1 August 2024

Smith+Nephew Second Quarter and First Half 2024 Results

12-Point Plan driving first half revenue growth, trading margin expansion and stronger cash flow. Full year guidance unchanged 

Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology company, reports results for the second quarter and first half ended 29 June 2024:

Download a copy of the announcement (PDF)

 

 

 

 

 

 

 

 

 

 

 

 

29 June

 

1 July

 

Reported

 

Underlying

 

 

2024

 

2023

 

growth

 

growth

 

 

$m

 

$m

 

%

 

%

Second Quarter Results1,2

 

 

 

 

 

 

 

 

Revenue

 

1,441

 

1,379

 

4.6

 

5.6

 

 

 

 

 

 

 

 

 

Half Year Results1,2

 

 

 

 

 

 

 

 

Revenue

 

2,827

 

2,734

 

3.4

 

4.3

Operating profit

 

328

 

275

 

19.5

 

 

Operating profit margin (%)

 

11.6

 

10.0

 

 

 

 

EPS (cents)

 

24.5

 

19.7

 

24.6

 

 

 

 

 

 

 

 

 

 

 

Trading profit

 

471

 

417

 

12.8

 

 

Trading profit margin (%)

 

16.7

 

15.3

 

 

 

 

EPSA (cents)

 

37.6

 

34.9

 

7.7

 

 

 

 

Q2 Trading Highlights1,2

H1 Highlights1,2

Outlook1,2

Strategic Highlights1,2

Deepak Nath, Chief Executive Officer, said:

“Today’s results are further evidence of the good progress we are making transforming Smith+Nephew into a higher growth and more profitable business.

“Across the majority of Orthopaedics, which was our underperforming business unit, we are now consistently achieving growth rates well above historical levels. The methods we employed in achieving these successes give me confidence that we will also turn around US Hip and Knee Implants and we expect to see a step up through the second half of the year.

“Our investment in innovation continues to deliver. In the first half of 2024, we delivered several major launches and product enhancements. For example, we continued to expand our CORI◊ Surgical System, which is now a recognised leader in robotics-assisted surgery. We also achieved full commercial launch of our AETOS◊ Shoulder System, addressing one of the fastest growing segments in Orthopaedics, and US regulatory approval for our new CATALYSTEM◊ Hip System.

“Our progress is also showing through in our double-digit trading profit growth and margin expansion, driven by positive operating leverage and efficiency initiatives. I am pleased to see this profit growth translate into cash flow, with our first-half trading cash flow up more than 150% year-on-year.

“Our guidance for the full year remains unchanged. There is still more work to be done and we expect to see further progress in the second half of the year.”

Analyst conference call

An analyst conference call to discuss Smith+Nephew’s second quarter and first half results will be held today at 8.30am BST / 3.30am EDT, details of which are available on the Smith+Nephew website at https://www.smith-nephew.com/en/who-we-are/investors.

Enquiries

Investors

 

Andrew Swift

+44 (0) 1923 477433

Smith+Nephew

 

 

 

Media

 

Charles Reynolds

+44 (0) 1923 477314

Smith+Nephew

 

 

 

Susan Gilchrist / Ayesha Bharmal

+44 (0) 20 7404 5959

Brunswick

 

Notes

  1. Unless otherwise specified as ‘reported’ all revenue growth throughout this document is ‘underlying’ after adjusting for the effects of currency translation and including the comparative impact of acquisitions and excluding disposals. All percentages compare to the equivalent 2023 period.

    ‘Underlying revenue growth’ reconciles to reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, by making two adjustments, the ‘constant currency exchange effect’ and the ‘acquisitions and disposals effect’, described below. See Other Information on pages 33 to 37 for a reconciliation of underlying revenue growth to reported revenue growth.

    The ‘constant currency exchange effect’ is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales and is measured as the difference between: 1) the increase/decrease in the current year revenue translated into US Dollars at the current year average exchange rate and the prior year revenue translated at the prior year rate; and 2) the increase/decrease being measured by translating current and prior year revenues into US Dollars using the prior year closing rate.

