Smith Nephew Forward looking statements and non-IFRS measures ◊Trademark of Smith+Nephew. Certain marks registered in US Patent and Trademark Office. Mid c -single-digit growth in Orthopaedics and Sports Medicine & ENT, partially offset by expected negative growth in Advanced Wound Bioactives Q1 2024 Revenue Performance Growth by Business Unit* Sports Med & ENT $441m • Underlying revenue growth +2.9%, +2.2% reported Growth by Region* *Growth rates are versus Q1 2023. Business Unit and Regional growth figure ...

Strategic Report [Our performance](index=2&type=section&id=Our%20performance) The company achieved **7.2% underlying revenue growth** to **$5,549 million** in 2023, with trading profit increasing by **7.6%** and margin improving by **20 basis points** 2023 Key Performance Indicators | Metric | 2023 Value | Change | | :--- | :--- | :--- | | **Group Revenue** | $5,549 million | +7.2% (Underlying) | | **Operating Profit** | $425 million | -5.4% | | **Trading Profit** | $970 million | +7.6% | | **Operating Profit Margin** | 7.7% | -90 basis points | | **Trading Profit Margin** | 17.5% | +20 basis points | | **Earnings Per Share (EPS)** | 30.2 cents | +1.3% | | **Adjusted EPS (EPSA)** | 82.8 cents | +18.2% | | **Cash Generated from Operations** | $829 million | +42.7% | | **Trading Cash Flow** | $635 million | +43.0% | | **R&D Investment** | $339 million | -1.8% | | **Dividend Per Share** | 37.5 cents | Unchanged | | **Return on Invested Capital (ROIC)** | 5.9% | -70 basis points | [Who we are](index=4&type=section&id=Who%20we%20are) Smith+Nephew is a leading medical technology company operating through three global business units, focusing on R&D, medical education, and resilient manufacturing - The company operates through three global business units[16](index=16&type=chunk) Revenue Contribution by Business Unit (2023) | Business Unit | % of Group Revenue | | :--- | :--- | | Orthopaedics | 40% | | Sports Medicine & ENT | 31% | | Advanced Wound Management | 29% | - In 2023, the company invested **$339 million** in R&D and launched **20 new products**[11](index=11&type=chunk) - The company's ESG strategy focuses on three pillars: **People**, **Planet**, and **Products**[13](index=13&type=chunk)[14](index=14&type=chunk) [Chair's statement](index=6&type=section&id=Chair%27s%20statement) The Chair highlights strong **7.2% underlying revenue growth** and **7.6% trading profit increase** in 2023, emphasizing the 12-Point Plan and proposed Remuneration Policy changes for US executives - The Board is focused on implementing the 12-Point Plan developed by CEO Deepak Nath to create sustainable long-term value and address the company's underperformance in recent years[27](index=27&type=chunk) - A major governance focus is the proposal to adjust the Remuneration Policy for US-based executives to align with US pay practices, as over **50%** of the company's revenues and the majority of its senior operational managers are in the US[32](index=32&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) 2023 Performance Highlights | Metric | Value | Change | | :--- | :--- | :--- | | Revenue Growth (Reported) | 6.4% | - | | Revenue Growth (Underlying) | 7.2% | - | | Trading Profit Growth (Reported) | 7.6% | - | | Operating Profit | $425 million | - | | Operating Profit Margin | 7.7% | - | - The Board recommends a final dividend of **23.1 cents** per share, resulting in a total dividend of **37.5 cents** per share for 2023, unchanged from 2022[44](index=44&type=chunk) [Chief Executive Officer's review](index=10&type=section&id=Chief%20Executive%20Officer%27s%20review) CEO Deepak Nath reports strong 2023 performance with **7.2% underlying revenue growth** and improved **17.5% trading profit margin**, driven by the successful 12-Point Plan execution and innovation 2023 Financial Performance | Metric | 2023 Value | Note | | :--- | :--- | :--- | | Group Revenue | $5,549 million | 7.2% underlying growth | | Operating Profit | $425 million | - | | Operating Profit Margin | 7.7% | - | | Trading Profit | $970 million | +7.6% reported growth | | Trading Profit Margin | 17.5% | +20 basis points vs. prior year | - The 12-Point Plan, announced in July 2022, is on track and focuses on three core areas: - **Fixing Orthopaedics**: Regaining momentum in hip/knee implants, robotics, and trauma - **Improving Productivity**: Supporting trading profit margin expansion - **Accelerating Growth**: Building on strong performance in Advanced Wound Management and Sports Medicine & ENT[51](index=51&type=chunk)[52](index=52&type=chunk) - Solid progress was made in fixing Orthopaedics, with full-year underlying growth of **5.7%**, a significant improvement from **1.9%** in the prior year; product availability issues have been largely resolved, closing over **95%** of the gap to target[54](index=54&type=chunk)[55](55&type=chunk) - Productivity improvements contributed approximately **160 basis points** to the 2023 trading profit margin through actions in pricing, procurement, and manufacturing optimization, including the announced closure of two sites in China and Germany[60](index=60&type=chunk)[62](index=62&type=chunk) - Innovation is a key growth driver, with **20 new products** launched in 2023; the company also announced the acquisition of CartiHeal, developer of a novel cartilage regeneration technology[67](index=67&type=chunk)[69](index=69&type=chunk) [Our marketplace](index=16&type=section&id=Our%20marketplace) Smith+Nephew operates in a **$45 billion** global medical technology market, driven by demographics, technology, and decentralization, facing cost pressures and high regulation - The company competes in global markets worth around **$45 billion** per year[84](index=84&type=chunk) - Long-term growth is supported by demographic trends (aging population), lifestyle conditions (diabetes, obesity), technological advancements, and increasing healthcare demand in emerging markets[85](index=85&type=chunk)[86](index=86&type=chunk)[87](index=87&type=chunk) - A significant market trend is the decentralization of care, with more procedures moving to outpatient settings like Ambulatory Surgery Centers (ASCs), especially in the US[88](index=88&type=chunk) - The industry is characterized by government pressure to reduce healthcare costs, leading to price sensitivity and policies like volume-based procurement in markets such as China[90](index=90&type=chunk) - The medical device sector is highly regulated, creating a high barrier to entry and requiring strict compliance with safety, efficacy, and quality standards[91](index=91&type=chunk)[92](index=92&type=chunk) [Our business model](index=18&type=section&id=Our%20business%20model) Smith+Nephew's business model leverages financial strength, culture, R&D, global operations, and sustainability to create value through innovative technology and customer-centric go-to-market strategies - The company's value creation is based on five key inputs: - **Financial**: A strong balance sheet and capital allocation framework - **People**: A culture based on Care, Courage, and Collaboration - **R&D**: Prioritized investment in new products and technologies - **Global Operations**: Resilient manufacturing and supply chains - **Sustainability**: Addressing long-term needs of stakeholders and the environment[99](index=99&type=chunk) - The process of creating value involves several core activities: - **Innovative Technology**: Offering a differentiated portfolio, including digital and robotic technologies - **Product Development**: A rigorous R&D model supplemented by strategic acquisitions - **Go to Market**: Global business units driving product strategy and marketing - **Expertise and Support**: A specialized sales force providing clinical and logistical support - **Medical Education**: The Smith+Nephew Academy supports the safe and effective use of products[103](index=103&type=chunk)[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk)[108](index=108&type=chunk) [Key Performance Indicators](index=20&type=section&id=Key%20Performance%20Indicators) Smith+Nephew tracks **7.2% underlying revenue growth**, **17.5% trading profit margin**, and **5.9% ROIC** alongside non-financial KPIs like R&D investment, new product launches, and ESG progress Financial KPIs (2023) | KPI | 2023 Value | Change vs. 2022 | | :--- | :--- | :--- | | Underlying Revenue Growth | 7.2% | +250 basis points | | Operating Profit Margin | 7.7% | -90 basis points | | Trading Profit Margin | 17.5% | +20 basis points | | Return on Invested Capital (ROIC) | 5.9% | -70 basis points | | Dividend Per Share | 37.5 cents | Unchanged | - The 12-Point Plan is reported to be approximately **65%** complete against its two-year milestones[118](index=118&type=chunk) Non-Financial KPIs (2023) | KPI | 2023 Value | | :--- | :--- | | R&D Investment | $339 million | | New Product Launches | 20 | | Employee Engagement Score | 4.20 (83rd percentile) | | Scope 1 & 2 GHG Reduction (since 2019) | 40% | | Waste to Landfill Reduction (since 2019) | 30% | | Product Donations | $5.1 million | [Financial review](index=20&type=section&id=Financial%20review) In 2023, Smith+Nephew achieved **$5,549 million** revenue with **7.2% underlying growth** and **$970 million** trading profit, forecasting **5.0-6.0% underlying revenue growth** and at least **18.0% trading profit margin** for 2024 2023 Group Performance Summary | Metric | 2023 ($ million) | 2022 ($ million) | Change | | :--- | :--- | :--- | :--- | | Revenue | 5,549 | 5,215 | +6.4% | | Operating profit | 425 | 450 | -5.6% | | Trading profit | 970 | 901 | +7.6% | | Profit before tax | 290 | 235 | +23.4% | | Basic EPS | 30.2 cents | 25.5 cents | +18.4% | | Adjusted EPS (EPSA) | 82.8 cents | 81.8 cents | +1.2% | - The company wrote off **$109 million** in assets and liabilities related to the discontinued Engage Surgical business, which was acquired in 2022[132](index=132&type=chunk) - Net debt (excluding leases) increased by **$238 million** to **$2,577 million** at year-end, influenced by dividend payments and metal-on-metal settlements[154](index=154&type=chunk) 2024 Outlook | Metric | 2024 Guidance | | :--- | :--- | | Underlying Revenue Growth | 5.0% to 6.0% | | Trading Profit Margin | At least 18.0% | | Tax Rate on Trading Results | 19% to 20% | - The company maintains its midterm target of consistently delivering **5%+ underlying revenue growth** and expanding its trading profit margin to at least **20%** in 2025[165](index=165&type=chunk)[166](index=166&type=chunk) [Creating value through innovation](index=28&type=section&id=Creating%20value%20through%20innovation) Innovation drives nearly half of 2023's underlying revenue growth, focusing on R&D, strategic acquisitions, medical education, and optimized manufacturing to address unmet clinical needs - Nearly **50%** of the company's 2023 underlying revenue growth came from products launched in the last five years[173](index=173&type=chunk) [Research & Development](index=28&type=section&id=Research%20%26%20Development) R&D focuses on unmet clinical needs, launching **20 new products** in 2023, including the AETOS® Shoulder System and acquiring CartiHeal for cartilage regeneration - In 2023, the company launched **20 new products** and completed development on two more for 2024 launch[186](index=186&type=chunk) - Key 2023 launches include the AETOS® Shoulder System to compete in the **$1.7 billion** shoulder repair market and expanded features for the CORI® Surgical System, such as the CORI® Digital Tensioner and AI-powered planning[187](index=187&type=chunk)[189](index=189&type=chunk) - The company acquired CartiHeal, developer of the CARTIHEAL® AGILI-C® Cartilage Repair Implant, a novel technology for cartilage regeneration; the deal involved a **$180 million** payment on completion with up to a further **$150 million** contingent on future performance[192](index=192&type=chunk) [Medical education](index=32&type=section&id=Medical%20education) Smith+Nephew Academy educates healthcare professionals on product use, expanding its global presence with the new S+N Academy Munich expected to train over **5,000 providers annually** - The Smith+Nephew Academy provides a comprehensive learning environment for healthcare professionals, combining digital platforms (S+N Academy Online) with in-person training centers[199](index=199&type=chunk)[200](index=200&type=chunk) - In October 2023, the company opened S+N Academy Munich, a new central European hub for medical education, expected to train over **5,000 healthcare providers** each year[206](index=206&type=chunk)[207](index=207&type=chunk) [Manufacturing](index=34&type=section&id=Manufacturing) Global Operations supports the 12-Point Plan by improving Orthopaedics product availability, optimizing the manufacturing network, and ensuring **90% EU MDR certification** for product lines - Global Operations is integral to the 12-Point Plan, focusing on fixing Orthopaedics and improving productivity through better collaboration between commercial and