Full Year 2016 Results
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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.
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Chief Executive Officer
Olivier Bohuon
Full Year 2016 highlights
4
Comments
• Revenues +2% underlying (+1% reported)
‐ Sports Medicine Joint Repair +8% ‐ BlueBelt up more than 50% ‐ Recon +2% with Knees +4% ‐ strong PICO◊ growth continues
• Trading profit margin 21.8% (-190bps)
• EPSA 82.6¢ (-3% reported)
• Full year dividend [30.8¢]
Full Year
2016 2015 Underlying
growth
$m $m
Revenue 4,669 4,634 2%
Trading profit 1,020 1,099
Trading profit margin 21.8% 23.7%
Operating profit 801 628
Operating profit margin
17.2% 13.6%
EPS 88.1¢ 45.9¢
EPSA 82.6¢ 85.1¢
Q4 revenue growth of -1% underlying*
5
3%
-3%
0%
-5% 0% 5%
Emerging
Est OUS
US
AWD
AWB
AWC
Hips
Knees
Arthroscopic Enabling Tech
Sports Medicine Joint Repair
Trauma & Extremities
Other Surgical
2%
1%
-3%
-6%
0%
15%
-4%
-3%
5%
-10% 0% 10%
Geographical growth Product franchise growth Revenue split
Underlying change (%) Underlying change (%)
* Underlying growth is not adjusted for the impact of four fewer selling days in Q4 2016 compared to Q4 2015 ‘Est OUS’ is Australia, Canada, Europe, Japan and New Zealand; ‘Other Surgical’ includes ENT and robotics sales (excluding implant sales)
Sports Medicine, Trauma & OSB
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• Q4 revenue performance*
‐ Sports Medicine Joint Repair +5% ($159m)
‐ Arthroscopic Enabling Technologies (AET) -3% ($168m)
‐ Trauma & Extremities -4% ($120m)
‐ Other Surgical Businesses** +15% ($48m)
• Commentary
‐ LENS◊ and WEREWOLF◊ well received
‐ Gulf States remain a headwind in Trauma
‐ first NAVIO◊ sale in India
* Underlying growth rates are not adjusted for the impact of four fewer selling days in Q4 2016 compared to Q4 2015 ** ‘Other Surgical Businesses’ includes ENT and robotics sales (excluding implant sales)
LENS Surgical Imaging System
Reconstruction
7
• Q4 revenue performance*
‐ Knees: global 0%, US -3%, OUS +3% ($247m)
‐ Hips: global -6%, US -5 %, OUS -7 % ($153m)
• Commentary
‐ JOURNEY◊ II remains primary growth driver
‐ ANTHEM◊ launched in several Emerging Market countries
‐ REDAPT◊ Revision System starting to contribute to growth
ANTHEM Knee System
* Underlying growth rates are not adjusted for the impact of four fewer selling days in Q4 2016 compared to Q4 2015
Advanced Wound Management
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• Q4 revenue performance*
‐ Advanced Wound Care -3% ($186m)
‐ Advanced Wound Bioactives +1% ($97m)
‐ Advanced Wound Devices +2% ($44m)
• Commentary
‐ AWC: strong US growth off-set by Europe and China
‐ PICO growth continues
‐ SANTYL◊ volume growth
PICO Single Use Negative Pressure Wound Therapy
* Underlying growth rates are not adjusted for the impact of four fewer selling days in Q4 2016 compared to Q4 2015
SVP Group Finance
Ian Melling
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Q4 and Full Year Revenue growth
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FY 2016(1) Q4 2016(1)
(1) Q4 2016 comprises 60 trading days (2015 – 64 trading days). Full year comprises 251 days (2015 – 251 days)
Growth % Growth %
Underlying Underlying
Acquisitions / Disposals
Acquisitions / Disposals
Currency Currency
Reported Reported
-1%
-1%
-1%
-3%
2%
0%
-1%
1%
Full Year Financial Highlights
