Smith & Nephew's reported underlying revenue growth of 7.8% to $1.4bn. All product areas saw at least mid-single digit growth.
Underlying operating profit fell from $440m to $417m. Factors driving the reduced profitability include continued high inflation, and increased sales and marketing expenditure.
Free cash outflow was $54m versus an inflow of $34m largely due to an increase in inventory. Net debt at the period end was up by $475m to $2.8bn.
Full-year underlying revenue growth guidance now stands at 6.0%-7.0%, up from the previous range of 5.0%- 6.0%. Smith & Nephew has stood by its 2023 target for underlying operating profit margins of at least 17.5%.
The interim dividend of 14.4cents was unchanged from last year.
The shares fell 3.6% following the announcement.
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Our view
Smith & Nephew has seen encouraging sales growth over the first half of 2023. We're also pleased to see progress on overcoming supply chain constraints which have been holding back the group's ability to meet demand.
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, new product lines and capabilities are being added to the CORI robotic surgery platform, where the group is seeing accelerated adoption by clinicians. Another area where the group is a thought leader, is negative pressure wound therapy, which has enjoyed double-digit growth so far this year.
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 has been one such hurdle, but with this regime now in place for over a year we're not expecting any further impact on comparisons.
As profits thin, it's becoming challenging to support the investment needed to improve operations. All the while, inflationary headwinds continue to keep a lid on margins. This year's trading margin target of 17.5% is still well below pre-pandemic levels, and first-half margins fell well short of this mark. The Group's been working hard to improve productivity too and is hopeful that a significant seasonal uplift in second-half trading will help bridge the gap. However, we think there's still plenty of work to be done to get there.
Market forecasts suggest a prospective yield of 2.7%. But as ever there can be no guarantees. And given the poor cash flows and increasing debt levels seen so far this year, we have some concerns over the sustainability of dividends if cash generation doesn't begin to improve.
Ultimately, execution has been a problem so far for Smith & Nephew and is still short of reaching its previously reined-back medium-term goals. If these targets can be achieved, then shareholders could be rewarded for waiting, but the recent market reaction suggests that investor patience is wearing thin and shareholder returns are not guaranteed.
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.
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