Smith & Nephew : Q1 results transcript 29 April 2021 (pdf)

Smith + Nephew First Quarter

2021 Results

Thursday, 29th April 2021

Transcript produced by Global Lingo

London - 020 7870 7100

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Smith + Nephew First Quarter 2021 Results

Thursday, 29th April 2021

Key Messages

Roland Diggelmann

Chief Executive Officer, Smith + Nephew

Key messages

Good morning everyone and welcome to Smith+Nephew's trading update. As mentioned, with me on the call today is our CFO Anne-Francoise Nesmes. I would like to start with a few opening comments. Firstly we are very encouraged by our progress in the first quarter of 2021 and that is for a number of reasons. One, our markets are getting better. The rollout of vaccination programmes and the resilience of healthcare systems are actually bringing back elective surgery volumes towards more normal levels and in an increasing number of regions. Our approach through the pandemic has been to maintain our commercial readiness for the recovery that is now underway. Second, we have made progress on the priorities and growth strategy that we set out in February at the time of the full-year presentation. The evidence of better commercial execution in our existing business is building. We are driving performance from our acquired assets and we are delivering on our 2021 R&D pipeline and investments. Finally of course visibility has improved on the recovery from COVID and with that we are pleased to return to giving financial guidance. Now Anne-Francoise will take you through the numbers for the quarter. I will then talk about some of our strategic progress and we will finish with the details of our 2021 outlook.

Financials

Anne-Francoise Nesmes

Chief Financial Officer, Smith + Nephew

Q1 revenue by region: $1,264m, 6.2% underlying, 11.5% reported

Good morning everyone. I will start by summarising our revenue by region. Our first quarter revenue was $1.3 billion which represented 6.2% underlying growth and an 11.5% reported growth. This includes the effect of two extra trading days compared to the first quarter of 2020. As you can see on the charts in front of you, there was significant variation between regions. In part that reflects timing differences in lapping the first COVID impacts in 2020 and we are also seeing different trajectories of growth and recovery between markets, particularly later in the quarter. As Roland mentioned though, the balance is because an increasing proportion of our end markets are moving closer to normal.

Now going into the detail of each region, the US grew by 7.1% and strengthened as the quarter progressed, with increasing vaccination rates and easing of restrictions enabling the recovery in elective procedures. Other established markets were more of a mixed picture. Japan and Australia showed solid growth but Europe varied by country. While the UK strengthened in the quarter, most other European markets slowed in March as infection rates rose. We expect that trend to continue into the second quarter.

In the emerging markets, China sales reflected a maintained recovery and as you may recall, an earlier and greater COVID impact in the first quarter of 2020. We have also seen in China some distributors changing ordering patterns in anticipation of the VBP for a subset of our

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Smith + Nephew First Quarter 2021 Results

Thursday, 29th April 2021

reconstruction products. In other emerging markets we saw signs of improvement, although again there was significant variation between countries.

Q1 revenue by franchise: $1,264m, 6.2%undelrying, 11.5% reported

Looking at the picture from a franchise perspective it is important to note that all three franchises grew and all improved over the fourth quarter of 2020. Sports Medicine & ENT grew the fastest at 10.4% while Orthopaedics grew at 1.6% and Advanced Wound Management grew by 9.3%. Recovering elective surgery volumes, our initiatives to improve commercial execution and as the effect of starting to lap the initial COVID impact in some of the regions also contributed to the growth.

Orthopaedics: $540m, 1.6% underlying

I will go now into the details of the franchises starting with orthopaedics. As in 2020 our hips business outperformed knees in the quarter. We have seen throughout the pandemic that surgeons have prioritised hip procedures and that is continuing across all affected regions. Our hip business has consistently grown above peers in recent quarters and continues to benefit from the rollout of our OR3O dual mobility system. In knees the dynamics were similar to 2020, as we reported before. We are of course working towards adding the cementless knee options for which we are on track for launch later this year. Pleasingly our other reconstruction grew by 17.7% driven by the US robotics sales, following the launch of CORI, our next generation robotic system. Our shipments are now increasingly to new customers, after our early prioritisation of upgrading NAVIO customers in 2020. We are continuing to develop additional surgical applications and regional rollouts and we expect further launches over the course of 2021. Trauma growth reflected the continued success of the EVOS plating system and the growth of our INTERTAN nail. We are also progressing with the commercial integration of the orthopaedic business acquired from Integra. We have started. We have combined the sales team. We have trained reps on the new portfolio. We have set new targets and we are making the instrument sets available.

Sports Medicine & ENT

Now moving to Sports Medicine, both Joint Repair and Arthroscopic Enabling Technologies grew double-digit. The recovery in Sports Medicine has been faster than the other markets we operate in. The significance of the outpatient setting, the younger patient mix and the involvement of acute injuries all contribute to the speed of the rebound. Only knee repairs remain a little slower with more exposure to competitive sports injuries. Very much in line with our strategy, our acquired products such as REGENETEN and recent launches such as HEALICOIL KNOTLESS continue to make important contributions across the segments. While ENT growth is still negative, it improved over the previous period reflecting a rebound in the Asia-Pacific region. Volumes of procedures in established markets remains low as parents continue to be cautious and we are continuing to see lower ENT infection rates.

Advanced Wound Management: $351m, 9.3% underlying

Finally moving on to Advanced Wound Management, Advanced Wound Care grew by 4.5% with a rebound in Asia-Pacific after the region's slow finish to 2020. Importantly this franchise has stayed focused on improving commercial execution and Roland will cover this in more detail in a moment. Bioactives growth was helped by timing of shipments with year-end orders that would historically have been shipped in December coming in January instead.