    The ‘acquisitions and disposals effect’ is the measure of the impact on revenue from newly acquired material business combinations and recent material business disposals. This is calculated by comparing the current year, constant currency actual revenue (which includes acquisitions and excludes disposals from the relevant date of completion) with prior year, constant currency actual revenue, adjusted to include the results of acquisitions and exclude disposals for the commensurate period in the prior year. These sales are separately tracked in the Group’s internal reporting systems and are readily identifiable.

  2. Certain items included in ‘trading results’, such as trading profit, trading profit margin, tax rate on trading results, trading cash flow, trading profit to cash conversion ratio, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures reported in this announcement are explained in Other Information on pages 33 to 37 and are reconciled to the most directly comparable financial measures prepared in accordance with IFRS. Reported results represent IFRS financial measures as shown in the Condensed Consolidated Interim Financial Statements.

 

Smith+Nephew Second Quarter Trading and First Half 2024 Results

Stepping up performance and meeting our commitments

Smith+Nephew delivered second quarter revenue of $1,441 million (Q2 2023: $1,379 million), up 5.6% on an underlying basis. On a reported basis, revenue growth was 4.6%, including a translational foreign exchange headwind of -100bps. Our second quarter trading performance improved from the first quarter, as expected, with positive growth across all three business units.

First half revenue was $2,827 million (H1 2023: $2,734 million), up 4.3% on an underlying basis, and 3.4% on a reported basis including a translational foreign exchange headwind of -90bps.

Trading profit for the first half was up 12.8% on a reported basis to $471 million (H1 2023: $417 million). The trading profit margin expansion to 16.7% (H1 2023: 15.3%) was around the top end of our guided range, driven by positive operating leverage and 12-Point Plan productivity improvements. The operating profit was $328 million (H1 2023: $275 million). Cash generated from operations was $368 million (H1 2023: $215 million) and trading cash flow increased to $284 million (H1 2023: $110 million), with 60% trading cash conversion (H1 2023: 26%). This is a significant improvement on the prior year, and trading cash conversion is expected to return to historical levels of around 85% for the full year.

12-Point Plan driving improved performance

In 2022, we announced our 12-Point Plan to fundamentally change the way we operate and transform business performance. We continue to make significant progress across our workstreams, which is translating into improved financial performance, with more benefits expected to come through in the second half of 2024 and beyond.

The first area of focus for the 12-Point Plan is fixing Orthopaedics, to regain momentum across hip and knee implants, robotics and trauma, and win share with our differentiated technology.

Progress has been made in the key areas that had been holding back performance. We had dramatically improved implant availability by the end of 2023 and, by the end of the second quarter of 2024, instrument set availability as well. Both were far below industry standards at the start of the 12-Point Plan, and are now at or above target levels. We are confident that we are on the right path to reduce Days Sales of Inventory (DSI), and after an initial build-up of inventory to support product launches in the early part of 2024, we were starting to see DSI reduce as we exited the first half.

In terms of commercial execution, we have turned around our Trauma business, which is now a significant growth driver built upon our new EVOS◊ Plating System, and we have entered a high growth category in Orthopaedics with the launch of the AETOS Shoulder System. We have strengthened our position in robotics, growing the installed base, including a record quarter of US sales in the second quarter across a wide customer base, including academic medical centres and Ambulatory Surgery Centers (ASCs). We have also made significant progress simplifying our portfolio, with a third of our global hip and knee brands now phased out.

As a result of the 12-Point Plan, we are now delivering higher growth from our Orthopaedics business unit, driven by reconstruction outside of the US, robotics and Trauma.

