Smith & Nephew (LSE:SN.) has lowered its full-year revenue growth outlook after reporting a weaker-than-expected second quarter, with lower U.S. knee implant sales and changes to reimbursement for wound care products weighing on performance.
Despite the softer revenue outlook, the medical technology group maintained its guidance for profit growth and free cash flow, stating that an accelerated efficiency programme has helped offset the impact on earnings.
First-Half Revenue Increases Despite Mixed Quarterly Performance
The company generated first-half revenue of $3.10 billion, compared with $2.96 billion in the same period last year, representing underlying growth of 2.3%.
Second-quarter revenue totalled $1.60 billion, with underlying growth of 1.6%. Reported revenue also benefited from a 120-basis-point foreign exchange tailwind, although management said overall performance was below expectations.
Within Orthopaedics, U.S. knee implant revenue declined 7.2% during the quarter as customers continued shifting towards cementless products ahead of upcoming product launches, while the company maintained a disciplined approach to its portfolio.
Advanced Wound Bioactives revenue fell 12.5%, reflecting the impact of revised reimbursement rules for skin substitute products introduced at the beginning of 2026.
By contrast, Sports Medicine & ENT delivered a strong performance, with second-quarter revenue rising 10% to $527 million from $479 million a year earlier, supported by continued demand for shoulder repair products.
Profitability Improves on Cost Savings
Trading profit increased 8.1% to $566 million in the first half, compared with $523 million a year earlier, while the trading profit margin improved by 60 basis points to 18.3%.
Operating profit rose 4.3% to $448 million, profit before tax increased 5% to $380 million, and adjusted earnings per share climbed 11% to 47.7 cents. Basic earnings per share also increased 6.2% to 35.6 cents.
The company generated efficiency savings of $130 million during the first half and has increased its full-year cost-saving target to approximately $200 million, with an additional $50 million expected during the second half.
Smith & Nephew said tariff-related headwinds were broadly offset by refunds, leaving no material impact on trading profit.
Cash Flow, Investment and Balance Sheet
Free cash flow totalled $231 million during the first half, reflecting a $51 million increase in capital expenditure. Most of the additional investment relates to the construction of a new manufacturing facility in Melton, United Kingdom, which is scheduled to begin operations in 2027.
Cash generated from operations increased 6.9% to $605 million, while net debt stood at $3.02 billion. The company’s adjusted leverage ratio remained at a manageable 1.8 times.
Management Maintains Profit Outlook
Chief Executive Deepak Nath said U.S. Orthopaedics “is not where we want it to be, but we expect growth to improve as we close product gaps, starting later this year and continuing into 2027.”
The company now expects underlying revenue growth of around 4% to 6% for the full year, compared with its previous expectation of around 6%. It continues to forecast second-half underlying revenue growth of at least 5%.
Smith & Nephew left its guidance for full-year trading profit growth unchanged, while continuing to target free cash flow of around $800 million and an adjusted return on invested capital of more than 10%.
The Board increased the interim dividend by 4% to 15.6 cents per share. In addition, the company said $216 million of its planned $500 million share buyback programme had been completed as of 3 August 2026.
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