20-F 1 snn-20201231x20f.htm 20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20-F

 


INFORMATION FOR SHAREHOLDERS (Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

Other information

XXX

Commission file number 1-14978

 

Board leadership and purpose

XX


Smith & Nephew plc

(Exact name of Registrant as specified in its charter)

 


England and Wales

(Jurisdiction of incorporation or organization)

Building 5, Croxley Park, Hatters Lane, Watford, Hertfordshire WD18 8YE

(Address of principal executive offices)

 


Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

    

Trading Symbol

    

Name on each exchange on which registered

American Depositary Shares

Ordinary Shares of 20¢ each

2.032% Notes due 2030

SNN

SNN 30

 

New York Stock Exchange

New York Stock Exchange*

New York Stock Exchange

*

Not for trading, but only in connection with the first registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.See page 238 for
testimonial reference

Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

 


Indicate the number of outstanding shares of each of the issuer’s class of capital or common stock as of the close of the period covered by the annual report: 884,885,397 Ordinary Shares of 20¢ each

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined. in Rule 405 of the Securities Act    Yes      No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or

15(d) of the Securities Exchange Act of 1934    Yes       No   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.

Large Accelerated Filer  

Accelerated Filer  

Non-accelerated filer   

Emerging growth company   

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. Yes       No  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

 U.S. GAAP

  

International Financial Reporting Standards as issued by the International Accounting Standards Board

  

Other

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow:     Item 17       Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes       No  

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes      No  


+Life
Unlimited

Annual Report and Accounts 2020

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Graphic


Strategy

Our Purpose

Life Unlimited captures the essence of our purpose to
improve the health issues that hinder people from living
their lives to the fullest. We design and make technology
that takes the limits off living, and we help healthcare
professionals achieve the same goal. Together we
improve life, while also improving performance.

Contents

Strategic report

  

Governance

  

Accounts

  

Other information

At a glance

1

Letter from the Chair

66

Statement of Directors’ responsibilities

139

Group information

214

Who we are

2

Board leadership and purpose

69

Other information

220

Chair’s statement

4

Nomination & Governance Committee report

85

Report of Independent Registered Public Accounting Firm

140

Shareholder information

227

Chief Executive Officer’s review

6

Responding to COVID-19

10

Audit Committee report

88

Group income statement

148

Our global markets

14

Compliance & Culture
Committee report

98

Group statement of
comprehensive income

148

Our business model

16

Key Performance Indicators

18

Our approach to stakeholders

102

Group balance sheet

149

Financial review

20

Directors’ Remuneration report

106

Group cash flow statement

150

Sustainability reporting

24

Group statement of changes
in equity

151

Investing in our people

28

Delivering innovation

36

Notes to the Group accounts

152

Serving our customers

44

Company financial statements

205

Our stakeholders

52

Notes to the Company accounts

207

Risk report

53

Graphic

Smith+Nephew

Annual Report 2020


Strategy

Strategic report

At a glance

+Our Performance

Our performance in 2020 reflected the significant
impact of COVID-19 across our markets.

    

Group revenue

$4,560m

   

Earnings per share (EPS)

51.3¢

-25%

   

Adjusted Earnings
per share
1 (EPSA)

64.6¢

-37%

Reported

-11.2%

Underlying1

-12.1%

Dividend per share

37.5¢

Unchanged

Operating profit

$295m

-64%

Trading profit1

$683m

-42%

Return on invested capital1
(ROIC)

7.1%

-340bps

Operating profit margin

6.5%

-940bps

Trading profit margin1

15.0%

-780bps

R&D expenditure

$307m

+5%

Cash generated
from operations

$972m

-29%

Trading cash flow1

$690m

-29%

HCPs trained

185,000+

+67%

Product donations

$4.7m

» KPIs on
pages 18-19

» Financial
review on
pages 20-23

1  These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 222–226.

Graphic

Smith+Nephew

Annual Report 2020

1


Strategy

Who we are

We are a leading portfolio
medical technology company

Life Unlimited. Smith+Nephew
exists to restore people’s bodies
and their self-belief.

  

  

  

18,000

employees supporting
healthcare professionals
in over

100

countries, for more than

160+

years

Smith+Nephew has been responding to COVID-19 since
January 2020, first in China,
and then across all of our
markets globally.

» See page 10

Our strategy

Five strategic imperatives form
our value creation plan for the
medium term.

Our culture

Our culture pillars
guide our behaviours
and build winning spirit:

» Care

» Collaboration

» Courage

» See page 30

1

Achieve the full potential
of our portfolio

2

Transform the business
through enabling technologies

3

Expand in high-growth segments

4

Strengthen talent and capabilities

5

Become the best owner

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2

Smith+Nephew

Annual Report 2020


Strategic report

Innovation

Innovation is at the heart of Smith+Nephew. We deliver new products that empower healthcare professionals with options to improve patient outcomes. We develop technology through our global Research & Development (R&D) programme, and also acquire exciting technologies where we can add value and make a meaningful difference to our customers and their patients.

Manufacturing
and Quality

At Smith+Nephew we take great pride in our manufacturing expertise. Our main manufacturing facilities in the Americas, Europe and Asia continued to deliver our vital products in 2020 despite COVID-19.

Medical Education

Every year Smith+Nephew provides medical education and training to tens of thousands of surgeons and nurses to help improve patient outcomes through the safe and effective use of our products.

» See pages 36–43

We serve our customers
through three global franchises

» Read more about our three global franchises on pages
44–51

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Graphic

Orthopaedics

Orthopaedics includes an innovative range of Hip and Knee Implants used to replace diseased, damaged or worn joints, robotics-assisted enabling technologies that empower surgeons, and Trauma products used to stabilise severe fractures and correct bone deformities.

  

Sports Medicine
& ENT

Our Sports Medicine and Ear, Nose and Throat (ENT) businesses offer advanced products and instruments used to repair or remove soft tissue. They operate in growing markets where unmet clinical needs provide opportunities for procedural and technological innovation.

  

Advanced Wound
Management

Our Advanced Wound Management portfolio provides a comprehensive set of products to meet broad and complex clinical needs, to help healthcare professionals reduce the human and economic consequences of wounds.

