Smith & Nephew : Investor presentation July - September 2019

Investor Presentation July - September 2019

Forward looking statements and non-IFRS measures

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. The terms 'Group' and 'Smith+Nephew' are used for convenience to refer to Smith & Nephew plc and its consolidated subsidiaries, unless the context requires otherwise.

Certain items included in 'trading results', such as trading profit, trading profit margin, tax rate on trading results, trading cash flow, trading profit to cash conversion ratio, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures in this announcement are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS in our Second Quarter Results announcement dated 31 July 2019.

2

100

Smith & Nephew is a

global Medical Device portfolio company,

FTSE100

A constituent of the UK's FTSE100, with ADRs traded on the New York Stock Exchange

Shares

S&N has a progressive dividend policy, and has paid a dividend every year since 1937

that has been trading for over 160 years, and operates in more than 100 countries

$4.9bn	~16,500
Annual sales in 2018	We have around 16,500
were $4.9 billion	employees globally

3

A portfolio medical device company

ALLEVYN◊LIFE	Advanced		Advanced	PICO◊
Advanced Foam		Negative Pressure
Wound Dressings	Wound Care		Wound Devices	Wound Therapy
Collagenase	Advanced			JOURNEY◊II BCS
		Bi-Cruciate
Wound
SANTYL◊Ointment			Stabilised
Enzymatic debrider	Bioactives		Knees	Knee System
	ENT	$4.9bn
	Arthroscopic	Revenues		POLAR3◊
	(2018)		Total Hip
COBLATION◊	Enabling	Hips	Solution
Wand	Technologies

REGENETEN◊Bioinductive Implant

Sports Medicine
Joint Repair	Other Recon	Trauma

TRIGEN◊INTERTAN◊

Intertrochanteric

Antegrade Nail

NAVIO◊

Surgical

System

4

Our performance

Revenue

$4,904m+2%*

4904

4765

4617 46344669

2014 2015 2016 2017 2018

Adjusted earnings per share (EPSA)

100.9¢+5%CAGR

Trading Profit

$1,123m 22.9% margin

1123

1099

10551048

1020

2014 2015 2016 2017 2018

Dividend per share

36.0¢+5%CAGR

Trading cash conversion

85%

85%		90%	85%
75%
74%

2014 2015 2016 2017 2018

Net Debt

$1,104m

83.2 85.1 82.6

94.5 100.9

29.630.8 30.8

35.0 36.0

1613	1361	1550
	1281
		1104

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

* Underlying growth percentage after adjusting for the effect of currency translation, acquisitions and disposals.

2014 2015 2016 2017 2018

5

Q2 2019 revenue:

$1,283m, 3.5% underlying, 3.1% reported

Revenue split

Emerging Markets

$246m

US

$635m

Other

Established Markets

$402m

Geographical growth

Global					3.5%
Established Markets					0.9%
US					2.3%
Other Established Markets	-1.3%
Emerging Markets											16.2%
	-5.0%	0.0%	5.0%	10.0%	15.0%	20.0%

Product franchise growth

Orthopaedics		3.6%
Knees						4.3%
Hips			2.9%
Other Recon				3.5%
Trauma		2.8%

Sports Medicine, ENT		5.6%
Sports Medicine Joint Repair				11.9%
Arthroscopic Enabling Technologies -2.1%
ENT			6.3%

Advanced Wound Management							1.2%
AWC	-1.7%
AWB	-1.2%
AWD													16.0%
	-5.0%	0.0%	5.0%	10.0%	15.0%	20.0%

6

H1 2019 revenue:

$2,485m, 3.9% underlying, 1.8% reported

Revenue split

Emerging Markets

$465m

US

$1,203m

Other

Established Markets

$817m

Geographical growth

Global					3.9%
Established Markets					1.5%
US					3.1%
Other Established Markets	-0.7%
Emerging Markets									15.8%
	-5.0%	0.0%	5.0%	10.0%	15.0%	20.0%