The improvement has been slower to come through in the US but there are encouraging signs of progress. The new leadership, appointed at the end of the first quarter, has proven US commercial turnaround experience. Customer service and satisfaction have improved, new growth-orientated incentive plans have been rolled out and employee turnover has returned to low-levels. Important key product launches have been delivered, including ten new features on our CORI Surgical System since 2022. We are confident that this last remaining underperforming area of the business, representing around 15% of the Group as a whole, is set to deliver an improving performance through the second half of 2024.

The second area of focus for the 12-Point Plan is improving productivity, to support trading profit margin expansion.

Since the start of the plan, we have driven portfolio pricing and made significant procurement savings to help mitigate cost inflation. Our manufacturing optimisation workstream is progressing, with the benefits from network simplification and cost and asset efficiencies expected to support our mid-term margin improvement targets. Our drive to reduce conversion cost, which is total direct and indirect cost to convert raw materials into finished goods as a percentage of sales, is ahead of target. From a network perspective we are reducing excess capacity, having announced the closure of four smaller orthopaedics facilities.

Our progress across these workstreams has been solid, contributing around 160bps to our 2023 full year trading profit margin and around 190bps to the 2024 first half trading profit margin, offsetting significant margin headwinds including from inflation and China VBP.

We continue to seek opportunities to make our business more efficient, offsetting ongoing margin headwinds such as persistent inflation, foreign exchange movements and China VBP. Building on the existing work of the 12-Point Plan, we have identified further saving opportunities. Including the initial $200 million of 12-Point Plan savings announced in 2023, total saving opportunities are now between $325 million and $375 million, phased from 2023 through to 2027. These savings are across all areas of our business, from manufacturing and procurement to warehouse and distribution, to business support and sales and marketing. There are over 40 initiatives, across seven workstreams, embedded into our future plans. These savings initiatives will contribute to delivering our commitment to expanding our trading profit margin in 2024 and 2025.

The third and final area of focus for the 12-Point Plan is further accelerating growth in our already well-performing Advanced Wound Management and Sports Medicine & ENT business units. These businesses, which together represent around 60% of Group revenue, have multi-year track records of market out-performance.

Through the 12-Point Plan we have brought additional resource to support expansion of our Negative Pressure Wound Therapy business, and delivered a major new platform in RENASYS◊ EDGE.

We have also accelerated cross-business unit deals between our Orthopaedics and Sports Medicine businesses. Under the 12-Point Plan we have developed a coordinated approach overseen by a dedicated strategic sales team targeting ASCs. The pace of cross division deals has more than trebled since 2022, and the total number of deals closed in the first half was ahead of our target.

In July we announced an exclusive partnership with Healthcare Outcomes Performance Company (HOPCo), a leader in musculoskeletal (MSK) value-based care and outcomes management to support ASC customers across our Orthopaedic and Sports Medicine businesses with digital health and AI-powered analytics platforms. Planned integration with intraoperative data from our CORI Surgical System will provide surgeons and healthcare providers with enhanced analytics enabling personalised surgical planning, intra-operative decision-making, and PROMS tracking and optimisation.

Improving organisational effectiveness

In 2023, we reorganised our global commercial operating model around our three business units of Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management in order to drive more agile decision making and greater accountability. We have started to see the benefits of this move.

Annual central corporate costs in 2023, covering Finance, IT, Human Resources, Global Business Services and Legal (as well as other central departments), were $403 million. Following the reorganisation, from the second half of 2024 central costs directly attributable to business units will be directly allocated to each business unit, with the objective of driving greater business unit accountability and efficiency. A small proportion of the corporate costs will continue to be held centrally, reflecting the centralised infrastructure required to support the Group and run a public limited company.  

Sustaining our high cadence of innovation

Our investment in innovation is another major driver of our sustained higher revenue growth. In 2023 almost half of our growth came from products launched in the last five years. In the first half of 2024 we continued to expand our portfolio with major new platforms and product enhancements that address unmet clinical needs and support our higher growth ambitions.

In Orthopaedics, we continued to expand our portfolio, including new implant systems for hips and shoulder, and building out our robotics-assisted CORI Surgical System.