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Smith+Nephew

Annual Report 2020

3


Chair’s statement

Emerging
stronger from a
challenging year

Graham Baker stood down as CFO in April for a new opportunity, and left with our best wishes for the future. The Board is grateful to Ian Melling, Senior Vice President Group Finance, who served as interim CFO between Graham leaving and Anne-Françoise joining.

Smith+Nephew has a strong, stable and highly experienced leadership team and the Board has noted the team spirit developing between Roland, Anne-Françoise and the whole Executive Committee.

We aim for our Board to have a wide range of background, skills and experiences and were pleased to welcome new colleagues with significant experience of leadership in medtech within our major markets of the US, Europe and China. More details on changes to the Board can be found on page 66 onwards.

Annual General Meeting

A highlight in our calendar is the Annual General Meeting, with its opportunity to interact directly with many of our private shareholders. Unfortunately this could not take place in the usual manner in 2020. Rather we held a small official meeting, followed by a virtual question and answer session. I thank everyone involved in delivering this unique event, and also thank shareholders who submitted questions and dialled-in to the virtual session.

Dear Shareholder

The 2020 financial performance was disappointing when set against the high expectations we had for the year.

Revenue was impacted by COVID-19 restrictions in all of our markets and the resultant postponement of elective surgeries. Faced with these challenges, management took the decision that Smith+Nephew had the financial strength to weather this storm whilst continuing to invest in the business and our strategy. As a result, jobs were protected and we proceeded with our plans to invest behind product launches, R&D and acquisitions, offset by some discretionary one-off cost savings.

  

  

The combination of the lower revenue and the sustained commitment to investment had an impact on margin, and consequently earnings, for the year. Looking ahead, we expect these investments to drive recovery and deliver higher growth over time. This, in turn, will support recovery in earnings.

Leadership

In July we welcomed Anne-Françoise Nesmes as the Company’s new Chief Financial Officer (CFO). Anne-Françoise is an established finance leader who has demonstrated her effectiveness supporting ambitious strategic, investment and efficiency programmes in her past roles, including CFO of Merlin Entertainments and Dechra Pharmaceuticals.

  

  

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We expect these investments
to drive recovery and deliver
higher growth steadily over
time. This, in turn, will support
recovery in earnings.”

Roberto Quarta

Chair

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4

Smith+Nephew

Annual Report 2020


Strategic report

“Smith+Nephew has
a strong, stable and
highly experienced
leadership team.”

  

  

Given the ongoing lockdown restrictions, which we expect to continue for some time, we shall be livestreaming our 2021 AGM from our Expert Connect Centre in Watford, UK, to enable all shareholders to participate electronically and safely whilst still being able to vote, speak and raise questions. More details are contained in the Notice of Meeting. We very much hope to be able to revert to an in-person meeting in 2022, as well as continuing to livestream.

Dividend

Smith+Nephew has paid a dividend every year since its shares were first listed on the London Stock Market in 1937. This reflects our long-standing commitment to delivering value while also investing for the future. In 2020, the Board determined that the Company’s strong balance sheet, effective response to COVID-19 and our desire to balance the needs of all our stakeholders, gave us the confidence to ensure shareholders benefitted from an annual distribution.

Therefore, the Board is recommending a Final Dividend of 23.1¢ per share, which, together with the Interim Dividend of 14.4¢ per share, will give a total distribution of 37.5¢ per share, unchanged from 2019 and maintaining our progressive dividend policy.

  

  

Culture

The Board wanted to ensure that COVID-19 did not stop our commitment to engage beyond the senior leadership team to take stock of the culture and morale within Smith+Nephew. Prior to the crisis, individual Board members had started a series of face-to-face listening sessions with employees. As we moved to an online environment we were able to continue this process with Board colleagues hosting video calls with employees across US, Europe and Asia Pacific. The invaluable insights from these meetings are covered in the Compliance & Culture Committee report on page 98.

Your Board is proud of how Smith+Nephew’s employees and management team have conducted themselves in 2020. In the face of an unprecedented global situation, they have continued to serve our customers today whilst making solid progress in transforming the Company for the future. On behalf of the whole Board, I would like to thank the team for their dedication and fortitude.

Yours sincerely,

Graphic

Roberto Quarta

Chair

37.5¢
per share dividend
unchanged from
2019

»  Our governance
report starts on
page 66

“Your Board is proud
of how Smith+Nephew’s
employees and
management
team have conducted
themselves in 2020.”

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Smith+Nephew

Annual Report 2020

5


Chief Executive Officer’s review

Innovation-led
and focused on
growth

We made significant improvement in our engagement as measured by our Global Employee Survey. We also reinforced our commitment to Inclusion and Diversity by beginning a Standing Together initiative, as well as launching several Employee Inclusion Groups, furthering our long-term strategic priority to strengthen our workforce.

We also made positive steps towards meeting the ambitious targets set out in our new sustainability strategy. These are focused on creating a lasting positive impact on our communities, minimising our environmental impacts, innovating sustainably and creating products that enable people to live their life to the full.

You can read more about all of these initiatives in this report.

» Investing in our people
page 28

Dear Shareholder

In 2020 Smith+Nephew faced unprecedented challenges as COVID-19 disrupted our business in every market. Trading across the year was impacted, with the second quarter being particularly badly affected as healthcare systems shut down elective procedures to focus on providing treatment to COVID-19 patients.

Throughout this period we prioritised the health and safety of employees, continued to support our customers and communities, and at the same time undertook important work to strengthen the Group. This included increasing investment in R&D, launching multiple new products, and making strategic acquisitions in higher growth segments.

I am proud of the approach we took and the progress we made.

  

  

Guided by our culture

Faced with a global pandemic we could easily have made excuses. We did not. Instead, our employees worked together to care for our customers, our communities and one another to further our purpose of Life Unlimited.

From our sales representatives who slept in their cars outside of hospitals to make sure they were there for the customers who needed them, to our team who mobilised quickly to develop a ventilator prototype, to our employees with health care training who returned to their communities to help treat those with COVID-19, to our essential workers who continued to come to our sites to manufacture and deliver product to our customers – across the business our teams demonstrated our culture pillars of Care, Collaboration and Courage.

