Global

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Chief Financial Officer’s overview

Julie Brown“ We have delivered good revenue and
earnings growth and strongcash generation.

 

Dear Shareholder,

When I joined Smith & Nephew in February 2013 I found a business with a unified sense of purpose – helping customers to improve the quality of life of patients – and a clear strategy to deliver this in a sustainable manner across our Established and Emerging & International Markets. The management team were making choices about where to invest to maximise our impact today and to ensure Smith & Nephew has the products and platform for the future.

For me, the role of Finance is as a strategic partner, enabling and supporting the business as it makes investments and drives efficiencies, and ensuring we can maintain our financial strength and discipline. I believe Smith & Nephew has made significant progress in 2013 and that judicious financial management has been and remains central to our success.

Strong revenue and earnings

For the full year 2013, we generated good underlying revenue and trading profit growth and met our margin expectations. Revenue was $4,351 million, an underlying 4% increase. Trading profit was $987 million, up 5% underlying. The trading profit margin was 22.7% a reduction of 60bps. Our adjusted earnings per share were 76.9¢, up 3%. The trading cash flow was $877 million, reflecting a trading profit to cash conversion ratio of 89%.

Capital Allocation Framework

We consider that the efficient use of capital on behalf of Shareholders is an important objective. We have delivered good revenue and earnings growth and strong cash generation in the challenging markets of the last few years.

During 2011, we announced our Strategic Priorities, focusing our business on liberating resources to invest in driving greater growth. In order to support this strategy, the Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value enhancing acquisitions. This approach was set out in the new Capital Allocation Framework announced in May 2013.

The Capital Allocation Framework will be used to prioritise the use of cash and ensure an appropriate capital structure. Our commitment, in order of priority, is to:

1. continue to invest in the business to drive organic growth;
2. maintain our progressive dividend policy;
3. realise acquisitions in-line with strategy; and
4. return any excess capital to Shareholders.

This is underpinned by maintaining leverage ratios commensurate with solid investment grade credit metrics.

In-line with the above framework, and reflecting our confidence in the successful execution of our Strategic Priorities, we commenced a $300 million share buy-back programme in May 2013. As of 31 December 2013 we had spent $226 million. This programme was suspended following ouragreement to acquire ArthroCare, announced on 3 February 2014.

Liberating resources

In August 2011, Smith & Nephew announced a programme to drive structural efficiencies in order to liberate the resources needed to fund investment in the emerging markets and R&D, targeting savings of at least $150 million per annum. The cost of the currently identified programmes is expected to be $160 million in cash and $40 million in non-cash costs.

To date the Group has realised annualised benefits of $131 million and we expect to complete the programme in early 2015 and realise slightly more than the anticipated benefits. The costs are on track. As a result of this programme and other actions, a culture of continuously looking to be more efficient is being embedded across the Group.

Acquisitions

During the year the Group has completed acquisitions of manufacturing and distribution businesses in Turkey, Brazil and India. The aggregate cost was $126 million. Through these acquisitions, we are implementing a number of our Strategic Priorities: to build leadership positions in the Emerging & International Markets; to supplement our organic growth through acquisitions; and to bring forward mid-tier portfolios to these countries.

Outlook

We anticipate the market conditions seen in the second half of 2013 to continue in 2014. We expect the US to be stable with some signs of improvement, Europe to remain challenging and the emerging markets to continue to offer opportunities for higher growth.

In terms of revenue growth by franchise, we expect:

  • Orthopaedic Reconstruction, continuing its recent improved performance, to grow at approaching the market rate;
  • Trauma & Extremities, building upon our recent investments, to grow overall at the market rate, but with a stronger second half to the year;
  • Sports Medicine, with its strong product pipeline, to deliver growth above the market rate; and
  • Advanced Wound Management, with its unique mix of leading products, to deliver another year of growth above the market. Within this, we expect Advanced Wound Bioactives to grow at a rate in the mid-teens.

In terms of trading profit margin, we expect to exceed our 2013 performance.

I am confident that our continuing focus on efficiency, coupled with further investments to drive growth and the disciplined use of our strong cash flow will generate greater value for our Shareholders.

Yours sincerely, 

Julie Brown signature

Julie Brown

Chief Financial Officer

 

    Download "Group Strategic Report" from our Annual Report 2013 (2MB)

Annual General Meeting 2014

Notice of AGM and Chairman's letter

The Annual General Meeting was held on Thursday, 10 April 2014.

10 April 2014