operations teams[211](index=211&type=chunk) - A redesigned Sales, Inventory and Operations Planning (SIOP) process was rolled out in 2023 to better align production with demand, leading to improved service[212](index=212&type=chunk)[213](index=213&type=chunk) - As part of manufacturing network optimization, the company announced the closure of two smaller facilities in China and Germany[215](index=215&type=chunk) - The company has made good progress with European Union Medical Device Regulation (EU MDR) submissions, with **90%** of respective product lines having received MDR certification[224](index=224&type=chunk) [Taking our innovation to market](index=36&type=section&id=Taking%20our%20innovation%20to%20market) Smith+Nephew commercializes innovations through three global business units: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management, each with dedicated sales and marketing teams - The company's go-to-market strategy is executed through three global business units, each with dedicated strategy, marketing, and sales teams[227](index=227&type=chunk) [Orthopaedics](index=36&type=section&id=Orthopaedics) The Orthopaedics unit, **40% of revenue**, grew **5.7%** in 2023, driven by improved supply and execution, with key products like JOURNEY® II and the CORI® Surgical System Orthopaedics Financial Performance (2023) | Metric | Value | Change (Underlying) | | :--- | :--- | :--- | | Revenue | $2,214 million | +5.7% | | Trading Profit | $398 million | +3.9% (Reported) | | **Revenue by Segment** | | | | Knee Implants | $940 million | +5.5% | | Hip Implants | $599 million | +3.8% | | Other Reconstruction | $111 million | +28.0% | | Trauma & Extremities | $564 million | +4.4% | - A major focus of the 12-Point Plan is to 'fix Orthopaedics'; in 2023, progress was made in improving product availability, logistics, and commercial execution[237](index=237&type=chunk) - The CORI® Surgical System is a key enabling technology, now indicated for partial, total, and revision knee procedures, as well as computer-guided hip surgery[244](index=244&type=chunk)[245](index=245&type=chunk) [Sports Medicine & ENT](index=40&type=section&id=Sports%20Medicine%20%26%20ENT) This unit achieved **10.0% underlying growth** to **$1,729 million** in 2023, led by REGENETEN® and ENT, focusing on procedural innovation and the growing ASC market Sports Medicine & ENT Financial Performance (2023) | Metric | Value | Change (Underlying) | | :--- | :--- | :--- | | Revenue | $1,729 million | +10.0% | | Trading Profit | $503 million | +6.6% (Reported) | | **Revenue by Segment** | | | | Sports Medicine Joint Repair | $945 million | +9.9% | | Arthroscopic Enabling Technologies | $588 million | +4.7% | | ENT | $196 million | +29.8% | - The Sports Medicine Joint Repair segment delivered strong performance, led by the REGENETEN® Bioinductive Implant[264](index=264&type=chunk) - The ENT business grew strongly, led by its tonsil and adenoid business utilizing COBLATION® Plasma Technology[264](index=264&type=chunk)[283](index=283&type=chunk) - The company is uniquely positioned to serve the growing Ambulatory Surgery Centers (ASCs) market by offering procedural solutions across sports medicine, orthopaedics, and post-surgical wound care[282](index=282&type=chunk) [Advanced Wound Management](index=44&type=section&id=Advanced%20Wound%20Management) This unit generated **$1,606 million** revenue with **6.4% underlying growth**, driven by Advanced Wound Devices, addressing complex needs through innovation and digital tools Advanced Wound Management Financial Performance (2023) | Metric | Value | Change (Underlying) | | :--- | :--- | :--- | | Revenue | $1,606 million | +6.4% | | Trading Profit | $472 million | +8.3% (Reported) | | **Revenue by Segment** | | | | Advanced Wound Care | $725 million | +2.1% | | Advanced Wound Bioactives | $553 million | +6.2% | | Advanced Wound Devices | $328 million | +17.6% | - Growth was led by the Advanced Wound Devices segment, driven by both the traditional RENASYS® and single-use PICO® Negative Pressure Wound Therapy (NPWT) systems[293](index=293&type=chunk) - The market is driven by long-term trends such as an aging population and increasing prevalence of obesity and diabetes, which are key drivers of wound prevalence[290](index=290&type=chunk) - The business unit is also focused on digital health, building on its WOUND COMPASS® Clinical Support App to leverage AI and data-driven services for more efficient and effective wound care[314](index=314&type=chunk) [Building a culture of belonging](index=48&type=section&id=Building%20a%20culture%20of%20belonging) Smith+Nephew fosters an inclusive culture through IDE, wellbeing, and engagement, meeting diversity goals and significantly improving employee engagement to the **83rd percentile** in 2023 - The company's culture is guided by three pillars: **Care**, **Courage**, and **Collaboration**[317](index=317&type=chunk) - In 2023, the company met its diversity goals, with **34%** of management positions held by females and **21%** of US management positions held by ethnically diverse individuals[318](index=318&type=chunk)[319](index=319&type=chunk)[322](index=322&type=chunk) - Employee engagement, measured by the Gallup Q12 survey, improved significantly, placing the company in the **83rd percentile** of Gallup's database, up from the **73rd percentile** in 2022[336](index=336&type=chunk)[339](index=339&type=chunk) - The company expanded its global wellness program, focusing on physical, mental, and financial wellness, and introduced a new Employee Assistance Plan provider, Spring Health[329](index=329&type=chunk)[330](index=330&type=chunk) [Shaping a healthy and sustainable future](index=54&type=section&id=Shaping%20a%20healthy%20and%20sustainable%20future) Smith+Nephew's ESG strategy focuses on People, Planet, and Products, committing to net zero GHG emissions by 2045 and achieving a **40% reduction in Scope 1 and 2 emissions** since 2019 - The ESG strategy focuses on three areas: **People** (community impact), **Planet** (environmental impact), and **Products** (sustainable innovation)[356](index=356&type=chunk) - The company has committed to achieving net zero Scope 1 and 2 GHG emissions by 2040 and net zero Scope 3 GHG emissions by 2045[371](index=371&type=chunk) 2023 Progress Against Key ESG Objectives (vs. 2019 Baseline) | Objective | 2023 Progress | | :--- | :--- | | Scope 1 & 2 GHG Emissions | 40% reduction | | Waste to Landfill (Strategic Sites) | 30% reduction | | Product Donations (2023) | $5.1 million | - A new ESG Operating Committee was established in January 2023 to implement and execute the ESG strategy, reporting to the Executive Committee[365](index=365&type=chunk) - The company's Scope 3 GHG emissions for 2023 were calculated at **1.3 million tonnes of CO2e**, with purchased goods and services being the most significant contributor (over **83%**)[454](index=454&type=chunk)[455](index=455&type=chunk) [Risk report](index=69&type=section&id=Risk%20report) Smith+Nephew's ERM framework identifies principal risks across five categories, with emerging risks including ESG and AI, and the Board confirming viability for the next three years - The company's principal risks are grouped into five categories: - **Compliance and Reputation**: (e.g., Legal and Compliance, Quality and Regulatory) - **External**: (e.g., Political and Economic) - **Financial**: (e.g., Foreign Exchange, Pricing and Reimbursement) - **Operational**: (e.g., Cybersecurity, Global Supply Chain, M&A, New Product Innovation) - **People**: (e.g., Talent Management)[475](index=475&type=chunk) - Emerging risks identified in 2023 include the increasing focus on Environmental, Social, and Governance (ESG) matters and the strategic implications of Artificial Intelligence (AI)[467](index=467&type=chunk) - The Board has determined that a three-year period to December 2026 is appropriate for its Viability Statement, aligning with the Group's strategic planning process[515](index=515&type=chunk) - Based on scenario testing of principal risks, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period[517](index=517&type=chunk) [Our stakeholders](index=84&type=section&id=Our%20stakeholders) The Board considers stakeholder interests—employees, investors, customers, suppliers, governments, and communities—to ensure long-term success, integrating feedback into decision-making - The Board considers the interests of key stakeholders in its decision-making process to promote the long-term success of the company[529](index=529&type=chunk) - Key stakeholder groups and their areas of interest include: - **Employees**: Purpose, strategy, culture, wellbeing, and IDE - **Investors**: Strategy, performance, capital allocation, remuneration, and ESG - **Customers and Suppliers**: Innovation, product quality, and ethical partnerships - **Environment and Communities**: ESG strategy (People, Planet, Products) - **Governments and Regulators**: Product safety and compliance[531](index=531&type=chunk)[533](index=533&type=chunk)[534](index=534&type=chunk) - In 2023, engagement with investors on the proposed US Executive Director Remuneration Policy shaped the final proposal submitted to shareholders[545](index=545&type=chunk) - Board listening sessions with employees provided valuable feedback on topics like innovation, strategy communication, and talent development, leading to management actions in 2024[540](index=540&type=chunk)[541](index=541&type=chunk) Governance [Board leadership and Company purpose](index=90&type=section&id=Board%20leadership%20and%20Company%20purpose) The Board ensures the company's long-term success by overseeing strategy, risk, and stakeholder engagement, led by the Chair and CEO with a diverse composition and clear responsibilities - The Board is responsible for the long-term success of the company, approving strategy, managing risk, and overseeing stakeholder engagement[640](index=640&type=chunk) - The Board has a clear division of responsibilities between the Chair (Rupert Soames), CEO (Deepak Nath), Senior Independent Director (Marc Owen), and other Non-Executive Directors[623](index=623&type=chunk)[624](index=624&type=chunk)[626](index=626&type=chunk) - Key Board activities in 2023 focused on: - **Strategy and Innovation**: Monitoring the 12-Point Plan, approving the three-year strategic plan, and setting capital investment priorities - **Operations and Commercial Excellence**: Strategic deep dives on business units and monitoring operational metrics - **Risk Oversight**: Evaluating risks related to strategic initiatives, including cybersecurity and ESG[646](index=646&type=chunk)[651](index=651&type=chunk)[653](index=653&type=chunk)[654](index=654&type=chunk) [Nomination & Governance Committee Report](index=104&type=section&id=Nomination%20%26%20Governance%20Committee%20Report) The Nomination & Governance Committee oversaw key Board and executive appointments, succession planning, and diversity initiatives in 2023, ensuring a balanced and effective Board composition - The committee oversaw four key appointments in 2023/early 2024: Rupert Soames (Chair), Jez Maiden (NED), Simon Lowth (NED), and John Rogers (CFO)[657](index=657&type=chunk)[658](index=658&type=chunk)[659](index=659&type=chunk) - Board succession planning is a key focus, with an emphasis on aligning Board skills with strategic priorities and enhancing diversity[667](index=667&type=chunk)[669](index=669&type=chunk) Board Diversity (as of 31 Dec 2023) | Category | Representation | | :--- | :--- | | Female Directors | 33.33% | | Directors from Ethnic Minority Backgrounds | 2 out of 12 | - An internal Board effectiveness review was conducted in 2023, identifying strengths in Board operations and setting focus areas for 2024, including long-term value creation and management succession planning[710](index=710&type=chunk)[713](index=713&type=chunk)[714](index=714&type=chunk) [Compliance & Culture Committee Report](index=111&type=section&id=Compliance%20%26%20Culture%20Committee%20Report) The Compliance & Culture Committee oversees ethics, compliance, quality, regulatory affairs, sustainability, and culture, reviewing program effectiveness and monitoring ESG progress and employee engagement - The committee's responsibilities cover four main areas: Ethics and Compliance, Sustainability, Culture, and Quality and Regulatory Affairs (QRA)[717](index=717&type=chunk)[722](index=722&type=chunk) - In 2023, the committee reviewed the ESG strategy to ensure alignment with the 12-Point Plan and monitored performance against People, Planet, and Product initiatives using enhanced dashboards[725](index=725&type=chunk)[726](index=726&type=chunk) - The committee received regular reports on QRA, including results of external regulatory inspections (e.g., by the FDA) and progress on EU Medical Device Regulation (MDR) compliance[732](index=732&type=chunk)[733](index=733&type=chunk) - Culture was a key focus, with the committee reviewing employee engagement survey results which