rates used for the
translation of currencies into US Dollars that have the most
significant impact on the Group results were:
|
|
|
|
|
|
|
2023
|
|
2022
|
Average rates
|
|
|
|
|
Sterling
|
|
1.24
|
|
1.23
|
Euro
|
|
1.08
|
|
1.05
|
Swiss Franc
|
|
1.11
|
|
1.05
|
Period end rates
|
|
|
|
|
Sterling
|
|
1.27
|
|
1.21
|
Euro
|
|
1.10
|
|
1.07
|
Swiss Franc
|
|
1.19
|
|
1.08
|
9. Subsequent events
On 9 January 2024, the Group
completed the acquisition of 100% of the share capital of
CartiHeal, the developer of CARTIHEAL◊
AGILI-C◊, a novel sports medicine technology for
cartilage regeneration in the knee. The acquisition of this
disruptive technology supports our strategy to invest behind our
successful Sports Medicine & ENT business unit. Smith+Nephew
paid $180m in cash on completion, with up to a further $150m
contingent on future financial performance.
This acquisition will be treated as
a business combination under IFRS 3. The provisional value of
acquired net tangible assets is not material and is not expected to
have material fair value adjustments. The remaining consideration
will be allocated between identifiable intangible assets
(product-related) and goodwill, with the majority expected to be
goodwill representing the control premium, the acquired workforce
and the synergies expected from integrating CartiHeal into the
Group's existing business.
In October 2022, US Pension plan
members were notified that Smith & Nephew Inc. would begin the
termination process for the plan. In December 2023, Fidelity &
Guaranty Life was selected to take over responsibility for the
remaining US pension plan obligation and administration upon
termination. A premium amount of $245m was paid in cash by the US
Plan on 4 January 2024 to settle the annuity purchase agreement
with Fidelity & Guaranty Life. Certain active employees and
terminated vested participants elected to receive a lump sum in
exchange for their plan benefit of $80m. This resulted in $4m of
settlement costs which were recognised in 2023, representing the
difference between defined benefit obligation (DBO) and the lump
sums paid to members in December 2023. A $2m credit will be
recorded in 2024 linked to the annuity purchase contract concluded
with Fidelity & Guaranty Life on 4 January
2024.
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
|
|
|
2023
|
|
2022
|
|
growth
|
|
growth
|
|
&
disposals
|
|
impact
|
|
|
$m
|
|
$m
|
|
%
|
|
%
|
|
%
|
|
%
|
Segment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Orthopaedics
|
|
2,214
|
|
2,113
|
|
4.8
|
|
5.7
|
|
-
|
|
(0.9)
|
Sports Medicine &
ENT
|
|
1,729
|
|
1,590
|
|
8.8
|
|
10.0
|
|
-
|
|
(1.2)
|
Advanced Wound
Management
|
|
1,606
|
|
1,512
|
|
6.2
|
|
6.4
|
|
-
|
|
(0.2)
|
Revenue from external
customers
|
|
5,549
|
|
5,215
|
|
6.4
|
|
7.2
|
|
-
|
|
(0.8)
|
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
|
|
profit1
|
|
tax2
|
|
Taxation3
|
|
profit4
|
|
operations5
|
|
per share6
|
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
¢
|
2023 Reported
|
|
5,549
|
|
425
|
|
290
|
|
(27)
|
|
263
|
|
829
|
|
30.2
|
Acquisition and disposal related
items8
|
|
-
|
|
60
|
|
78
|
|
(14)
|
|
64
|
|
16
|
|
7.3
|
Restructuring and rationalisation
costs
|
|
-
|
|
220
|
|
223
|
|
(42)
|
|
181
|
|
124
|
|
20.7
|
Amortisation and impairment of
acquisition intangibles8
|
|
-
|
|
207
|
|
207
|
|
(45)
|
|
162
|
|
-
|
|
18.6
|
Legal and
other7,8
|
|
-
|
|
58
|
|
64
|
|
(12)
|
|
52
|
|
145
|
|
6.0
|
Lease liability payments
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(52)
|
|
-
|
Capital expenditure
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(427)
|
|
-
|
2023 Adjusted
|
|
5,549
|
|
970
|
|
862
|
|
(140)
|
|
722
|
|
635
|
|
82.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
Profit
|
|
|
|
|
|
generated
|
|
|
|
|
|
|
Operating
|
|
before
|
|
|
|
Attributable
|
|
from
|
|
Earnings
|
|
|
Revenue
|
|
profit1
|
|
tax2
|
|
Taxation3
|
|
profit4
|
|
operations5
|
|
per share6
|
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
$m
|
|
¢
|
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
other7
|
|
-
|
|
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
|
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.
8
During 2023, management evaluated the commercial
viability of Engage products and concluded that they should be
discontinued. A total of $109m of Engage's assets and liabilities
were written off as a result of this action, which includes
goodwill of $84m (included in acquisition and disposal related
items), intangible assets of $37m (included in amortisation and
impairment of acquisition intangibles), inventory of $21m (included
in legal and other), partially offset by the remeasurement of
contingent consideration of $33m (included in acquisition and
disposal related items).
Acquisition and disposal related items
For the year ended 31 December 2023,
costs primary related to the acquisition of CartiHeal and
impairment of Engage goodwill, partially offset by credits relating
to remeasurement of contingent consideration for prior year
acquisitions. Adjusted profit before tax additionally excludes
losses of $18m related to the Group's shareholding in
Bioventus.
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.
Restructuring and rationalisation costs
For the year ended 31 December
2023, these costs primarily relate to the
efficiency and productivity elements of the 12-Point Plan and the
Operations and Commercial Excellence programme that was announced
in February 2020. Adjusted profit before tax additionally excludes
$3m restructuring costs related to the Group's shareholding in
Bioventus.
For the year ended 31 December 2022,
these costs include efficiency and productivity elements of the
12-Point Plan and Operations and Commercial Excellence programme
announced in February 2020. 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 2023
and 2022, 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 2023,
charges primarily relate to legal expenses for on-going
metal-on-metal hip claims partially offset by a $8m decrease in the
provision that reflects the present value of the estimated cost to
resolve all other known and anticipate metal-on-metal hip claims
and by the release of a provision for an intellectual property
dispute.
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 years ended 31 December 2023
and 2022, 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.
Leverage ratio
The leverage ratio is net debt
including lease liabilities to adjusted EBITDA. Net debt is
reconciled in Note 6 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, goodwill and trade investments.
The calculation of the leverage ratio is set out
below:
|
|
|
|
|
|
|
|
2023
|
|
2022
|
|
|
|
$m
|
|
$m
|
|
Net debt including lease
liabilities
|
|
2,776
|
|
2,535
|
|
|
|
|
|
|
|
Trading profit
|
|
970
|
|
901
|
|
Depreciation of property, plant
and equipment
|
|
306
|
|
319
|
|
Amortisation of other intangible
assets, impairment of goodwill and trade investments
|
|
139
|
|
56
|
|
Impairment of property, plant and
equipment
|
|
31
|
|
30
|
|
Impairment of other intangible
assets
|
|
-
|
|
7
|
|
Adjustment for items already
excluded from trading profit
|
|
(119)
|
|
(31)
|
|
Adjusted EBITDA
|
|
1,327
|
|
1,282
|
|
Leverage ratio (x)
|
|
2.1
|
|
2.0
|
|