We announced 510(k) clearance for the CATALYSTEM Primary Hip System. The system is designed to address the evolving demands of primary hip surgery including the increased adoption of anterior approach procedures and the expanding role of ASCs. Commercial launch is scheduled for the second half of 2024.

We announced new CORIOGRAPH◊ Pre-Operative Planning and Modeling Services, making CORI the only orthopaedic robotic-assisted system to offer either intraoperative image-free or image-based registration for knee implants, enabling the surgeon to choose whether or not to perform a pre-operative MRI scan. This is one of a number of distinct features for CORI, including supporting revision knee procedures and offering both burr and saw cutting options.

We moved to full commercial launch of the AETOS Shoulder System in the US, and announced 510(k) clearance for its use with ATLASPLAN◊ 3D Planning Software and Patient Specific Instrumentation for total shoulder arthroplasty. AETOS will enable Smith+Nephew to compete effectively in the $1.7 billion shoulder market, which, at around 9% CAGR, is one of the fastest growing segments in Orthopaedics.

In Sports Medicine, we completed the acquisition of CartiHeal, the developer of the CARTIHEAL AGILI-C◊ Cartilage Repair Implant, a novel sports medicine technology for cartilage regeneration in the knee. The integration of the CARTIHEAL AGILI-C business is on track, including progress across sales force training, medical education and reimbursement.

We continue to invest behind our Arthroscopic Enabling Technology. During the second quarter we introduced the INTELLIO◊ SHIFT System, which combines our leading COBLATION◊ and DYONICS◊ resection technologies into a single controller and a multifunctional foot pedal, simplifying the operating room experience for surgeons. We also launched an updated INTELLIO cart, updated software for the INTELLIO Tablet, which serves as both a control device and image storage for the INTELLIO Tower, and introduced the EVO◊ 4K Image Management System.

In ENT, we launched the ARIS◊ COBLATION Turbinate Reduction Wand. This utilises Smith+Nephew’s advanced COBLATION Plasma Technology to provide a minimally invasive way to reduce hypertrophic turbinates, a condition that requires 350,000 procedures per annum in the US.

In Advanced Wound Management, we launched the RENASYS EDGE Negative Pressure Wound Therapy System. This is designed to reduce inefficiency and complexity and features an improved user interface for enhanced intuitiveness and simplicity and a durable pump built to offer virtually maintenance-free use. The launch commenced in the US and will be expanded to Europe in the second half. 

We also continued our high cadence of incremental innovation in skin substitutes, with the launch of GRAFIX◊ PLUS in the second quarter, an easier-to-handle new version in our lead product family, targeting the growing post-acute market.

Second quarter 2024 trading update

Our second quarter revenue was $1,441 million (Q2 2023: $1,379 million), up 5.6% year-on-year on an underlying basis. On a reported basis this represented growth of 4.6%, including a translational -100bps headwind from foreign exchange (primarily due to the strength of the US Dollar). The second quarter comprised 64 trading days, one more than the equivalent period in 2023.

Consolidated revenue analysis for the second quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29 June

 

1 July

 

Reported

 

Underlying

 

Acquisitions

 

Currency

 

 

 

2024

 

2023

 

growth

 

growth(i)

 

/disposals

 

impact

 

Consolidated revenue by business unit by product

 

$m

 

$m

 

%

 

%

 

%

 

%

 

Orthopaedics

 

581

 

554

 

4.9

 

5.8

 

-

 

(0.9)

 

Knee Implants

 

240

 

238

 

1.0

 

2.1

 

-

 

(1.1)

 

Hip Implants

 

156

 

152

 

2.8

 

4.0

 

-

 

(1.2)

 

Other Reconstruction(ii)

 

32

 

27

 

17.1

 

17.8

 

-

 

(0.7)

 

Trauma & Extremities

 

153

 

137

 

11.4

 

11.8

 

-

 

(0.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sports Medicine & ENT

 

