Smith & Nephew : Q2 results transcript 29 July 2020 (PDF)

Q2 and First Half 2020

Results

Wednesday, 29th July 2020

Q2 and First Half 2020 Results

Wednesday, 29th July 2020

H1 2020 Highlights

Roland Diggelmann

Chief Executive Officer, Smith+Nephew

Welcome Address

Introduction

Good morning everyone and welcome to Smith+Nephew's second quarter and first half results. I hope this finds you all well and safe. I'm on the call here today with Ian Melling. Ian has been serving as interim CFO since April, and we greatly appreciate the work he has done leading the finance function through a period of unprecedented industry challenges, as you all know. I'm also pleased to announce that Anne-Francoise Nesmes joined Smith+Nephew as Chief Financial Officer on 27 July. Hopefully, many of you will get to speak with her over the coming month, once she's had the chance to get her feet under the table.

The second quarter and first half was materially impacted by COVID-19 pandemic, as we expected. We are encouraged though by the improvement seen across all segments since the trough in April. Restrictions on elective surgery has generally eased across major markets even with the recent setbacks in certain regions. I am delighted with the way our team has responded in difficult conditions and I am very confident we have the necessary resilience as well as agility as our markets continue to recover.

As well as taking you through the detail of our results today, we'd like to provide as much detail as we can, so we'll also cover how we're seeing the recovery play out in each segment, our progress on our work to control costs this year, and what we've been doing to enhance our long-term growth profile which remains the strategic priority of Smith+Nephew.

Highlights

Let me start with the highlights of half-year numbers. Revenue in the half was $2 billion dollars, which is an underlying revenue decline of 18.7%, including the effect of one less selling day, compared to first half 2019. Trading profit was $172 million. The trading margin of 8.5% reflects negative operating leverage and higher provision charges offset by cost savings. And Ian Melling will go into much more detail on this later. EPSA was 13.4 cents.

Q2 revenue

Turning to the next page, for the second quarter, revenue was $901 million, which is a - 29.3% underlying decline and -29.8% reported. Trading days were unchanged compared to the prior year. The impact of COVID-19 was, of course, the driver, and we saw significant restrictions on elective procedures across major markets early in the quarter. The effect was greatest on our surgical business as expected, Orthopaedics, and Sports Med and ENT, which were down 34% and 33.3%, respectively. While Wound Management was relatively resilient, it was still significantly affected at -17.6%.

Looking by geography for the quarter, the US declined -31.8%, other established markets by -30.8%, and emerging markets by -20.2%, with China the first major market to improve and actually grow in the second quarter.

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Elective Procedure Trends by Market

Now, let me go into some more detail by country.

United States

We already reported that the US was initially more impacted than Europe with sales at the trough around -60% negative on the prior year versus around -50% for Europe. We have since seen the US recover more strongly as the quarter progressed. All 50 states reopened for elective procedures during the quarter. Texas and Mississippi introduced new restrictions in July, although around 90% of facilities in the state are still operating.

Europe

Within Europe, we're still seeing significant variation between countries. There were strong rebounds in Germany, also in Switzerland and Austria, France and Spain by the end of the quarter. But volumes have continued to lag in some other markets, such as the UK, which accounts for 4% of our global sales, and Eastern Europe. We do expect that Europe as a whole will be one of the slower regions to recover. This reflects the more public nature of the healthcare systems, the condition of some systems before the crisis, and differences in incentives, in particular, compared to the US.

Emerging markets

The emerging markets have also been a similarly mixed picture. China was already beginning to recover as we entered April, and grew for the quarter as a whole, predominantly driven by the surgical businesses. Capacity utilisation in the healthcare system steadily increased as the quarter progressed, and already reached above 80% during the month of June. We did see temporary restrictions, however, on surgery in Beijing following a localised outbreak late in the quarter, but these have been lifted again in the last two weeks.

Other regions, such as India, and Latin America, and South Africa still have COVID-19 restrictions in place, and as a result have yet to recover.

I know there is a lot of interest in how the recovery played out as the quarter progressed, so let me take a little bit more time on this slide and then subsequently less on the following franchise slides.

As you know, we already announce monthly gross rates at group level, after a -47% in April, gross recovered to -27% in May, and -12% in June. And we are seeing a positive - a good trend for July.

Monthly Underlying Sales Development by Franchise

Looking across the portfolio, the businesses that were most impacted initially tended also to be the fastest to recover. The Orthopaedics franchise rebounded strongly through the quarter after being down 58% in April. A number of categories returned to growth in June already, such as revision hips, partial knees, trauma plates and screws.

