First Half 2016 Results
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 forwardlooking 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
Julie Brown Chief Financial Officer
First Half 2016 highlights Key Comments
First Half
Revenue
Trading profit
Underlying growth
2016
2015
$m
$m
2,328
2,272
3
483
512
-3
%
• Revenues +3% underlying (+2% reported) ‐ Knee Implants +7% ‐ Sports Med Joint Repair +10% ‐ US +6% ‐ Emerging markets mid teens excl. China and Gulf states • Successful BlueBelt integration • Trading profit margin 20.8%
Trading profit margin
20.8%
22.5%
EPSA
37.4¢
39.1¢
• EPSA 37.4¢ (-4% reported, -2% CER) • Interim dividend 12.3¢ (up +4%)
4
Mike Frazzette Chief Commercial Officer
Q2 revenue growth of 2% underlying Geographical growth
Revenue split
Product franchise growth
Sports Medicine Joint Repair
4% US
10%
Arthroscopic Enabling Tech Trauma & Extremities Other Surgical
4%
-6% 14% 5%
Knees
1%
Est OUS
Hips
AWC
0% -7% 4%
-2%
Emerging
AWB
1%
AWD
-4%
-2%
0%
2%
4%
6%
Underlying change (%) Note: ‘Est OUS’ is Australia, Canada, Europe, Japan and New Zealand
-10%
0%
10%
20%
Underlying change (%)
6
China – improvements expected in H2 Smith & Nephew sales trajectory in China
2014 FY
2015 Q1
Q2
2016 Q3
Q4
Q1
Q2
H2e
Reconstruction Sports Medicine
Trauma Advanced Wound Management 7
Sports Medicine, Trauma & OSB • Q2 Revenue performance ‐
Sports Medicine Joint Repair +10% ($147m)
‐
Arthroscopic Enabling Technologies (AET) +4% ($160m)
‐
Trauma & Extremities -6% ($119m)
‐
Other Surgical Businesses* +14% ($61m)
• Commentary ‐
strong growth in Sports Medicine Joint Repair led by Shoulder portfolio
‐
Trauma continues to be adversely impacted by Gulf States and China headwinds
‐
ENT generating good growth
ULTRABUTTON◊ Adjustable Fixation Device
8 * ‘Other Surgical Businesses’ includes ENT, Gynaecology and robotics sales (excluding implant sales)
ArthroCare – two year update strengthened Sports Medicine business integration completed ahead of time $65m cost synergies delivered accelerated growth in Established Markets successful product launches ‐
such as our Rotator Cuff Repair Solutions
strong and exciting combined pipeline ‐
including WEREWOLF◊ and LENS◊
sales synergies coming through ‐
e.g. faster Shoulder growth than in standalone businesses 9
Reconstruction • Q2 Revenue performance ‐
Knees: global +5%*, US +4%*, OUS +6%* $238m)
‐
Hips: global 0%, US +1%, OUS 0% ($153m)
• Commentary ‐
continued growth in global Knees
‐
JOURNEY II XR ‘live surgeries’ attract strong interest
‐
Hips growth of +1% excluding BHR
* Excludes the effect of ZUK product acquisition
JOURNEY ◊ II XR Bi-Cruciate Retaining Knee System
10
Syncera • Interest in Syncera continues to exceed expectations ‐
CJR is stimulating additional interest
‐
but conservative market segment
• Good engagement with providers on future models of healthcare • Broadening remit of Syncera team ‐
pure Syncera solutions
‐
unique supporting technologies, risk-sharing models, consultancy
Not all Models are Different Most are the same. One is unique.