448

 

422

 

6.3

 

7.6

 

-

 

(1.3)

 

Sports Medicine Joint Repair

 

239

 

229

 

4.7

 

6.0

 

-

 

(1.3)

 

Arthroscopic Enabling Technologies

 

155

 

145

 

7.3

 

8.7

 

-

 

(1.4)

 

ENT (Ear, Nose and Throat)

 

54

 

48

 

10.8

 

11.6

 

-

 

(0.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advanced Wound Management

 

412

 

403

 

2.3

 

3.3

 

-

 

(1.0)

 

Advanced Wound Care

 

183

 

181

 

1.6

 

3.0

 

-

 

(1.4)

 

Advanced Wound Bioactives

 

139

 

138

 

0.7

 

0.7

 

-

 

-

 

Advanced Wound Devices

 

90

 

84

 

6.6

 

8.0

 

-

 

(1.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,441

 

1,379

 

4.6

 

5.6

 

-

 

(1.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated revenue by geography

 

 

 

 

 

 

 

 

 

 

 

 

 

US

 

760

 

734

 

3.6

 

3.6

 

-

 

-

 

Other Established Markets(iii)

 

421

 

403

 

4.4

 

6.9

 

-

 

(2.5)

 

Total Established Markets

 

1,181

 

1,137

 

3.9

 

4.8

 

-

 

(0.9)

 

Emerging Markets

 

260

 

242

 

7.6

 

9.5

 

-

 

(1.9)

 

Total

 

1,441

 

1,379

 

4.6

 

5.6

 

-

 

(1.0)

 

(i)   Underlying growth is defined in Note 1 on page 3

(ii)  Other Reconstruction includes robotics capital sales, our joint reconstruction business and cement

(iii)  Other Established Markets are Europe, Canada, Japan, Australia and New Zealand

 

Orthopaedics

Revenue from our Orthopaedics business unit was up 5.8% (4.9% reported) in the second quarter, driven by our actions to improve operational performance.

Knee Implants grew 2.1% (1.0% reported) and Hip Implants grew 4.0% underlying (2.8% reported).

In Knee Implants, growth was driven by our cementless, revision and partial knee systems and Hip growth was led by our POLAR3◊ Total Hip Solution and R3◊ Acetabular System.

We continue to deliver strong growth outside of the US across both segments, even against tougher comparative periods, with underlying growth of 6.6% in Knee Implants and 7.7% in Hip Implants in the second quarter. In the US, Knees declined -1.7% while Hips returned to growth, up 1.0%. As stated above, we have made good progress with the remaining operational and commercial challenges in the US and expect performance to improve through the second half of the year. 

Other Reconstruction revenue growth was 17.8% (17.1% reported), led by the strongest quarter of US sales yet from our robotics-assisted CORI Surgical System, including into both academic medical centres and ASCs.

Trauma & Extremities revenue growth was 11.8% (11.4% reported), with double-digit growth in the US led by the EVOS Plating System. The launch of the new AETOS Shoulder System is progressing well.

Sports Medicine & ENT

Sports Medicine & ENT delivered revenue growth of 7.6% (6.3% reported). Excluding China, Sports Medicine & ENT grew 11.0% on an underlying basis (9.9% reported). Here the sector faces a headwind from the Volume Based Procurement (VBP) programme in China, which commenced in May 2024, with 29 of 31 Provinces having implemented by quarter end. We expect the VBP headwind to persist throughout the second half of the year.

Sports Medicine Joint Repair revenue was up 6.0% (4.7% reported) with good growth across our knee repair portfolio and strong double-digit growth from our REGENETEN◊ Bioinductive Implant. Excluding China, Sports Medicine Joint Repair grew 11.8% underlying (10.7% reported).

Arthroscopic Enabling Technologies revenue grew 8.7% (7.3% reported), driven by our WEREWOLF◊ FASTSEAL COBLATION system fluid management, and better video capital sales on improved third-party supply, as expected.