11 (1) Non-GAAP measure: Reconciled to the relevant GAAP measure in the Fourth Quarter Trading and Full Year 2016 Results announcement
Reported Trading
2016 2015 2016 2015
Revenue $4,669m $4,634m $4,669m $4,634m
Operating profit $801m $628m
Trading profit(1) $1,020m $1,099m
Operating / Trading profit margin(1) 17.2% 13.6% 21.8% 23.7%
EPS / EPSA(1) 88.1¢ 45.9¢ 82.6¢ 85.1¢
Cash generated from operating activities / Trading cash flow(1)
$1,035m $1,203m $765m $936m
Full year trading income statement
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Group trading margin 2016
13
Year-on-year trading margin movement Key trading margin drivers
2015 2016
23.7% Exchange and price
Robotic Technologies and GYN disposal
Loss of leverage from lower sales growth
Group Optimisation
21.8%
Full year IFRS profit adjusting items
14
Full year EPSA and EPS
15 * Tax rate on Trading results of 23.8% in 2016 includes a one-off benefit following agreement with IRS
Tax rate* 2016: 23.8% 2015: 26.8%
Full year free cash flow
16
Cash flow and capital allocation
17
(1,361)
(1,550)
849 9
(392)
(279)
(300) (76) (1,800)
(1,500)
(1,200)
(900)
(600)
(300)
0
Dec-15
Net Debt
FCF pre capex Capex Dividends BlueBelt and
GYN
Share buy
back
Other Dec-16
Net Debt
$m
Reinvest for organic growth
Progressive dividend policy
Acquisitions & disposals
Return excess to share-holders
1 2 3 4
Chief Executive Officer
Olivier Bohuon
Strategic priorities and rebalancing
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• Winning in Established Markets
• Accelerating development in Emerging Markets
• Innovating for value
• Simplifying and improving our operating model
• Supplement organic growth through acquisitions
2011* Future
Lower Growth
65%
Higher Growth
35%
Higher Growth
65%
Lower Growth
35%
Proportion of Revenue
Improving Strengthening
Creating
* Excluding Clinical Therapies
2011-2016: our journey here
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We simplified the Group structure and invested in talent
• Streamlined from four independent silos to a
single group structure
• Created single country MD model and global functions
• Established governance and rigour around capital deployment
We invested in our growth platforms and our infrastructure
• Stepped up R&D investment
• Built our presence in Emerging Markets
• Built a global infrastructure
• Healthpoint, ArthroCare
• Distribution in Emerging Markets
• Technologies e.g. Robotics
Organic investments
Acquisitions
2017 – 2018: driving improved execution
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Tools to execute better
• Improve salesforce excellence
• Drive better pricing
• Support sales with compelling Health Economic evidence
• Enhance market access in procurement driven environments
Ongoing improvement programmes
• Research & Development
• Strengthening supply chain
• Responding to increasing regulatory requirements
• Harmonising our IT systems
• Shared Business Services
A structure fit to implement our strategy
• Organisational structure is fully
in place
• Commercial operations; single country MD model
• Global functions to drive excellence and efficiency
Innovation remains at the heart of Smith & Nephew
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• JOURNEY◊ II Knee System
• REDAPT Revision Hip System
• NAVIO◊ Surgical System
• Our comprehensive Joint Repair portfolio
• COBLATION◊ WEREWOLF System
• LENS Surgical Imaging System
• TRIGEN◊ INTERTAN◊ Intertrochanteric Nail