Sports medicine

In Sports Med the greatest share of business typically comes from privately paid and outpatient procedures, which again meant the hard initial impact and then a faster recovery. The picture has been quite similar between joint repair and arthroscopic enabling technologies, although recovering the capital component of AET has been lagging

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consumables. The customer pipeline for the two is very strong, but we're currently seeing slower and more cautious decision-making around larger investments. ENT then has been at the slower part of the franchise to recover with some understandable caution around restarting procedures in the nose and throat.

Advanced wound management

In Advanced Wound Management, the drivers of the slowdown were a little different and we are seeing a slower recovery for a number of reasons. These do include sales rep access, the geographic mix - we have a higher of our sales in Europe - the patient behaviour, along with timing effects from movements in wholesaler inventory levels.

Franchise Details

Let me now move to the details of the franchises starting with Orthopaedics.

Orthopaedics

As mentioned, joint replacements saw significant deferral of procedures during the quarter, with the relative resilience on hips consistent across all regions. This is in part due to the hip market having a higher proportion of emergency cases. But the results saw an early benefit from the launch of OR3O, our dual mobility hip system. OR3O itself has been extremely well-received, and we are seeing it pulling through the other components of our hip constructs. We are now starting to make it available in markets outside the US.

Trauma was more resilient and by the end of the quarter had returned to growth in the US and in Asia-Pacific. EVOS, our plating system, had strong double-digit growth even with the lower levels of activity in society that dampened overall trauma demand.

Other reconstruction growth rates reflect the slow quarter of capital sales. However, I am very excited to report we made the first sales of CORI in the quarter, and CORI is our next-generation robotic surgery system.

Sports medicine and ENT

Moving on to Sports Med and ENT. As with Orthopaedics, the franchise is heavily driven by elective surgery, and was impacted by treatment deferrals, particularly, early in the quarter. We still saw continued positive growth from some of the recent launched products, such as FLOW wands and LENS 4K. Also, we had the first cases for Novostitch Pro in Europe, and we had the CE Mark granted in April for Regeneten, and we are set to launch in the coming quarter.

ENT sales declined 44% in the quarter and case volumes remain low.

Advanced wound management

Finally, Advanced Wound Management. The franchise saw a significant impact from COVID. Advanced Wound Devices was the most affected segment with negative pressure, a category that's more exposed to elective surgery of course. Other headwinds included temporary closures of wound clinics during outbreaks and the falling admissions in long-term care facilities, many of which have not been accepting new residents.

In Bioactives, we saw a slow biotissues market across surgical cases, wound clinics, and burn centres.

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Looking beyond this quarter, we've made important steps on realising full value of GRAFIX and STRAVIX, which we acquired with Osiris. After a successful pilot, our existing Smith+Nephew Bioactives will now also be promoting these products. Revenue synergies were an important part of the business case for the acquisition and most of that benefit is still to come.

So with that, I'll hand over to Ian to take you through the details of the financials. Ian, please.

H1 Trading Income Statement

Ian Melling

Senior Vice President, Group Finance, Smith+Nephew

H1 EPSA and EPS

Thank you, Roland. Starting with the P&L, half-year revenue declined 18.1% on a reported basis, and 18.7% on an underlying basis, excluding the impact of foreign exchange and acquisitions. Trading profit was $172 million and the trading margin was 8.5%. We have experienced margin pressure due to the negative leverage effect from the fixed components of our cost base and the impact of reduced production volumes. Due in large part to the impact of the COVID-19 situation on our business, we also took additional charges of approximately $50 million to provisions for inventory, excess and obsolescence, and bad debt, which are included in cost and SG&A, respectively. These provisions reduce the margin by 2.5 percentage points.

To mitigate these impacts, we have delivered approximately $150 million cost savings in areas such as variable pay, third-party commissions and royalties, travel, promotional activity, events, and consultancy spend. The R&D expense has been largely protected as we continue to invest in the innovation that is central to our strategy. As a result, the R&D ratio stepped up to 6.6% of sales in the period, from 5.2% in the prior year, and rose slightly in absolute dollar terms.

There was a small IFRS operating loss in the half of minus $5 million, principally reflecting the lower trading profit margin along with amortisation, restructuring, and legal and other charges.

Moving further down the P&L, adjusted earnings per share declined by 71%, broadly in line with trading profit. Basic earnings per share declined by 67%, and was helped by a one-time gain from the successful outcome of a UK tax case.

The interim dividend of 14.4 cents is in line with the prior year.

H1 Free Cash Flow

We generated positive trading cash flow of $25 million in the period with trading cash conversion of 14%. We have continued to invest in capital expenditure as we progress changes to our manufacturing site. The working capital outflow of $137 million included higher inventory, partially offset by declining receivables due to the decline in revenue. Restructuring, acquisition, legal and other outflows increased to $112 million, of which

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$69 million relates the restructuring programmes. The prior year included $80 million of insurance receipts for legal matters.

