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Smith & Nephew plc (NYSE:SNN)
Q2 2020 Earnings Call
Jul 29, 2020, 3:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Smith+Nephew Q2 and First Half 2020 Results Conference Call. Certain statements in this presentations are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of patterns. More information about these factors is contained in the company's filing with the Securities and Exchange Commission.

I would now like to hand the conference over to first speaker today, Mr. Roland Diggelmann, Chief Executive Officer. Thank you, and please go ahead.

Roland Diggelmann -- Chief Executive Officer

Thank you, Maria. Good morning, everyone, and welcome to Smith+Nephew's second quarter and first half results. I hope this finds you all well and safe. I'm on the call here today with Ian Melling. Ian has been serving as an interim CFO since April, and we greatly appreciate the work he's done leading the finance function through a period of unprecedented industry challenges, as you all know. I'm also pleased to announce that Anne-Francoise Nesmes joined Smith+Nephew as Chief Financial Officer on July 27. Hopefully, many of you will get to speak with her over the coming months once she's had the chance to get her feet under the table. The second quarter and first half was materially impacted by COVID-19 pandemic, as we expected. We're encouraged though by the improvement seen across all segments since the trough in April. Restrictions on elective surgery have generally eased across major markets, even with the recent setbacks in certain regions.

I'm delighted with the way our team has responded in difficult conditions, and I'm very confident we have the necessary resilience, as well as agility, as our markets continue to recover. As well as taking you through the detail of our results today, we'd like to provide as much detail as we can, so we'll also cover how we're seeing the recovery play out in each segment, our progress on our work to control costs this year and what we've been doing to enhance our long-term growth profile, which remains the strategic priority of Smith+Nephew. Let me start with the highlights of half year numbers. Revenue in the half was $2 billion, which is an underlying revenue decline of 18.7%, including the effect of one less selling day compared to first half 2019. Trading profit was $172 million, with trading margins of 8.5%, reflects negative operating leverage and higher provision charges, offset by cost savings. And Ian Melling will go into much more detail on this later. EPSA was $0.134. Turning to the next page. For the second quarter, revenue was $901 million, which is a 29.3% underlying decline and 29.8% minus reported. Trading days were unchanged compared to the prior year.

The impact of COVID-19 was, of course, the driver, and we saw significant restrictions on elective procedures across major markets early in the quarter. The effect was greatest on our Surgical business, as expected, Orthopaedics and Sports Med and ENT, which were down 34% and 33.3%, respectively. While Advanced Wound Management was relatively resilient, it was still significantly affected at minus 17.6%. Looking by geography. For the quarter, the U.S. declined 31.8%, other Established Markets by 30.8% and Emerging Markets by 20.2%, with China the first major market to improve and actually grow in the second quarter. Now let me go into some more detail by country. We already reported that the U.S. was initially more impacted than Europe, with sales at the trough around 60% negative on the prior year versus around 50% for Europe. We since, though, also seen the U.S. recover more strongly as the quarter progressed. All 50 states reopened for elective procedures during the quarter. Texas and Mississippi have introduced new restrictions in July, although around 90% of facilities in the states are still operating.

Within Europe, we're still seeing significant variation between countries. There were strong rebounds in Germany, also in Switzerland and Austria, France and Spain by the end of the quarter, but volumes have continued to lag in some other markets such as the U.K., which accounts for 4% of our global sales, and Eastern Europe. We do expect that Europe as a whole will be one of the slower regions to recover. This reflects the more public nature of the healthcare systems, the condition of some systems before the crisis and differences in incentives, in particular compared to the U.S. The Emerging Markets have also been a similarly mixed picture. China was already beginning to recover as we entered April and grew for the quarter as a whole, predominantly driven by surgical businesses. Capacity utilization in the healthcare system steadily increased as the quarter progressed and already reached above 80% during the month of June. We did see temporary restrictions, however, on surgery in Beijing, following a localized outbreak late in the quarter, but these have been lifted again in the last two weeks. Other regions, such as India, then Latin America and South Africa still have COVID-19 restrictions in place and, as a result, are yet to recover. I know there's a lot of interest in how the recovery played out as the quarter progressed, so let me take a little bit more time on this slide and then subsequently less on the following franchise slides.

As you know, we already announced monthly growth rates at group level. After a 47% negative in April, gross recovered to minus 27% in May and minus 12% in June, and we're seeing a positive a good trend for July. Looking across the portfolio. The businesses that were most impacted initially have tended to also be the fastest to recover. The Orthopaedics franchise rebounded strongly through the quarter after being down 58% in April. A number of categories returned to growth in June already, such as revision hips, partial knees, trauma plates and screws. In Sports Med, the greater share of business typically comes from privately paid and outpatient procedures, which again meant the hard initial impact and then a faster recovery. The picture has been quite similar between Joint Repair and Arthroscopic Enabling Technologies, although recovering the capital component of AET has been lagging consumables. The customer pipeline for the tower is very strong, but we're currently seeing slower and more cautious decision-making around larger investments.

