Supporting healthcare professionals for over 150 years

Supporting healthcare professionals for over 150 years

Full Year 2017 Results

Forward looking statements and non-IFRS measures

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.

Certain items included in ‘trading results’, such as trading profit, trading profit margin, tax rate on trading results, trading cash flow, trading profit to cash conversion ratio, EPSA and underlying growth are non-IFRS financial measures. The non-IFRS financial measures in this announcement are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS in our Fourth Quarter and Full Year 2017 Results announcement dated 8 February 2018

2

Chief Executive Officer Olivier Bohuon

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Full Year 2017 highlights

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Full Year 2017

$m 2016

$m

Revenue 4,765 4,669

Trading profit 1,048 1,020

Trading profit margin 22.0% 21.8%

Operating profit 934 801 Operating profit margin 19.6% 17.2%

EPS 87.8¢ 88.1¢

EPSA 94.5¢ 82.6¢

Comments • Revenues +3% underlying (+2% reported)

‐ Emerging Markets +12% ‐ Recon +3% with Knees +5% ‐ Advanced Wound Devices +13% ‐ Arthroscopic Enabling Tech. -3%

• Trading profit margin 22.0% (+20 bps) • Trading cash conversion 90% • EPSA 94.5¢ (+14%) • Full year dividend 35.0¢ (+14%)

14%

0%

-3%

1%

6%

4%

5%

-3%

6%

-5% 0% 5% 10% 15%

Q4 revenue of $1,278m; growth of 2% underlying

‘Other Est’ is Australia, Canada, Europe, Japan and New Zealand ‘Other Surgical’ includes ENT and robotics sales (excluding implant sales)

Emerging

Other Est

US

14%

-1%

1%

-5% 0% 5% 10% 15%

AWB AWD

AWC

Hips

Knees

Other surgical

Trauma & Extremities

Arthroscopic Enabling Tech

Sports Medicine Joint Repair

5 All revenue growth rates in the presentation are on an underlying basis and without adjustment for number of selling days, unless otherwise stated

Geographical growth Revenue split Product franchise growth

Sports Medicine, Trauma & OSB

Q4 revenue performance • Sports Medicine Joint Repair +6% ($173m) • Arthroscopic Enabling Technologies (AET) -3% ($167m) • Trauma & Extremities +5% ($128m) • Other Surgical Businesses* +4% ($51m)

Commentary

• Rotation Medical acquisition completed • AET impacted by continued softness in resection • 2018 focus: gradual return to growth in AET

* ‘Other Surgical Businesses’ includes ENT and robotics sales (excluding implant sales) 6

EVOS™ SMALL

Plating System

Reconstruction

Q4 revenue performance • Knees: global +6%, US +4%, OUS +9% ($266m) • Hips: global +1%, US +1%, OUS +1% ($157m)

Commentary • Knees growing more than twice the market rate • Hip momentum improving • 2018 focus: full commercial launch of JOURNEY II XR in the US

JOURNEY ™ II XR Bi-Cruciate Retaining Knee System

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Advanced Wound Management

Q4 revenue performance • Advanced Wound Care -3% ($187m) • Advanced Wound Bioactives 0% ($97m) • Advanced Wound Devices +14% ($52m)

Commentary • AWC: sequentially weakening UK market • AWD: continued double digit PICO™ growth • 2018 focus: drive disease-based selling in Europe

ALLEVYN™ LIFE non-bordered

Foam dressing range

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Innovation: Launching differentiated products

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PICO™ 7 Single Use Negative Pressure

Wound Therapy

• available in Europe* and Australia • dressing-full indicator** • enhanced vacuum and leak management** • 25% quieter** • patient-friendly user interface and belt clip**

* Not yet available in UK ** Improvements compared to PICO

ALLEVYN™ LIFE Non-bordered EVOS™ SMALL

REDAPT™ Monolithic Sleeved Stem

JOURNEY™ II XR

LENS™ Mobile App

NAVIO™ TKA

WEREWOLF™ / FLOW 50

Starting 2018 with PICO 7 Important 2017 launches

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33

50+

0

10

20

30

40

50

60

2016 2017 2018E

Number of publications

Products supported by increasing clinical evidence

10

TRIGEN INTERTAN

eCAP

33 publications in 2017 High impact evidence New evidence communicated has demonstrable impact on sales