ENT revenue was up 11.6% (10.8% reported), reflecting strong tonsil and adenoid procedure volumes. 

Advanced Wound Management

Advanced Wound Management revenue growth was 3.3% (2.3% reported).

Advanced Wound Care revenue was up 3.0% (1.6% reported), including good growth from our foams and infection management portfolios and a strong quarter in the Middle East and Emerging Markets.

Advanced Wound Bioactives revenue was up 0.7% (0.7% reported). Growth came from a sequential recovery in SANTYL◊, along with a more normalised prior year comparator. As previously stated, quarter-to-quarter variability has been a long-term feature of SANTYL, and we expect further improvement for the rest of the year. Offsetting SANTYL was a slower second quarter for skin substitute product GRAFIX, ahead of the launch of GRAFIX PLUS.

Advanced Wound Devices revenue was up 8.0% (6.6% reported), led by strong growth from our single-use PICO◊ Negative Pressure Wound Therapy System, LEAF◊ Patient Monitoring System and VERSAJET◊ Hydrosurgery System.

Growth by Region

Revenue growth in our Established Markets was up 4.8% (3.9% reported). Within this, the US delivered 3.6% revenue growth (3.6% reported) and Other Established Markets 6.9% revenue growth (4.4% reported). Emerging Markets revenue was up 9.5% (7.6% reported), with strong double-digit growth across the Middle East, India and Latin America.

First Half 2024 Consolidated Analysis

Smith+Nephew results for the first half ended 29 June 2024:

 

 

 

 

 

 

 

 

 

 

Half year

 

Half year

 

Reported

 

 

 

2024

 

2023

 

growth

 

 

 

$m

 

$m

 

%

 

Revenue

 

2,827

 

2,734

 

3.4

 

Operating profit

 

328

 

275

 

19.5

 

Acquisition and disposal related items

 

-

 

(17)

 

 

 

Restructuring and rationalisation costs

 

62

 

46

 

 

 

Amortisation and impairment of acquisition intangibles

 

87

 

102

 

 

 

Legal and other

 

(6)

 

11

 

 

 

Trading profit(i)

 

471

 

417

 

12.8

 

 

 

¢

 

¢

 

 

 

Earnings per share ('EPS')

 

24.5

 

19.7

 

 

 

Acquisition and disposal related items

 

0.2

 

0.1

 

 

 

Restructuring and rationalisation costs

 

5.8

 

4.6

 

 

 

Amortisation and impairment of acquisition intangibles

 

7.8

 

9.1

 

 

 

Legal and other

 

(0.7)

 

1.4

 

 

 

Adjusted Earnings per share ('EPSA')(i)

 

37.6

 

34.9

 

7.7

 

 

 

 

 

 

 

 

 
  1. See Other Information on pages 33 to 37

First Half 2024 Analysis

Our first half revenue was $2,827 million (H1 2023: $2,734 million), up 4.3% on an underlying basis and up 3.4% on a reported basis, including a translational foreign exchange headwind of -90bps. The first half comprised 127 trading days, in line with the equivalent period in 2023.

Operating profit was $328 million (H1 2023: $275 million) after acquisition and disposal related items, restructuring and rationalisation costs, amortisation and impairment of acquisition intangibles and legal and other items incurred in the first half (see Other Information on pages 33 to 37).

Trading profit for the first half was up 12.8% on a reported basis to $471 million (H1 2023: $417 million). The trading profit margin strengthened by 140bps to 16.7% (H1 2023: 15.3%), driven by positive operating leverage from revenue growth and productivity improvements and cost saving initiatives from the 12-Point Plan which more than offset headwinds from continuing inflation, China VBP within Sports Medicine Joint Repair, transactional foreign exchange and the acquisition of CartiHeal (see Note 2 to the Interim Financial Statements for global business unit trading profit).