11
Blue Belt – six month update 6 months post acquisition:
successful integration
strong operational performance
expansion of indications: approval of Total Knee
first Total Knee case on NAVIO
full commercial launch of Total Knee on-track for 2017
Expecting >50% sales growth for full year 12
Advanced Wound Management • Q2 Revenue performance ‐
Advanced Wound Care -7% ($177m)
‐
Advanced Wound Bioactives +4% ($93m)
‐
Advanced Wound Devices +1% ($43m)
• Commentary ‐
‐
AWC trend impacted by ‐
previously indicated destocking in China
‐
adapting to changing market dynamics in Europe
ACTICOAT◊ Flex Antimicrobial Barrier Dressing
14% AWD growth in Established Markets
13
Julie Brown Chief Financial Officer
H1 and Q2 Revenue growth H1 2016(1)
Q2 2016(1)
Growth %
Growth %
Underlying
3%
Underlying
2%
Acquisitions
1%
Acquisitions
1%
CER(2)
4%
CER(2)
3%
Currency
-1%
Currency Reported
(1) (2)
-2% 2%
Reported
H1 comprises 128 days (2015 – 124 days) Q2 2016 comprises 64 trading days (2015 – 63 trading days) Constant exchange rates
2%
15
H1 Trading income statement 2016
2015
$m
$m
2,328
2,272
Cost of goods sold
(632)
(566)
Gross profit
1,696
1,706
Gross profit margin*
72.8%
75.1%
Selling, general and admin
(1,100)
(1,084)
Research and development
(113)
(110)
Trading profit
483
512
20.8%
22.5%
Revenue
Trading profit margin
16 * includes the effect of transactional exchange impacting year-on-year margin by around 190bps
H1 Trading margin drivers H1 Trading margin history
21.8%
Selected H1 2016 margin drivers
Transactional exchange ~190 bps in Gross Profit
22.5% 20.8%
Margin impact of sales decline in China & Gulf States Blue Belt investment Group Optimisation & acquisition benefits
2014
2015
2016 17
H1 IFRS profit adjusting items 2016
2015
$m
$m
483
512
(6)
(13)
Restructuring and rationalisation
(35)
(19)
Amortisation of acquisition intangibles
(67)
(78)
Legal and other items
(18)
37
IFRS Operating profit
357
439
Trading profit
Acquisition related costs
18
H1 EPSA and EPS
Growth 2016
2015
$m
$m
Trading profit
483
512
Net interest payable
(24)
(21)
Other finance costs
(6)
(7)
-
(3)
Adjusted profit before tax
453
481
Taxation
(119)
(131)
Adjusted attributable profit
334
350
Number of shares – million
894
894
Adjusted earnings per share ("EPSA")
37.4¢
39.1¢
Earnings per share ("EPS")
27.0¢
33.0¢
Share of results from associate
Reported
-6%
CER
-4%
Underlying
-3%
Tax rate 26.3%
-4%
-2%
19
H1 Free cash flow 2016
2015
$m
$m
483
512
14
13
147
148
Capital expenditure
(174)
(161)
Movements in working capital and provisions
(215)
(130)
Trading cash flow
255
382
Trading cash conversion
53%
75%
Restructuring, rationalisation, acquisition & other
(49)
36
Operating cash flow
206
418
Net interest paid
(24)
(17)
Taxation paid
(87)
(72)
95
329
Trading profit Share based payment Depreciation and amortisation
Free cash flow
2015 includes $99m cash receipt on Arthrex legal claim
20
H1 Cash flow and capital allocation Reinvest for organic growth
$m
1
0 (200) (400) (600) (800) (1,000) (1,200) (1,400) (1,600) (1,800)
(1,361)
Dec-15
269
FCF pre capex
(174)
Capex
Progressive dividend policy
2
(170)
Acquisition in line with strategy
3
Return excess to shareholders
4
-
(214) Dividends Acquisitions Share buy back
(45)
Other
(1,695) Jun-16 Net Debt
21
Gynaecology divestment • Reminder of announcement in May ‐
agreement to divest Gynaecology business for $350m gross proceeds
‐
expected completion in early August
‐
launch of related $300m share buyback programme
‐
EPSA impact broadly neutral in 2017, reduction of less than 1.0¢ in 2016
‐
H2 trading margin adversely impacted by 20bps
22