Pressure Injury Prevention Randomised Clinical Trials (RCT): • 71% reduction in the onset of sacral

pressure ulcers when adding ALLEVYN LIFE to standard preventative protocol1

• Patients treated with Leaf patient monitoring system are 73% less likely to develop a pressure injury2

Surgical Site Complication (SSC) Meta-Analysis: • 60 articles reviewed, 10 RCTs, 1,863

patients, concluding that the prophylactic application of PICO reduces incidence of SSC by 58%3

(1) Forni C, D’Alessandro F, Gallerani P, et al. Effectiveness of using a new poly-urethane foam multi-layer dressing in the sacral area to prevent the onset of pressure ulcer in the elderly with hip fractures: A pragmatic randomised con-trolled trial. Int Wound J. 2018;1–8. (2) Pickham, D. et al. Effect of a wearable patient sensor on care delivery for preventing pressure injuries in acutely ill adults: A pragmatic randomized clinical trial (LS-HAPI study). International Journal of Nursing Studies 80 (2018) 12-19. (3) Strugala V and Martin R. Meta-analysis of comparative trials evaluating a prophylactic single-use negative pressure wound therapy system for the prevention of surgical site complications. Surgical Infections Vol 18, Number 00 (2017). DOI: 10.1089/sur.2017.156.

Chief Financial Officer Graham Baker

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Full year trading income statement

Full Year

2017 $m

2016 $m

Revenue 4,765 4,669

Cost of goods sold (1,248) (1,272)

Gross profit 3,517 3,397

Gross profit margin 73.8% 72.8%

Selling, general and admin (2,246) (2,147)

Research and development (223) (230)

Trading profit 1,048 1,020

Trading profit margin 22.0% 21.8%

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3% underlying growth

+20bps growth

Full year EPSA and EPS

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Full Year

2017 $m

2016 $m Growth

Trading profit 1,048 1,020 3%

Net interest payable (51) (46)

Other finance costs (7) (11)

Share of results from associate 6 2

Adjusted profit before tax 996 965 3%

Taxation on trading result (170) (230)

Adjusted attributable profit 826 735 12%

Weighted average number of shares (m) 874 890

Adjusted earnings per share ("EPSA") 94.5¢ 82.6¢ 14%

Earnings per share ("EPS") 87.8¢ 88.1¢ 0%

2017 tax rate*: 17% including one-off

credits

* Tax rate on trading result

Full year free cash flow

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Full Year 2017

$m 2016

$m Trading profit 1,048 1,020

Share based payment 31 27

Depreciation and amortisation 320 300

Capital expenditure (376) (392)

Movements in working capital and other (83) (190)

Trading cash flow 940 765

Trading cash conversion 90% 75%

Restructuring, acquisition, legal & other (44) (122)

Net interest paid (48) (45)

Taxation paid (135) (141)

Free cash flow 713 457

Net debt and capital allocation

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1 Reinvest for organic growth

2 3 Return excess to shareholders

Progressive dividend policy

Acquisitions in line with strategy

1,550

1,281

376

269

159 16

1,089

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

31 Dec-16 Net Debt

FCF pre capex Capex Dividends Acquisitions Other 31 Dec-17Net Debt

2018 Guidance

(1) Based on exchanges rates prevailing on 2nd February 2018. (2) Tax rate on trading result

Sales growth: Underlying: 3% to 4%

Reported(1): around 7% to 8%

Trading profit margin:

30-70bp improvement

Tax rate(2):

20-21%

(previously: around 25%)

Underlying sales growth:

Consistent growth above market

Trading profit margin:

Ongoing improvement

Tax rate(2):

20-21%

(previously: around 25%)

2018

Medium - term

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Business review

Manufacturing, Warehousing and Distribution • simplify and streamline • meet future volume demand • maintain focus on quality