• PICO Single Use NPWT
Global R&D function
• Single group R&D strategy with focused organisation
• Prioritisation and harmonisation of projects
• Better execution of product launches
• External vs internal competencies
Strong product lines Driving innovation
Our 2017 guidance and medium-term outlook
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(1) Based on exchanges rates prevailing on 31st January 2017. (2) Tax rate on trading result
Sales growth:
Reported(1): 1.2% to 2.2% Underlying: 3% to 4%
Trading profit margin:
20-70bp improvement
Tax rate(2):
Around 26%
Underlying sales growth:
Consistent growth above market
Trading profit margin:
Ongoing improvement
Cash:
Releasing cash to invest in M&A and/or return to shareholders
2017
Medium - term
A stronger Smith & Nephew
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• iple growth drivers A fundamentally transformed Group…
…in a unique, strong, global position…
…with multiple drivers of higher growth
• Sports Medicine leadership
• Innovative Knee portfolio including robotics
• PICO changing the NPWT landscape
• Emerging Markets
• M&A optionality
Appendices
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H1 H2 Full Year
2016 2015 2016 2015 2016 2015
$m $m $m $m $m $m
Revenue 2,328 2,272 2,341 2,362 4,669 4,634
Cost of goods sold (632) (566) (640) (577) (1272) (1,143)
Gross profit 1,696 1,706 1,701 1,785 3,397 3,491
Gross profit margin 72.8% 75.1% 72.7% 75.6% 72.8% 75.3%
Selling, general and admin (1,100) (1,084) (1,047) (1,086) (2,147) (2,170)
Research and development (113) (110) (117) (112) (230) (222)
Trading profit 483 512 537 587 1,020 1,099
Trading profit margin 20.8% 22.5% 22.9% 24.9% 21.8% 23.7%
Trading income statement - half and full year
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IFRS profit adjusting items – half and full year
H1 H2 Full Year
2016 2015 2016 2015 2016 2015
$m $m $m $m $m $m
Trading profit 483 512 537 587 1,020 1,099
Acquisition related costs (6) (13) (3) 1 (9) (12)
Restructuring and rationalisation (35) (19) (27) (46) (62) (65)
Amortisation of acquisition intangibles (67) (78) (111) (126) (178) (204)
Legal and other items (18) 37 48 (227) 30 (190)
IFRS Operating profit 357 439 444 189 801 628
H1 H2 Full Year
2016 2015 2016 2015 2016 2015
$m $m $m $m $m $m
Trading profit 483 512 537 587 1,020 1,099
Net interest payable (24) (21) (22) (20) (46) (41)
Other finance costs (6) (7) (5) (6) (11) (13)
Share of results from associate - (3) 2 (2) 2 (5)
Adjusted profit before tax 453 481 512 559 965 1,040
Taxation (119) (131) (111) (148) (230) (279)
Adjusted attributable profit 334 350 401 411 735 761
Number of shares – million 894 894 881 894 890 894
Adjusted earnings per share ("EPSA") 37.4¢ 39.1¢ 45.5¢ 46.0¢ 82.6¢ 85.1¢
Earnings per share ("EPS") 27.0¢ 33.0¢ 61.6¢ 12.9¢ 88.1¢ 45.9¢
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EPSA and EPS – half and full year
Free cash flow – half and full year
29
H1 H2 Full Year
2016 2015 2016 2015 2016 2015
$m $m $m $m $m $m
Trading profit 483 512 537 587 1,020 1,099
Share based payment 14 13 13 16 27 29
Depreciation and amortisation 147 148 153 159 300 307
Capital expenditure (174) (161) (218) (197) (392) (358)
Movements in working capital and other (215) (130) 25 (11) (190) (141)
Trading cash flow 255 382 510 554 765 936
Trading cash conversion 53% 75% 95% 94% 75% 85%
Restructuring, rationalisation, acquisition & other