showed strong connection to the company's purpose, and tracking actions from employee listening sessions[737](index=737&type=chunk)[740](index=740&type=chunk)[742](index=742&type=chunk) [Audit Committee Report](index=114&type=section&id=Audit%20Committee%20Report) The Audit Committee ensured financial reporting integrity, oversaw risk management, and monitored internal controls, reviewing key accounting judgments and managing the external auditor transition - The committee identified three significant matters related to the 2023 financial statements: - **Valuation of inventories**: Particularly for the Orthopaedics business, due to high levels of product required at customer sites - **Liability provisioning**: Primarily for legal disputes related to metal-on-metal hip products, which involves significant estimation - **Impairment**: Review of goodwill and acquisition intangible assets, with a focus on the Orthopaedics CGU[753](index=753&type=chunk)[755](index=755&type=chunk)[757](index=757&type=chunk) - The committee oversaw the transition of the external auditor, with Deloitte LLP to be appointed for the 2024 financial year, replacing KPMG[773](index=773&type=chunk) - The committee reviewed the effectiveness of the Group's risk management program and internal controls, including compliance with the Sarbanes-Oxley (SOX) Act, and found them to be effective[788](index=788&type=chunk)[798](index=798&type=chunk) - The committee reviewed management's going concern assessment and concurred that its continued adoption is appropriate[763](index=763&type=chunk) [Directors' Remuneration Report](index=121&type=section&id=Directors%27%20Remuneration%20Report) The Remuneration Committee proposed a new policy for US-based executives to align pay with market norms, reflecting strong 2023 performance with the CEO's bonus at **130.8% of base salary** - The committee is proposing a new Remuneration Policy for US-based Executive Directors to be voted on at the 2024 AGM; this is to address a competitiveness gap with the US MedTech market[812](index=812&type=chunk)[817](index=817&type=chunk)[822](index=822&type=chunk) - Proposed changes for US Executive Directors include: - **PSP**: Maximum opportunity to increase from **275%** to **300%** of base salary - **RSP**: Introduction of a new Restricted Share Programme at **125%** of base salary, vesting in three equal tranches - **Share Ownership Guideline**: Increase from **300%** to **500%** of base salary[825](index=825&type=chunk)[826](index=826&type=chunk)[832](index=832&type=chunk) 2023 Annual Bonus Payout | Executive Director | Payout (% of Base Salary) | Payout (% of Maximum) | | :--- | :--- | :--- | | Deepak Nath (CEO) | 130.8% | 61.4% | | Anne-Françoise Nesmes (CFO) | 127.5% | 59.3% | - The 2021 Performance Share Programme (PSP) award, based on performance from 2021-2023, vested at **21%** of the target amount[846](index=846&type=chunk)[990](index=990&type=chunk) Accounts [Group financial statements](index=172&type=section&id=Group%20financial%20statements) This section presents the consolidated financial statements for the Smith+Nephew Group for 2023, including the Income Statement, Balance Sheet, and Cash Flow Statement, prepared under UK-adopted IFRS Group Income Statement Summary (Year ended Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Revenue | 5,549 | | Gross Profit | 3,819 | | Operating Profit | 425 | | Profit Before Taxation | 290 | | Attributable Profit for the Year | 263 | Group Balance Sheet Summary (As of Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Total Assets | 9,987 | | Total Liabilities | 4,770 | | Total Equity | 5,217 | Group Cash Flow Statement Summary (Year ended Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Net Cash Inflow from Operating Activities | 608 | | Net Cash Used in Investing Activities | (448) | | Net Cash Used in Financing Activities | (200) | | Net Decrease in Cash and Cash Equivalents | (40) | [Company financial statements](index=227&type=section&id=Company%20financial%20statements) This section presents the separate financial statements for Smith & Nephew plc for 2023, detailing the parent company's financial position under FRS 101 Company Balance Sheet Summary (As of Dec 31, 2023) | Metric | Value ($ million) | | :--- | :--- | | Total Assets | 10,498 | | Total Liabilities | 4,089 | | Shareholders' Funds | 6,409 | - The attributable profit for the year dealt with in the accounts of the Company was **$58 million**, compared to **$80 million** in 2022[1431](index=1431&type=chunk) Other information [Group information](index=235&type=section&id=Group%20information) This section provides supplementary Group information, including risk factors, cybersecurity management, and reconciliations of non-IFRS financial measures for clearer performance understanding - The company has a dedicated cybersecurity function led by a Chief Information Security Officer (CISO) who reports to the Audit and Executive Committees; no cybersecurity incidents materially affected the Group in 2023[1474](index=1474&type=chunk)[1481](index=1481&type=chunk) - Detailed risk factors are outlined, covering areas such as Global Supply Chain, Strategy and Commercial Execution, Competitive Markets, Pricing and Reimbursement, New Product Innovation, Cybersecurity, and Legal/Compliance risks[1484](index=1484&type=chunk) - The report provides detailed reconciliations for non-IFRS measures like 'Underlying Revenue Growth' to reported growth, and 'Trading Profit' to 'Operating Profit' to clarify performance trends[1549](index=1549&type=chunk)[1559](index=1559&type=chunk)[1562](index=1562&type=chunk) [Shareholder information](index=248&type=section&id=Shareholder%20information) This section provides essential shareholder information, including AGM details, dividend history, share capital, major shareholders, and tax considerations for UK and US investors - The Annual General Meeting (AGM) will be held on Wednesday, May 1, 2024[1686](index=1686&type=chunk) Dividend History (US cents per share) | Year | Interim | Final | Total | | :--- | :--- | :--- | :--- | | 2023 | 14.40 | 23.10 | 37.50 | | 2022 | 14.40 | 23.10 | 37.50 | | 2021 | 14.40 | 23.10 | 37.50 | | 2020 | 14.40 | 23.10 | 37.50 | | 2019 | 14.40 | 23.10 | 37.50 | - The company's ordinary shares are traded on the London Stock Exchange (LSE: SN) and as American Depositary Shares (ADSs) on the New York Stock Exchange (NYSE: SNN), with each ADS representing two ordinary shares[1581](index=1581&type=chunk) - As of February 16, 2024, BlackRock, Inc. was the only major shareholder with a notifiable interest, holding **5.2%** of the ordinary shares in issue[1601](index=1601&type=chunk)[1609](index=1609&type=chunk)

Strategic Report [Our Performance](index=3&type=section&id=Our%20performance) In 2023, Smith+Nephew reported Group revenue of $5,549 million, a 6.4% reported increase and 7.2% on an underlying basis, with operating profit at $425 million and trading profit reaching $970 million 2023 Key Performance Indicators | Metric | 2023 Value | Change vs. Prior Year | | :--- | :--- | :--- | | **Group Revenue** | $5,549 million | +6.4% Reported, +7.2% Underlying | | **Operating Profit** | $425 million | -5.4% | | **Trading Profit** | $970 million | +7.6% | | **Operating Profit Margin** | 7.7% | -90bps | | **Trading Profit Margin** | 17.5% | +20bps | | **Adjusted EPS (EPSA)** | 82.8¢ | +18.2% | | **Dividend Per Share** | 37.5¢ | Unchanged | | **R&D Investment** | $339 million | -1.8% | | **Cash Generated from Operations** | $829 million | +42.7% | | **Return on Invested Capital (ROIC)** | 5.9% | -70bps | [Who We Are](index=5&type=section&id=Who%20we%20are) Smith+Nephew is a leading portfolio medical technology company with a 168-year history, serving over 100 countries and treating more than 14 million patients in 2023, structured into three global business units - The company operates through three global business units: **Orthopaedics**, **Sports Medicine & ENT**, and **Advanced Wound Management**[22](index=22&type=chunk) 2023 Business Unit Revenue Contribution | Business Unit | Percentage of Group Revenue | | :--- | :--- | | Orthopaedics | 40% | | Sports Medicine & ENT | 31% | | Advanced Wound Management | 29% | - In 2023, the company invested **$339 million** in R&D and launched **20 new products**[17](index=17&type=chunk) - The company's ESG strategy focuses on three pillars: **People** (community impact), **Planet** (environmental impact reduction), and **Products** (sustainable innovation)[19](index=19&type=chunk)[20](index=20&type=chunk) [Chair's Statement](index=7&type=section&id=Chair's%20statement) The Chair, Rupert Soames, highlights encouraging progress in 2023 with 7.2% underlying revenue growth and improved trading profit margin, expressing confidence in CEO Deepak Nath's leadership and the 12-Point Plan - The Board is confident in CEO Deepak Nath and the **12-Point Plan**, which is beginning to show positive results and gather forward momentum[33](index=33&type=chunk)[52](index=52&type=chunk) - A major proposal is to adjust the **Remuneration Policy** for US-based executives to be more competitive with US MedTech peers, as **over 50%** of company revenue and most senior operational managers are in the US[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk) 2023 Performance Highlights from Chair's Statement | Metric | 2023 Value | Underlying Growth | | :--- | :--- | :--- | | Revenue | - | 7.2% | | Trading Profit | $970 million | 7.6% (reported) | | Operating Profit | $425 million | - | | Operating Profit Margin | 7.7% | - | - The Board recommends a final dividend of **23.1¢ per share**, resulting in a total dividend of **37.5¢ per share** for 2023, **unchanged** from 2022[50](index=50&type=chunk) [Chief Executive Officer's Review](index=11&type=section&id=Chief%20Executive%20Officer's%20review) CEO Deepak Nath reports strong 2023 performance with 7.2% underlying revenue growth to $5.55 billion and a 17.5% trading profit margin, attributing success to the 12-Point Plan and operational improvements 2023 Financial Performance Overview | Metric | 2023 Value | Underlying Growth | Reported Growth | | :--- | :--- | :--- | :--- | | Group Revenue | $5,549 million | 7.2% | 6.4% | | Trading Profit | $970 million | - | 7.6% | | Trading Profit Margin | 17.5% | +20bps | - | - The **12-Point Plan** is on track and focuses on three pillars: 1) **Fixing Orthopaedics**, 2) **Improving productivity**, and 3) **Accelerating growth** in Advanced Wound Management and Sports Medicine & ENT[57](index=57&type=chunk)[59](index=59&type=chunk) - In Orthopaedics, product availability has significantly improved, closing **over 95%** of the gap to target, though US Reconstruction remains a priority for improvement[60](index=60&type=chunk)[61](index=61&type=chunk) - Productivity initiatives contributed approximately **160bps** to the 2023 trading profit margin through actions in pricing, procurement, and manufacturing optimization[66](index=66&type=chunk) - Innovation remains a key growth driver, with **20 new products** launched in 2023 and the acquisition of **CartiHeal**, a novel cartilage regeneration technology[73](index=73&type=chunk)[75](index=75&type=chunk) [Our Marketplace](index=17&type=section&id=Our%20marketplace) Smith+Nephew operates in a global medical technology market valued at approximately $45 billion, driven by demographic trends, lifestyle conditions, technological advancements, and emerging markets - The company competes in a global medical technology market worth around **$45 billion** per annum[90](index=90&type=chunk) - Long-term growth is driven by **demographic trends** (aging population), **lifestyle conditions** (diabetes, obesity), **technological advancements** (AI, biotech), and rising demand in **emerging markets**[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) - A key market trend is the **decentralization of care**, with more procedures moving to outpatient settings like **Ambulatory Surgery Centers (ASCs)**, especially in orthopaedics and sports medicine[94](index=94&type=chunk) - The market is characterized by significant **cost pressure** from governments, **stringent regulations** that create high barriers to entry, and **seasonality** in procedure volumes, with higher activity in winter months[96](index=96&type=chunk)[97](index=97&type=chunk)[100](index=100&type=chunk) [Our Business Model](index=19&type=section&id=Our%20business%20model) Smith+Nephew's business model creates value for patients, clinicians, and shareholders through its 'Life Unlimited' purpose and 'Strategy for Growth', leveraging financial strength, R&D, and global operations - The business model is designed to create value by transforming outcomes for patients, clinicians, and healthcare systems, guided by the **'Life Unlimited' purpose**[103](index=103&type=chunk) - Key inputs for value creation include **financial strength**, a culture based on **Care, Courage, and Collaboration**, **prioritized R&D investment**, a focus on **sustainability**, and **resilient global operations**[105](index=105&type=chunk) - The value creation process involves developing **innovative products**, setting product strategy through **three global business units**, providing expertise and support via a **specialized sales force**, and offering medical education through the **Smith+Nephew Academy**[109](index=109&type=chunk)[110](index=110&type=chunk)[111](index=111&type=chunk)[114](index=114&type=chunk) [Key Performance Indicators](index=21&type=section&id=Key%20Performance%20Indicators) Smith+Nephew tracks its performance using financial and non-financial KPIs, achieving 7.2% underlying revenue growth and a 17.5% trading profit margin in 2023, while also improving employee engagement and sustainability metrics Financial KPIs (2023) | KPI | 2023 Result | Trend/Comment | | :--- | :--- | :--- | | Underlying Revenue Growth | 7.2% | Ahead of guidance | | Operating Profit Margin | 7.7% | Decreased from 8.6% in 2022 | | Trading Profit Margin | 17.5% | Increased by 20bps from 2022 | | Return on Invested Capital (ROIC) | 5.9% | Decreased from 6.6% in 2022 | | Dividend per Share | 37.5¢ | Unchanged from 2022 | Non-Financial KPIs (2023) | KPI | 2023 Result | Comment | | :--- | :--- | :--- | | R&D Investment | $339 million | - | | New Product Launches | 20 | +2 ready for 2024 launch | | Employee Engagement Score | 4.20 | 83rd percentile in Gallup's database | | Headline Safety Rate | 0.15 | Incidents per 200,000 hours worked | | Practitioner Training Sessions | 97,405 | Medical education sessions provided | | Scope 1 & 2 GHG Reduction (vs 2019) | 40% | On track for 70% reduction by 2025 | - The **12-Point Plan**, a key strategic initiative, is reported to be approximately **65% complete** against its milestones[124](index=124&type=chunk) [Financial Review](index=23&type=section&id=Financial%20review) In 2023, Smith+Nephew achieved strong financial results with 7.2% underlying revenue growth to $5.55 billion and a trading profit margin of 17.5%, despite impacts from restructuring costs and a $109 million write-off 2023 Group Performance Summary | Metric | 2023 ($ million) | 2022 ($ million) | Change | | :--- | :--- | :--- | :--- | | Revenue | 5,549 | 5,215 | +6.4% | | Operating profit | 425 | 450 | -5.6% | | Trading profit | 970 | 901 | +7.6% | | Profit before tax | 290 | 235 | +23.4% | | Basic EPS | 30.2¢ | 25.5¢ | +18.4% | | Adjusted EPS (EPSA) | 82.8¢ | 81.8¢ | +1.2% | - The company recorded a **$109 million write-off** of assets and liabilities from the discontinued Engage Surgical business, which was acquired in 2022[138](index=138&type=chunk) - The **12-Point Plan** incurred **$220 million** in restructuring costs in 2023, delivering incremental benefits of around **$68 million** during the year[139](index=139&type=chunk) 2024 Financial Outlook | Metric | 2024 Guidance | | :--- | :--- | | Underlying Revenue Growth | 5.0% to 6.0% | | Trading Profit Margin | At least 18.0% | | Tax Rate on Trading Results | 19% to 20% | - The company maintains its mid-term target of achieving at least a **20% trading profit margin** in 2025[170](index=170&type=chunk) [Creating Value Through Innovation](index=29&type=section&id=Creating%20value%20through%20innovation) Smith+Nephew's innovation strategy, driven by R&D, medical education, and manufacturing optimization, contributed nearly 50% of 2023's underlying revenue growth through new product launches and strategic acquisitions - Approaching **50%** of the company's 2023 underlying revenue growth came from products launched in the last five years[177](index=177&type=chunk)[72](index=72&type=chunk) - The company's R&D is focused on four key trends: **robotics and digital systems**, **biologics**, **procedural innovation** for less invasive methods, and delivering **economic value**[188](index=188&type=chunk) - In 2023, the company launched **20 new products** and acquired **CartiHeal**, developer of a novel cartilage regeneration implant, for an initial **$180 million**[190](index=190&type=chunk)[128](index=128&type=chunk) - A new **Smith+Nephew Academy** was opened in Munich, expected to train over **5,000 healthcare providers** annually, serving as a central European hub for medical education[211](index=211&type=chunk)[212](index=212&type=chunk) - Manufacturing operations are being optimized under the **12-Point Plan**, including closing two smaller facilities in China and Germany to improve efficiency and product availability[220](index=220&type=chunk) [Research & Development](index=29&type=section&id=Research%20%26%20Development) Smith+Nephew's R&D focuses on addressing unmet clinical needs, launching 20 new products in 2023 including enhancements to its CORI® Surgical System and the new AETOS® Shoulder System, and leveraging M&A for innovation like the CartiHeal acquisition - Key 2023 product launches included the **AETOS® Shoulder System**, designed to compete in the **$1.7 billion** shoulder market, and expanded functionality for the **CORI® Surgical System**, including AI-powered planning tools[193](index=193&type=chunk)[191](index=191&type=chunk)[192](index=192&type=chunk) - The company announced the acquisition of **CartiHeal**, developer of the **CARTIHEAL® AGILI-C® Cartilage Repair Implant**, a novel technology for cartilage regeneration in the knee with a broader indication than existing treatments[197](index=197&type=chunk) - The new **RENASYS® EDGE Negative Pressure Wound Therapy System** was launched, designed for enhanced simplicity and durability, particularly for home-care settings[200](index=200&type=chunk) [Medical Education](index=33&type=section&id=Medical%20education) Smith+Nephew is committed to educating healthcare professionals through the Smith+Nephew Academy, a global network offering blended learning, which expanded its physical presence with a new academy in Munich in 2023 - The **Smith+Nephew Academy** provides comprehensive medical education through a blended learning environment, including digital platforms, hands-on experiences, and VR simulations[204](index=204&type=chunk)[205](index=205&type=chunk) - In October 2023, the company opened **S+N Academy Munich**, a new central European hub expected to train more than **5,000 healthcare providers** each year[211](index=211&type=chunk)[212](index=212&type=chunk) - The company's medical education programs have received the **highest level of accreditation** from the Royal College of Surgeons of England (RCSEng)[213](index=213&type=chunk) [Manufacturing](index=35&type=section&id=Manufacturing) Global Operations, central to the 12-Point Plan, improved product availability and reduced production in 2023 through a redesigned SIOP process, network optimization, and progress on EU MDR certification - A redesigned **Sales, Inventory and Operations Planning (SIOP)** process was rolled out in 2023, leading to improved service and better alignment between commercial and operations teams[217](index=217&type=chunk)[218](index=218&type=chunk) - Manufacturing network optimization included announcing the **closure of two smaller facilities** in China and Germany and reducing the contingent workforce[220](index=220&type=chunk) - The company has made good progress with **EU Medical Device Regulation (EU MDR)** submissions, with **90%** of respective product lines having received MDR certification[230](index=230&type=chunk) [Taking Our Innovation to Market](index=37&type=section&id=Taking%20our%20innovation%20to%20market) Smith+Nephew markets its innovations through three global business units—Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management—all of which delivered strong underlying revenue growth in 2023 by leveraging differentiated technology and specialized sales forces 2023 Business Unit Performance (Underlying Revenue Growth) | Business Unit | 2023 Underlying Revenue Growth | | :--- | :--- | | Orthopaedics | 5.7% | | Sports Medicine & ENT | 10.0% | | Advanced Wound Management | 6.4% | - The company serves its markets through **three global business units**, each with specialist sales and support teams dedicated to specific healthcare professional requirements[233](index=233&type=chunk) [Orthopaedics](index=37&type=section&id=Orthopaedics) The Orthopaedics division, representing 40% of Group revenue, achieved 5.7% underlying revenue growth in 2023, driven by its CORI® Surgical System and Trauma & Extremities, with a strategic focus on robotic-enabled growth and expansion into the shoulder market Orthopaedics 2023 Revenue Performance | Segment | Revenue ($ million) | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | | **Total Orthopaedics** | **$2,214 million** | **4.8%** | **5.7%** | | Knee Implants | $940 million | 4.7% | 5.5% | | Hip Implants | $599 million | 2.5% | 3.8% | | Other Reconstruction | $111 million | 27.8% | 28.0% | | Trauma & Extremities | $564 million | 3.7% | 4.4% | - The division's trading profit was **$398 million** in 2023, up from **$383 million** in 2022[236](index=236&type=chunk) - A major focus of the **12-Point Plan** is 'Fixing Orthopaedics', which in 2023 involved improving product availability, logistics, and commercial execution[243](index=243&type=chunk) - Key growth drivers include the **CORI® Surgical System**, which is the only system indicated for partial, total, and revision knee procedures, and the newly launched **AETOS® Shoulder System**[251](index=251&type=chunk)[258](index=258&type=chunk) [Sports Medicine & ENT](index=41&type=section&id=Sports%20Medicine%20%26%20ENT) The Sports Medicine & ENT division delivered strong 10.0% underlying revenue growth in 2023, reaching $1.729 billion, driven by the REGENETEN® Bioinductive Implant and ENT products, with a strategy focused on procedural innovation and market development Sports Medicine & ENT 2023 Revenue Performance | Segment | Revenue ($ million) | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | | **Total Sports Medicine & ENT** | **$1,729 million** | **8.8%** | **10.0%** | | Sports Medicine Joint Repair | $945 million | 8.7% | 9.9% | | Arthroscopic Enabling Technologies | $588 million | 3.7% | 4.7% | | ENT | $196 million | 28.1% | 29.8% | - The division's trading profit was **$503 million** in 2023, an increase of **6.6%** from **$472 million** in 2022[262](index=262&type=chunk)[270](index=270&type=chunk) - Strong performance in Sports Medicine Joint Repair was led by the **REGENETEN® Bioinductive Implant**, which has been shown to change the course of rotator cuff tear progression[270](index=270&type=chunk)[278](index=278&type=chunk) - The company is expanding its portfolio with the acquisition of **CartiHeal** for cartilage regeneration and new solutions for foot and ankle soft tissue repair[280](index=280&type=chunk)[283](index=283&type=chunk) [Advanced Wound Management](index=45&type=section&id=Advanced%20Wound%20Management) The Advanced Wound Management division achieved 6.4% underlying revenue growth in 2023, reaching $1.606 billion, driven by strong performance across all segments, particularly Advanced Wound Devices, and focuses on innovation in products and digital tools Advanced Wound Management 2023 Revenue Performance | Segment | Revenue ($ million) | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | | **Total Advanced Wound Management** | **$1,606 million** | **6.2%** | **6.4%** | | Advanced Wound Care | $725 million | 1.8% | 2.1% | | Advanced Wound Bioactives | $553 million | 6.3% | 6.2% | | Advanced Wound Devices | $328 million | 17.0% | 17.6% | - The division's trading profit increased by **8.3%** to **$472 million** in 2023, with a trading profit margin of **29.4%**[294](index=294&type=chunk)[301](index=301&type=chunk) - Growth in Advanced Wound Devices was driven by both the traditional **RENASYS®** and single-use **PICO® Negative Pressure Wound Therapy (NPWT)** systems[301](index=301&type=chunk) - The company is investing in digital health tools, such as the **WOUND COMPASS® Clinical Support App**, to optimize clinical practice and support patient care[321](index=321&type=chunk) [Building a Culture of Belonging](index=49&type=section&id=Building%20a%20culture%20of%20belonging) Smith+Nephew is focused on creating an inclusive and high-performing culture, advancing its Inclusion, Diversity, and Equity (IDE) program, improving employee engagement, and maintaining a robust global compliance program - The company met its 2023 diversity goals, achieving **34% female representation** in management and **21% ethnic diversity** in US management positions[325](index=325&type=chunk) - Employee Inclusion Groups (EIGs) are a key part of the IDE strategy, with over **800 members** globally across groups like the Women's Network, UNITY (race & ethnicity), and PRIDE (LGBTQ+)[332](index=332&type=chunk)[334](index=334&type=chunk) - The annual Gallup employee engagement survey showed continued improvement, with an **89% participation rate** and a grand mean score placing the company in the **83rd percentile** of Gallup's database[129](index=129&type=chunk)[343](index=343&type=chunk) - A