Guidance
Updated outlook • H2 sales ‐
H1 trends continue in Sports Medicine and Reconstruction
‐
partial improvements in China; Gulf States remain challenging
‐
four fewer sales days in H2
• Translational foreign exchange revenue impact of 0% in H2 and -1% in FY • Full year margin ‐
Guidance relating to transactional foreign exchange and BlueBelt unchanged (-180 bps)
‐
We expect the slower than anticipated sales growth, mainly in the Emerging Markets, to impact H2 margin, as will the divestment of GYN
‐
H2 trading margin will be stronger than H1
23
Summary • H1: continuing trends ‐
trends in most of our franchises continue
‐
innovative products and technologies drive growth
• Excellent product pipeline ‐
WEREWOLF◊ COBLATION System, LENS◊ Surgical Imaging System, JOURNEY◊ II XR BiCruciate Retaining Knee System, REDAPT◊ Revision System, RENASYS◊ TOUCH Negative Pressure Wound Therapy
24
Questions
Appendices
2016 Technical guidance (unchanged) Guidance
Full year
Restructuring costs
c. $50m
Acquisition and integration costs
c. $10m
Amortisation of acquisition intangibles
c. $140m
Income from associates
Slightly negative
Net interest payable
c. $45m
Other finance costs
c. $10m
Tax rate on Trading result
26.5% or slightly lower
27
Franchise revenue analysis 2015 Q1
Q2
Q3
2016 Q4
Full Year
Growth Growth Growth Growth Growth
Q1
Q2
Growth Revenue Growth
%
%
%
%
%
%
$m
%
5
4
2
5
4
5
487
4
9
7
4
9
7
11
147
10
(2)
1
(2)
3
-
4
160
4
5
2
2
-
2
(7)
119
(6)
Other Surgical Businesses*
11
7
10
13
10
19
61
14
Reconstruction
1
4
3
4
3
7
391
3
Knee Implants
2
7
6
6
5
9
238
5
Hip Implants
(1)
1
(2)
1
-
4
153
-
Sports Medicine, Trauma & OSB Sports Medicine Joint Repair Arthroscopic Enabling Technologies Trauma & Extremities
Advanced Wound Management Advanced Wound Care
1
7
6
8
6
-
313
(3)
9
12
6
4
8
-
177
(7)
Advanced Wound Bioactives
5
6
2
16
7
(4)
93
4
(27)
(9)
17
14
(3)
11
43
1
3
5
4
5
4
4
1,191
2
Advanced Wound Devices Group
All revenue growth rates are on an underlying basis * ‘Other Surgical Businesses’ includes ENT, Gynaecology and robotics sales (excluding implant sales)
28
Regional revenue analysis 2015 Q1
Q2
Q3
2016 Q4
Full Year
Growth Growth Growth Growth Growth
Q1
Q2
Growth Revenue Growth
%
%
%
%
%
%
$m
%
1
4
4
9
5
8
582
4
(2)
3
1
2
1
4
429
1
-
3
3
6
3
6
1,011
3
Emerging Markets
22
14
8
2
11
(6)
180
(2)
Group
3
5
4
5
4
4
1,191
2
Geographic regions US Other Established Markets
Established Markets
‘Other Established Markets’ is Australia, Canada, Europe, Japan and New Zealand. All revenue growth rates are on an underlying basis
29
Analysis of restructuring costs P&L Charge
Cash Spend
Previous Total to Date
H1
Total to date
Previous Total to Date
H1
Total to date
Group Optimisation Plan
$m
$m
$m
$m
$m
$m
Cash costs
105
34
139
84
36
120
-
-
n/a
n/a
n/a
Asset write-offs
-
Total
105
34
139
84
36
120
Structural Efficiency Programme
$m
$m
$m
$m
$m
$m
Cash costs
149
1
150
146
1
147
Asset write-offs
21
-
21
n/a
n/a
n/a
Total
170
1
171
146
1
147
Of the $34m total charged in the period, all $34m are reflected in ‘selling, general and administrative expenses’ and nothing in ‘cost of goods sold’ in the Group Income Statement. Structural Efficiency target of $160m cash costs and $40m asset write-offs. Group Optimisation target of $150m total costs.
30
Business days per quarter Q1
Q2
Q3
Q4
Full Year
2015
61
63
63
64
251
2016
64
64
63
60
251
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. 31
Exchange rates Q2/15
FY/15
Q1/16
Q2/16
Period end
1.12
1.09
1.14
1.11
Average
1.11
1.11
1.10
1.13
Period end
1.57
1.48
1.42
1.33
Average
1.53
1.53
1.43
1.43
$:€
$:£
32
