Coronavirus Triggers Double-Digit Revenue Dropoff at Smith+Nephew

Smith+Nephew plc’s finances are in a funk due to COVID-19.

Fourth-quarter and full-year 2020 revenue was down as the global pandemic once again prompted the cancellation or postponement of elective surgeries. Fourth-quarter revenue fell 5.8 percent (reported) and 7.1 percent (underlying) to $1.32 billion. However, the company claims the Q4 slowdown in elective surgeries was less severe than the second-quarter decline as healthcare systems adapted to manage COVID-19 patients while maintaining some procedures.
 
Decisions to maintain investment and focus on recovery readiness drove momentum across the company, with hip implant selling well in the United States due to the continued rollout of OR3. Smith+Nephew posted strong growth in Sports Medicine Joint Repair during Q4 from REGENETEN, and experienced improved underlying trajectory in Advanced Wound Management in the United States and Europe.
 
“In 2020 we continued to strengthen Smith+Nephew through increased investment in R&D, new product launches and strategic acquisitions in our higher growth segments. We achieved this while also managing unprecedented disruption from COVID-19. The resilience of the business and strength of the balance sheet also meant we are able to maintain our progressive dividend policy,” said Roland Diggelmann, CEO. “We start 2021 with three clear priorities: to return to top-line growth and recapture momentum; to drive further operational improvement; and to continue to respond effectively to COVID-19. We will build on the progress we are starting to make in areas where we have recently invested and introduced innovation. We will again invest more in R&D and I am excited by the pipeline of new technologies approaching launch, and by the potential of our recent acquisitions.” 
 
Full year revenue was $4.56 billion (2019: $5.13 billion), down 12.1 percent on an underlying basis and 11.2 percent on a reported basis. Proceeds were impacted by a foreign exchange headwind of -20bps and 110bps benefit from acquisitions.
 
Group trading profit was $683 million in 2020 (2019: $1.16 billion), and the trading profit margin was 15 percent (2019: 22.8 percent). This reflects the impact of COVID-19 with lower gross margins resulting from factory underutilisation and an increase in provisions, and negative leverage from SG&A costs, as well as increased investment in R&D and dilution from foreign exchange and acquisitions, offset by savings realised from short term mitigating actions and efficiency programmes.
 
Global franchise trading profit performance was impacted by COVID-19, with each franchise profit declining year-on-year. The impact was greatest in our Orthopaedics and Sports Medicine & ENT franchises as they were more exposed to the postponement of elective procedures. The APEX efficiency program, initiated at the end of 2017, incurred restructuring costs of $49 million in 2020. APEX is now substantially complete and, when finalised, will have delivered annualised benefits of around $190 million, $30 million more than originally guided, for a one-off cost of around $290 million, $50 million more than originally planned.
 
A new program focused mostly on driving efficiencies in operations and supply chain and, to a lesser extent, on improvements in Smith+Nephew’s commercial organization, is now under way. This incurred costs of $75 million in 2020.
 
Reported operating profit of $295 million (2019: $815 million) was after restructuring costs, as well as acquisition and disposal related items, amortisation and impairment of acquisition intangibles and legal and other items incurred in the year.

Cash generated from operations was $972 million (2019: $1.37 billion) and trading cash flow was $690 million (2019: $970 million). The trading profit to cash conversion ratio was 101 percent (2019: 83 percent) as a result of working capital movements.
 
On Dec. 31, 2020, the company had net debt of $1.7 billion (excluding lease liabilities), compared to committed facilities of $4.5 billion. The leverage ratio was 1.8x at year-end.
 
Reported tax for the year to Dec. 31, 2020, was a credit of $202 million (2019: charge of $143 million). This reflects refunds and tax credits due to the successful U.K. tax litigation outcome, releases of provisions following the conclusion of tax audits and other settlements, and deductibility of non-trading items partially offsetting trading profits. The tax rate on trading results for the year to Dec. 31, 2020, was 11.3 percent and included a one-off benefit from the tax provision releases (2019: 19.1 percent).
 
Adjusted earnings per share was 64.6 cents (129.2 cents per ADS) (2019: 102.2 cents). Basic earnings per share (EPS) was 51.3 cents (102.6 cents per ADS) (2019: 68.6 cents), reflecting restructuring costs, acquisition and disposal related items, amortisation and impairment of acquisition intangibles and legal and other items incurred, partially offset by the reported tax credit of $202 million. 
 
In September 2020 Smith+Nephew announced the $240 million acquisition of the Extremity Orthopaedics business of Integra LifeSciences Holdings Corporation. This acquisition, which was completed in January 2021, will significantly strengthen the company’s extremities business by adding a combination of a focused sales channel, complementary shoulder replacement and upper and lower extremities portfolio, and a new product pipeline.
 
In Q1 2020 Smith+Nephew acquired Tusker Medical Inc., the developer of Tula, a new system for in-office delivery of ear tubes to treat recurrent or persistent ear infections. This U.S. Food and Drug Administration-approved Breakthrough Device designation is the first system that can be used to place ear tubes in young children using local anaesthesia in the physician-office setting. Tula is highly complementary to the firm’s existing ENT portfolio, with the same customer and patient populations. Other acquisitions in 2020 included two digital technology products that formed the basis for ARIA.