Cash tax was lower in H1 2020 compared to H1 2019, primarily related to a reduction in the US with overpayments in prior periods offset against amounts due in 2020. Overall, free cash flow was negative of minus $139 million.

Net Debt and Capital Allocation

On the balance sheet, net debt increased by just over $500 million to $2.3 billion, including around $100 million from the acquisition of Tusker Medical. Closing net debt includes $200 million of lease liabilities and we finished the period with a leverage ratio of two.

Our liquidity position remains strong with $3.4 billion committed credit facilities and no debt maturities in 2020.

Balancing Cost Control with Readiness

We indicated in May we were targeting up to $200 million in discretionary savings for 2020 in response to COVID-19. We're on track to deliver that with around $150 million of savings delivered in the first half. Our approach has been to balance cost control with readiness to fully take part in the recovery of each market. There remains uncertainty around the full year revenue outlook. And while we've identified additional savings if they become required, we also retain the option to reinvest some saving if more favourable scenarios play out. You should still expect material negative operating leverage for as long as our sales remain under pressure from the effects of COVID-19.

And with that, I'll hand back to Roland.

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Positioning for Recovering Demand

Roland Diggelmann

Chief Executive Officer, Smith+Nephew

Launching Products in a Changed Environment

Thank you, Ian. I'd like to finish with an update on what we've been doing to improve the longer term gross profile and to position ourselves for recovering demand.

We've made significant steps forward on some of the priorities we talked about in February and May, particularly around innovation and launch execution in the opportunities in ASCs and the development of our people.

Let me go to the next page, and you will see that one priority was our renewed commitment to innovation as a driver to improve our growth.

Key launches and regulatory clearances

Our recent launches are already making a difference and we continue to invest in R&D. Importantly, we've also been able to secure important regulatory clearances and approvals in major markets in line with our plans. For some examples, we secured FDA clearance for the total knee application on CORI following the earlier clearances for UNI Knees, and also for the INTELLIO Connected Tower in Sports Medicine. In Europe, we completed requirements for CE marking Regeneten in April was mentioned. So these launches are all underway.

Digital marketing

Part of our approach across our portfolio has also been to adapt with the new ways of engaging with our customers of course. Traditional medical conferences have not been taking place, so we've used digital conferences to continue to reach out to customers. For example, more than 11,500 people visited our virtual AAOS booth.

Digital professional education

Also, on professional education, we've held a global webinar series during the second quarter, reaching across our product categories with more than 25,000 participants in total. Our medical education team was quick to recognise the digital opportunity and has been able to replace traditional in-person lectures and case discussions without the need to travel and without the surgeons out of the hospital.

Now, we're not yet at a point where every aspect of traditional training can be conducted remotely and we are supporting lab-based training and visiting surgeon programmes with appropriate safety protocols.

You can also see the strength of the early take up of OR3O in our hip growth. And that demonstrates that we're still able to launch effectively in this changed environment. That is impressive - that is important given the impressive pipeline that we have and innovation that we continue to bring to the market.

Accelerating ASC Opportunity Through COVID

We have also identified ASCs as a strategic cross-franchise opportunity for Smith+Nephew for the opportunity to bring orthopaedics and sports medicine together. There were already good

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reasons to expect acceleration of joint replacements in the setting of ASCs, including Medicare reimbursements, total knee replacements in the ASC for the first time in 2020. It has also become clear over the quarter that part of the US healthcare system response to COVID has been to accelerate this shift.

We have already seen a significant increase this year in the proportion of joint replacement procedures taking place in ASCs in both knees and hips. We are also seeing changes in choices made by physicians as they change settings. And that does support our view that the shift can be an opportunity for us and for market share changes at the same time. We believe we are well-positioned to benefit from this shift through our service offering for ASCs through our brand, positive connections, with our enabling technology, including the launch of CORI. As I mentioned, CORI is our next-generation robotic surgery system. It is faster, is more compact in our view, continues to be a modular design that will enable us to bring more applications to the platform over time, and it does not require CT, which is important for ASCs.

So, while it's early days still in the growth opportunity at ASCs, we see the developments this year as validating both our view for the potential for Smith+Nephew and for the approach to this high growth segment.

Strengthening Capabilities and Supporting Communities

Another key priority was the ongoing focus on our people. As restrictions have eased in each country, we have been stepping up production and reopening our offices. Employees are still being encouraged to work remotely where they can, and we've put precautionary measures in place at all of our sites to ensure that when employees are there they can work in a safe way.

The period of low business activity has also been an opportunity to further develop our employees' capabilities and so further enhance our long-term effectiveness as an organisation. As an example, in the first six months of the year, our sales force more than doubled the time spent on products and other professional training compared to the prior year. The large majority was delivered by distance learning. And we are building on that capability by developing new specific training content for a wider range of functions.