  

  

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Faced with a global
pandemic we could easily
have made excuses.
We did not.”

Roland Diggelmann

Chief Executive Officer

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6

Smith+Nephew

Annual Report 2020


Strategic report

2020 performance

We entered 2020 full of optimism following record revenue in 2019 and a growth rate we had not delivered for many years. However, COVID-19 hit early in the year, first in China, an important market for us, and, soon after, all of our markets were affected. As a result, our 2020 revenue and profit were both down year-on-year.

The impact of COVID-19 was most pronounced on our Orthopaedic Reconstruction, Sports Medicine and ENT businesses, driven by lower levels of elective surgery.

Our Advanced Wound Management and Trauma businesses remained more resilient across the year.

The second quarter was particularly difficult, with revenue falling by nearly 30%. We saw some improvement in the summer and autumn, but rates of COVID-19 infection increased again from mid-October onwards. Encouragingly the overall effect on the business was less severe than we saw earlier in the year, as some healthcare systems were able to maintain non-COVID care at a higher rate than before.

  

  

Even within this disappointing year there were milestones of note. We sold our millionth PICO 7 Negative Pressure Wound Therapy system and two millionth OXINIUM hip or knee implant. And the success of recently launched products, such as our OR3O Dual Mobility Hip and EVOS System in Trauma, demonstrated that true innovation will always drive demand.

We also adapted in how we served our customers. A highlight of this was our medical education team, which pivoted to online and delivered a record number of training courses across the year.

New innovation

Smith+Nephew is an innovation-led business. In 2020 we invested a record $307 million in R&D and delivered important launches. These included cutting-edge digital solutions, such as a new robotics system, a suite of connected sports medicine surgical tools for the operating room and a business and patient management platform to help customers expand outpatient care. Despite the challenges, we intentionally maintained our focus on developing and launching new products so that we could regain momentum as our markets recovered.

  

  

Investing in businesses and technologies in higher-growth segments is at the core of our acquisition strategy. The pandemic did not stop us from making important progress here too. In January 2020 we acquired the developer of Tula®, a new system for in-office delivery of ear tubes to treat recurrent or persistent ear infections. And in September we announced the acquisition of an extremity orthopaedics business that will significantly strengthen our portfolio in this higher growth area.

You can read more about the work of our R&D team, our product launches and acquisitions later in this report.

» Delivering innovation
page 36

2 million

implants made from
OXINIUM have been
used in the treatment
of patients

Two million patients have been treated with implants made from OXINIUM Technology – Smith+Nephew’s proprietary oxidised zirconium alloy used in hip and knee replacements.

OXINIUM is a unique material that combines the strength of metal with the wear resistance of ceramic. Its hardness, low-friction and resistance to roughening and abrasion makes it ideal for a wide variety of hip and knee applications.

The evidence behind OXINIUM is compelling. Four major registries around the world have shown OXINIUM to be the best performing hip bearing on the market1–4 and it is the only bearing technology with published results of 45 million knee cycles in vitro wear simulation testing, simulating 30 years of normal activity.5, 6

  

OXINIUM Technology is a key component in several advanced products offered through Smith+Nephew’s innovative hip and knee portfolios. This includes the POLAR3 Total Hip Solution, the OR3O Dual Mobility Hip System and the JOURNEY II Total and Unicompartmental Knee Systems.

» References available
on page 238

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Smith+Nephew

Annual Report 2020

7


  

  

  

  

The Extremity Orthopaedics business, acquired in January 2021, is expected to deliver strong growth, and the Tula System has the potential to transform tympanostomy tube treatment of children as ENT surgeries restart.

Drive further operational improvement across the Group

Our second priority for 2021 is to drive further operational improvement across Smith+Nephew in order to provide more resources for investment in the mid-term, including in R&D. This priority aligns to our strategic imperative to become the best owner.

We are undertaking a programme to transform our operations, which is expected to deliver around $200 million of annualised benefits by 2025 for a one-off cost of around $350 million.

One major component of the programme is to continue to optimise our manufacturing network, including introducing digital technologies and lean manufacturing. We are building a new facility in Malaysia, which will provide additional capacity in a low-cost location to support future growth and have expanded our site in Costa Rica. We are outsourcing our global warehousing and distribution functions in the US and Europe to a specialist third party partner and expect to benefit from the greater scale and expertise of our partner, including their advanced warehouse automation.

We will also focus on other process efficiencies. We have already made progress on commercial optimisation, having completed buy-outs of a number of third-party sellers in some markets. Doing this brings us closer to our individual sales representatives and to our customers, as well as removing an additional layer of cost. In addition, we aim to simplify end-to-end processes in all parts of our business.

Chief Executive Officer’s review continued

Our strategic imperatives

Grow

+  Together

+  Effectively

1 

Achieve the full potential of our portfolio

4 

Strengthen talent
and capabilities

5 

Become the
best owner

2

Transform the business through enabling technologies

3

Expand in high-growth
segments

2021 priorities

Our three priorities for 2021 build on the work undertaken and investments made in 2020 and are underpinned by our strategic imperatives.

Return to top-line growth

and recapture momentum

Our first priority for 2021 is to return to top-line growth and recapture the momentum we were building prior to COVID-19, with the ultimate aim of increasing earnings through operating leverage. This priority aligns with the first three of our Strategic Imperatives targeted at improving revenue growth.

Our focus here is to drive higher returns from our differentiated product portfolio. Our recent experience of launching innovative products demonstrates that our emphasis on commercial excellence can enhance growth. Many of our recent new product launches are at early stages, and there is considerable scope to expand them both to new customers, and into new markets. As an example, later this year our new robotics platform CORI will launch in Europe and India, important markets for surgical robotics.

In 2021 we expect to again invest more in R&D as we continue to develop innovation that improves outcomes for patients and customers and meets unmet clinical needs. We have a strong pipeline across the franchises with many launches planned, including further digital technologies, subject to completion of necessary regulatory reviews, clearances and approvals. These include a cementless knee, a next-generation single-use negative pressure wound therapy system and upgrades to our robotics and connected tower platforms. We also have a significant programme of innovation planned for China, including new products made in China for China.

