First Half 2016 Results
Forward looking statements
This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls or other problems with quality management systems or failure to comply with related regulations; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; disruption to our supply chain or operations or those of our suppliers; competition for qualified personnel; strategic actions, including acquisitions and dispositions, our success in performing due diligence, valuing and integrating acquired businesses; disruption that may result from transactions or other changes we make in our business plans or organisation to adapt to market developments; and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20-F, for a discussion of certain of these factors. Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations. 2
Chief Financial Officer
Julie Brown
First Half 2016 highlights
Key Comments
• Revenues +3% underlying (+2% reported) ‐ Knee Implants +7% ‐ Sports Med Joint Repair +10% ‐ US +6% ‐ Emerging markets mid teens excl.
China and Gulf states
• Successful BlueBelt integration
• Trading profit margin 20.8%
• EPSA 37.4¢ (-4% reported, -2% CER)
• Interim dividend 12.3¢ (up +4%)
First Half
2016 2015 Underlying
growth
$m $m %
Revenue 2,328 2,272 3
Trading profit 483 512 -3
Trading profit margin 20.8% 22.5%
EPSA 37.4¢ 39.1¢
4
Chief Commercial Officer
Mike Frazzette
Emerging
Est OUS
US
AWD
AWB
AWC
Hips
Knees
Arthroscopic Enabling Tech
Sports Medicine Joint Repair
Trauma & Extremities
Other Surgical
4%
-7%
0%
5%
14%
-6%
4%
10%
-10% 0% 10% 20%
Q2 revenue growth of 2% underlying
6
Geographical growth Product franchise growth Revenue split
Underlying change (%) Underlying change (%)
Note: ‘Est OUS’ is Australia, Canada, Europe, Japan and New Zealand
1%
-2%
1%
4%
-4% -2% 0% 2% 4% 6%
China – improvements expected in H2
7
Smith & Nephew sales trajectory in China
2014 2015 2016
FY Q1 Q2 Q3 Q4 Q1 Q2 H2e
Reconstruction
Sports Medicine
Trauma
Advanced Wound
Management
Sports Medicine, Trauma & OSB
• Q2 Revenue performance
‐ Sports Medicine Joint Repair +10% ($147m)
‐ Arthroscopic Enabling Technologies (AET) +4% ($160m)
‐ Trauma & Extremities -6% ($119m)
‐ Other Surgical Businesses* +14% ($61m)
• Commentary
‐ strong growth in Sports Medicine Joint Repair led by Shoulder portfolio
‐ Trauma continues to be adversely impacted by Gulf States and China headwinds
‐ ENT generating good growth
8
ULTRABUTTON◊ Adjustable Fixation Device
* ‘Other Surgical Businesses’ includes ENT, Gynaecology and robotics sales (excluding implant sales)
ArthroCare – two year update
strengthened Sports Medicine business
integration completed ahead of time
$65m cost synergies delivered
accelerated growth in Established Markets
successful product launches ‐ such as our Rotator Cuff Repair Solutions
strong and exciting combined pipeline
‐ including WEREWOLF◊ and LENS◊
sales synergies coming through ‐ e.g. faster Shoulder growth than in standalone businesses
9
• Q2 Revenue performance
‐ Knees: global +5%*, US +4%*, OUS +6%* $238m)
‐ Hips: global 0%, US +1%, OUS 0% ($153m)
• Commentary
‐ continued growth in global Knees
‐ JOURNEY II XR ‘live surgeries’ attract strong interest
‐ Hips growth of +1% excluding BHR
Reconstruction
10 * Excludes the effect of ZUK product acquisition
JOURNEY ◊ II XR Bi-Cruciate Retaining Knee System
Syncera
• Interest in Syncera continues to exceed expectations
‐ CJR is stimulating additional interest
‐ but conservative market segment
• Good engagement with providers on future models of healthcare
• Broadening remit of Syncera team
‐ pure Syncera solutions
‐ unique supporting technologies, risk-sharing models, consultancy
11
Not all Models are Different Most are the same. One is unique.
