- First half profit ahead of expectations
- Strong cash generation
- Full year guidance reiterated
Global medical technology company Smith & Nephew (SN.) notched-up a new 12-month high of £12.30 as the shares leapt 10% following a strong first half which came in ahead of market forecasts.
The rally takes gains for the year ahead of the FTSE 100, but the shares remain roughly 35% below pre-pandemic levels.
INCREASING MOMENTUM
First half revenue to 29 June increased 3.4% year-on-year to $2.83 billion on a reported basis but excluding a 1% FX (foreign exchange) headwind underlying growth was 4.3%.
Adjusted operating profit was 12.8% higher at $471 million, ahead of consensus analysts’ estimates of $462 million, equating to a 1.4% profit margin expansion to 16.7%, around the top-end of guidance.
This was driven in part by positive operating leverage effects (greater proportion of revenue turning into profit) and operational efficiencies from implementation of productivity improvements.
Cash generated from operations jumped to $368 million from $215 million in the first half of 2023 driven by favourable movements in working capital.
There was a ‘significant’ improvement in the trading cash conversion ratio (proportion of adjusted operating profit converted into cash) to 60% from 20% and the company expects to get back to historic levels of 85% for 2024.
WHAT DID THE COMPANY SAY?
CEO Deepak Nath commented: ‘Today's results are further evidence of the good progress we are making transforming Smith+Nephew into a higher growth and more profitable business.
‘Across the majority of Orthopaedics, which was our underperforming business unit, we are now consistently achieving growth rates well above historical levels.
‘The methods we employed in achieving these successes give me confidence that we will also turn around US Hip and Knee Implants and we expect to see a step up through the second half of the year.
‘Our guidance for the full year remains unchanged. There is still more work to be done and we expect to see further progress in the second half of the year.’
The company updated its capital allocation framework with the main highlight being a reduction in the target leverage ratio to around two-times net debt to EBITDA (earnings before interest, tax, depreciation, and amortisation).
From 2025 onwards the firm is targeting a progressive dividend policy whereby it pays out between 35% to 40% of adjusted earnings per share. The 2024 dividend is expected to be unchanged.