comprehensive global compliance program is in place to ensure adherence to laws, regulations, and industry codes, with oversight from a **Board-level Compliance & Culture Committee**[347](index=347&type=chunk)[350](index=350&type=chunk) [Shaping a Healthy and Sustainable Future](index=55&type=section&id=Shaping%20a%20healthy%20and%20sustainable%20future) Smith+Nephew's ESG strategy, integral to its 'Strategy for Growth', focuses on People, Planet, and Products, with commitments to net-zero emissions by 2045 and significant progress in reducing Scope 1 & 2 GHG emissions - The ESG strategy focuses on three pillars: **People** (community impact), **Planet** (environmental reduction), and **Products** (sustainable innovation)[363](index=363&type=chunk) - The company has committed to achieving **net-zero Scope 1 and 2 GHG emissions by 2040** and **Scope 3 by 2045**[378](index=378&type=chunk) 2023 ESG Progress Highlights | Area | 2023 Progress | | :--- | :--- | | **People** | $5.1 million in product donations; 95 community/charity events held | | **Planet** | 40% reduction in Scope 1 & 2 GHG emissions since 2019; 30% reduction in waste to landfill from strategic sites since 2019 | | **Products** | Sustainability review embedded into New Product Development process | - The company has streamlined its ESG governance with the establishment of an **ESG Operating Committee** reporting to the Executive Committee, with Board oversight[372](index=372&type=chunk) [TCFD Reporting](index=63&type=section&id=TCFD%20reporting) Smith+Nephew's TCFD report details its climate change governance, strategy, and risk management, with Board oversight and integration of climate risks into its ERM process, targeting net-zero by 2045 and a 70% reduction in Scope 1 & 2 emissions by 2025 - Board-level oversight of ESG and climate-related risks is in place, with specific responsibilities delegated to the **Audit, Compliance & Culture, and Remuneration Committees**[428](index=428&type=chunk)[430](index=430&type=chunk) - Climate-related risks are integrated into the company's **Enterprise Risk Management (ERM)** process, covering both transition risks (commercial, legal, pricing) and physical risks (extreme weather, sea-level rise)[434](index=434&type=chunk)[436](index=436&type=chunk) - The company has committed to **net-zero Scope 1 & 2 GHG emissions by 2040** and **Scope 3 by 2045**. It is on track for its interim target of a **70% reduction in Scope 1 & 2 emissions by 2025**[441](index=441&type=chunk) GHG Emissions (2023 vs. 2019 Baseline) | Emission Scope | 2023 (tonnes CO2e) | 2019 (tonnes CO2e) | Reduction | | :--- | :--- | :--- | :--- | | Scope 1 | 15,901 | 9,888 | N/A (Increase) | | Scope 2 (market-based) | 24,365 | 57,152 | N/A | | **Total Scope 1 & 2 (market-based)** | **40,266** | **67,040** | **40%** | [Risk Report](index=70&type=section&id=Risk%20report) Smith+Nephew employs a comprehensive Enterprise Risk Management (ERM) framework to identify, assess, and mitigate risks across compliance, external, financial, operational, and people categories, with the Board confirming the Group's viability for the next three years - The company utilizes a formal **Enterprise Risk Management (ERM)** process with a 'top-down' and 'bottom-up' approach to identify and manage risks[471](index=471&type=chunk)[478](index=478&type=chunk) - Emerging risks identified in 2023 include heightened stakeholder focus on **ESG** and the strategic implications of **Artificial Intelligence (AI)**[474](index=474&type=chunk) - Principal Risks are categorized into five groups: **Compliance and Reputation** (e.g., legal, quality), **External** (e.g., political, economic), **Financial** (e.g., foreign exchange, pricing), **Operational** (e.g., cybersecurity, supply chain), and **People** (e.g., talent management)[482](index=482&type=chunk) - The Board has issued a **Viability Statement**, confirming a reasonable expectation that the Group can continue operations and meet its liabilities for the **three-year period ending December 2026**[524](index=524&type=chunk) [Our Stakeholders](index=85&type=section&id=Our%20stakeholders) Smith+Nephew's Board considers the impact on key stakeholders—Employees, Investors, Customers and Suppliers, Governments and Regulators, and the Environment and Communities—in its decision-making process, engaging through various channels to deliver sustainable long-term value - The Board considers the interests of key stakeholders when making decisions to deliver sustainable long-term value, in compliance with **Section 172 of the Companies Act 2006**[537](index=537&type=chunk) - Key stakeholder groups identified are: **Employees**, **Investors**, **Customers and suppliers**, **Environment and communities**, and **Governments and regulators**[539](index=539&type=chunk)[541](index=541&type=chunk)[542](index=542&type=chunk) - Engagement with employees includes **Board listening sessions**, site visits, and monitoring culture through surveys. Key 2023 feedback focused on innovation, strategy communication, and talent development[545](index=545&type=chunk)[548](index=548&type=chunk) - The Chair and senior management engage regularly with investors on strategy, performance, and remuneration, with feedback shaping Board agendas and proposals like the **2024 Remuneration Policy**[550](index=550&type=chunk)[553](index=553&type=chunk) Governance [Governance at a Glance](index=91&type=section&id=Governance%20at%20a%20glance) Smith+Nephew is committed to high standards of corporate governance, complying with the UK Corporate Governance Code 2018 and relevant NYSE and SEC rules, with a Board demonstrating strong engagement and a focus on diversity and experience - The company complies with the **UK Corporate Governance Code 2018** and the rules of the **NYSE** and **SEC** applicable to foreign private issuers[571](index=571&type=chunk) 2023 Board and Committee Meeting Attendance | Committee | Attendance Rate | | :--- | :--- | | Board | 94% | | Audit | 100% | | Nomination & Governance | 88% | | Compliance & Culture | 95% | | Remuneration | 96% | - As of year-end 2023, the Board composition was **33.3% female**[580](index=580&type=chunk) [Board Leadership and Company Purpose](index=93&type=section&id=Board%20leadership%20and%20Company%20purpose) The Board of Directors, led by Chair Rupert Soames, is responsible for the long-term success of the company, overseeing strategy, risk, and stakeholder engagement, with the Executive Committee managing day-to-day operations - The Board's primary focus is the **long-term sustainable success** of the company, approving strategy, evaluating risk, and overseeing implementation[646](index=646&type=chunk) - Key Board activities in 2023 included reviewing progress against the **12-Point Plan**, approving the three-year strategic plan, setting dividend policy, and overseeing succession planning[656](index=656&type=chunk) - All Non-Executive Directors are considered **independent** under both UK and US requirements, ensuring independent oversight and challenge of management[637](index=637&type=chunk) - The **Executive Committee**, led by the CEO, is responsible for the day-to-day operational management of the Group and executing its strategy[617](index=617&type=chunk) [Nomination & Governance Committee Report](index=105&type=section&id=Nomination%20%26%20Governance%20Committee%20Report) The Nomination & Governance Committee focused on Board and executive succession in 2023, managing key appointments and overseeing Board effectiveness and diversity, while identifying long-term value creation and management succession as key focus areas for 2024 - The committee managed four significant appointments in 2023/early 2024: **Rupert Soames** (Chair), **Jez Maiden** (NED), **Simon Lowth** (NED), and **John Rogers** (CFO)[663](index=663&type=chunk)[664](index=664&type=chunk)[665](index=665&type=chunk)[666](index=666&type=chunk) - The Board appointment process evaluates skills, experience, and diversity, using external advisors to compile a **diverse shortlist** of candidates for consideration[670](index=670&type=chunk)[671](index=671&type=chunk)[672](index=672&type=chunk) Board Diversity Statistics (as of 31 Dec 2023) | Category | Board Representation | | :--- | :--- | | Women | 33.33% | | Ethnic Minority Background | 2 Directors (16.67%) | - The 2023 internal Board effectiveness review found the Board to be operating effectively. Key focus areas for 2024 are **long-term strategic drivers for value creation** and **enhanced management succession planning**[718](index=718&type=chunk)[720](index=720&type=chunk)[721](index=721&type=chunk) [Compliance & Culture Committee Report](index=114&type=section&id=Compliance%20%26%20Culture%20Committee%20Report) The Compliance & Culture Committee oversees the company's ethics, compliance, quality, regulatory affairs, culture, and sustainability programs, reviewing global program effectiveness, ESG strategy, and monitoring corporate culture through employee engagement and Board listening sessions - The committee oversees ethics and compliance, receiving regular reports on the **global program's effectiveness**, audit findings, and significant allegations[729](index=729&type=chunk)[730](index=730&type=chunk) - In 2023, the committee reviewed and monitored the company's **ESG strategy** and performance against targets for People, Planet, and Products, using enhanced dashboards from the new **ESG Operating Committee**[732](index=732&type=chunk)[733](index=733&type=chunk) - The committee monitored Quality and Regulatory Affairs, reviewing performance against KPIs, results of external inspections (e.g., by the FDA), and progress on emerging regulations like **EU MDR**[738](index=738&type=chunk)[739](index=739&type=chunk) - Culture was monitored via employee engagement surveys, IDE strategy updates, and **five Board listening sessions** held in 2023, which provided direct employee feedback on strategy, leadership, and culture[745](index=745&type=chunk)[749](index=749&type=chunk) [Audit Committee Report](index=117&type=section&id=Audit%20Committee%20Report) The Audit Committee focused on the transition to Deloitte as external auditor, IT framework oversight, and ERM, while reviewing significant financial matters including Orthopaedics inventory valuation, legal provisions for metal-on-metal hip products, and goodwill impairment, concluding the 2023 Annual Report is fair and internal controls are effective - A key focus for 2024 is supporting the transition of the external audit from **KPMG to Deloitte**, effective from January 1, 2024[753](index=753&type=chunk)[777](index=777&type=chunk) - Significant matters reviewed included the valuation of inventories, particularly the **$544 million provision** for excess & obsolete (E&O) inventory, of which **82%** relates to Orthopaedics[760](index=760&type=chunk)[1080](index=1080&type=chunk) - The committee reviewed legal provisions, including the **$149 million provision** for metal-on-metal hip product claims, and concluded the levels were appropriate[761](index=761&type=chunk)[762](index=762&type=chunk) - Impairment reviews were a key focus, resulting in the **full impairment of goodwill and intangible assets** related to the discontinued Engage Surgical business. The Orthopaedics CGU goodwill was also closely reviewed but not impaired[763](index=763&type=chunk)[764](index=764&type=chunk) - The committee reviewed and confirmed the effectiveness of the Group's **internal controls over financial reporting**, in compliance with the UK Corporate Governance Code and the Sarbanes-Oxley Act (SOX)[801](index=801&type=chunk)[803](index=803&type=chunk) [Directors' Remuneration Report](index=124&type=section&id=Directors'%20Remuneration%20Report) The 2023 Remuneration Report proposes amending the Remuneration Policy for US-based Executive Directors to align with US MedTech market norms, including increased CEO share ownership guidelines and a new Restricted Share Programme, deemed crucial for talent retention and long-term stability - A new **Remuneration Policy** is proposed for 2024 to make compensation for US-based executives more competitive with the US MedTech market, where **over 50%** of the company's revenue is generated[817](index=817&type=chunk)[820](index=820&type=chunk) - Proposed changes for US executives include introducing a **Restricted Share Programme (RSP)** of **125% of salary** and increasing the **Performance Share Programme (PSP)** maximum opportunity to **300% of salary**. The share ownership guideline for the CEO will increase from **300% to 500% of salary**[830](index=830&type=chunk)[831](index=831&type=chunk)[837](index=837&type=chunk) 2023 Executive Director Bonus Payout | Executive Director | Total Bonus Earned | Payout as % of Base Salary | | :--- | :--- | :--- | | Deepak Nath (CEO) | $1,997,124 | 130.8% | | Anne-Françoise Nesmes (CFO) | £812,763 | 127.5% | - The **2021 Performance Share Programme (PSP)** award vested at **21% of the