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Chief Financial Officer's Review

Dear Shareholder,

In 2019 the Group adopted a new global commercial model built around three specialised global franchises, unveiled a new purpose and culture pillars, and introduced five new strategic imperatives which formed our value creation plan. These important changes underpinned our improved performance in 2019.

2019 Performance

Group revenue in 2019 was $5,138 million, an increase of 4.8% on a reported basis and 4.4% on an underlying basis.1 Our performance accelerated across the year, with revenue growth of 7.7% on a reported basis and 4.9% on an underlying basis1 in the second half.

The reported operating profit for 2019 was $815 million, a 6% reduction from the previous year as the costs associated with recent acquisitions and amortisation of acquired intangibles both rose, reflecting our strategic commitment to sourcing innovation externally as well as from our internal R&D activities, in order to drive mid-term growth. The costs of the Accelerating Performance and Execution (APEX) restructuring programme and legal and other charges were also marginally higher than the prior year.

Trading profit1 for the year was $1,169 million and the trading profit margin1 was 22.8% reflecting savings realised under the APEX programme offset by re-investment in the business, including more in R&D, and dilution from acquisitions (2018: 22.9% including 50bps benefit from one-off legal settlement not repeated in 2019). We took a $121 million charge in the year to increase our provision for metal-on-metal hip claims globally and received $147 million in insurance recoveries relating to the same matter.

Each of the three global franchises made a good contribution to the Group’s 2019 trading profit.

The reported tax rate was 19.2% (2018: 15.1%). The tax rate on trading results1 for the year to 31 December 2019 was 19.1% (2018: 16.1%). This was at the lower end of the guided rate of between 19–21%. The reported tax rate was in-line with the tax rate on trading results as most non-trading items are expected to be tax deductible.

Basic earnings per share (‘EPS’) was down 10% to 68.6¢ reflecting the impact of acquisitions completed during the year and restructuring charges related to the APEX programme. Adjusted earnings per share1 (‘EPSA’) was up 1% at 102.2¢, reflecting improved trading performance but suppressed by the one-off benefit from a tax provision release in the prior year.

I’m pleased to report that trading cash flow1 was $970 million, up from $951 million in 2018, and we had another year of strong cash conversion (as defined on page 201) at 83% (2018: 85%). Return On Invested Capital (ROIC1 – as defined on page 204) was 10.5% (2018: 12.5%), reflecting the reduction in operating profit compared to the prior year, principally as a result of additional costs of acquisitions.

Capital allocations and net debt

The appropriate 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.

Net debt2 including lease liabilities was $1,770 million at year end, an increase of $666 million from $1,104 million at 31 December 2018. The Group transitioned to IFRS 16 on 1 January 2019 resulting in lease liabilities of $170 million at 31 December 2019.

As part of our strategy to expand in higher growth markets, we actively pursued value-enhancing M&A opportunities in 2019, investing $869 million in acquisitions.


The APEX programme, initiated at the end of 2017, incurred restructuring costs of $134 million in 2019, with additional benefits recognised in the 2019 income statement of around $80 million.

This programme is nearing its conclusion and is now expected to deliver annualised benefits of $190 million, $30 million more than originally expected, for a one-off cost of $290 million, $50 million more than originally planned.

As part of the APEX programme significant changes have been made to the finance team within Smith+Nephew. We have an integrated team that combines resources across our major markets with significant support and leadership resource now located in our business services centres in India, Poland, Malaysia and Costa Rica. The finance team has undertaken the challenge of making these changes in a positive way.

I am proud of what we have already achieved and excited about the next steps toward our target operating model.


In 2020 we expect our underlying revenue growth to be in the range of 3.5% to 4.5%. On a reported basis this equates to a range of around 4.0% to 5.0%, with foreign exchange reducing reported growth by around -80bps based on exchange rates prevailing on 14 February 2020, and acquisitions adding 130bps.

We expect to deliver a 2020 trading profit margin1 at or slightly above 2019 levels. This is after absorbing a transactional foreign exchange headwind of around -50bps, dilution from the 2019 acquisitions and Tusker Medical acquired in January 2020, and the planned increase in investment in R&D, offset by the benefits of the APEX programme.

Smith+Nephew is monitoring the COVID-19 outbreak closely, which introduces additional uncertainty. Our full year outlook assumes that the situation normalises in early Q2. China represented 7% of Group revenue in 2019.

The tax rate on trading results for 2020 is expected to be in the range 18.5% to 19.5%, subject to any material changes to tax law or other one-off items.

Yours sincerely,
Graham Baker
Chief Financial Officer