Full Year 2016 Results 1
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. 2
Olivier Bohuon Chief Executive Officer
Full Year 2016 highlights Full Year 2016 2015 $m $m Underlying growth 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% 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 ] EPS 88.1 45.9 EPSA 82.6 85.1 4
Q4 revenue growth of -1% underlying* Geographical growth Revenue split Product franchise growth Sports Medicine Joint Repair 5% 0% US Arthroscopic Enabling Tech Trauma & Extremities Other Surgical -3% -4% 15% Knees 0% -3% Est OUS Hips AWC Emerging AWB 3% AWD -6% -3% 1% 2% -5% 0% 5% -10% 0% 10% 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) 5
Sports Medicine, Trauma & OSB 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 LENS Surgical Imaging System * 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) 6
Reconstruction 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 7
Advanced Wound Management 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 8
Ian Melling SVP Group Finance 9
Q4 and Full Year Revenue growth Q4 2016 (1) FY 2016 (1) Growth % Growth % Underlying -1% Underlying 2% Acquisitions / Disposals -1% Acquisitions / Disposals 0% Currency -1% Currency -1% Reported -3% Reported 1% (1) Q4 2016 comprises 60 trading days (2015 64 trading days). Full year comprises 251 days (2015 251 days) 10
Full Year Financial Highlights 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 (1) Non-GAAP measure: Reconciled to the relevant GAAP measure in the Fourth Quarter Trading and Full Year 2016 Results announcement 11
Full year trading income statement 12
Group trading margin 2016 Year-on-year trading margin movement Key trading margin drivers 23.7% 21.8% Exchange and price Robotic Technologies and GYN disposal Loss of leverage from lower sales growth Group Optimisation 2015 2016 13
Full year IFRS profit adjusting items 14
Full year EPSA and EPS Tax rate* 2016: 23.8% 2015: 26.8% * Tax rate on Trading results of 23.8% in 2016 includes a one-off benefit following agreement with IRS 15
Full year free cash flow 16
$m Cash flow and capital allocation 0 Reinvest for organic growth Progressive dividend policy Acquisitions & disposals Return excess to shareholders 1 2 3 4 (300) (600) (900) (1,200) (1,500) (1,800) (1,361) Dec-15 Net Debt 849 (392) (279) FCF pre capex Capex Dividends BlueBelt and GYN 9 (300) Share buy back (76) Other (1,550) Dec-16 Net Debt 17
Olivier Bohuon Chief Executive Officer
Strategic priorities and rebalancing 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% Improving Strengthening Creating Proportion of Revenue Higher Growth 65% Lower Growth 35% * Excluding Clinical Therapies 19
2011-2016: our journey here Organic investments Acquisitions 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 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 20
2017 2018: driving improved execution 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 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 21
Innovation remains at the heart of Smith & Nephew Driving innovation Strong product lines 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 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 22
Our 2017 guidance and medium-term outlook 2017 Sales growth: Reported (1) : 1.2% to 2.2% Underlying: 3% to 4% Trading profit margin: 20-70bp improvement Tax rate (2) : Around 26% Medium - term 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 (1) Based on exchanges rates prevailing on 31 st January 2017. (2) Tax rate on trading result 23
A stronger Smith & Nephew 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 24
Appendices
Trading income statement - half and full year 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% 26
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 27
EPSA and EPS 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 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 28
Free cash flow 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 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 29
Franchise revenue analysis 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 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) 30
Regional revenue analysis 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 Other Established Markets is Australia, Canada, Europe, Japan and New Zealand. All revenue growth rates are on an underlying basis 31
2017 Technical guidance 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 31 st January 2017 32
Analysis of restructuring costs Group Optimisation Plan Previous Total to Date P&L Charge FY Total to date Previous Total to Date Cash Spend FY Total to date $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 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. 33
Business days per quarter 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. 34
Exchange rates 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 35