maximum opportunity**, based on performance over the 2021-2023 period[851](index=851&type=chunk)[995](index=995&type=chunk) - The CEO pay ratio for 2023 was **72:1** against the median UK employee. Excluding a one-off buy-out award vesting, the ratio would have been **55:1**[1031](index=1031&type=chunk) Accounts [Statement of Directors' Responsibilities](index=159&type=section&id=Statement%20of%20Directors'%20responsibilities) The Directors confirm their responsibility for preparing the Annual Report and financial statements in accordance with applicable laws and regulations, asserting that the financial statements provide a true and fair view of the Group's affairs and that the Annual Report is fair, balanced, and understandable - Directors are responsible for preparing financial statements that give a **'true and fair view'** of the Group's financial position and performance[1058](index=1058&type=chunk) - The Group financial statements are prepared in accordance with both **UK-adopted international accounting standards** and **IFRS as issued by the IASB**[1057](index=1057&type=chunk) - The Directors confirm that the Annual Report is **fair, balanced, and understandable**, providing necessary information for shareholders to assess the company's position, performance, business model, and strategy[1063](index=1063&type=chunk) [Report of Independent Registered Public Accounting Firm](index=159&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) KPMG LLP issued an unqualified opinion on Smith & Nephew's consolidated financial statements for the three-year period ended December 31, 2023, and confirmed the effectiveness of internal control over financial reporting, while identifying three critical audit matters - **KPMG** issued an **unqualified audit opinion**, stating the consolidated financial statements are fairly presented in accordance with IFRS[1069](index=1069&type=chunk) - **KPMG** also provided a positive opinion on the effectiveness of the Group's **internal control over financial reporting** as of December 31, 2023[1069](index=1069&type=chunk) - Three critical audit matters were identified: 1) **Recoverability of Orthopaedics CGU goodwill**, 2) **Provision for excess and obsolescence (E&O) for Orthopaedics inventory**, and 3) **Provision for metal-on-metal hip products**[1077](index=1077&type=chunk)[1080](index=1080&type=chunk)[1082](index=1082&type=chunk) [Group Financial Statements](index=174&type=section&id=Group%20financial%20statements) The Group's financial statements for 2023 show revenue of $5.55 billion and an attributable profit of $263 million, with total assets of $9.99 billion and total equity of $5.22 billion, reflecting a net cash inflow from operating activities of $608 million Group Income Statement Highlights (Year ended Dec 31, 2023) | Item | 2023 ($ million) | 2022 ($ million) | | :--- | :--- | :--- | | Revenue | 5,549 | 5,215 | | Gross profit | 3,819 | 3,675 | | Operating profit | 425 | 450 | | Profit before taxation | 290 | 235 | | **Attributable profit for the year** | **263** | **223** | Group Balance Sheet Highlights (As of Dec 31, 2023) | Item | 2023 ($ million) | 2022 ($ million) | | :--- | :--- | :--- | | Total assets | 9,987 | 9,966 | | Total liabilities | 4,770 | 4,707 | | **Total equity** | **5,217** | **5,259** | Group Cash Flow Statement Highlights (Year ended Dec 31, 2023) | Item | 2023 ($ million) | 2022 ($ million) | | :--- | :--- | :--- | | Net cash inflow from operating activities | 608 | 468 | | Net cash used in investing activities | (448) | (472) | | Net cash used in financing activities | (200) | (926) | | **Net decrease in cash and cash equivalents** | **(40)** | **(930)** | [Notes to the Group Accounts](index=179&type=section&id=Notes%20to%20the%20Group%20accounts) The notes to the Group accounts detail accounting policies and financial figures, highlighting critical estimates in inventory valuation, legal provisions, and impairment testing, and reporting segment performance and post-balance sheet events - Critical accounting estimates involve **valuation of inventories** (especially for Orthopaedics), **liability provisions for legal disputes** (e.g., metal-on-metal hip cases), and **impairment of goodwill and intangible assets**[1136](index=1136&type=chunk)[1154](index=1154&type=chunk)[1157](index=1157&type=chunk)[1159](index=1159&type=chunk) 2023 Revenue and Trading Profit by Segment ($ million) | Segment | Revenue | Trading Profit | | :--- | :--- | :--- | | Orthopaedics | 2,214 | 398 | | Sports Medicine & ENT | 1,729 | 503 | | Advanced Wound Management | 1,606 | 472 | | **Total Segment** | **5,549** | **1,373** | - The provision for metal-on-metal hip claims was **$149 million** at year-end 2023, down from **$239 million** in 2022, primarily due to utilization[1369](index=1369&type=chunk)[1370](index=1370&type=chunk) - Post-balance sheet, the Group completed the acquisition of **CartiHeal** on January 9, 2024, for an initial cash payment of **$180 million**[1460](index=1460&type=chunk) Other Information [Risk Factors](index=240&type=section&id=Risk%20factors) Smith+Nephew faces significant risks including supply chain disruptions, intense market competition requiring continuous innovation, pricing and reimbursement pressures, and substantial legal and compliance risks such as product liability claims and cybersecurity threats - Global supply chain risks include **disruption at key manufacturing sites**, **reliance on single-source suppliers**, and **increased costs** from geopolitical events and freight issues[1523](index=1523&type=chunk)[1524](index=1524&type=chunk) - The company faces **intense competition**, requiring **continuous new product innovation**. Failure to innovate or integrate acquisitions successfully could lead to **loss of market share**[1533](index=1533&type=chunk)[1544](index=1544&type=chunk) - **Pricing and reimbursement pressures** from government-controlled healthcare systems and initiatives like **volume-based procurement** pose a significant risk to revenue and margins[1536](index=1536&type=chunk)[1539](index=1539&type=chunk) - Legal and compliance risks are substantial, including **product liability claims** (e.g., metal-on-metal hips), adherence to complex global regulations like **EU MDR**, and managing **cybersecurity threats**[1554](index=1554&type=chunk)[1558](index=1558&type=chunk)[1551](index=1551&type=chunk) [Non-IFRS Financial Information - Adjusted Measures](index=247&type=section&id=Non-IFRS%20financial%20information%20-%20Adjusted%20measures) Smith+Nephew uses non-IFRS financial measures like underlying revenue growth, trading profit, and adjusted EPS (EPSA) to provide a clearer view of its underlying performance by excluding specific items, aiding management assessment and investor understanding of trends - The company uses non-IFRS measures like **trading profit**, **underlying revenue growth**, and **EPSA** to show underlying performance, excluding items such as acquisition costs, restructuring, and major legal expenses[1587](index=1587&type=chunk) Reconciliation of Reported to Underlying Revenue Growth (2023) | Metric | Value | | :--- | :--- | | Reported Growth | 6.4% | | Currency Impact | (0.8)% | | Acquisitions/Disposals | 0.0% | | **Underlying Growth** | **7.2%** | Reconciliation of Operating Profit to Trading Profit (2023, $ million) | Item | Value | | :--- | :--- | | **Operating Profit** | **425** | | Acquisition and disposal-related items | 60 | | Restructuring and rationalisation costs | 220 | | Amortisation and impairment of acquisition intangibles | 207 | | Legal and other | 58 | | **Trading Profit** | **970** | - Adjusted Earnings Per Share (EPSA) for 2023 was **82.8¢**, reconciled from a basic EPS of **30.2¢** by adjusting for the after-tax impact of the excluded items[1599](index=1599&type=chunk)[1600](index=1600&type=chunk) [Shareholder Information](index=251&type=section&id=Shareholder%20information) This section provides key information for Smith & Nephew plc shareholders, including its dual listing on the LSE and NYSE, progressive dividend policy, major shareholder interests, and tax implications - The company's ordinary shares are listed on the **LSE (SN.)** and as **ADSs on the NYSE (SNN)**, with each ADS representing **two ordinary shares**[1619](index=1619&type=chunk) Dividend History (US cents per share) | Year | Interim | Final | Total | | :--- | :--- | :--- | :--- | | 2023 | 14.40 | 23.10 | 37.50 | | 2022 | 14.40 | 23.10 | 37.50 | | 2021 | 14.40 | 23.10 | 37.50 | | 2020 | 14.40 | 23.10 | 37.50 | | 2019 | 14.40 | 23.10 | 37.50 | - As of February 16, 2024, **BlackRock, Inc.** was the only shareholder with a holding exceeding **3%**, at **5.2%** of issued shares[1639](index=1639&type=chunk)[1647](index=1647&type=chunk) - The Annual General Meeting (AGM) will be held on **May 1, 2024**[1724](index=1724&type=chunk)

Financial Data and Key Metrics Changes - Revenue for 2023 was $5.5 billion, representing a 7.2% growth on an underlying basis and 6.4% on a reported basis, despite an 80 basis points headwind from foreign exchange [1] - Trading profit increased by 7.6% to $970 million, with a trading margin of 17.5%, consistent with guidance [1] - Adjusted earnings per share grew by 1.3% to $0.828, while basic earnings per share increased by 18% to $0.302 [21] Performance by Business Lines - Orthopaedics grew by 5.7% for the year, with specific growth of 4.9% in Q4 [17][6] - Sports Medicine and ENT grew by 10.9% for the year, with underlying revenue growth of 7.1% in Q4 [17][10] - Advanced Wound Management (AWM) grew by 6.4% for the year, with underlying revenue growth of 7.8% in Q4 [17][14] Performance by Markets - U.S. revenue grew by 6.2%, established markets rose by 6.1%, and emerging markets grew by 7.6% [5] - Growth in emerging markets was impacted by headwinds from Sports Medicine VBP implementation in China [5] Company Strategy and Industry Competition - The company expects underlying revenue growth of 5% to 6% for 2024, with improvements in Orthopaedics and continued strong performance in Sports Medicine and AWM [27] - The 12-Point Plan is central to improving overall performance, with significant progress noted in operational efficiency and product availability [33][34] - The company aims for a trading margin expansion to at least 18% in 2024, with a midterm target of at least 20% by 2025 [29][31] Management's Comments on Operating Environment and Future Outlook - Management acknowledged macroeconomic headwinds, including input cost inflation and transactional FX, but expects to offset these through productivity improvements and operational leverage [29][30] - The implementation of China Sports Medicine VBP is anticipated to be a headwind, expected to impact growth by around 5 percentage points [13][27] Other Important Information - Trading cash flow for the full year was $635 million, with a trading cash conversion of 65% [22] - Net debt at the end of the year was $2.8 billion, with a leverage ratio of 2.1x adjusted EBITDA [25] Q&A Session Summary Question: What went wrong with the Knees performance in Q4? - The U.S. Knees specific SKUs were slow to come, particularly OXINIUM related, impacting replenishment and set delivery [61] - Expected turnover from performance management occurred later than anticipated, contributing to weaker performance [62] Question: Can you elaborate on manufacturing initiatives and expected cost savings? - The company is optimizing its manufacturing footprint, closing plants in Tuttlingen, Lyon, and Beijing, with volumes shifted to Memphis and Malaysia [66] - Significant margin benefits are expected from these changes, although specific savings figures were not disclosed [67] Question: How do you see margin phasing in 2024? - The company expects a more normalized year in terms of first half margin, with growth anticipated from H1 to H1 [68] - Factors affecting margin include previous one-off investments and matured productivity measures from the prior year [69]

Emerging Markets $250m • Record CORI◊placements in US Q4 sales factors Future drivers Q4 sales factors Future drivers 7.8% 7.1% 4.9% Group 6.4% | --- | --- | |-------|-------| | | | | | | 7 * Growth rates are versus Q4 2022 8 FY revenue growth by Business Unit | --- | --- | --- | --- | |--------------------------------------|------------|------------|-----------------| | | FY 2023 $m | FY 2022 $m | Reported growth | | IFRS operating profit | 425 | 450 | (5.4%) | | IFRS operating profit margin | 7.7% | 8.6% ...

Forward looking statements and non-IFRS measures ◊ Trademark of Smith+Nephew. Certain marks registered in US Patent and Trademark Office. • Ortho step up in growth, as expected • Operational KPI progress translating into better revenue growth weep / 4 Business unit growth Orthopaedics $536m 3.6% 11.1% 8.3% Group 7.7% +8.3% Knees: US -1.3%, OUS +15.2% Hips: US +3.6%, OUS +3.4% Future drivers • Hips and Knees include return to growth in China, VBP fully lapped • CORI◊penetration continues to accelerate; first ...