Product franchise growth

Orthopaedics		3.7%
Knees					4.2%
Hips		2.7%
Other Recon						5.0%
Trauma				3.8%

Sports Medicine, ENT		5.4%
Sports Medicine Joint Repair				11.5%
Arthroscopic Enabling Technologies -1.6%
ENT		5.3%

Advanced Wound Management						2.4%
AWC					0.1%
AWB	-0.6%
AWD													16.2%
-5.0%	0.0%	5.0%	10.0%	15.0%	20.0%

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2019 Guidance

2019	Sales growth:	Trading profit margin:	Tax rate:
Underlying: 3.0% to 4.0%	22.8% to 23.2%	19% to 21%(2)

Reported: 3.6% to 4.6%(1)

Medium	Sales growth:		Trading profit margin:		Tax rate:
Consistent growth		Ongoing improvement		19% to 21%(2)
term
above market

1. Based on the foreign exchange rates prevailing on 25 July 2019

(2)Tax rate on trading result

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Strategic imperatives for the company

	Grow		Together	Effectively
1	2	3	4	5

Achieve the	Transform	Expand in	Strengthen	Become the
full potential	the business	high-growth	talent and	best owner
of our portfolio	through	segments	capabilities
	enabling
	technologies

9

New commercial model: creation of global franchises

Chief

Executive

Officer

President,

President,

Chief

President,

Chief

President,

Sports

Advanced

President,

President,

Financial

President,

Global

RA/QA

Orthopaedics

Medicine &

Wound

EMEA

APAC

Officer, GBS

R&D

Operations

Officer

ENT

Mgmt

& IT

Chief	Chief	Chief Legal
Bus. Dev.
Human	and
and Corp.
Resources	Compliance
Affairs
Officer	Officer
Officer

10

Moving from robotic-assisted surgery to a digital ecosystem

NAVIO™

Surgical System

Launch of NAVIO 7.0 in	Launch of next-generation
H2 2019	platform, with Brainlab hip
	and knee software

• Brainlab hip software on

NAVIO

Introduction of robotic arms

• Ecosystem incorporatingstand-alone robotic arms, augmented reality
• Expansion into sports medicine and other clinical specialties

11

Executing on M&A strategy

Acquisition of Orthopaedic Joint Reconstruction Business

12

The pillars of a new purpose-driven culture

Life Unlimited

Care	Collaboration	Courage
A culture of empathy and	A culture of team,	A culture of continuous learning,
understanding for each other,	based on mutual trust and respect	innovation and accountability
our customers and patients

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APEX summary

• Benefits of$160m p.a.by 2022
• Totalone-offcosts (mainly cash) up to $240m (c.150% of annualisedrun-ratebenefits)
• Period:2018 - 2022, with around 75% of benefits and >75% of costs by 2020
• Benefitsunderpin medium-term margin guidance

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Appendices

15

Technical guidance

	July 2019
Foreign exchange and other revenue impact
Impact of translational FX on revenue(1)	(2.0%)
Acquisition impact on revenue	+2.6%
Non-trading items
Restructuring costs	c. $100-120m
Acquisition and integration costs	c. $30-40m
European Medical Device Regulation (MDR) compliance costs	c. $50m
Other
Amortisation of acquisition intangibles	c. $140-150m
Income from associates	c. $5m
Net interest(2)	$50-55m
Other finance costs	c. $15m
Tax rate on trading result	19%-21%

(1)	Based on the foreign exchange rates prevailing on 25 July 2019
(2)	Excludes interest associated with IFRS 16 leases	16