Our teams have also used our resources to support our communities in the fight against COVID-19. We have now assembled more than 1 million face shields at our Memphis and Costa Rica facilities to help beat the increased demand for PPE. And now, we are supporting the trial of the technology designed to support distancing between employees in manufacturing and lab environments.

So, in summary, we had made excellent progress before we entered the COVID crisis. We had really good momentum throughout the end of 2019 and the start of 2020. Managing the immediate pressures has obviously been necessary but we have also kept developing in line with our strategy and advancing our focus areas for 2020. Our priority remains to sustainably accelerate the underlying growth of our business while focussing on delivering innovation, strengthening our talent and capabilities, and improving profitability at the same time.

So with that, I look forward to your questions. Thank you very much.

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Q&A

Patrick Wood (Bank of America Merrill Lynch): Thank you very much, I'll keep it to two please. The first would be just maybe a little bit of colour please on the reinvestment rate that you guys are thinking of that cost savings pool, let's say, if the top line recovers. I mean, if we have 2021 looking more like a normal year for Smith+Nephew, should we expect the majority or all of that cost savings pool to be reinvested? That would be the first question.

The second one, I'm just curious if you can give us any colour, and thank you for the monthly so far, but very roughly the shape of what you've been seeing in July, a little bit more colour on that in terms of the sequential improvement relative to June. That would be really helpful. Thank you.

Roland Diggelmann: Thanks for the question, Patrick. On the first question, obviously, we want to continue to invest because the fundamentals, mid- and long-term, remain positive. We have actually also ring-fenced R&D in the first half because we believe strongly in innovation and in the gross opportunities in the market in general. So, we will be cautious and we'll be behind monitoring closely the developments in the market, and we'll invest behind those. As you pointed out, the majority of the savings in the first half were discretionary costs, so that we've already secured $150 million of savings. So, I think what you can see is we have the opportunity to generate those savings. We'll monitor the market development. If need be, we can introduce more savings. If the markets recover, though, we are ready and prepared to continue to invest to support the growth and the recovery.

On July, I'm happy to report that July has been, I would say, a good month. If I look at the trajectory from April onwards, I am positive and optimistic. We're not at the end of the month, of course, and at the same time, as you well know, a lot of uncertainty remains. But the trend generally is positive.

Patrick Wood: Super. Thanks for taking my questions.

Roland Diggelmann: Thanks, Patrick.

Kit Lee (Jefferies): Thank you, two questions please. Just, firstly, on your capital equipment business, when do you think there will be more clarity on hospital budgets and, you know, your customer decisions on buying [inaudible] or other equipment? And then my second question is on the provisions. How should we think about that for the second half? Do you think there is more provisions on the way or is that $50 million enough for the full year? Thank you.

Roland Diggelmann: Thank you, Kit. I'll take the first question and then Ian will take the second on provisions.

Well, indeed, as expected, the hospitals were, of course, slower in making capital equipment decisions, very understandably. I think as the markets recover this will actually accelerate. Again, there is no reason to believe that CAPEX or larger equipment sales will be more difficult in the future because the trends will continue. If I look at the tower that we have on offering in Sport Med, the INTELLIO, it's a great solution - continue to be very excited about our Sports Med and the positioning. And then we had a very strong trend towards robotics entering this crisis. So, I believe we'll continue to see that as technology evolves. I'm very

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positive about our next-generation platform here with CORI. It's a great solution, great technical features. It fits very well in the ASCs and in the trend to more decentralised, more modular approaches. And I believe we also have, beyond the technical features, I think we also have a very positive financial proposal here.

Ian Melling: Thanks, Roland. On your second question, Kit, as you've seen, we're not guiding on the second half. And that logic applies to the provisions as much as it does anything else. But what I would say is if we continues to see the recovery that we've seen across Q2 coming into Q3, then there will be much less pressure on those provisions. If we saw a second dip approaching Q2 levels then it might be a different story.

Kit Lee: Okay. That's great, thank you.

Kyle Rose: Great. Thank you for taking the question this morning. Can you hear me alright?

Roland Diggelmann: Yes, we can.

Kyle Rose: Great. So just a couple of questions for me, one specifically on the knee business. Obviously, I understand those procedures are a bit deferrable than the hip side. Just wanted to see what you've seen as far as a month-over-month trend on the knee side and how and when you expect that business to return to growth? The second question, Roland, you talked about the ASC channel, so I appreciate the commentary. But you also talked about seeing potentially different choices from physicians in that channel. Can you maybe help us understand what that means? Does that mean different type of implants? Different type of treatments? And then the last question is just your overall M&A and thoughts about capital allocation in this period. Thank you.

