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 forwardlooking 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

Julie Brown
Chief Financial Officer

First Half 2016 highlights

Key Comments

First Half

Revenue

Trading profit

Underlying
growth

2016

2015

$m

$m

2,328

2,272

483

512

-3

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%

Trading profit margin

20.8%

22.5%

EPSA

37.4

39.1

EPSA 37.4 (-4% reported, -2% CER)

Interim dividend 12.3 (up +4%)

Mike Frazzette
Chief Commercial Officer

Q2 revenue growth of 2% underlying

Geographical growth

Revenue split

Product franchise growth

Sports Medicine
Joint Repair

4%
US

10%

Arthroscopic
Enabling Tech
Trauma &
Extremities
Other Surgical

4%

-6%
14%
5%

Knees

1%

Est OUS

Hips

AWC

0%
-7%
4%

-2%

Emerging

AWB

1%

AWD

-4%

-2%

0%

2%

4%

6%

Underlying change (%)

Note: Est OUS is Australia, Canada, Europe, Japan and New Zealand

-10%

0%

10%

20%

Underlying change (%)

China improvements expected in H2

Smith & Nephew sales trajectory in China

2014
FY

2015
Q1

Q2

2016
Q3

Q4

Q1

Q2

H2e

Reconstruction
Sports Medicine

Trauma
Advanced Wound
Management
7

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

ULTRABUTTON
Adjustable Fixation Device

8
* 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

Reconstruction
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

* Excludes the effect of ZUK product acquisition

JOURNEY II XR
Bi-Cruciate Retaining
Knee System

10

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

Not all Models are Different

Most are the same. One is unique.

11

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

ACTICOAT Flex
Antimicrobial Barrier Dressing

14% AWD growth in Established Markets

13

Julie Brown
Chief Financial Officer

H1 and Q2 Revenue growth

H1 2016(1)

Q2 2016(1)

Growth %

Growth %

Underlying

3%

Underlying

2%

Acquisitions

1%

Acquisitions

1%

CER(2)

4%

CER(2)

3%

Currency

-1%

Currency
Reported

(1)
(2)

-2%
2%

Reported

H1 comprises 128 days (2015 124 days) Q2 2016 comprises 64 trading days (2015 63 trading days)
Constant exchange rates

2%

15

H1 Trading income statement

2016

2015

$m

$m

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

20.8%

22.5%

Revenue

Trading profit margin

16
* includes the effect of transactional exchange impacting year-on-year margin by around 190bps

H1 Trading margin drivers

H1 Trading margin history

21.8%

Selected H1 2016 margin drivers

Transactional exchange
~190 bps in Gross Profit

22.5%
20.8%

Margin impact of sales decline

in China & Gulf States
Blue Belt investment
Group Optimisation &
acquisition benefits

2014

2015

2016
17

H1 IFRS profit adjusting items

2016

2015

$m

$m

483

512

(6)

(13)

Restructuring and rationalisation

(35)

(19)

Amortisation of acquisition intangibles

(67)

(78)

Legal and other items

(18)

37

IFRS Operating profit

357

439

Trading profit

Acquisition related costs

18

H1 EPSA and EPS

Growth
2016

2015

$m

$m

Trading profit

483

512

Net interest payable

(24)

(21)

Other finance costs

(6)

(7)

(3)

Adjusted profit before tax

453

481

Taxation

(119)

(131)

Adjusted attributable profit

334

350

Number of shares million

894

894

Adjusted earnings per share

("EPSA")

37.4

39.1

Earnings per share ("EPS")

27.0

33.0

Share of results from associate

Reported

-6%

CER

-4%

Underlying

-3%

Tax rate 26.3%

-4%

-2%

19

H1 Free cash flow

2016

2015

$m

$m

483

512

14

13

147

148

Capital expenditure

(174)

(161)

Movements in working capital and provisions

(215)

(130)

Trading cash flow

255

382

Trading cash conversion

53%

75%

Restructuring, rationalisation, acquisition & other

(49)

36

Operating cash flow

206

418

Net interest paid

(24)

(17)

Taxation paid

(87)

(72)

95

329

Trading profit
Share based payment
Depreciation and amortisation

Free cash flow

2015 includes $99m cash

receipt on Arthrex legal claim

20

H1 Cash flow and capital allocation

Reinvest for
organic
growth

$m

0
(200)
(400)
(600)
(800)
(1,000)
(1,200)
(1,400)
(1,600)
(1,800)

(1,361)

Dec-15

269

FCF pre
capex

(174)

Capex

Progressive
dividend
policy

(170)

Acquisition
in line with
strategy

Return
excess to
shareholders

(214)
Dividends Acquisitions Share buy
back

(45)

Other

(1,695)
Jun-16
Net Debt

21

Gynaecology divestment
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

22

Guidance

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

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 BiCruciate Retaining Knee System, REDAPT Revision System, RENASYS TOUCH
Negative Pressure Wound Therapy

24

Questions

Appendices

2016 Technical guidance (unchanged)

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

27

Franchise revenue analysis

2015
Q1

Q2

Q3

2016
Q4

Full
Year

Growth Growth Growth Growth Growth

Q1

Q2

Growth Revenue Growth

$m

487

11

147

10

(2)

(2)

160

(7)

119

(6)

Other Surgical Businesses*

11

10

13

10

19

61

14

Reconstruction

391

Knee Implants

238

Hip Implants

(1)

(2)

153

Sports Medicine, Trauma &

OSB
Sports Medicine Joint Repair
Arthroscopic Enabling
Technologies
Trauma & Extremities

Advanced Wound
Management
Advanced Wound Care

313

(3)

12

177

(7)

Advanced Wound Bioactives

16

(4)

93

(27)

(9)

17

14

(3)

11

43

1,191

Advanced Wound Devices

Group

All revenue growth rates are on an underlying basis

* Other Surgical Businesses includes ENT, Gynaecology and robotics sales (excluding implant sales)

28

Regional revenue analysis

2015
Q1

Q2

Q3

2016
Q4

Full
Year

Growth Growth Growth Growth Growth

Q1

Q2

Growth Revenue Growth

$m

582

(2)

429

1,011

Emerging Markets

22

14

11

(6)

180

(2)

Group

1,191

Geographic regions
US
Other Established Markets

Established Markets

Other Established Markets is Australia, Canada, Europe, Japan and New Zealand.
All revenue growth rates are on an underlying basis

29

Analysis of restructuring 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

n/a

n/a

n/a

Asset write-offs

Total

105

34

139

84

36

120

Structural Efficiency
Programme

$m

$m

$m

$m

$m

$m

Cash costs

149

150

146

147

Asset write-offs

21

21

n/a

n/a

n/a

Total

170

171

146

147

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.

30

Business days per quarter

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.
31

Exchange rates
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

$:

$:

32