Restructuring costs related to the efficiency and productivity work underway across the Group totalled $62 million (see Note 2 to the Interim Financial Statements). Going forward, and beyond the guided total restructuring costs of around $275 million associated with the 12-Point Plan, restructuring costs are anticipated to be significantly lower.

The business is increasingly focused on cash and working capital improvement. Cash generated from operations was $368 million (H1 2023: $215 million) and trading cash flow was $284 million (H1 2023: $110 million), with the year on year increase primarily driven by favourable working capital movement (see Other Information on pages 33 to 37 for a reconciliation between cash generated from operations and trading cash flow). The trading profit to cash conversion ratio was 60% in the first half, significantly better than the prior year period (H1 2023: 26%), and is expected to return to historical levels of around 85% for the full year due to the expected continued improvement in working capital. Free cash flow of $39 million (H1 2023: outflow of $82m) reflects the better trading cash conversion, partially offset by restructuring costs related to the 12-Point Plan.

Of particular focus is our work on inventory. After an initial build-up of inventory to support product launches in the early part of the year, we are starting to see DSI across Orthopaedics and Advanced Wound Management reduce, and stabilise in Sports Medicine & ENT. In particular, our overall ‘Inventory Health’ is improving, with a significant reduction in the number of units of slow-moving SKUs in Orthopaedics, by around 9% since the start of 2024. Our improved Sales, Inventory and Operations Planning process, introduced in 2023 as part of the 12-Point Plan, has been an important enabler of this reduction.

There remains a significant amount of work to do to reduce inventory levels and given this and the relatively slow churn of some products, reduction in absolute inventory levels will take time. Nonetheless, we expect to see a material reduction in our DSI by 10-15% by year-end, with absolute inventory levels being slightly down year-on-year.

The net interest charge within reported results was $61 million (H1 2023: $44 million), with the change due to an increase in net debt year on year and an increase in the overall weighted average interest rate given the prevailing higher rate environment. The Group’s net debt, including lease liabilities, increased from $2,776 million at 31 December 2023 to $3,086 million at 29 June 2024 mainly due to the CartiHeal acquisition of around $180 million and payment of the final dividend ($202 million), partially netted off by free cash flow generated of $39 million (see Note 6 to the Interim Financial Statements), with committed facilities of $4.5 billion. The net debt to adjusted EBITDA ratio at the half year was 2.2x. We expect this ratio to be around 2.0x at year-end.

Our reported tax for the period ended 29 June 2024 was a charge of $39 million (H1 2023: $39 million). The first half tax rate on trading results of 17.8% (H1 2023: 17.4%) was calculated using full year projections, applied to trading profits for the first half and includes non-recurring tax credits arising in this period. The applicable rate of corporate income tax has been applied to the actual non-trading items in the period on an item-by-item basis. See Note 3 to the Interim Financial Statements and Other Information on pages 33 to 37 for further details on taxation.

Basic earnings per share (‘EPS’) was 24.5¢ (49.0¢ per ADS) (H1 2023: 19.7¢ per share). Adjusted earnings per share (‘EPSA’) was 37.6¢ (75.2¢ per ADS) (H1 2023: 34.9¢ per share).

Interim Dividend

The interim dividend is 14.4¢ per share (28.8¢ per ADS), in line with 2023. This dividend is payable on 8 November 2024 to shareholders whose names appear on the register at the close of business on 4 October 2024 (see Note 4 to the Interim Financial Statements for further detail).

Capital Allocation Framework

Reflecting the progress made under the 12-Point Plan and the improving outlook for the Group, we are today announcing an updated Capital Allocation Framework, which we use to prioritise the use of cash and inform our investment decisions.

Our first priority remains investing in the business to drive organic growth and meet our sustainability targets.

There is increasing visibility and focus on improving our Return on Invested Capital (ROIC) at the business unit level through allocation of central costs and our drive to improve working capital. In particular, there is an opportunity to improve ROIC for our Orthopaedics business unit, hence improving ROIC at a Group level. We anticipate improved returns year-on-year at the end of 2024, with more to come in 2025 and beyond. We will continue to prioritise investment in those areas where we expect to see the highest incremental returns on invested capital.