We also expect to make progress in delivering value from recently acquired assets. In particular there are opportunities to drive synergistic growth in Trauma & Extremities, Sports Medicine Joint Repair, ENT and Advanced Wound Bioactives. For instance, the acquired Sports Medicine products REGENETEN and NOVOSTITCH, which have been well received in the US, are only at the start of their launch in other markets.

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“Our medical education team pivoted to online and delivered a record number of training courses across the year.”

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Smith+Nephew

Annual Report 2020


Strategic report

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Continue to respond effectively
to COVID-19

Protecting and supporting our employees remains our priority in our response to COVID-19. We are developing new ways to work, and have initiated a Workplace Unlimited programme to address employees’ needs for flexible working. We continue to invest in safety at our sites, such as wearable sensor technologies to encourage social distancing.

We are also focused on how we can best support our customers in person and virtually. This includes innovating in how we deliver medical education for customers to support the safe and effective use of our products. In 2021 we will launch Education Unlimited, a new global website platform with medical education resources spanning across our franchises.

We remain determined to balance discretionary costs while at the same time preparing for recovery. As examples, travel remains restricted and company meetings have been moved online.

  

  

“In 2020 we sold
our one millionth
PICO
7 single-use
NPWT System.”

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Ready to deliver

I’m proud of the way Smith+Nephew has responded to the challenges of 2020. We’ve demonstrated our financial and cultural resilience, and stayed focused on supporting customers and advancing our strategy for growth.

We expect the impact of COVID-19 on our customers and markets to continue in the first half of 2021, with the timing and extent of the recovery still uncertain, and Anne-Françoise covers our outlook on page 23.

What I am certain of is that our recent investments into innovation and the portfolio are ready to translate into growth acceleration. I’m excited by the pipeline of new technology that’s approaching launch, and by the potential of our recent acquisitions as we integrate them into Smith+Nephew. We have a clear set of priorities, a strong team and renewed energy.

Yours sincerely,

Graphic

Roland Diggelmann

Chief Executive Office

“Many of our recent
product launches are at
early stages, and there
is considerable scope
to expand them both
to new customers, and
into new markets.”

Smith+Nephew

Annual Report 2020

9


Responding to COVID-19

Protecting employees
and serving customers

Smith+Nephew has been responding to COVID-19 since January 2020, first in China, and then across all of our markets globally. Throughout the year we prioritised the health and wellbeing of employees and protecting jobs, supported our customers and communities, and worked to ensure the business was well prepared to respond as elective surgeries returned.

  

  

Maintaining Board effectiveness

The Board reacted to COVID-19 by seamlessly switching to a digital environment. Board meetings were held over video conference and we increased the number of meetings, both to support management and ensure effective oversight of the Company’s response.

The Board was also determined not to dilute its engagement with other stakeholders. Employee engagement sessions were moved online, with Non-Executive Directors meeting employees from the US, APAC and EMEA in this manner. The Board also continued to hear the voice of our customers, for instance in October hearing from a surgeon involved in the design of our new robotics system CORI. Shareholder meetings continued via video conference. You can read more about the Board’s stakeholder engagement in our Section 172 Statement on page 102.

» Read more in our Corporate Governance section starting on page 66

Care

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Taking care of each other by social distancing

BumpTM is a cutting-edge system designed to improve workplace safety and use anonymous employee data to inform effective social distancing. Bump technology immediately alerts wearers when they are getting too close to another person. Following a successful trial, Bump was rolled out at Smith+Nephew’s Hull facility. In 2021 we expect to utilise it at other major sites in Memphis, Tennessee and Costa Rica.

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10

Smith+Nephew

Annual Report 2020


Strategic report


on the business

Caring for employees

In 2020 our employees faced unprecedented challenges. Many new working practices were required whilst we continued to serve our customers.

We took many measures to safeguard employees, including temporarily closing offices and supporting working from home wherever possible.

At all our sites precautionary safety measures were put in place consistent with applicable local requirements. These included social distancing measures, temperature checks, availability of hand sanitisers and other PPE equipment. We limited business travel and in-person meetings.

As a result we were able to continue to manufacture our critical products and supply customers as they strove to improve the quality of life of patients.

No jobs were lost amongst our workforce in 2020 as a result of COVID-19, and we did not utilise the UK Government’s furlough scheme.

We recognised that our duty of care also extended to the broader welfare of employees. For our sales force, for whom a proportion of their income is typically commission based, we ensured that they retained a significant percentage of regular income and used downtime to enhance digital training on technical product knowledge and business skills.

  

  

Special pandemic leave was introduced so that no employee had to take unpaid leave to care for a loved one or if asked to self-isolate. Other measures taken included enhancing our Employee Assistance Programme to make it easier for employees to access resources to support their emotional, mental, physical and financial wellbeing, as well as reviewing objectives during the year to ensure expectations were achievable and aligned with business deliverables in the second half of the year. Details of the impact of COVID-19 on Remuneration can be found in our Policy report on page 106.

» Read more on page 28

  

  

Serving our customers

We continued to serve customers to the best of our ability while respecting local restrictions.

At the height of the global lockdown in the second quarter of 2020, our Trauma and Reconstruction teams supported urgent patient cases, and our Advanced Wound Management teams kept product flowing to customers in both hospital and community care settings.

We also launched new services for customers. For example, in March we launched a new digital education programme designed to support the development of surgeons by providing educational webinars on the safe and effective use of Smith+Nephew products as well as surgical techniques. More than 11,000 healthcare professionals attended in the first month. You can read more about our medical education programme on page 42.

In the US we launched a 24/7 helpline where both patients and clinicians can access information on our Advanced Wound Management portfolio and get immediate answers to questions on the proper use of our products as well as wound-related education, with the intent of easing the burden on healthcare providers.

We also continued to innovate, and launched multiple new products with a focus on enabling and digital technologies. More details of our R&D activities and product launches can be found in the Innovation section starting on page 36.

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Extensive safety measures to protect employees were put in place at all our sites.