Roland Diggelmann: Thank you, Kyle. I'll just start with your last question on M&A. I would first want to mention that our M&A strategy remains unchanged. We continue to look for technologies and innovation that fits with our general strategy that we can leverage through our existing commercial footprint. We continue to look very actively in the marketplace. There may be some distressed assets here and there, but what we want to maintain is a clear strategic approach here, and also have the ability actually to be seen as a good owner in the market. We have made five acquisitions last year. I think this has really been, I would say, a watershed moment for us as an organisation. So, we continue to be interested in M&A. Of course, and while initially, of course, the focus was on liquidity and cash flow, we have a very solid balance sheet and that is a positive.

On the ASCs and the different choices by physicians, there is typically - there is an opportunity here because the ASC setting, of course, is a different one. You do also have a different patient selection. So, we see it as an opportunity twofold. One, on the implant choices. And second, of course, on the address that we have towards the ASCs because we're selling it to these accounts for the most part already through our leading Sports Medicine franchise. We see the opportunities of converging there. And in the future, we also see the opportunity of course with robotic solutions with CORI with a small footprint, modular, non-CT requiring solution.

On the knees, we continue to monitor the situation. As I mentioned, the hips were faster to recover. I think it's two elements here. One is the fact that there is more trauma-related

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joint replacements on hips. The second one being a very successful launch of OR3O, the dual mobility. But, I have no reason to believe that the knees won't pick up either. They're just lagging a little bit behind the hips at this stage. But I'm confident that they will continue to grow as the markets recover. And here again, we have a great portfolio. And, of course, we have CORI coming to the market which will support that growth.

Chris Gretler (Credit Suisse): Yes. Good morning, it's Chris. Hi, Ian. Hi, Roland. I have two question actually, and it relates to the cost saving. First of all, $150 million you quote, it is actually a run rate exit at the half year-end or is this basically the total cost saving you experienced now in the first half?

Ian Melling: So, thank you, Chris, I'll take that one. So the $150 million is the cost saving that we realised in the first half against our expectations. So just to be clear, it's not a year-over-year cost saving number, it's cost saving against our expectations coming into the year in the first half.

Chris Gretler: Okay. Thank you for the clarification. And then the second question is now on the restructuring programme. I think earlier this year now we had an expectation that there might be some more programmes now coming up eventually. Is this in the current environment now still a topic or you basically just wait and see how the pandemic develops before coming up with any incremental programme on top of OPEX?

Ian Melling: Yeah, thanks, Chris. We have incurred some modest cost in the first half on the new programme but also some things have been delayed as the result of COVID, and we are considering our plans in that area. So, we're still working through the full impact of those. And we'll come back to you all in due course with an update on that. It will also give Anne-Francoise a chance to come in and see those plans as well. So still on the cards, still work-in-progress, and expect to see something in due course.

Chris Gretler: Okay, thank you. And maybe one last question just quickly on these ASCs. Actually, what percent of now your knee sales, and I guess there is not much now in hips, but at this stage come from ASC for you guys?

Roland Diggelmann: It's still a small number, of course, because the majority of the capacity is in essential hospitals. I would say for us it is close to about 10% of our knee sales. It is a higher proportion I believe than for others. And it has - and I think that's the more important message is we have seen a good growth in ASCs during this crisis, albeit at the low level because the entire volumes were depressed. But we continue to see this trend evolving and we feel that we are very well-positioned to benefit from the move to de-central and ambulatory.

Chris Gretler: Okay. Thank you, I appreciate your comments.

Ian Melling: Thank you, Chris.

Julien Dormois (Exane): Hello. Sorry, can you hear me now?

Roland Diggelmann: Yes.

Julien Dormois: Okay, sorry. Thank you. Good morning, Roland. Good morning, Ian. I have two questions please. The first one relates to the comments that you made during the Q1 call where you alluded to the risk of pricing pressure mounting in the industry at hospitals

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related to the pandemic will damage financials. What are your latest thoughts on that topic - have you seen anything or is that not happening at all at the moment? And the second question relates to the underlying growth momentum. You have clearly stated that the strategic focus remains on accelerating top line, and we see lots of reasons to be optimistic in Orthopaedics and Sports Med with the high rate of innovation. But what are your thoughts about Wound Management? Is there - did you have plans here to come up with maybe more innovation or more acquisitions in order to reinvigorate growth in the segment - it has been lagging for some time.

Roland Diggelmann: Thank you Julien. I will go with the question on pricing and the pricing pressure first. I'd say initially we haven't seen anything that would indicate more price pressure on the short-term. I think everybody has been very busy managing the COVID crisis and the situation. We've always had price pressure in our industry. I think that's something that we know how to deal with. We will just have to observe and see what the future brings here. So, I'm relatively positive here as well.