Blue Belt – six month update
6 months post acquisition:
successful integration
strong operational performance
expansion of indications: approval of Total Knee
first Total Knee case on NAVIO
full commercial launch of Total Knee on-track for 2017
Expecting >50% sales growth for full year
12
Advanced Wound Management
• Q2 Revenue performance
‐ Advanced Wound Care -7% ($177m)
‐ Advanced Wound Bioactives +4% ($93m)
‐ Advanced Wound Devices +1% ($43m)
• Commentary
‐ AWC trend impacted by
‐ previously indicated destocking in China
‐ adapting to changing market dynamics in Europe
‐ 14% AWD growth in Established Markets
13
ACTICOAT◊ Flex Antimicrobial Barrier Dressing
Chief Financial Officer
Julie Brown
Q2 2016(1) H1 2016(1)
H1 and Q2 Revenue growth
15 (1) H1 comprises 128 days (2015 – 124 days) Q2 2016 comprises 64 trading days (2015 – 63 trading days) (2) Constant exchange rates
Growth % Growth %
Underlying Underlying
Acquisitions Acquisitions
CER(2) CER(2)
Currency Currency
Reported Reported
3%
1%
4%
-2%
2%
2%
1%
3%
-1%
2%
16
2016 2015
$m $m
Revenue 2,328 2,272
Cost of goods sold (632) (566)
Gross profit 1,696 1,706
Gross profit margin* 72.8% 75.1%
Selling, general and admin (1,100) (1,084)
Research and development (113) (110)
Trading profit 483 512
Trading profit margin 20.8% 22.5%
H1 Trading income statement
* includes the effect of transactional exchange impacting year-on-year margin by around 190bps
17
H1 Trading margin drivers
H1 Trading margin history Selected H1 2016 margin drivers
2014 2015 2016
21.8% 22.5%
20.8%
Transactional exchange ~190 bps in Gross Profit
Margin impact of sales decline in China & Gulf States
Blue Belt investment
Group Optimisation & acquisition benefits
18
H1 IFRS profit adjusting items
2016 2015
$m $m
Trading profit 483 512
Acquisition related costs (6) (13)
Restructuring and rationalisation (35) (19)
Amortisation of acquisition intangibles (67) (78)
Legal and other items (18) 37
IFRS Operating profit 357 439
Growth
2016 2015 Reported CER Underlying
$m $m
Trading profit 483 512 -6% -4% -3%
Net interest payable (24) (21)
Other finance costs (6) (7)
Share of results from associate - (3)
Adjusted profit before tax 453 481
Taxation (119) (131) Tax rate 26.3%
Adjusted attributable profit 334 350
Number of shares – million 894 894
Adjusted earnings per share ("EPSA")
37.4¢ 39.1¢ -4% -2%
Earnings per share ("EPS") 27.0¢ 33.0¢
19
H1 EPSA and EPS
H1 Free cash flow
20
2016 2015
$m $m
Trading profit 483 512
Share based payment 14 13
Depreciation and amortisation 147 148
Capital expenditure (174) (161)
Movements in working capital and provisions (215) (130)
Trading cash flow 255 382
Trading cash conversion 53% 75%
2015 includes $99m cash receipt on Arthrex legal claim
Restructuring, rationalisation, acquisition & other (49) 36
Operating cash flow 206 418
Net interest paid (24) (17)
Taxation paid (87) (72)
Free cash flow 95 329
(1,361)
(1,695)
269
(174) (170)
(214)
- (45)
(1,800)
(1,600)
(1,400)
(1,200)
(1,000)
(800)
(600)
(400)
(200)
0
Dec-15 FCF pre
capex
Capex Dividends Acquisitions Share buy
back
Other Jun-16
Net Debt
H1 Cash flow and capital allocation
21
$m
Reinvest for organic growth
Progressive dividend policy
Acquisition in line with strategy
Return excess to share-holders 1 2 3 4
Gynaecology divestment
22
• Reminder of announcement in May
‐ agreement to divest Gynaecology business for $350m gross proceeds
‐ expected completion in early August
‐ launch of related $300m share buyback programme
‐ EPSA impact broadly neutral in 2017, reduction of less than 1.0¢ in 2016
‐ H2 trading margin adversely impacted by 20bps
Updated outlook
• H2 sales