24/7

In the US we launched a 24/7
helpline where both patients
and clinicians can access
information on our Advanced
Wound Management portfolio

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Smith+Nephew

Annual Report 2020

11


Responding to COVID-19 continued

Graphic

The ‘New Normal’
programme uses the
experience of the early
months of COVID-19
to identify, align or
accelerate existing
efforts to prepare us
for what comes next in
our marketplace as
well as in our own
workplace.”

  

  

Supporting communities

Smith+Nephew actively engaged in its communities, and made donations of product and personal protective equipment in 2020. We also supported employee volunteering, including registered healthcare professionals wanting to return to front line care.

We are using our manufacturing expertise to support the fight against COVID-19. For example, in the UK we worked with the University of Oxford and King’s College London to develop OxVent, a low-cost ventilator. Our facilities in Memphis and Costa Rica assembled more than one million face shields, and we used our 3D printers to produce PPE for donation to non-profit organisation Church Health in Memphis.

  

  

Our New Normal programme

COVID-19 has required companies worldwide to adapt to new ways of working. In July Smith+Nephew launched its ‘New Normal’ programme, with the objective of using the experience of the early months of COVID-19 to identify, align or accelerate existing efforts to prepare us for what comes next in our marketplace as well as in our own workplace.

Our New Normal programme has two workstreams: Workplace Unlimited and Go to Market. Each is sponsored by several members of the Executive Committee.


in April we started working with InTech
Industries Inc. (Birmingham, Alabama),
our existing supplier of face shields,
to ramp up production for the US.
Our Memphis team, joined by colleagues
in Costa Rica, assembled more than
one million face shields.

+

Collaboration

1 million+
Face shields assembled
by our teams in Memphis and Costa Rica

  

Collaborating with our
suppliers and colleagues
to produce more than
one million face masks

Recognising the need for more face shields,
in April we started working with InTech
Industries Inc. (Birmingham, Alabama),
our existing supplier of face shields,
to ramp up production for the US.
Our Memphis team, joined by colleagues
in Costa Rica, assembled more than
one million face shields.

  

  

Graphic

12

Smith+Nephew

Annual Report 2020


Strategic report

New Normal – Workplace Unlimited

In August, we launched the Workplace Unlimited survey to better understand what flexibility meant to our teams. More than 7,000 employees responded, and from the feedback it was clear that most employees wanted the opportunity for increased flexibility, in some fashion.

With executive sponsorship by our Chief HR Officer Elga Lohler, and President Operations & GBS Mark Gladwell, a project team of more than 50 colleagues set out to further understand employee needs regarding workspace solutions and practices, and to design a new model based on a common Group-wide set of global flexibility principles. Through them we will provide as much flexibility as possible in the future.

» Read more on Workplace
Unlimited page 31

  

  

7,000+

employees responded to our Workplace Unlimited survey, making it clear that most employees wanted the opportunity for increased flexibility

  

  

New Normal – Go to Market

COVID-19 will have a lasting impact on our business and our markets. While it has presented significant challenges, it has also given us a unique opportunity to put in place new approaches to serve our customers better than ever before.

Go to Market is focused on evaluating our current approaches and establishing new and innovative ways to meet our customers’ needs while driving growth. It is led by Myra Eskes, President APAC Region, Simon Fraser, President Advanced Wound Management and Skip Kiil, President Orthopaedics.

The project consists of workstreams seeking ways to be more efficient and effective across all facets of commercial execution, from innovation to product launch excellence, the use of digital technology to enhance the customer experience, and identifying and refining ways to enhance value delivery to healthcare systems, improve outcomes and reduce cost of care.

+

Courage

Supporting colleagues who volunteered to return to front line care

Wound Care Consultant, Tanja Lamm is based in Germany. Before joining us, she worked as a specialist in intensive care and anaesthesia, providing care for critically ill patients. With the outbreak of the COVID-19 pandemic, Tanja took special volunteering leave, returning to the hospital to support her former colleagues and care for patients in the COVID-19 intensive care unit.

Graphic

A picture containing icon

Description automatically generated

Smith+Nephew

Annual Report 2020

13


Our global markets

Smith+Nephew
competes in large
and attractive markets

COVID-19 has increased the focus on telehealth, including solutions to provide patient care remotely over digital platforms pre and post procedure.

The medical device and supplies segment of the global healthcare industry is worth more than $400 billion per annum. Within this, Smith+Nephew’s product segments are worth around $38 billion, growing at approximately 4% annually prior to 2020 and the impact of COVID-19.

$38bn

Value of Smith+Nephew’s addressable market segments

4%

Average annual growth rate across our segments prior to COVID-19

  

  

  

  

Long-term growth has been driven by lifestyle related health conditions, such as increasing prevalence of diabetes and obesity, lifestyle choices such as greater levels of physical activity and sport later in life, as well as improvements to life expectancy meaning that there are increasingly more patients in the world. In emerging markets, these factors have been compounded by economic development driving demand, particularly in China and India. At the same time, governments are focused on reducing the cost of healthcare, pushing down pricing. Medical technology companies are under pressure to continue to innovate, and also to provide evidence supporting both the clinical and economic benefits of products.

Clinical innovations, financial benefits and patient preferences are prompting hospitals and health systems to move certain inpatient procedures to outpatient settings.¹ The impact of COVID-19 has accelerated this trend, as providers try to keep patients separated from COVID-19 patients, and also catch up on elective procedures delayed by lockdown measures. COVID-19 has also increased the focus on telehealth, including solutions to provide patient care remotely over digital platforms pre and post procedure.

The US is expected to continue to lead the medical device industry reaching $300 billion in annual sales by 2030.2 By this stage, China and India, who are both growing at twice the global market rate, are expected to be in the top five markets, with over $200 billion and $40 billion of sales respectively.

A highly regulated industry

The medical device sector is one of the world’s most heavily regulated industries.

Regulations and industry codes govern the way industry interacts with healthcare professionals and government officials globally, including the AdvaMed Code of Ethics and the MedTech Europe Code of Ethical Business Practice.

Anti-bribery and corruption legislation, including the UK Bribery Act and the US Foreign Corrupt Practices Act, also apply to Smith+Nephew’s global business. There is also a strong focus on compliance and cost control in emerging markets, especially in China. For more information on our approach to compliance see page 33.

National regulatory authorities govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the products to ensure they are safe and perform as intended.

