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Chief Financial Officer’s review

Striving to achieve ever greater efficiencies is an important element of Smith & Nephew’s strategy

Dear Shareholder,

Group revenue in 2015 was $4,634 million (2014 – $4,617 million), an increase of 4% on an underlying basis and flat on a reported basis. Foreign exchange movements reduced revenue by 8% partially offset by acquisitions, which added 4% to the reported growth rate.

Revenue growth was 5% in the US, 1% across our Other Established Markets and 11% in the Emerging Markets.

Trading profit was $1,099 million (2014 – $1,055 million). The trading profit margin was 23.7% (2014 – 22.9%), up 80bps, reflecting the benefits from the Group Optimisation programme and synergies from the ArthroCare acquisition.

Reported operating profit of $628 million (2014 – $749 million) is after integration and acquisition costs, as well as restructuring and rationalisation costs, amortisation and impairment of acquired intangibles and legal and other items incurred in the full year. The 2015 operating profit was lowered by a $203 million accounting charge relating to a legal settlement and provision explained below.

The tax rate for the full year is 26.8% on trading results (2014 – 27.7%), a 90bps reduction year-on-year. We expect the tax rate on trading results to be 26.5% or slightly lower for 2016, barring any changes to tax legislation.

Adjusted earnings per share was 85.1¢ (170.2¢ per American Depositary Share (‘ADS’)) compared to 83.2¢ last year, up 2%, which would have been up 9% at constant exchange rates. Basic earnings per share was 45.9¢ (91.8¢ per ADS) (2014 – 56.1¢), primarily in recognition of the metal-on-metal accounting charge.

Trading cash flow was $936 million in the year. The trading profit to cash conversion ratio was 85% (2014 – 74%), a year-on-year improvement in working capital management.

Net debt was $1,361 million, down from $1,613 million at the end of Q4 2014. This represents a reported net debt/EBITDA ratio of 1.0x. The Blue Belt acquisition was completed after the year end for $279 million.

Legal settlement and provision

During the fourth quarter of 2015, Smith & Nephew settled the majority of US metal-on-metal hip claims, without admitting liability with the net cash cost after insurance recoveries being $25 million. These claims principally related to Smith & Nephew’s portfolio of modular metal-on-metal hip products (such as the R3 metal liner), which are no longer on the market.

We have taken an accounting charge of $203 million to cover both this net cost and also the present value of the estimated costs to resolve all other known and anticipated claims over the coming years. This amount does not include associated legal fees or any possible insurance recovery on these other claims as such recoveries cannot be recognised for accounting purposes until virtually certain. The Group carries considerable product liability insurance and we will continue to defend claims vigorously. The estimate is based on an actuarial model with assumptions relating to the number of claims and outcomes, and is subject to revision as circumstances evolve.

Capital returns

The efficient use of capital on behalf of shareholders is important to Smith & Nephew. The Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value enhancing acquisitions. This approach is set out in our Capital Allocation Framework which we 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.

Enhancing Group efficiency

We continue to simplify and improve our operating model, becoming more efficient in 2015. Our programme to realise more than $120 million of annual savings is progressing ahead of plan, and had delivered $100 million of annualised benefits at year end. The suspension of the Medical Device Excise Tax will present us with opportunities to accelerate investment in our quality and regulatory systems and health economics teams, particularly in support of the US market.

Acquisitions

We completed the acquisition of ArthroCare on 29 May 2014, further strengthening our Sports Medicine franchises. This business is performing in-line with our expectations. We are ahead of our plan to deliver $85 million of synergies by 2017 and have achieved almost all our targeted cost savings. Revenue synergies will continue to be delivered over the coming years.

Just after the year end, on 4 January 2016, we acquired Blue Belt Technologies for $279 million, giving us a leading position in the fast-growing area of orthopaedic roboticsassisted surgery. We expect strong revenue growth from Blue Belt Technologies. Investment in the combined R&D programmes and supportive clinical evidence will dilute Group trading profit margin by around 60bps in 2016, with the BlueBelt Technologies business becoming profitable in 2018.

Outlook

In 2016, we expect to deliver continued good underlying revenue growth as we benefit from our investments in existing businesses, acquisitions and pioneering technologies.

We would have expected our trading profit margin to reach or exceed 24% in 2016, including the 60bps dilution from investing in the Blue Belt Technologies product pipeline. However, our margin will be reduced by a significant –120bps transactional currency headwind based on current exchange rates, as highlighted in our Q3 results.

We have a clear strategy that is re-invigorating Smith & Nephew and I am confident that we will continue to execute successfully in 2016 and beyond.  

 

Julie Brown

Chief Financial Officer

 

    Download "Strategic Report" from our Annual Report 2015 (6MB)

Annual Report 2015 PDF downloads

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  Governance (2MB) 

  Group Financial
 Statements (1.5MB) 

  Complete
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Annual General Meeting 2016

The Annual General Meeting will be held on Thursday, 14 April 2016

14 April 2016

Read and download the Notice of Meeting, Chairman's letter, and form of proxy

AGM 2016