Franchise revenue analysis

			2018				2019
	Q1	Q2	Q3	Q4	Full year	Q1	Q2	Q2
	Growth	Growth	Growth	Growth	Growth	Growth	Revenue	Growth
	%	%	%	%	%	%	$m	%
Orthopaedics	0	1	5	4	3	3.9	552	3.6
Knee Implants	2	3	4	3	3	4.1	262	4.3
Hip Implants	(2)	1	4	4	2	2.4	156	2.9
Other Reconstruction	30	27	43	45	36	6.9	16	3.5
Trauma	(2)	(5)	3	1	(1)	4.8	118	2.8
Sports Medicine & ENT	1	3	3	2	2	5.3	379	5.6
Sports Medicine Joint Repair	5	7	8	8	7	11.0	194	11.9
Arthroscopic Enabling Technologies	(5)	(1)	(2)	(4)	(3)	(1.1)	146	(2.1)
ENT	6	5	5	3	5	4.2	39	6.3
Advanced Wound Management	(2)	1	1	2	0	4.1	352	1.2
Advanced Wound Care	0	2	1	2	1	2.0	177	(1.7)
Advanced Wound Bioactives	(12)	(6)	(7)	(3)	(6)	0.4	114	(1.2)
Advanced Wound Devices	2	9	11	14	9	16.4	61	16.0
Total	0	2	3	3	2	4.4	1,283	3.5

All revenue growth rates are on an underlying basis and without adjustment for number of selling days.	17
2018 growth by franchise has been re-presented to align with the new global franchise structure effective from 1 January

2019. There has been no change in total growth for any period presented.

Regional revenue analysis

			2018				2019
	Q1	Q2	Q3	Q4	Full	Q1		Q2
	Year
	Growth	Growth	Growth	Growth	Growth	Revenue	Growth	Revenue	Growth
	%	%	%	%	%	$m	%	$m	%
US	(2)	1	4	3	1	568	4.0	635	2.3
Other Established Markets(1)	(2)	1	(1)	0	0	415	(0.1)	402	(1.3)
Total Established Markets	(2)	1	2	2	1	983	2.2	1,037	0.9
Emerging Markets	9	6	10	8	8	219	15.3	246	16.2
Total	0	2	3	3	2	1,202	4.4	1,283	3.5

(1) Other Established Markets' are Australia, Canada, Europe, Japan and New Zealand.	18
All revenue growth rates are on an underlying basis and without adjustment for number of selling days

H1 trading income statement

	2019	2018
	$m	$m
Revenue	2,485	2,440		3.9% underlying growth
Cost of goods sold	(646)	(651)
Gross profit	1,839	1,789
Gross profit margin	74.0%	73.3%
Selling, general and admin	(1,178)	(1,168)
Research and development	(129)	(114)
Trading profit	532	507
Trading profit margin	21.4%	20.8%		+60bps growth

19

H1 EPSA and EPS

Full Year

	2019	2018	Growth
	$m	$m
Trading profit	532	507	5%
Net interest payable	(25)	(25)
Other finance costs	(6)	(7)
Share of results from associate	(3)	2
Adjusted profit before tax	498	477
Taxation on trading result	(98)	(96)			2019 tax rate*: 19.7%
Adjusted attributable profit	400	381
Weighted average number of shares (m)	874	873
Adjusted earnings per share ("EPSA")	45.8¢	43.7¢	5%
Earnings per share ("EPS")	35.3¢	31.4¢	13%
Dividend per share	14.4¢	14.0¢	3%

• Tax rate on trading result

20

H1 free cash flow

Full Year

	2019	2018
	$m	$m
Trading profit	532	507
Share based payment	17	18
Depreciation and amortisation	188	171
Lease liability repayments	(23)	-
Capital expenditure	(153)	(178)
Movements in working capital and other	(156)	(131)
Trading cash flow	405	387
Trading cash conversion	76%	76%
Restructuring, acquisition, legal and other	(38)	(147)
Net interest paid	(24)	(26)
Taxation paid	(68)	(95)
Free cash flow	275	119

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Trading days per quarter

	Q1	Q2	Q3	Q4	Full Year
2017	64	63	63	60	250
2018	63	64	63	61	251
2019	63	63	63	62	251
2020	62	63	63	64	252

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.
We define trading days as weekdays adjusted for significant holidays in our principal countries.	22