General & Admin expenses • leverage investments in

systems and functions • move closer to best-in-class

expense ratios

Commercial effectiveness • increase efficiency through

sales force effectiveness • maintain customer focus

with dedicated sales teams

Outcome of review to be announced with full year results in February

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Increase efficiency through sales force effectiveness while maintaining customer focus with dedicated sales teams:

• enhance segmentation and targeting • increase customer facing time by reducing/simplifying non-selling tasks • optimize resource allocation

Leverage investments in systems and functions to improve efficiency:

• expansion of our Global Business Services platform to accommodate relocations and insourcing of services

• further consolidation, relocation and standardisation of Global Functions • rationalisation of legacy IT systems and ‘cloud-first’ strategy

Simplify and streamline, while meeting future volume demand and maintaining focus on quality:

• rationalisation of manufacturing footprint

• multiple initiatives to simplify and optimise Supply Chain

Accelerating Performance and Execution (APEX)

Manufacturing, Warehousing & Distribution

General & Administrative expenses

Commercial effectiveness

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Summary of APEX financial guidance

• Benefits of $160m p.a. by 2022

• Total one-off costs (mainly cash) up to $240m (c.150% of annualised run-rate benefits)

• Period: 2018 – 2022, with around 75% of benefits and >75% of costs by 2020

• Benefits underpin medium-term margin guidance

• CAPEX ratio around 8-9% of sales expected during the first two years

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2018 2020 2022

Illustrative phasing of annualised benefits and one-off charges

Annualised benefit One-off charges (cumulative)

India Poland Costa Rica

Our Global Business Services (GBS) organisation provides transactional support across all functional areas from three strategic low cost hubs enabling

optimisation of our Global Functions

• process standardisation

• process automation

• low cost hubs

• insourcing of services currently provided by third parties

G&A efficiencies mainly from our GBS function

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Our Global Business Services (GBS) organisation Key characteristics of GBS

President Global Operations Matt Stober

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Our Global Operations function

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QUALITY

DELIVERY COST

• manufacturing

• direct procurement

• supply chain & logistics

• engineering development

• quality assurance

• global regulatory affairs

• almost 8,000 people

• 20 manufacturing sites

• >70 distribution centres

• >70m units per year

Scope of Global Operations Our framework Our scale

PEOPLE

SAFETY

2017 and before: focus on improving our base

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2012 2013 2014 2015 2016 2017

Labor Cost / Hr Overhead Cost / Hr Material Cost / Hr

Backorder levels Manufacturing cost structure trend

*Note: Back Orders are indexed to 100 with January 2016 as the base. *Note: Cost Structure is indexed with 2012 as the base.

Dec

201

7

Jan

2017

Jan

2016

More than 80% reduction

Source: Internal estimates.

Today: a legacy manufacturing footprint

Suzhou (CN)

Beijing (CN)

Hull (UK)

Warwick (UK)

Aarau (CH)

Curacao Costa Rica

2 x Plymouth (US)

2 x Memphis (US)

Oklahoma City (US)

Forth Worth (US)

St Elmo (US)

Mansfield (US)

Moscow (RU)

Tuttlingen (DE)

Melbourne (AU)

Devrukh (IN)

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>200,000 square feet 100,000 to 200,00 square feet <100,000 square feet

Irvine (US)

Our APEX programme will reduce complexity

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12

4

4

less than 100

100 to 200

more than 200

In ‘000 square feet • scale and scalability of sites

• future expected volume growth

• proximity to customers

• low vs. high cost location

• specialisation, expertise and talent

• scope for and degree of automation

• maintain supply and quality throughout process

• regulatory constraints

• rationalisation of sites / site disposals

• transfer of production and expansion of selected sites

• adding new capacity

• insourcing and outsourcing of the right processes

Current manufacturing sites by size Considerations APEX actions

• Reconfigure networks to leverage scale and minimize freight costs

• Rationalise vendors

• Improve processes to enable centralisation

• Minimise border duties and complexities

1

2

3

4

Improving supply chain efficiency

• consolidation of warehousing and distribution network

• rationalisation and selective insourcing of 3rd party distributor network

• implementation of automation technology

• optimisation of freight modes and lanes

• standardisation of customer service and planning processes via software solutions

