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Chief Executive Officer's review

Dear Shareholder

Everyone has health issues at some stage in their life. At Smith & Nephew, we have the opportunity to help patients get back to their lives as quickly as possible, and as well as possible. Whether it be in Orthopaedics, Sports Medicine or Wound Management we recognise this opportunity and it inspires and motivates our work each day around the world.

Creating a purpose-driven culture

I believe that a successful and sustainable business has a foundation that is built on a purpose-driven culture. When I joined, we asked our employees which elements of our culture they liked and that we should retain, as well as what we needed to improve at Smith & Nephew. 6,000 employees responded.

It was clear that our colleagues cared deeply about the work that we do. It was also clear that they recognised that we could do better. The opportunity was to find an authentic and inspiring purpose that combines this caring spirit with a greater focus on working more effectively and instilling a strong accountability to deliver consistently on our commitments.

Life Unlimited captures the essence of Smith & Nephew and our purpose to address meaningfully the health issues that hinder people from living their lives to their fullest.

To support this brand purpose we have developed three culture pillars: Care, Collaboration and Courage - which we launched with employees at the end of 2018. Grounded in the service of patients and practitioners, these simple tenets guide us in our work together and couple the idea of continuous learning and improvement with the aspiration to lead in all our endeavours.

Our business and strategic imperatives

Smith & Nephew is a portfolio medical technology company with a broad and deep range of high quality products. We have examples of market-leading technology in almost every area of our business. We also operate in large and attractive global markets, with solid long-term growth prospects supported by favourable demographics and lifestyle trends.

At the end of 2018, we launched five new strategic imperatives that recognise the specific business and markets we operate in, and form the basis of our value creation plan for the medium-term.

  1. Achieve the full potential of our portfolio
  2. Transform the business through enabling technologies
  3. Expand in high-growth segments
  4. Strengthen talent and capabilities
  5. Become the best owner

These highlight the key multi-year initiatives in which the Company is now engaged. They also detail the specific plans and metrics for the upcoming calendar year from which all employees build their own individual annual objectives.

Increasing customer centricity

One of the most significant changes we are making is implementing a new commercial model. In line with industry best practice for global medical technology businesses, we are moving from a regional selling model to a global franchise structure. We have put dedicated presidents of Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management in place.

Each president has global upstream marketing responsibility, as well as full commercial responsibility for the franchise in the US. Outside the US, we will have two regions, Europe, Middle East and Africa, and Asia Pacific. Both regions are now represented on the Smith & Nephew Executive Committee ensuring continued focus on commercial execution. As specialists, the presidents bring great insight into our customers' current and future needs, wherever they are in the world and will be able to direct the full resources of their franchises to meet these.

I am delighted with the quality of leaders we have attracted. The focus is now on unlocking the potential of Smith & Nephew, with five members of my executive team directly responsible for driving growth in their franchises and regions.

Adding value through acquisitions

Smith & Nephew completed 2018 with a net debt1 to adjusted EBITDA ratio2 of 0.8x and, with strong cash flows and cash conversion, we will look to appropriately deploy capital to M&A initiatives more significantly than in recent years as part of our business model for success.

Technology acquisitions such as Rotation Medical have proven to be a great success. From its REGENETEN™ Bioinductive Implant for rotator cuff repair, we have driven performance well-ahead of our deal model, with more than 130% growth in 2018. We believe there is still much more to come from this product as we add manufacturing capacity and launch in new international markets in 2019.

In December, we announced the acquisition of Ceterix Orthopaedics, the developer of the NovoStitch™ Pro Meniscal Repair System. This product is highly complementary to our portfolio and will significantly expand our opportunity in the underserved meniscal repair segment.

I expect us to continue to enhance our position in high-growth, high-innovation markets over time and capitalise on our platform as a global medical device portfolio company.

2018 results

In 2018, revenue growth was 3% on a reported basis and 2% underlying, and we delivered a meaningful improvement in trading profit margin.

Geographically, we continued to build upon our strong position in the Emerging Markets, which now account for 17% of Group revenue. A solid performance in the US, our largest market, was somewhat offset by continued weakness in some European markets.

At a franchise level, highlights included the market beating growth from Knee Implants, the strong return to growth delivered in Hip Implants, and the increased adoption of our NAVIO robotics platform. Growth from our Advanced Wound Devices franchise also stood out, driven by our PICO single-use Negative Pressure Wound Therapy system. Actions are underway to improve weaker performances from Arthroscopic Enabling Technology and Advanced Wound Bioactives.

After a slow start to 2018, it's pleasing that our team accelerated performance as the year progressed, whilst at the same time making the important changes to how we run the Company.

Focused on delivery

At Smith & Nephew, we aspire to be amongst the highest-performing portfolio medical technology companies.

We start 2019 with a new executive leadership team and operating structure in place. We have clarified our brand purpose with Life Unlimited and have introduced new culture pillars and strategic imperatives to support it.

Together, we are confident that we are building the right foundation for sustainable success and an ability to grow consistently with our markets in the future. This confidence is reflected in our financial guidance for further improvements in both revenue and margin performance in 2019, explained in detail by our Chief Financial Officer, Graham Baker.

There is much to do to achieve our goals and aspirations but we are grateful for the opportunity to positively affect the patients, practitioners and health systems that we serve globally. I look forward to updating you on our progress.

Yours sincerely,

Namal Nawana
Chief Executive Officer

1. Net debt is reconciled in Note 15 to the Group accounts.
2. These non-IFRS financial meausres are explained and reconciled to the most directly comparable financial measures prepared in accourdance with IFRS on pages 194-198 of the full Annual Report.