1  Becker’s ASC Review: 4 trends driving
change in healthcare.

2  KPMG: Medical devices 2030: Making a
power play to avoid the commodity trap.

14

Smith+Nephew

Annual Report 2020


Strategic report

The majority of countries require products to be authorised or registered prior to entering the market, and such authorisation or registration needs to be subsequently maintained. Smith+Nephew’s major regulatory authorities include the US FDA, the Medicines and Healthcare products Regulatory Agency (MHRA) in the UK, relevant EU Competent Authorities, the Ministry of Health, Labour and Welfare in Japan, the National Medical Products Administration (NMPA) in China, and the Australian Therapeutic Goods Administration (TGA). Inspections and audits by these authorities continue to increase year-on-year and involve significant and continued financial and resource investment by Smith+Nephew to respond appropriately. In addition we are required to respond to new regulations, such as the European Union (EU) Medical Device Regulations (MDR) which will be fully implemented from May 2021 (see page 43).

Geo-political factors

Following the UK’s departure from the EU, a new Trade and Cooperation Agreement came into effect on 1 January 2021. This includes commitment to zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin.

In the UK, the CE mark can continue to be used until 30 June 2023 and the UK will develop a new regulatory system. The UK continues to negotiate agreements to reproduce the effects of EU trade agreements with other countries.

US and Chinese tariffs remain in place after no progress was made on a second phase of negotiations in 2020. Relief is unlikely in the near term, however, as the US government is likely to focus on domestic economic recovery, before addressing outstanding trade issues.

Additionally, some countries are adopting localisation and price-control policies with respect to government procurement of healthcare products that aim to increase domestic manufacturing, with the pandemic focusing greater attention on global supply chains and accelerating this trend.

The importance of seasonality

There tends to be a higher volume of orthopaedic and sports medicine procedures during the winter months when accidents and sports-related injuries are more frequent. Elective procedures tend to slow down in the summer months due to holidays. Advanced Wound Management is less impacted by seasonality due to the nature of the products.

At Smith+Nephew, the majority of our business is in the northern hemisphere, including approximately 50% in the US and 20% in Europe. In the US, out-of-pocket costs for health insurance plans are tied to medical expenses in a calendar year. As a result, households that have reached their annual deductible amount and/or annual out-of-pocket cap before year’s end will find it to be cost-effective to schedule necessary procedures later in that year rather than delaying into the next year.

Competition

Smith+Nephew’s three global franchises have several major competitors who differ with respect to product focus, geographic reach and scale. For example, our main surgical competitors are larger in scale and tend to be more exposed to the US, whereas the majority of our key wound competitors are not US-centric.

In our Orthopaedic franchise we are one of four leading players, competing against US-based companies Stryker, Zimmer Biomet and DePuy Synthes (a Johnson & Johnson company). In Sports Medicine, Smith+Nephew holds a leading position behind Arthrex (US), and also competes against Stryker and DePuy Mitek.

We are the second largest global Advanced Wound Management business in terms of revenue, with the broadest product range. In the Advanced Wound Care sub-segment we compete with Mölnlycke (Sweden) and ConvaTec (UK). In Advanced Wound Devices, we are the primary challenger to Negative Pressure Wound Therapy incumbent 3M. In our Advanced Wound Bioactives franchise, we have leadership positions in our respective categories.

Market size 20201

Orthopaedics

  

  

 

 

Hip and
Knee Implants

  

  

Trauma and
Extremities

$12.6bn

$6.5bn

+2%

-15%

+4%

-4%

2017–19
Average
growth

2020
Growth

2017–19
Average
growth

2020
Growth

Graphic

Graphic

A

Smith+Nephew2

11%

A

Smith+Nephew2

7%

B

Zimmer Biomet

33%

B

DePuy Synthes4

40%

C

Stryker

22%

C

Stryker

22%

D

DePuy Synthes4

19%

D

Zimmer Biomet

9%

E

Others

15%

E

Others

22%

  

  

Sports Medicine3

Advanced Wound
Management

  

  

$4.6bn

$9.1bn

+5%

-12%

+5%

-3%

2017–19
Average
growth

2020
Growth

2017–19
Average
growth

2020
Growth

Graphic

Graphic

A

Smith+Nephew2

26%

A

Smith+Nephew2

14%

B

Arthrex

33%

B

3M5

19%

C

Stryker

11%

C

Mölnlycke

9%

D

DePuy Mitek4

13%

D

ConvaTec

7%

E

Others

17%

E

Others

51%

1  Data used in 2020 estimates generated by Smith+Nephew is based on publicly available sources and internal analysis and represents an indication of market shares and sizes.

2  Smith+Nephew 2020 market share unchanged from 2019 final data. 2019 Annual Report published estimates based on preliminary data. 2019 final data was Hip & Knee Implants 11%, Trauma & Extremities 7%, Sports Medicine 26% and AWM 14%.

3  Representing repair products and arthroscopic enabling technologies, and excluding ENT.

4  A division of Johnson & Johnson.

5  3M acquired Acelity in 2019.

Smith+Nephew

Annual Report 2020

15


Our business model

Value creation is driven
by our purpose, culture pillars
and strategic imperatives

Our resources

  

  

» Creating value through

  

  

Our people & culture

Attracting, developing and retaining the best employees is important. We strive to build a purpose-driven culture based on strong and authentic values.

» See page 28 for more

Ethics & compliance

Committed to doing business the right way, compliance is embedded in the way we work.

» See page 33 for more

Sustainability

Our sustainability strategy includes challenging targets set over the long term in the three areas of People, Planet and Products.

» See page 24 for more

Research & development

Innovation is part of our culture and we are protecting the amount we invest in new products.

» See page 36 for more

Manufacturing & quality

Operating global manufacturing efficiently and to high standards to ensure quality and competitiveness.

» See page 40 for more

Medical education

Supporting the safe and effective use of our products through medical education.

» See page 42 for more

Sales & marketing

Supporting customers through highly specialised sales teams with in-depth technical product knowledge that surgeons and nurses value greatly.

» See page 44 for more

Purpose-driven culture

Having a clear purpose gives employees
a sense of belief and determination and
a common goal. This supports a strong
culture which drives performance across
the business both in terms of financial
and non-financial value.