(49) 36 (73) (127) (122) (91)
Operating cash flow 206 418 437 427 643 845
Net interest paid (24) (17) (21) (19) (45) (36)
Taxation paid (87) (72) (54) (65) (141) (137)
Free cash flow 95 329 362 343 457 672
Franchise revenue analysis
30 All revenue growth rates are on an underlying basis * ‘Other Surgical Businesses’ includes ENT, Gynaecology (prior to divestment in August) and robotic sales (excluding implant sales)
2015 2016
Q1 Q2 Q3 Q4 Full Year
Q1 Q2 Q3 Q4 Full Year
Growth Growth Growth Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % % % % $m %
Sports Medicine, Trauma & OSB
5 4 2 5 4 5 4 4 1 1,907 3
Sports Medicine Joint Repair 9 7 4 9 7 11 10 8 5 587 8
Arthroscopic Enabling Technologies
(2) 1 (2) 3 - 4 4 2 (3) 631 2
Trauma & Extremities 5 2 2 - 2 (7) (6) 1 (4) 475 (4)
Other Surgical Businesses* 11 7 10 13 10 19 14 12 15 214 15
Reconstruction 1 4 3 4 3 7 3 2 (2) 1,529 2
Knee Implants 2 7 6 6 5 9 5 4 - 932 4
Hip Implants (1) 1 (2) 1 - 4 - - (6) 597 (1)
Advanced Wound Management 1 7 6 8 6 - (3) (1) (1) 1,233 (1)
Advanced Wound Care 9 12 6 4 8 - (7) (2) (3) 719 (3)
Advanced Wound Bioactives 5 6 2 16 7 (4) 4 (3) 1 342 -
Advanced Wound Devices (27) (9) 17 14 (3) 11 1 5 2 172 5
Group 3 5 4 5 4 4 2 2 (1) 4,669 2
Regional revenue analysis
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‘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 Q3 Q4 Full Year
Growth Growth Growth Growth Growth Growth Growth Growth Growth Revenue Growth
% % % % % % % % % $m %
Geographic regions
US 1 4 4 9 5 8 4 2 - 2,299 3
Other Established Markets (2) 3 1 2 1 4 1 - (3) 1,679 -
Established Markets - 3 3 6 3 6 3 1 (1) 3,978 2
Emerging Markets 22 14 8 2 11 (6) (2) 6 3 691 -
Group 3 5 4 5 4 4 2 2 (1) 4,669 2
2017 Technical guidance
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Guidance Full year
Restructuring costs Nil
Acquisition and integration costs c. $5m
Amortisation of acquisition intangibles c. $120m
Income from associates ~$0m
Net interest payable $50m - $55m
Other finance costs similar to 2016
Tax rate on Trading result c. 26%
Foreign exchange and other
Impact of disposal of Gynaecology business on revenue -80bps
Impact of translational FX* on revenue c. -1%
* Based on foreign exchange rates prevailing on 31st January 2017
Analysis of restructuring costs
33
Of the $62m total charged in the full year, all $62m are reflected in ‘selling, general and administrative expenses’ and nothing in ‘cost of goods sold’ in the Group Income Statement.
P&L Charge Cash Spend
Previous
Total to Date FY Total to date
Previous Total to Date
FY Total to date
Group Optimisation Plan
$m $m $m $m $m $m
Cash costs 105 57 162 84 60 144
Asset w/offs - 3 3 n/a n/a n/a
Total 105 60 165 84 60 144
Structural Efficiency Programme
$m $m $m $m $m $m
Cash costs 149 2 151 146 2 148
Asset w/offs 21 - 21 n/a n/a n/a
Total 170 2 172 146 2 148
Business days per quarter
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Q1 Q2 Q3 Q4 Full Year
2015 61 63 63 64 251
2016 64 64 63 60 251
2017 64 63 63 60 250
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 week days adjusted for significant holidays in our principal countries.
Exchange rates
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Q4/15 FY/15 Q1/16 Q2/16 Q3/16 Q4/16 FY/16
$:€
Period end 1.09 1.09 1.14 1.11 1.12 1.05 1.05
Average 1.10 1.11 1.10 1.13 1.12 1.08 1.11
$:£
Period end 1.48 1.48 1.42 1.33 1.30 1.23 1.23
Average 1.52 1.53 1.43 1.43 1.31 1.24 1.35