In terms of the underlying growth on Wound, you are absolutely right there. Sports Medicine and Orthopaedics have seen very good growth coming into this crisis - very good momentum. In Wound, I think if I look at the three sub-segments in Wound Care, we've made good progress in Europe coming into this situation. We've had some challenges in the US, but I think we can manage that. In Bioactives, we have made the acquisition with Osiris, so that gives us a really nice play in the Bioactive field of Wound. And with GRAFIX and STRAVIX, we have some great products. We have now cross-trained our sales force between Osiris and Smith+Nephew. And we're also going to be launching this product over time outside of the US. So, I'm positive in that sector.

The one area that's been the most depressed in the crisis is actually the one we've been strongest in, which is Devices. Which is very much linked to surgical procedures. So with PICO and the next-generation PICO coming to the market next year, I am very optimistic that we continue that positive trend and actually grow market share.

Julien Dormois: Okay, that's clear. Thank you very much.

Roland Diggelmann: Thank you, Julien.

Michael Jungling (Morgan Stanley): Great. Thank you and good morning all, I have two questions. Firstly, on the Q3 sales growth expectations. And I'm just curious how you're thinking about Q3 pent-up demand being worked on by physicians. I'm trying to understand whether there is a meaningful possibility in your eyes with a seasonally a low volume quarter but the same time pent-up being used by surgeons to catch up could feasibly result in for you, sort of, a bit of growth, actual positive growth, in the quarter for Orthopaedics?

And then question number two is on cost savings. Is it correct that the $150 million in discretionary savings for the first half was slightly better than what you had suggested earlier? And how does one think about $50 million of additional savings in the context of $150 million in the first half? I'm trying to understand how much flexibility you have in that spend. It seems to me that you probably have quite a lot. But if you could quantify it and how you are thinking about it, that would be very helpful.

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Roland Diggelmann: Sure. Thank you, Michael. So on Q3, obviously, there is a lot of uncertainty still in the market, but I think you described it quite well. I absolutely believe it's possible that we will see a continued good recovery and good trend. There is certainly pent-up demand. It's not the same in every geography, of course. You have to factor in when the different geographies went into the lockdown and into deferring surgeries. So, we're going to see probably this evolving geography by geography. But given the fact that the US is accounting for almost half of our sales, and the relatively quick recovery, I am also optimistic here.

We are seeing two things happening. Of course, the pent-up demand being worked on, and then an ongoing demand being managed because of the fundamentals remain the same - the patients are out there, they need and they demand surgery and care. And so there is an incentive for the entire system and all stakeholders to provide the solutions to patients.

On the savings, Ian, can you give some colour?

Ian Melling: Yeah, absolutely. And just to add what you said, Roland, but just in response to your comment, Michael, but August is our lower sales month seasonally. So, August is going to be a little harder to interpret. But I think as we come out of the quarter by September we should have a clearer view.

In terms of the saving, yeah, I think we're pleased with the $150 million in the first half. It's in line with, you know, maybe slightly better than our expectations, but not significantly so. In terms of what to expect in the second half, I think it will depend on the top line. So if the top line comes back strongly and we see the recovery we just discussed, then we will have lower cost savings, and we'll be spending more in variable areas and on sales reps compensation and the like.

Michael Jungling: Okay.

Ian Melling: And yeah, travel. You know, it's looking like it's going to come back a little slower maybe, but we will see. You know, it depends on whether travel comes back or not. So there's lots of variables in there. I think it will be very dependent on the top line. So it will be -

Michael Jungling: It sounds to me - but it sounds to me that you've got quite a lot of discretion in the EBITA that you want to show. Because, let's say, if the second half grows at minus 5%, you've seeing quite a lot of discretion in terms of how much you want to spend on travel, on consulting, all those things that you mentioned in the press release. Is that a fair statement?

Ian Melling: We have some discretion and we have some variable cost in there as well, where it's more a case of it will be variable with sale. So yes there is some discretion but, clearly, if customers are going - if people are visiting customers then we'll want to be visiting customers. So, we won't want to be behind the competition by restricting spend and preventing certain events or visiting customers.

Michael Jungling: Okay. And a final follow-up, please. Is the inventory obsolescence charge of $46 million in the first half, have those products been scrapped or can they still be sold in the second half?

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Ian Melling: The majority would still be able to be sold. Michael, it's not a binary thing across the whole portfolio. There will be some expiration issues in there, but the majority would still be available for sale.

Michael Jungling: Great, thank you.

Roland Diggelmann: Maybe just one more comment on the savings. I think from a management perspective, I think what's important to us is that we find the right balance between the savings and then of course investing such that we are in the best possible shape for the recovery. Because we all know the recovery will come. The fundamentals are positive. The question is when and in what shape are we. And that's why we've taken some deliberate decisions to also protect the R&D line to ensure that we are ready with new product innovation but also with the sales capability for when the markets restart. And again that restart is something that has a lot of uncertainty and that looks very different in different geographies - just looking at the US, then China, then some markets in Europe. So it comes down to individual decisions at the market level. But we want to make sure that we are very ready and very strong when the markets recover.