Financial Data and Key Metrics Changes - The company reported third-quarter revenue of $1.4 billion, representing 7.7% underlying growth, with all business units and regions contributing positively [25][76]. - The full-year revenue growth guidance has been refined to the higher end of the 6% to 7% range, reflecting good momentum and improving execution [6][32]. - Trading margin guidance is now around 17.5%, reflecting additional headwinds, particularly from China [6][77]. Business Line Data and Key Metrics Changes - Orthopedics growth has accelerated, with underlying growth of 8.3% in the third quarter, following 3.9% in Q1 and 5.8% in Q2 [100]. - Advanced Wound Management grew 3.6% underlying, with a notable decline in bioactives by 4.8% due to production transition issues [71][72]. - Sports Medicine experienced growth of 11.1%, driven by internal and external innovations, although it faced headwinds from a slowing market in China [66][68]. Market Data and Key Metrics Changes - Growth was broad-based across regions, with 7.2% growth in the US, 7.8% in other established markets, and 9.2% in emerging markets [7]. - In China, sales were down 1.4%, impacted by a slowdown in Sports Medicine and destocking in anticipation of the VBP process [7][68]. - The ENT segment grew 40.2%, driven by the core tonsil and adenoid business, although demand growth is expected to moderate [70]. Company Strategy and Development Direction - The company is advancing a 12-point plan aimed at operational improvements and cost reductions, which is expected to drive key metrics toward their targets [24][78]. - There is a focus on enhancing product availability and commercial execution, particularly in orthopedics, to sustain growth [100][104]. - The company is also investing in innovation, with a pipeline that includes new applications for existing products and expansion into new markets [79][66]. Management's Comments on Operating Environment and Future Outlook - Management noted that the healthcare market is experiencing a slowdown, impacting overall performance, particularly in orthopedics and sports [10][46]. - Despite challenges, management remains optimistic about achieving midterm guidance, citing operational improvements and revenue leverage as key factors [55][56]. - The company expects to see a normalization in growth rates as it moves into 2024, with ongoing productivity gains and improved pricing strategies [54][55]. Other Important Information - The company announced the closure of two smaller factories, representing a 20% reduction in manufacturing footprint, which is expected to contribute to gross margin improvement [14][24]. - There are ongoing challenges related to product supply, particularly in the US knee business, which has impacted growth [19][44]. - The impact of the anticorruption campaign in China remains uncertain, but management does not expect it to persist indefinitely [46][130]. Q&A Session Summary Question: What are the underlying trends in the orthopedic side? - Management highlighted that growth in orthopedics was driven by the other reconstruction segment, with regional variations noted [82]. Question: Can you provide insights on pricing contributions to growth? - Management indicated that pricing has shown low single-digit positive growth, contributing to overall performance [83]. Question: What is the current status of CORI placements? - Management confirmed progress towards the placement target for CORI, with a focus on both placements and utilization [111]. Question: How is the company addressing the impact of VBP? - Management explained that the expanded scope of VBP is expected to impact 1.5% to 2% of group sales, with ongoing adjustments being made [126]. Question: What are the expectations for the 2025 margin target? - Management remains confident in achieving the 20% margin target, despite new headwinds, citing operational improvements and cost reduction initiatives [121][125].

| --- | --- | --- | --- | --- | --- | |-------------------|-------|-----------------------------------------|------------------------------------|-----------------------------------|--------------------------------------------| | Overall progress | | Fixing Orthopaedics \n1 point | Improving productivity \n2 points | | Accelerating Sports & AWM \n1 point | | | 50% | Rewire Orthopaedics commercial delivery | | Improve value and cash processes | Scale Negative Pressure Wound Therapy 50% | | c.45% | | | | | | ...

Smith & Nephew plc (NYSE:SNN) Q2 2023 Earnings Conference Call August 3, 2023 3:30 AM ET Company Participants Deepak Nath - Chief Executive Officer Anne-Francoise Nesmes - Chief Financial Officer Conference Call Participants Jack Reynolds-Clark - RBC Hassan Al-Wakeel - Barclays Graham Doyle - UBS Veronika Dubajova - Citi David Adlington - JPMorgan Robert Davies - Morgan Stanley Chris Gretler - Credit Suisse Deepak Nath Good morning. Welcome to the Smith & Nephew Second Quarter and First Half Results Call. I ...

[Financial & Operational Highlights](index=4&type=section&id=Smith%2BNephew%20Second%20Quarter%20and%20First%20Half%202023%20Results) [Q2 & H1 2023 Performance Summary](index=4&type=section&id=Q2%20%26%20H1%202023%20Performance%20Summary) Smith+Nephew reported strong revenue growth for the second quarter and first half of 2023, with Q2 underlying revenue up 7.8% and H1 up 7.3%, driven by growth across all business units, particularly a 12.0% underlying increase in Sports Medicine & ENT in Q2, though H1 trading profit margin declined to 15.3% from 16.9% year-over-year due to inflation, foreign exchange headwinds, and increased sales and marketing expenses, while the interim dividend remained unchanged at 14.4 cents per share H1 2023 Key Financial Results (vs H1 2022) | Metric | H1 2023 | H1 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $2,734 million | $2,600 million | +5.2% (Reported) | | Underlying Revenue Growth | 7.3% | - | - | | Operating Profit | $275 million | $242 million | +13.6% | | Trading Profit | $417 million | $440 million | -5.2% | | Trading Profit Margin | 15.3% | 16.9% | -160 basis points | | EPS (cents) | 19.7¢ | 20.2¢ | -2.5% | | EPSA (cents) | 34.9¢ | 38.1¢ | -8.4% | Q2 2023 Underlying Revenue Growth by Business Unit | Business Unit | Q2 2023 Underlying Growth | | :--- | :--- | | **Total Revenue** | **+7.8%** | | Orthopaedics | +5.8% | | Sports Medicine & ENT | +12.0% | | Advanced Wound Management | +6.2% | - The H1 trading profit margin of **15.3%** was impacted by expected seasonality, higher input inflation, transactional FX, and increased sales and marketing investments to fuel growth[13](index=13&type=chunk) - The interim dividend was maintained at **14.4¢** per share, consistent with the prior year[13](index=13&type=chunk) [2023 Full Year Outlook](index=4&type=section&id=2023%20Full%20Year%20Outlook) The company has raised its full-year underlying revenue growth guidance to a range of 6.0% to 7.0%, up from the previous 5.0% to 6.0%, while the trading profit margin guidance remains unchanged, expected to be at least 17.5%, with a significant step-up anticipated in the second half, and the forecast tax rate on trading results has been lowered to around 17% Updated 2023 Full Year Guidance | Metric | Previous Guidance | Updated Guidance | | :--- | :--- | :--- | | Underlying Revenue Growth | 5.0% to 6.0% | 6.0% to 7.0% | | Trading Profit Margin | At least 17.5% | At least 17.5% (Unchanged) | | Tax Rate on Trading Results | Around 19% | Around 17% | - A significant improvement in trading profit margin is expected in the second half, driven by seasonality, operating leverage from revenue growth, and productivity benefits, which are anticipated to more than offset headwinds from inflation and a **-120 basis points** transactional foreign exchange impact[71](index=71&type=chunk) [Strategic Highlights](index=6&type=section&id=Strategic%20Highlights) The company is making significant progress on its 12-Point Plan, which is focused on fixing Orthopaedics, improving productivity, and accelerating growth in its other business units, with key achievements including improved product availability in Orthopaedics and an increased cadence of new product launches, while concurrently, CFO Anne-Françoise Nesmes will step down in Q2 2024, with an external search for her successor underway - The 12-Point Plan is showing progress, with significant improvements in product availability and commercial execution in Orthopaedics[17](index=17&type=chunk) - The company has increased its pace of innovation, with **13** new products launched in H1 2023, and is on track to meet its full-year target of **25** launches[17](index=17&type=chunk)[34](index=34&type=chunk) - Chief Financial Officer Anne-Françoise Nesmes will step down in the **second quarter of 2024**, and the Board has initiated an external search for a successor[17](index=17&type=chunk) [Business Performance Review](index=8&type=section&id=Business%20Performance%20Review) [Delivering our transformational Strategy for Growth](index=8&type=section&id=Delivering%20our%20transformational%20Strategy%20for%20Growth) The company's 12-Point Plan, initiated in July 2022, is on track to transform business performance, focusing on fixing Orthopaedics, improving productivity, and accelerating growth in Advanced Wound Management and Sports Medicine & ENT, with overdue orders in Orthopaedics reduced by approximately 50% from their peak, and productivity initiatives expected to yield over $200 million in annual savings by 2025, with inventory levels projected to decrease in the second half of 2023 - The 12-Point Plan focuses on: - Fixing Orthopaedics to regain momentum and win share - Improving productivity to expand trading profit margin - Further accelerating growth in Advanced Wound Management and Sports Medicine & ENT[29](index=29&type=chunk) - Progress in fixing Orthopaedics includes reducing overdue orders by around **50%** from the H1 2022 peak and improving customer order fill rates (LIFR)[27](index=27&type=chunk) - Productivity actions are projected to deliver over **$200 million** in annual savings by 2025, with associated restructuring costs of around **$275 million** over three years[32](index=32&type=chunk) - Inventory levels are expected to start falling in the second half of the year as new products are rolled out and raw materials are consumed[30](index=30&type=chunk) [Increasing our cadence of innovation](index=10&type=section&id=Increasing%20our%20cadence%20of%20innovation) Innovation is a key pillar of the company's growth strategy, with 13 new products launched in H1 2023 out of a targeted 25 for the full year, including enhancements to the CORI Surgical System, such as a Digital Tensioner and a new saw solution, and the introduction of the AETOS Shoulder System to compete in the fast-growing shoulder market and the RENASYS EDGE Negative Pressure Wound Therapy System - The CORI Surgical System was enhanced with the CORI Digital Tensioner for soft tissue balancing and received FDA 510(k) clearance for a saw solution, adding versatility to the robotics platform[35](index=35&type=chunk)[37](index=37&type=chunk) - The AETOS Shoulder System was introduced to compete in the **$1.3 billion** shoulder market, which is growing at approximately **9% CAGR**[38](index=38&type=chunk)[40](index=40&type=chunk) - In Advanced Wound Management, the new RENASYS EDGE Negative Pressure Wound Therapy System was launched, designed for improved efficiency and simplicity[42](index=42&type=chunk) - In Sports Medicine, the UltraTRAC QUAD ACL Reconstruction Technique was introduced, expanding the company's procedural solutions for knee repair[41](index=41&type=chunk) [Second Quarter 2023 Trading Update](index=12&type=section&id=Second%20Quarter%202023%20Trading%20Update) In Q2 2023, Smith+Nephew achieved underlying revenue growth of 7.8% to $1,379 million, driven by strong elective procedure volumes and solid performance across all business units, with Orthopaedics growing 5.8%, Sports Medicine & ENT surging by 12.0%, and Advanced Wound Management increasing by 6.2%, demonstrating robust growth in both Established Markets (+7.1%) and Emerging Markets (+11.0%) Q2 2023 Consolidated Revenue Analysis (in millions of US dollars) | Category | Q2 2023 | Q2 2022 | Reported Growth | Underlying Growth | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | **$1,379 million** | **$1,293 million** | **+6.6%** | **+7.8%** | | Orthopaedics | $554 million | $530 million | +4.6% | +5.8% | | Sports Medicine & ENT | $422 million | $381 million | +10.4% | +12.0% | | Advanced Wound Management | $403 million | $382 million | +5.5% | +6.2% | [Q2 Performance by Business Unit](index=14&type=section&id=Q2%20Performance%20by%20Business%20Unit) In Q2, Orthopaedics revenue grew 5.8% underlying, with Knee Implants up 7.8% and Hip Implants up 3.4%, while Sports Medicine & ENT was a standout performer with 12.0% growth, driven by a 12.5% increase in Joint Repair and a 38.9% surge in ENT, and Advanced Wound Management grew 6.2%, led by a 21.4% increase in Advanced Wound Devices, particularly the PICO and RENASYS systems - **Orthopaedics:** Grew **5.8%** underlying, with Knee Implants rising **7.8%** and Hip Implants **3.4%**, and