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Smith + Nephew First Quarter 2021 Results

Thursday, 29th April 2021

However even without this effect, growth driven by demand has been double-digit. Advanced Wound Devices largely recovered in line with the broader franchise in each region. The slower growth rate in AWD is driven by the geographic mix with a higher proportion of sales in European and less in US and China, our fastest-growing markets.

Strategic Progress and Outlook

Roland Diggelmann

Chief Executive Officer, Smith+Nephew

Priority for 2021: Return to top-line growth and recapture momentum

I would like to spend some time on our progress against the priorities for 2021 that we set out to you in February. One of those priorities is the return to top-line growth and to recapture the momentum from before the pandemic. As you know, organic growth is a key driver of shareholder returns and it is what enables positive operating leverage through our P&L. The aim is to build on the new commercial model and the leadership from 2018 and 2019 by maximising the potential of our existing portfolio, then delivering value from the acquired assets and of course launching a new pipeline of innovation in 2021 and beyond.

Growth strategy in action - Wound franchise example

One example here is the progress of the Wound franchise. It continues in the first quarter. It is a good example of the delivery against the first two components of our growth strategy. Firstly, an important driver of the improvement has been the detailed work done by the franchise team together with the regions. I will take you through a couple of examples of what they have been working on. In our go-to-market strategy the franchise leaders focused more on key account management and on winning in bigger blocks of business. We also allocated more of our Sales resource towards working with large hospital networks to C-level contacts at major customers and to national tenders and processes outside the US. We have also established a new launch excellence process for Wound Management with a dedicated team and a more systematic end-to-end process that involves the regulatory, sales training, product supply and regional rollout plans

The franchise has also renewed its focus on people, including on sales training, development and mentoring programmes and we are seeing good results from this, with employee engagement scores up, with a lower attrition by about 50% and more than 40% of management positions recently filled by women. Secondly, the performance of Bioactives shows us delivering on the value of an acquired asset, in this case, Osiris. An important part of the business case was to sell skin substitute products Grafix and Stravix through the Smith

• Nephew sales force. We are seeing the benefit of that coming through now. There is more to come. We are planning for launches of new forms of Grafix and Stravix this year and we are also preparing for geographic expansions beyond the United States for these products.

Progress on key R&D projects

Moving on to innovation where there is early progress on delivering our expanded pipeline. Many of the highlights of this quarter have been the recently launched growth drivers such as Anne-Francoise has touched on, the OR3O, the continued success, the strong adoption of EVOS in Trauma for instance. In addition, four of the projects we highlighted to you in February have now received their first regulatory clearances and are expected to launch in the

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Smith + Nephew First Quarter 2021 Results

Thursday, 29th April 2021

coming months. In Orthopaedics the new instruments for hip and knee surgery are ready to be shipped in the US. The EVOS Large Fragment and Periprosthetic plates should also help extend the success of our plates and screws business and actually having the large fragment plates gives us access to a bigger part of the segment and makes the whole of the system a more complete solution for customers. It has been adopted very positively by our customer base.

In Sports Medicine the next-generation of FASTFIX builds on our already leading meniscal repair portfolio. It is a smaller, flexible device that gives access to parts of the meniscus that are hard to reach with existing devices. We plan to launch in the middle of the year and we see a good opportunity from launching this as the knee repair market recovers further from COVID. DoubleFlo is a further upgrade to the arthroscopic tower. It combines inflow and outflow pumps for better control in fluid management. This follows the launches in visualisation, in mechanical resection and in radio frequency. The Intellio connected tower really has been upgraded and enhanced with DoubleFlo and it will continue to enhance the competitiveness of the tower. We have upgraded the tower now on all elements within two years. These first regulatory clearances are an exciting start to our pipeline delivery for the year and as you can see from the slide there is more to come across all of our franchises.

Priority for 2021: Drive operational improvement

Driving operational improvement is another priority for the year. In February we announced the new operations transformation programme. It targets around $200 million of annualised cost savings by the end of 2023. Work is underway on the key workstreams and this slide shows two examples which are already well advanced. On the left you can see we are making good progress with the new manufacturing facility in Malaysia. We expect the site to actually begin production next year, enabling us to support future growth from a lower cost location. We are also in the process of outsourcing our global warehousing and distribution to single regional logistics hubs in Memphis, in the Netherlands and in Singapore, all of that managed by specialist third party partners. The European and APAC projects are already significantly advanced and the Memphis outsourcing is underway. When complete we should benefit from the greater scale and from the expertise of our partners, including their automation technology. Of course our focus on efficiency goes beyond manufacturing operations and we continue to control discretionary costs across the entire organisation.

2021 outlook

Finally, I would like to cover the outlook for 2021. As mentioned, the improved visibility means we are in a position to return to giving financial targets. We are targeting underlying revenue growth of 10-13% for the full year. Within that we continue to expect hips to outperform knees, Sports Medicine & ENT to rebound strongly and the trajectory of Advanced Wound Management to remain strong. As of 23rd April foreign exchange will add around 3% to growth and completed M&A around another 2%. For the trading profit margin we have a range of between 18% and 19%. Consistent with our previous outlook this includes some temporary negative operating leverage at the gross margin level relative to 2019 as a result of COVID. Our efficiency programmes will provide a partial offset to that. Also, we continue to expect dilution from investment in R&D of around 100 basis points, initial dilution from M&A completed since the start of 2020 of around 150 basis points and the headwind from transactional foreign exchange exposure of around 100 basis points. Finally, we expect the

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