Michael Jungling: Very good colour. Thank you.

Roland Diggelmann: Thank you, Michael.

David Adlington (JP Morgan): Hey guys, thanks for taking my questions. I'm afraid a couple of numbers for clarification points please. I just wanted to check the $50 million split of provisions, and I may have missed it, but the split between the trade receivables and inventory. And just to double-check the inventory, cost of goods, and receivables, and then sales and marketing. Secondly, just in terms of the technical guidance because the slides are missing again. Just wondered any updates there, particularly with respect to foreign exchange please?

Ian Melling: Thank you, David. So just on the numbers. Of the, about $50 million of provisions, the majority is inventory. A very rough cut, 80% inventory, 20% bad debt. The inventory charges are in cost of sale. The bad debt charges are in SG&A within the P&L. And foreign exchange there's no significant update, David. But we will follow-up with you offline on that one.

David Adlington: Okay, thanks.

Veronika Dubajova (Goldman Sachs): Good morning, gentlemen, thank you for taking my question. I'll start with one and then I'll have a follow-up. Just kind of curious, Roland, to get your thoughts, when you look at the patient recovery and, in particular, with what you're seeing in July in the US, what do you think is a realistic time frame for the business to return to growth - just an approximate guess of when you think you might be at a point on a year-on-year basis the business is back to growth, I mean, assuming no second wave or large outbreaks?

Roland Diggelmann: Thank you, Veronika, you are obviously asking the big question here, that I wish I could give you a precise answer. I think we just don't have enough data points to give you a very precise answer. What I can tell you is that the markets in the US have recovered quickly. I think there is common incentive by all stakeholders to return to a certain sense new normal. We have seen patients being willing to go back to hospitals, which has

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not been the case in other markets or to a lesser extent. We have also seen all 50 states allowing elective surgeries again. We are also seeing that even when new lockdowns or new restrictions are introduced, since everybody has learned, this doesn't mean that elective surgeries are not deferred or delayed again.

So, we are seeing a lot of positives in the way the market has recovered and the speed it has recovered in the US. But I wish I could give you more precise information. I can only give you a little glimpse into what we are seeing in July, although the month hasn't finished. Of course, we have seen a very good trend and a very good continuation of that initial trend in the month of July as well.

Veronika Dubajova: And my follow-up on this. You know, we're hearing a lot of the surgeries that are happening now are effectively rescheduled backlog that docs are working through. Do you have a sense for what the new demand generation looks like? So, I'm thinking about ambulatory visits that are, sort of, leads into surgeries 2-3 months from now. And some of your peers have kind of discussed the risk of maybe a W-shaped recovery, so we have a strong rebound but then a dip down once that backlog works through. How are you guys thinking about it, and maybe if you can share some anecdotes from the ground on what you are seeing in terms of that new demand funnel.

Roland Diggelmann: Yeah, let me try. And I think it's anecdotal information that I'm sharing here, of course. What we have indeed seen is once the restrictions were lifted and elective surgery was possible the pick-up was very high and very quick in the US. I think there was a pent-up demand, and I think it is possible that there will be a bit of a - you called it a W-shape. I'm not sure how exactly that would look like. Anecdotally, what we are hearing is that physicians are seeing a good pipeline of new patients. They're also investing more time - they're working longer hours, they're working more days, they're scheduling more OR capacity to accommodate for both managing the pent-up demand and then managing the ongoing new patient demand. So, I'm optimistic. I'm positive especially for the US.

Veronika Dubajova: Understood. Thank you guys very much.

Roland Diggelmann: Thanks, Veronika.

Tom Jones (Berenberg): Good morning, thanks for taking my questions - I have two. One was just about the current recovery. We've discussed the demand side of the equation quite a lot, but I wondered if you'd like to make some comments on the supply side. You know, clearly, there's an incentive for physician in the US, etcetera, to get back to work. But is there a risk that we end up not ever being able to get back to 100% capacity unless we make some significant changes to healthcare systems? I guess what I'm alluding to are things like enhanced cleaning protocols, more patient separation, etcetera, etcetera. You know, reducing the overall functional capacity of operating departments even if they are working longer hours as you said. I know that's certainly been an issue in the UK where a lot of hospitals are back to operating but at a much, much reduced pace due to the enhanced COVID protocols they have in place. So just some comments on the supply side would be good if you can. And then I have a follow-up.

Roland Diggelmann: Sure. I think what we have seen is the healthcare systems reacting quite quickly to this new situation with enhanced protocols, with submissions to hospitals,

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with all the way to managing the way visitors are allowed into hospitals or not. So, I think that's been done remarkably quickly and with very different individual approaches, of course, and also different in geographies. But, I think the system has been quite agile here to react to this.