Other Reconstruction, including robotics, growing **21.0%**[50](index=50&type=chunk)[51](index=51&type=chunk) - **Sports Medicine & ENT:** Grew **12.0%** underlying, with Sports Medicine Joint Repair up **12.5%**, and ENT surging **38.9%** due to the recovery in tonsil and adenoid procedures[53](index=53&type=chunk)[54](index=54&type=chunk) - **Advanced Wound Management:** Grew **6.2%** underlying, with Advanced Wound Devices leading with **21.4%** growth, driven by strong performance from both PICO and RENASYS negative pressure systems[55](index=55&type=chunk)[56](index=56&type=chunk) [Q2 Performance by Geography](index=12&type=section&id=Q2%20Performance%20by%20Geography) Geographically, Q2 2023 revenue growth was strong across the board, with Established Markets growing 7.1% underlying, including the US up 6.3% and Other Established Markets up 8.5%, while Emerging Markets delivered robust growth of 11.0% underlying, largely due to volume recovery in China following earlier COVID-related restrictions Q2 2023 Underlying Revenue Growth by Geography | Geography | Underlying Growth | | :--- | :--- | | Established Markets | +7.1% | | - US | +6.3% | | - Other Established Markets | +8.5% | | Emerging Markets | +11.0% | [First Half 2023 Consolidated Analysis](index=16&type=section&id=First%20Half%202023%20Consolidated%20Analysis) For the first half of 2023, revenue was $2,734 million, up 7.3% underlying, with trading profit at $417 million, resulting in a trading profit margin of 15.3%, down from 16.9% in H1 2022 due to inflation and strategic investments, while cash generated from operations was $215 million, with trading cash flow at $110 million, impacted by an increase in inventory, and net debt increased to $2,656 million, and the company declared an interim dividend of 14.4 cents per share - H1 trading profit was **$417 million** with a margin of **15.3%**, compared to **$440 million** and **16.9%** in H1 2022, with the decline attributed to inflation, FX headwinds, and increased sales and marketing expenses[61](index=61&type=chunk) - Trading cash flow was **$110 million** (H1 2022: **$154 million**), with a trading profit to cash conversion ratio of **26%** (H1 2022: **35%**), and the reduction was primarily due to increased inventory, which is expected to decrease in H2 2023[63](index=63&type=chunk)[64](index=64&type=chunk) - Net debt (excluding lease liabilities) increased to **$2,656 million** at the end of H1 2023, up from **$2,339 million** at the end of 2022[65](index=65&type=chunk) - Adjusted earnings per share (EPSA) was **34.9¢**, a decrease from **38.1¢** in H1 2022[68](index=68&type=chunk) [Condensed Consolidated Interim Financial Statements](index=24&type=section&id=2023%20HALF%20YEAR%20CONDENSED%20CONSOLIDATED%20INTERIM%20FINANCIAL%20STATEMENTS) [Group Income Statement](index=24&type=section&id=Unaudited%20Group%20Income%20Statement) For the half year ended July 1, 2023, the company reported revenue of $2,734 million, an increase from $2,600 million in the prior-year period, with operating profit growing to $275 million from $242 million, though attributable profit for the period slightly decreased to $172 million compared to $177 million in H1 2022, resulting in a basic EPS of 19.7 cents H1 2023 Income Statement Summary (in millions of US dollars) | Line Item | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Revenue | 2,734 million | 2,600 million | | Gross Profit | 1,898 million | 1,827 million | | Operating Profit | 275 million | 242 million | | Profit before taxation | 211 million | 204 million | | Attributable profit | 172 million | 177 million | | Basic EPS | 19.7¢ | 20.2¢ | [Group Balance Sheet](index=25&type=section&id=Unaudited%20Group%20Balance%20Sheet) As of July 1, 2023, total assets stood at $9,844 million, a slight decrease from $9,966 million at the end of 2022, with total equity at $5,233 million, and a notable change being the increase in inventories to $2,411 million from $2,205 million at year-end 2022, while total liabilities were $4,611 million Balance Sheet Summary (in millions of US dollars) | Category | 1 July 2023 | 31 Dec 2022 | | :--- | :--- | :--- | | **Total Assets** | **9,844 million** | **9,966 million** | | Inventories | 2,411 million | 2,205 million | | Goodwill | 3,049 million | 3,031 million | | **Total Liabilities** | **4,611 million** | **4,707 million** | | Long-term borrowings | 2,633 million | 2,712 million | | **Total Equity** | **5,233 million** | **5,259 million** | [Condensed Group Cash Flow Statement](index=27&type=section&id=Unaudited%20Condensed%20Group%20Cash%20Flow%20Statement) For H1 2023, net cash inflow from operating activities was $113 million, a decrease from $207 million in H1 2022, primarily due to a larger negative movement in working capital, with net cash used in investing activities at $182 million, and net cash used in financing activities at $86 million, resulting in a net decrease in cash and cash equivalents of $155 million for the period H1 2023 Cash Flow Summary (in millions of US dollars) | Category | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Cash generated from operations | 215 million | 227 million | | **Net cash inflow from operating activities** | **113 million** | **207 million** | | Net cash used in investing activities | (182 million) | (268 million) | | Net cash used in financing activities | (86 million) | (704 million) | | **Net decrease in cash and cash equivalents** | **(155 million)** | **(765 million)** | | Cash and cash equivalents at end of period | 183 million | 512 million | [Group Statement of Changes in Equity](index=28&type=section&id=Unaudited%20Group%20Statement%20of%20Changes%20in%20Equity) Total equity decreased from $5,259 million at the beginning of 2023 to $5,233 million as of July 1, 2023, primarily driven by the payment of equity dividends totaling $201 million, which was partially offset by the attributable profit of $172 million for the period - Total equity started at **$5,259 million** on Jan 1, 2023 and ended at **$5,233 million** on July 1, 2023[87](index=87&type=chunk) - Key movements in equity included attributable profit of **+$172 million**, other comprehensive loss of **-$18 million**, and equity dividends paid of **-$201 million**[87](index=87&type=chunk) [Notes to the Financial Statements](index=29&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Interim%20Financial%20Statements) [Note 1: Basis of Preparation and Accounting Policies](index=29&type=section&id=1.%20Basis%20of%20preparation%20and%20accounting%20policies) The interim financial statements were prepared in accordance with IAS 34 and on a going concern basis, with directors concluding the Group has sufficient resources to continue operations for at least 12 months despite the challenging economic environment, and the principal risks remain consistent with the 2022 Annual Report, including supply chain, commercial execution, and cybersecurity, while critical estimates relate to inventory valuation, legal provisions, and impairment - The financial statements have been prepared on a going concern basis, with directors concluding the Group has sufficient resources and headroom on its borrowing facilities and financial covenants[91](index=91&type=chunk)[93](index=93&type=chunk) - The provision for excess and obsolete inventory increased from **$504 million** at year-end 2022 to **$576 million** at 1 July 2023, primarily due to higher inventory levels[105](index=105&type=chunk) - The principal risks and uncertainties are consistent with the 2022 Annual Report and include business continuity, commercial execution, cybersecurity, global supply chain, and legal/compliance risks[94](index=94&type=chunk) [Note 2: Business Segment Information](index=33&type=section&id=2.%20Business%20segment%20information) The Group operates and reports across three global business units: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management, with H1 2023 Orthopaedics generating $1,102 million in revenue and $174 million in trading profit, Sports Medicine & ENT having revenue of $843 million and trading profit of $224 million, and Advanced Wound Management reporting revenue of $789 million and trading profit of $223 million, while total Group trading profit of $417 million was reconciled from a Group operating profit of $275 million H1 2023 Revenue and Trading Profit by Segment (in millions of US dollars) | Segment | Revenue | Trading Profit | | :--- | :--- | :--- | | Orthopaedics | 1,102 million | 174 million | | Sports Medicine & ENT | 843 million | 224 million | | Advanced Wound Management | 789 million | 223 million | | **Segment Total** | **2,734 million** | **621 million** | | Corporate Costs | - | (204 million) | | **Group Trading Profit** | **-** | **417 million** | - Group operating profit of **$275 million** was adjusted for items including restructuring costs (**$46 million**) and amortisation of acquisition intangibles (**$102 million**) to arrive at the Group trading profit of **$417 million**[128](index=128&type=chunk) [Note 3: Taxation](index=41&type=section&id=3.%20Taxation) The reported tax charge for H1 2023 was $39 million, resulting in an effective tax rate of 18.5%, compared to a 13.2% rate in H1 2022, and the Group will be subject to the OECD Pillar Two model rules starting in 2024, which is expected to increase the Group's tax rate - The reported tax charge for H1 2023 was **$39 million**, with an effective tax rate of **18.5%**[136](index=136&type=chunk) - The Group will be subject to the OECD Pillar Two global minimum tax rate of **15%** from **2024**, which is expected to increase the Group's tax rate[137](index=137&type=chunk) [Note 4: Dividends](index=42&type=section&id=4.%20Dividends) The Board approved an interim dividend for 2023 of 14.4 US cents per ordinary share, payable on November 1, 2023, to shareholders on record as of October 6, 2023, following the 2022 final dividend of $201 million paid on May 17, 2023 - The 2023 interim dividend was approved at **14.4 US cents** per share, payable on November 1, 2023[139](index=139&type=chunk) [Note 6: Net Debt](index=43&type=section&id=6.%20Net%20debt) As of July 1, 2023, net debt including lease liabilities was $2,849 million, an increase from $2,535 million at the end of 2022, with net debt excluding lease liabilities standing at $2,656 million, and the Group has private placement debt of $105 million due for repayment in the second half of 2023 and another $100 million due in the first half of 2024 Net Debt Position (in millions of US dollars) | Category | 1 July 2023 | 31 Dec 2022 | | :--- | :--- | :--- | | Net debt (excl. leases) | 2,656 million | 2,339 million | | Net debt (incl. leases) | 2,849 million | 2,535 million | - The Group has upcoming debt repayments of **$105 million** in H2 2023 and **$100 million** in H1 2024 from private placement debt[145](index=145&type=chunk) [Other Disclosures](index=49&type=section&id=Other%20Disclosures) [Directors' Responsibilities and Independent Review Report](index=49&type=section&id=Directors'%20Responsibilities%20and%20Independent%20Review%20Report) The Directors confirmed that the interim financial statements were prepared in accordance with IAS 34 and provide a fair review of the company's performance and position, and the independent auditor, KPMG LLP, concluded their review by stating that nothing has come to their attention to suggest the financial statements are not prepared in all material respects in accordance with IAS 34 and UK regulations - The Directors confirmed the interim financial statements were prepared in accordance with IAS 34[160](index=160&type=chunk) - KPMG LLP, the independent auditor, provided a review conclusion stating no material misstatements were found, but noted a review is substantially less in scope than an audit[162](index=162&type=chunk)[164](index=164&type=chunk) [Reconciliation of Non-IFRS Measures](index=51&type=section&id=Other%20information) This section defines and reconciles non-IFRS financial measures used by management, such as underlying revenue growth, trading profit, and Adjusted EPS (EPSA), where underlying revenue growth adjusts for currency effects and acquisitions/disposals, and trading profit excludes items like acquisition-related costs, restructuring charges, and significant legal expenses to show underlying performance, with H1 2023 reported EPS of 19.7 cents adjusted to an EPSA of 34.9 cents - Underlying revenue growth is a non-IFRS measure that adjusts reported revenue for constant currency exchange effects and the impact of acquisitions and disposals[176](index=176&type=chunk) - Trading profit is a non-IFRS measure that excludes items such as acquisition/disposal costs, restructuring expenses, amortisation of acquisition intangibles, and significant legal costs from operating profit[179](index=179&type=chunk) H1 2023 Reconciliation of Reported EPS to EPSA (in cents) | Description | Per Share Amount (¢) | | :--- | :--- | | **Reported Basic EPS** | **19.7¢** | | Acquisition and disposal related items | 0.1¢ | | Restructuring and rationalisation costs | 4.6¢ | | Amortisation of acquisition intangibles | 9.1¢ | | Legal and other | 1.4¢ | | **Adjusted EPS (EPSA)** | **34.9¢** |