The second priority is also unchanged, and is to invest in acquisitions, targeting new technologies in high growth segments with strong strategic fit that meet our financial criteria.

Our first two priorities will ensure continued investment in innovation and sustained higher revenue growth.

The third priority is to maintain an optimal balance sheet and appropriate dividend. Here we will continue to target investment grade credit ratings. We are updating our target leverage ratio to around 2x net debt to adjusted EBITDA (previously 2.0x to 2.5x). We have a progressive dividend policy and from 2025 onwards we expect a payout of around 35% to 40% of EPSA. The interim payment will be 40% of the prior full year. We expect the 2024 total dividend to be flat year-on-year.

Our final priority remains to return any surplus capital to shareholders, via a share buyback subject to the above balance sheet metrics.

Outlook

Our guidance for 2024 is unchanged.

For revenue, we expect to deliver another year of strong growth in the range of 5.0% to 6.0% underlying. On a reported basis the guidance equates to a range of around 4.4% to 5.4% based on exchange rates prevailing on 26 July 2024.

We expect higher revenue growth in the second half than the first. Within this, we expect a stronger second half from Orthopaedics, underpinned by an improvement in US Hip and Knee Implants. We expect Sports Medicine to continue to deliver strong growth outside of China, with VBP remaining a headwind. ENT growth will reflect a strong H2 2023 comparator. We expect an improvement in Advanced Wound Management with further growth recovery from Advanced Wound Bioactives. In terms of phasing, there are two additional trading days in the fourth quarter over the same prior year period, albeit we expect the impact of these additional days to be less than proportionate given their timing. 

We expect to expand our trading profit margin to at least 18.0%. Within this, headwinds include continuing inflation, a -70bps impact from China VBP within Sports Medicine Joint Repair, and around -50bps from foreign exchange, plus a small impact from the acquisition of CartiHeal. We expect to more than offset these headwinds through positive operating leverage from revenue growth and productivity improvements and cost saving initiatives from the 12-Point Plan.

As in prior years, we expect the trading profit margin to be higher in the second half than in the first half, although with a less marked step up than in 2023.

The tax rate on trading results for 2024 is forecast to be in the range of 19% to 20%, subject to any material changes to tax law or other one-off items.

Midterm targets

Our midterm targets are unchanged. The Group is focused on delivering underlying revenue growth of consistently 5%+ and expanding our trading profit margin.

We continue to target at least 20% trading profit margin in 2025. While headwinds such as persistent inflation, foreign exchange movements and China VBP in Sports Medicine Joint Repair make that a demanding target, we do expect to see an increasing impact from the 12-Point Plan, including the benefits of our manufacturing optimisation programme and other productivity improvements, which are expected to flow through in 2025.

Forward calendar

The Q3 Trading Report will be released on 31 October 2024.

About Smith+Nephew

Smith+Nephew is a portfolio medical technology business focused on the repair, regeneration and replacement of soft and hard tissue. We exist to restore people’s bodies and their self-belief by using technology to take the limits off living. We call this purpose ‘Life Unlimited’. Our 18,000 employees deliver this mission every day, making a difference to patients’ lives through the excellence of our product portfolio, and the invention and application of new technologies across our three global business units of Orthopaedics, Sports Medicine & ENT and Advanced Wound Management.

Founded in Hull, UK, in 1856, we now operate in more than 100 countries, and generated annual sales of $5.5 billion in 2023. Smith+Nephew is a constituent of the FTSE100 (LSE:SN, NYSE:SNN). The terms ‘Group’ and ‘Smith+Nephew’ are used to refer to Smith & Nephew plc and its consolidated subsidiaries, unless the context requires otherwise.

For more information about Smith+Nephew, please visit www.smith-nephew.com 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.

 

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