‐ H1 trends continue in Sports Medicine and Reconstruction
‐ partial improvements in China; Gulf States remain challenging
‐ four fewer sales days in H2
• Translational foreign exchange revenue impact of 0% in H2 and -1% in FY
• Full year margin
‐ Guidance relating to transactional foreign exchange and BlueBelt unchanged (-180 bps)
‐ We expect the slower than anticipated sales growth, mainly in the Emerging Markets, to impact H2 margin, as will the divestment of GYN
‐ H2 trading margin will be stronger than H1
23
Guidance
Summary
• H1: continuing trends
‐ trends in most of our franchises continue
‐ innovative products and technologies drive growth
• Excellent product pipeline
‐ WEREWOLF◊ COBLATION System, LENS◊ Surgical Imaging System, JOURNEY◊ II XR Bi-Cruciate Retaining Knee System, REDAPT◊ Revision System, RENASYS◊ TOUCH Negative Pressure Wound Therapy
24
Questions
Appendices
2016 Technical guidance (unchanged)
27
Guidance Full year
Restructuring costs c. $50m
Acquisition and integration costs c. $10m
Amortisation of acquisition intangibles c. $140m
Income from associates Slightly negative
Net interest payable c. $45m
Other finance costs c. $10m
Tax rate on Trading result 26.5% or slightly lower
Franchise revenue analysis
28 All revenue growth rates are on an underlying basis * ‘Other Surgical Businesses’ includes ENT, Gynaecology and robotics sales (excluding implant sales)
2015 2016
Q1 Q2 Q3 Q4 Full Year
Q1 Q2
Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % $m %
Sports Medicine, Trauma & OSB
5 4 2 5 4 5 487 4
Sports Medicine Joint Repair 9 7 4 9 7 11 147 10
Arthroscopic Enabling Technologies
(2) 1 (2) 3 - 4 160 4
Trauma & Extremities 5 2 2 - 2 (7) 119 (6)
Other Surgical Businesses* 11 7 10 13 10 19 61 14
Reconstruction 1 4 3 4 3 7 391 3
Knee Implants 2 7 6 6 5 9 238 5
Hip Implants (1) 1 (2) 1 - 4 153 -
Advanced Wound Management
1 7 6 8 6 - 313 (3)
Advanced Wound Care 9 12 6 4 8 - 177 (7)
Advanced Wound Bioactives 5 6 2 16 7 (4) 93 4
Advanced Wound Devices (27) (9) 17 14 (3) 11 43 1
Group 3 5 4 5 4 4 1,191 2
Regional revenue analysis
29
‘Other Established Markets’ is Australia, Canada, Europe, Japan and New Zealand. All revenue growth rates are on an underlying basis
2015 2016
Q1 Q2 Q3 Q4 Full Year
Q1 Q2
Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % $m %
Geographic regions
US 1 4 4 9 5 8 582 4
Other Established Markets (2) 3 1 2 1 4 429 1
Established Markets - 3 3 6 3 6 1,011 3
Emerging Markets 22 14 8 2 11 (6) 180 (2)
Group 3 5 4 5 4 4 1,191 2
Analysis of restructuring costs
30
Of the $34m total charged in the period, all $34m are reflected in ‘selling, general and administrative expenses’ and nothing in ‘cost of goods sold’ in the Group Income Statement.
Structural Efficiency target of $160m cash costs and $40m asset write-offs.
Group Optimisation target of $150m total costs.
P&L Charge Cash Spend
Previous
Total to Date H1 Total to date
Previous Total to Date
H1 Total to date
Group Optimisation Plan
$m $m $m $m $m $m
Cash costs 105 34 139 84 36 120
Asset write-offs - - - n/a n/a n/a
Total 105 34 139 84 36 120
Structural Efficiency Programme
$m $m $m $m $m $m
Cash costs 149 1 150 146 1 147
Asset write-offs 21 - 21 n/a n/a n/a
Total 170 1 171 146 1 147
Business days per quarter
31
Q1 Q2 Q3 Q4 Full Year
2015 61 63 63 64 251
2016 64 64 63 60 251
Year-on-year differences in the number of trading days typically impacts our surgical businesses in the Established Markets more than our wholesaler and distributor-supported businesses.
Exchange rates
32
Q2/15 FY/15 Q1/16 Q2/16
$:€
Period end 1.12 1.09 1.14 1.11
Average 1.11 1.11 1.10 1.13
$:£
Period end 1.57 1.48 1.42 1.33
Average 1.53 1.53 1.43 1.43