In 2022, like for like revenues were up 4.7% to $5.2bn, ignoring currency movements.
This was helped by improved trading in the final quarter across all divisions, with Sports Medicine & ENT (Ear Nose and Throat) performing particularly strongly. A 4.1% increase in fourth quarter Orthopaedics revenues was driven by a return to growth in hip implants and a 5.5% increase in knee implant sales, where momentum in new products continues to build.
Despite the higher revenues, trading profit (underlying operating profit) was down 3.7% to $901m due to factors including higher inflation, and a rebound in sales and marketing expenditure. This was a margin of 17.3% against earlier guidance of 17.5%.
This year the group is targeting underlying revenue growth between 5 and 6%, and trading profit margins of at least 17.5%
Free cash flow was down to $110m from $469m, largely due to a build-up of inventory. Smith & Nephew ended 2022 with net debt of $2.3bn, excluding lease liabilities.
A final dividend of $0.231 per share has been proposed, unchanged from last year. Share buy backs remain on hold.
The shares were up 3.8% in early trading.
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Our view
Smith & Nephew is starting to turn a corner. The medical device maker operates through three segments - Orthopaedics, offering hip and knee replacements, Sports Medicine, a soft tissue repair business, and Wound Management, providing materials to manage injuries and prevent infection.
Demographic trends and widespread backlogs should continue to underpin demand for elective surgeries for some time to come. But Smith & Nephew is not just sitting and waiting for the market to drive its sales growth. It's continuing to develop and launch new products, cross sell its wide product range across its territories, and introduce existing products into new areas of treatment.
We see innovation as its biggest weapon for targeting higher market share. In Orthopaedics, its cementless knee systems and work in robotic surgery are core differentiators. Another area where the group is a thought leader, is negative pressure wound therapy. Its also a part of the business where management sees an opportunity to scale up. We think the compelling clinical evidence of improved surgical wound healing supports this goal.
But while there are some structural growth opportunities, the group does face some challenges. The way China now buys its hip and knee replacement devices is one such hurdle. Bulk purchases have driven prices far lower, and that's taken a bite out of revenue growth. This will continue to make comparatives challenging throughout the first half of 2023. To make matters worse, inflationary pressure's squeezing margins. On top of this, supply chain constraints have driven an increase in inventories, as well as overdue orders to customers. However, some progress is being made in reducing this backlog.
As profits thin it's becoming challenging to support the investment needed to improve operations. Inflationary headwinds are expected to keep a lid on margins this year, with the previous 2022 margin target of 17.5% now pushed out to 2023. A 12-point plan is in place to drive growth and productivity. The jury is still out on whether it will deliver.
The shares come with a 2.7% yield nearly 2 times covered by forecasted free cash flows. However no dividends can be guaranteed, and given demands elsewhere in the business, we expect growth in shareholder distributions to remain modest at best for the time being.
Ultimately, execution has been a problem so far for Smith & Nephew and its medium-term goals have been reined back. If these targets can be achieved then shareholders could be rewarded for their patience. Bold steps such as new manufacturing facilities and upgrades to production processes are underway. But we still see challenges ahead, not least the macro-economic environment, and overhauling the group's supply chain.
Smith & Nephew key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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