• relocation of select roles to Global Business Services (GBS) platform

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Supply Chain initiative areas Examples of initiatives from which we expect savings

Chief Executive Officer Olivier Bohuon

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Next steps What we have done

Improving our commercial effectiveness

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• standardised global sales force metrics dashboards

• redesigned salesforce incentive schemes to better align with commercial objectives

• initiatives to optimise customer facing time – e.g. via online training

• identified and shared best practices across markets and regions – e.g. by building and leveraging internal expert network

• optimize resource allocation to increase return on commercial expenditures

• enhance segmentation and targeting

• increase rep focus on selling (vs. logistics or servicing) during customer interactions

• further sales force excellence best practices

Continuously improving

2016 and before

Building strong platforms

Delivering on commitments

2017

Continuously improving

2018 and beyond

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Questions

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Appendices

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2018 technical guidance

Guidance February 2018

Foreign exchange and other revenue impact

Impact of translational FX* on revenue +3.5%

Acquisition impact on revenue +0.3%

Exceptional items

Restructuring costs c. $100m

Acquisition and integration costs c. $5m

European Medical Device Regulation (MDR) compliance costs $20m-$30m

Other

Amortisation of acquisition intangibles c. $110m

Income from associates c. $5m

Net interest $52m - $57m

Other finance costs c. $15m

Tax rate on Trading result 20-21%

* Based on the foreign exchange rates prevailing on 2nd February 2018 32

Full Year IFRS reconciliation

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Full Year 2017

$m 2016

$m Growth

Trading profit 1,048 1,020 3%

Trading margin 22.0% 21.8% +20bps

Acquisition related costs 10 (9)

Restructuring and rationalisation - (62)

Amortisation of acquisition intangibles (140) (178)

Legal and other items 16 30

IFRS Operating profit 934 801 17%

Operating margin 19.6% 17.2% +240bps

Franchise revenue analysis

2016 2017

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 4 1 3 4 3 2 2 1,926 3

Sports Medicine Joint Repair 11 10 8 5 8 7 5 8 6 627 6

Arthroscopic Enabling Technologies 4 4 2 (3) 2 (1) (4) (3) (3) 615 (3)

Trauma & Extremities (7) (6) 1 (4) (4) 5 7 (2) 5 495 4

Other Surgical Businesses 19 14 12 15 15 7 11 6 4 189 7

Reconstruction 7 3 2 (2) 2 3 2 4 4 1,583 3

Knee Implants 9 5 4 0 4 5 4 6 6 984 5

Hip Implants 4 0 0 (6) (1) 0 (1) 1 1 599 0

Advanced Wound Management 0 (3) (1) (1) (1) 1 3 2 0 1,256 2

Advanced Wound Care 0 (7) (2) (3) (3) 1 2 (1) (3) 720 0

Advanced Wound Bioactives (4) 4 (3) 1 0 (8) 0 7 0 342 0

Advanced Wound Devices 11 1 5 2 5 16 14 8 14 194 13

Group 4 2 2 (1) 2 3 3 3 2 4,765 3

All revenue growth rates are on an underlying basis and without adjustment for number of selling days 34

Regional revenue analysis

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2016 2017

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 8 4 2 0 3 1 2 2 1 2,306 2

Other Established Markets 4 1 0 (3) 0 1 (1) 0 (1) 1,678 0

Established Markets 6 3 1 (1) 2 1 1 1 0 3,984 1

Emerging Markets (6) (2) 6 3 0 12 13 9 14 781 12

Group 4 2 2 (1) 2 3 3 3 2 4,765 3

‘Other Established Markets’ is Australia, Canada, Europe, Japan and New Zealand. All revenue growth rates are on an underlying basis and without adjustment for number of selling days

Trading days per quarter

• 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.

Q1 Q2 Q3 Q4 Full Year

2016 64 64 63 60 251

2017 64 63 63 60 250

2018 63 64 63 61 251

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