Overall, again, I mentioned the fundamentals remain strong - patient demographics, access to healthcare in emerging markets. I think this has remained unchanged. So I'm optimistic for the mid- and the long-term. The question now, of course, is how we get there. We're also seeing certain healthcare systems, for instance, in China and other markets reserving some extra capacity in the event or in the possible event that there were to be a second wave. And I think, in particular, in Europe the main driver is patient confidence to going back to hospitals. This has been something that hasn't - we haven't seen much in the US, probably more in Europe - how do patients go back to hospitals and are they willing to go back for planned surgery. Of course, again, a trend to de-central care, and ASCs is helping here. There will be, I think, an amplified or accelerated trend to specialisation as well, to patient stratification to having the, I would call it, the good patients in one setting and the more complex surgeries in other settings. So all of this will have an impact.

But what we've seen so far, overall and in summary, is actually the system being able to cope with that in a good way. And then, of course, at the end of the day, the clinical need doesn't go away. So that's why we remain very optimistic.

Tom Jones: Okay, perfect. And my second question is really kind of big picture post-COVID one. You know, there's a lot of talk about the new normal. But, I wonder from your experience so far, what permanent changes to your industry, to your business do you think COVID might precipitate? You already alluded to the shift to ASCs, and I guess that was a trend that was there but it's now been accelerated. But interested to hear your thoughts on what other permanent changes might ensue from this pandemic. You know, maybe thinking marketing expense has become significantly lower if you can do a lot more remotely, whatever it might be. Just be interested to hear what you think the new post-COVID world looks like for your industry and your company.

Roland Diggelmann: Yes. Thank you, it's a great question, Tom. I think, of course, there are some trends that I think will sustain. We have an entire programme internally that looks at exactly that and how will the new normal actually look. A lot of those trends that were there before I think will be accelerated or amplified. The trend to ASCs is one. The trend to robotics is another one - reduce the number of instruments, for instance. But then, more generally, how we engage with customers that will change. It's difficult to assess how we will change exactly. But, we have now learned a lot how we can keep in touch with our customers, how we can engage with them through digital needs or means, excuse me.

What will certainly change, and continues to change, is how medical education is being delivered, again, through digital means. The large meetings I think were the fact that healthcare professionals will probably travel less, be less attending physical meetings, physical training events, training through augmented reality and other means will certainly accelerate. And then finally, also internally we'll have - we have had really good experiences with how we actually train and educate our sales force. I think that's also one of the trends that will sustain.

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So a lot of opportunities here. As you've certainly heard, there is also opportunities to deliver certain services in a less costly way, reducing the overall meeting, convention, training, travel expenses, etcetera. And everything, every crisis also offers an opportunity here. We continue to monitor this very closely. And we've actually had really good experiences with some of these remote engagement opportunities with customers alike, as with our sales force, and everyone is pleased.

Tom Jones: Good. That's very, very helpful. I'll get back in the queue.

Roland Diggelmann: Thanks, Tom.

Oliver Metzger (CommerzBank): Yeah, hi. Good morning, one question left from my side, it's on Wound Bioactives. In the past we saw there's a very high underlying growth rate as Osiris ahead of corona. So could you give us an idea how the business performed during the crisis compared to your legacy Bioactives portfolio and which are your expectation of the Osiris will return to growth again?

Roland Diggelmann: Yeah. Thank you, Oliver. Osiris or the products from the Osiris legacy have actually underperformed relative to the overall Advanced Wound Management business. I think there has been a couple of reasons here. First of all, we are very early in the process of integration. So, we are very positive now we have taken this opportunity to cross-train the sales force from both Osiris and the Smith+Nephew legacy so they can sell both ranges of products. I think that increases the access to the market. The second access to market that we will certainly improve or achieve will be selling the product outside of the US. So far,

Osiris haven't been selling outside of the US. This is a process because it's registration-dependent and this is a bioactive, so the pathway is different in different markets. And then, of course, the most important reason is that the products from Osiris are linked to surgeries and surgical events. And as we've had many fewer surgeries of course there was a direct impact on the usage of those products.

But, again, as I mentioned earlier, I'm very positive. We're only at the beginning of the sales synergies here, and we have a very active role to play in the areas of Bioactives in Wound.

Oliver Metzger: Clear. Thank you very much.

Roland Diggelmann: Thanks, Oliver.

Well, thank you all for your questions. Before we close, thanks again for your questions, for your interest as always. You will shortly be receiving an invitation for our virtual investor event. This will be taking place on 8 September. We will be having the opportunity to talk some more about some really exciting innovations on the pipeline of Smith+Nephew, in particular, of course, CORI and the robotics endeavour. And we hope to speak to many of you then. Thank you very much.

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