» See page 28 to read
how our culture
guided us in 2020

Life Unlimited

» See page 6 to read
about our strategic
progress in 2020

Strategic imperatives

Our five strategic imperatives are
fundamental to how we focus the
resources of the business to maximise
commercial impact in our markets.
They form the basis of our value
creation plan for the medium term.

Bubble chart

Description automatically generated

16

Smith+Nephew

Annual Report 2020


Strategic report

  

  

» Value delivered in 2020

$4,560m

Revenue

$295m

Operating profit

$683m

Trading profit1

c.$40m

Efficiency savings

185,000+

Practitioner
training instances

$4.7m

Product donations

8,000

Hours volunteered

$328m

Dividend

» See pages 18–19 for
more on our KPIs

1  These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 222–226.

Strong product portfolio

We have market-leading technology across our broad range of products. We deploy our capital to drive continued innovation from our R&D programmes and invest in product and technology acquisitions which improve outcomes and widen access to life-changing care.

» See pages 36–40 to read more about
our innovation

» See pages 44–51 to
read more about the
performance across
our franchise areas

Customer centricity

Serving our customers is at the heart of our business model. We have a global franchise and regional model led by management who are specialists in their areas. This keeps us close to our customers, ensuring we can anticipate and meet their needs.

Graphic

Smith+Nephew

Annual Report 2020

17


Key Performance Indicators

Measuring our progress

Smith+Nephew uses a number of financial and non-financial Key Performance Indicators (KPIs) to track and evaluate performance and delivery against its strategic imperatives, as described on page 8, and other business objectives. Those KPIs in the public domain are consolidated below. A number of other KPIs are commercially sensitive and not published.

Grow +

KPIs measuring progress across our three strategic imperatives focused on growth

Revenue growth

Profit margin

Investment in R&D

Revenue growth allows management and investors to measure our relative performance. We are committed to outgrowing our markets in the medium term.

Profit margin allows management and investors to determine relative performance. We are committed to delivering improvements in the medium term.

This KPI allows management and investors to understand how much is being invested in new innovative products designed to drive future revenue growth and profit.

Revenue growth – reported

Operating profit margin

$246m

$292m

$307m

3%

4.8%

-11.2%

-11.2%

Reported revenue growth includes a 110bps benefit from acquisitions and -20bps currency impact in 2020.

17.6%

15.9%

6.5%

6.5%

Reported profit margin reflects restructuring costs, as well as acquisition and disposal related items, amortisation and legal and other items.

  

$307m

In 2020 we protected our R&D investment and launched multiple new products from our organic pipeline and acquisitions.

g

2018

2019

2020

2018

2019

2020

2018

2019

2020

» For more information see page 36

Revenue growth – underlying1

Trading profit margin1

Medical Education

2%

4.4%

-12.1%

-12.1%

Revenue was impacted by COVID-19 restrictions and the resultant postponement of elective surgeries.

22.9%

22.8%

15.0%

15.0%

The combination of the lower revenue and our sustained commitment to investment had an impact on margin for the year.

This KPI helps investors understand how we support the safe and effective use of our products through the provision of medical education.

  

185,000+

practitioner training instances

More than 185,000 healthcare professionals attended our courses globally, with nearly 80% delivered virtually.

2018

2019

2020

2018

2019

2020

Dividend per share

Return on Invested Capital

» For more information see page 42

Dividend payments allow investors to receive a cash return on their investment in Smith+Nephew.

ROIC allows management and investors to measure the return generated on capital invested, providing a metric for long-term value creation.

Graphic

» Financial review
on pages 20-23

36.0¢

37.5¢

37.5¢

37.5¢

The total distribution of 37.5¢ per share, unchanged from 2019, maintains our progressive dividend policy.

12.5%

10.5%

7.1%

7.1%

The decrease in ROIC in 2020 reflected the reduction in operating profit.

1  These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 222–226.

2018

2019

2020

2018

2019

2020

18

Smith+Nephew

Annual Report 2020


Strategic report

Together +

Effectively

KPI measuring progress across our fourth strategic imperative focused on our people

KPIs measuring progress across our final strategic imperative focused on stewardship

Employee engagement score

Efficiency savings

The Gallup Global Engagement Survey allows management and investors to assess how well our employees are engaged, which is a key driver of business performance.

+0.32

Engagement growth

Our Grand Mean score improved by 0.32 propelling us from the 34th to the 76th percentile of companies in Gallup’s extensive database. These are excellent results for a company in its second survey year, according to Gallup.

16,000 employees participated, an outstanding response rate of 89%, up from 84% in 2019.

  

  

This KPI helps management and investors measures our progress in driving greater efficiency to liberate resources for reinvestment in future drivers of growth.

$190m

Annualised benefits from APEX

APEX programme, initiated at the end of 2017, was substantially completed in 2020, delivering around $190 million of annualised benefits for one-off costs of around $290 million.

  

  

$200m

COVID-19 related savings delivered

$200m of one-off COVID-19 related savings against the budget set at the start of the year were realised in the year in areas such as variable pay, third party commissions and royalties, travel, promotional activity, events, and consultancy spend.

$200m

Operations transformation annualised target

We are taking the next step in improving our long-term efficiency, continuing a programme to transform our operations. This is expected to deliver around $200 million of annualised benefits by 2025 for a one-off cost of around $350 million.

Quality and Safety

This KPI allows management and investors to understand if we are operating a safe working environment at high standards to ensure quality and competitiveness.

Headline safety rate

Long-term sustainability targets

 

0.45

 

 

0.49

 

 

0.30

 

 

Our headline safety rate improved in 2020. We adopt the industry-standard OSHA system to record incidents of occupational injury and ill health. Performance is expressed as the number of incidents per 200,000 hours worked. For more information see our 2020 Sustainability Report.

These KPIs allow management and investors to measure progress against our long-term sustainability targets in the three areas of People, Planet and Products.

8,000

Hours volunteered

Each year employees are encouraged to use paid volunteering time.

$4.7m

Product donations

Each year we donate products to support underserved communities.

