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We made significant progress in 2014 and continued to deliver good revenue and earnings growth

Dear Shareholder,

Smith & Nephew made significant progress in 2014 and continued to deliver good revenue and earnings growth. Our growth trajectory is being enhanced by the integration of our acquisitions, greater Group efficiency, and tax improvement – combining with strong cash generation and disciplined capital allocation to accelerate value creation for shareholders.

Strong earnings growth

In the full year 2014, we generated revenue of $4,617 million (2013: $4,351 million), an increase of 2% on an underlying basis and 6% on a reported basis. Acquisitions added 5% to the reported growth rate, while currency was a -1% headwind.

Trading profit was $1,055 million (2013: $987 million), up 3% underlying and 7% on a reported basis. The trading profit margin was 22.9% (2013: 22.7%), a 20bps increase despite the headwind from the US RENASYS distribution hold announced in June.

Operating profit for 2014 was $749 million (2013: $810 million), reflecting acquisition costs largely relating to ArthroCare, as well as restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred. The net interest charge and other financing costs for 2014 were $33 million (2013: $7 million). Profit before tax was therefore $714 million (2013: $802 million).

The tax charge of $213 million reflects an effective tax rate of 27.7% for the full year (2013: 29.2%) on Trading results.

EPSA was 83.2¢ (166.4¢ per ADS) (2013: 76.9¢). Reported basic earnings per share was 56.1¢ (112.2¢ per ADS) (2013: 61.7¢).

Trading cash flow was $781 million (2013: $877 million), reflecting a trading profit to cash conversion ratio of 74% (2013: 89%).

Net debt at the year-end was $1,613 million reflecting our acquisitions of ArthroCare and in the emerging markets. This represents a reported net debt/EBITDA ratio of 1.2x.

Reinvestment & Group optimisation

During 2014, we launched a programme to target further efficiencies. We have identified four main areas of activity:


  1. Globalising functions such as Finance, HR, IT and Legal to ensure that we are operating most effectively to support business growth.
  2. Driving procurement savings to get the most value from the money we spend.
  3. Rationalising our footprint to simplify the way we work.
  4. Further simplifying our operating model, including establishing a single operating structure under a single managing director in all markets outside the US so that we can make decisions more quickly and effectively.


All areas of the programme are progressing well. Overall, we are on target to deliver benefits of over $120 million over a four-year period, with the majority of this expected to benefit margin over time.


We acquired ArthroCare Corporation in 2014 for a net $1.5 billion. This has strengthened our Sports Medicine business. Its technology and products will significantly enhance our portfolio, and we will use our global presence to drive substantial new growth. The integration is progressing well.

The financial rationale for this transaction was strong, and we expect to realise cost and revenue synergies of around $85 million of additional annual trading profit in 2017. Our other recent acquisitions continue to perform well. The Advanced Wound Bioactives business acquired at the end of 2012 delivered strong 15% growth in 2014.

Our emerging markets acquisitions in Brazil, Turkey and India are now bedded in and delivering increasing benefits. And Bioventus, our orthobiologic therapies development vehicle, completed a successful external refinancing and repaid a $160 million loan‑note, plus $28 million of accrued interest, to us in October. Segment reporting

As we simplify our operating model and move to one commercial organisation in all countries barring the US, we are updating our segmental reporting to reflect this, providing disclosure consistent with the financial information used by senior management to run the business. This means that from 1 January 2015 we will continue to disclose revenue performance by franchise, but other financial data, such as trading margin and assets, will no longer be split between two divisions – Advanced Surgical Devices (‘ASD’) and Advanced Wound Management (‘AWM’), since they are now part of one operating unit.


We have made material progress in reshaping Smith & Nephew for higher growth since 2011. Whilst the journey to transform Smith & Nephew continues, increasingly we expect to benefit from the actions and investments we have made.

We expect the Group to deliver higher underlying revenue growth in 2015 than in 2014. We also expect to deliver a further improvement in trading profit margin.

Additionally, we expect the effective corporate tax rate on trading results to reduce to slightly above 27% in 2015, absent any changes to tax legislation. This is incremental to the 220bps reduction achieved in the last two years. We believe the Group is at the start of a new and exciting phase in its 158-year history.


Yours sincerely, 

Julie Brown signature

Julie Brown

Chief Financial Officer


    Download "Strategic Report" from our Annual Report 2014 (6MB)

Annual Report 2014 

  Strategic Report (6MB)

  Governance (0.8MB) 

   Financial statements (2MB) 

   Download the
2014 annual report

Annual General Meeting 2015

Notice of AGM and Chairman's letter

The Annual General Meeting will be held on Thursday, 9 April 2015.

10 April 2014