» More details on these, including the actions we are undertaking to meet our commitments, can be found on page 24

  

  

  

  

2018

2019

2020

Regulatory inspections

Our manufacturing and product design sites are subject to external regulatory inspections and audits conducted by the US FDA as well as other health authorities and regulatory agencies. During 2020 we received no warning letters or other significant regulatory actions.

Smith+Nephew

Annual Report 2020

19


Graphic

Financial review

Maintaining
financial
strength

The reported operating profit for 2020 was $295 million, a 64% reduction from the previous year due to the impact of COVID-19 described above, although this was partially mitigated by cost savings. Profit was also reduced by higher amortisation which increased from the prior year reflecting a full year amortisation charge of acquisitions completed in 2019. Legal and other charges increased due to higher costs associated with EU Medical Device Regulations.

Trading profit1 for the year was $683 million and the trading profit margin1 was 15.0% reflecting the impact of the sales reductions caused by COVID-19 and resulting manufacturing facility underutilisation and increased inventory provisions.

Global franchise trading profit performance was impacted by COVID-19 with each franchise profit reducing from the prior year. The impact was greater in our Orthopaedics and Sports Medicine & ENT franchises as they were more exposed to postponement of elective procedures. More details on franchise performance can be found on pages 46–51.

Earnings per share

Basic earnings per share (‘EPS’) was down 25% to 51.3¢ reflecting the impact of COVID-19 partially offset by a reported tax credit. Adjusted earnings per share1 (‘EPSA’) was down 37% at 64.6¢, reflecting the lower trading performance partially offset by the lower trading tax rate.

2020 Performance
and impact of COVID-19

Group revenue in 2020 was $4,560 million, a decrease of 11.2% on a reported basis and a decrease of 12.1% on an underlying basis.1

Our business was significantly impacted by the COVID-19 pandemic, first in China in the first quarter and then more broadly across the world as lockdowns took effect and elective procedures were postponed. In the second quarter this resulted in revenue growth rates of -29.8% reported (-29.3% underlying1). The business rebounded strongly in the third quarter as COVID-19 rates fell and procedures

  

  

resumed with revenue declines of -3.7% reported (-4.2% underlying1). In the fourth quarter, COVID-19 infection levels increased in the US and Europe and sales declined by -5.8% reported (-7.1% underlying1) as healthcare systems were better prepared to continue procedures compared to earlier in the year.

We also took the decision early on to maintain investments behind R&D and where needed to ensure we were ready for the recovery.

In parallel, we also identified quickly the discretionary spend that could be reduced to mitigate the impact of the pandemic.

  

  

Graphic

We took the decision early on to
maintain strategic investments,
such as R&D, to ensure the business
is well positioned to grow when the
recovery starts.”

Anne-Françoise Nesmes

Chief Financial Officer

20

Smith+Nephew

Annual Report 2020


Strategic report

Group performance

  

2020
$ million

  

2019
$ million

  

Change
$ million

Revenue

4,560

5,138

(578)

Operating profit

295

815

(520)

Trading profit1

683

1,169

(486)

Profit before tax

246

743

(497)

Attributable profit

448

600

(152)

EPS

51.3¢

68.6¢

(17.3¢)

EPSA1

64.6¢

102.2¢

(37.6¢)

Non-IFRS measures

The underlying increase in revenues by market reconciles to reported growth, the most directly comparable financial measure calculated in accordance with International Financial Reporting Standards (IFRS), as follows:

Reconciling items

  

2020

$ million

  

2019
$ million

  

Reported
growth
%

  

Underlying
growth
%

  

Acquisitions/
Disposals
%

  

Currency
impact
%

US

2,339

2,551

(8.3%)

(10.1%)

1.8%

Other Established Markets

1,450

1,630

(11.0%)

(12.3%)

0.2%

1.1%

Emerging Markets

771

957

(19.4%)

(16.8%)

0.5%

(3.1%)

Total

4,560

5,138

(11.2%)

(12.1%)

1.1%

(0.2%)

Trading profit reconciles to operating profit, the most directly comparable financial measure calculated in accordance with IFRS, as follows:

  

2020
$ million

  

2020
%

  

2019
$ million

  

2019
%

Operating profit

295

6.5%

815

15.9%

Acquisition and disposal related items

4

0.1%

32

0.6%

Restructuring and rationalisation costs

124

2.7%

134

2.6%

Amortisation and impairment of acquisition intangibles

171

3.7%

143

2.8%

Legal and other

89

2.0%

45

0.9%

Trading profit

683

15.0%

1,169

22.8%

Taxation

Reported tax for the year to 31 December 2020 was a credit of $202 million (2019: charge of $143 million). This reflects refunds and tax credits due to the successful UK tax litigation outcome, releases of provisions following the conclusion of tax audits and other settlements, and lower profits. The tax rate on trading results1 for the year to 31 December 2020 was 11.3% (2019: 19.1%). This is lower than the prior year due to releases of tax provisions following the conclusion of tax audits and other settlements.

Smith+Nephew is subject to various taxes in the many countries in which the Group operates. We seek to pay the correct amount of tax in-line with local tax laws in each jurisdiction.

Our business generates tax receipts for the governments in each of these countries. In addition to corporate income taxes, we pay and collect other taxes principally including payroll (employee) taxes, sales (indirect) taxes and customs duties.

During 2020, we made global tax payments of $637 million. This comprises $229 million of taxes borne by Smith+Nephew (corporate income taxes, employer social security contributions and customs duties) and $408 million of taxes collected from employees and customers on behalf of governments (employee income taxes and social security contributions and net indirect tax payable). Corporate income taxes, in particular, were lower than in prior years due to the impact on profits of COVID-19. These figures exclude the $100 million tax refund we received following the successful outcome of the UK tax litigation matter.

Efficiency

Graphic

The APEX programme that was announced in February 2018 and the operations and commercial excellence programme that was announced in February 2020, incurred restructuring costs of $124 million in 2020, with additional benefits recognised in the 2020 income statement of around $40 million. Whilst some projects were delayed slightly by COVID-19, these programmes remain an important part of our strategy.

» Franchise
Performance
on pages 46-50

1  These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in
accordance with IFRS on pages 222–226.

Smith+Nephew

Annual Report 2020

21