ENT then has been at the slower part of the franchise to recover with some understandable caution around restarting procedures in the nose and throat. In Advanced Wound Management, the drivers of the slowdown were a little different, and we're seeing a slow recovery for a number of reasons. These do include sales rep access, the geographic mix, we have a higher proportion of our sales in Europe; patient behavior, along with timing effects for movements in wholesaler inventory levels. Let me now move to the details of the franchises, starting with Orthopaedics. As mentioned, joint replacement saw significant deferrals of procedures during the quarter with the relative resilience on hips consistent across all regions. This is in part due to the hip market having a higher proportion of emergency cases. But there's also an early benefit from the launch of OR3O, our Dual Mobility Hip System. OR3O itself has been extremely well received, and we've seen it pulling through the other components of our hip constructs. We're now starting to make it available in markets outside the U.S. Trauma was more resilient and, by the end of the quarter, had returned to growth in the U.S. and in Asia Pacific.

EVOS, our plating system, had strong double-digit growth, even with the lower levels of activity in society that dampered overall trauma demand. Other Reconstruction growth rates reflect the slow quarter of capital sales. However, I'm very excited to report we made the first sales of CORI in the quarter. And CORI is our next-generation robotic surgery system. Moving on to Sports Med & ENT. As with Orthopaedics, the franchise is heavily driven by elective surgery and was impacted by treatment deferrals, particularly early in the quarter. We still saw continued positive growth from some of the recent launch products such as FLOW Wands and LENS 4K. Also, we had the first cases for NovoStitch Pro in Europe, and we had the CE Mark granted in April for REGENETEN, and we intend to launch in the coming quarter. ENT sales declined 44% in the quarter and case volumes remain low.

Finally, Advanced Wound Management. The franchise still saw a significant impact from COVID. Advanced Wound Devices was the most affected segment, with negative pressure a category that's more exposed to elective surgery, of course. Other headwinds included temporary closures of wound clinics during outbreaks and the falling admissions in long-term care facilities, excuse me, many of which have not been accepting new residents. In Bioactives, we saw a slow bio tissues market across surgical cases, wound clinics and burn centers. Looking beyond this quarter, we've made important steps on realizing the full value of Grafix and Stravix, which we acquired with Osiris. After a successful pilot, our existing Smith+Nephew Bioactives reps will now also be promoting these products. Revenue synergies were an important part of the business case for the acquisition, and most of that benefit is still to come.

So with that, I'll hand over to Ian to take you through the details of the financials. Ian, please.

Ian Melling -- Interim Chief Financial Officer

Thank you, Roland. Starting with the P&L. Half year revenue declined 18.1% on a reported basis and 18.7% on an underlying basis, excluding the impact of foreign exchange and acquisitions. Trading profit was $172 million and the trading margin was 8.5%. We have experienced margin pressure due to the negative leverage effect from the fixed components of our cost base and the impact of reduced production volumes. Due in large part to the impact of the COVID-19 situation on our business, we also took additional charges of approximately $50 million to provisions for inventory excess and obsolescence and bad debts, which are included in COGS and SG&A, respectively. These provisions reduced the margin by 2.5 percentage points.

To mitigate these impacts, we have delivered approximately $150 million of cost savings in areas such as variable pay, third-party commissions and royalties, travel, promotional activity, events and consultancy spend. The R&D expense has been largely protected as we continue to invest in the innovation that's central to our strategy. As a result, the R&D ratio stepped up to 6.6% of sales in the period from 5.2% in the prior year and rose slightly in absolute dollar terms. There was a small IFRS operating loss in the half of minus $5 million, principally reflecting the lower trading profit margin, along with amortization, restructuring and legal and other charges. Moving further down the P&L. Adjusted earnings per share declined by 71%, broadly in line with trading profit. Basic earnings per share declined by 67% and was helped by a onetime gain from the successful outcome of a U.K. tax case. The interim dividend of $0.144 is in line with the prior year. We generated positive trading cash flow of $25 million in the period, with trading cash conversion of 14%. We have continued to invest in capital expenditure as we progress changes to our manufacturing site base.

The working capital outflow of $137 million includes higher inventory, partially offset by declining receivables due to the decline in revenue. Restructuring, acquisition, legal and other outflows increased to $112 million, of which $69 million relates to restructuring programs. The prior year included $80 million of insurance receipts for legal matters. Cash tax was lower in H1 2020 compared to H1 2019, primarily related to a reduction in the U.S. as overpayments in prior periods offset against amounts due in 2020. Overall, free cash flow was negative at minus $139 million. On the balance sheet, net debt increased by just over $500 million to $2.3 billion, including around $100 million from the acquisition of Tusker Medical. Closing net debt includes $200 million of lease liabilities, and we finished the period with a leverage ratio of two. Our liquidity position remains strong with $3.4 billion of committed credit facilities and no debt maturities in 2020. We indicated in May that we were targeting up to $200 million in discretionary savings for 2020 in response to COVID-19. We're on track to deliver that with around $150 million of savings delivered in the first half. Our approach has been to balance cost control with readiness to fully take part in the recovery of each market. There remains uncertainty around the full year revenue outlook and while we've identified additional savings if they become required, we also retain the option to reinvest some savings if more favorable scenarios play out. You should still expect material negative operating leverage for as long as our sales remain under pressure from the effects of COVID-19.

And with that, I'll hand back to Roland.

Roland Diggelmann -- Chief Executive Officer

Thank you, Ian. I'd like to finish with an update on what we've been doing to improve the longer-term growth profile and to position ourselves for recovering demand. We've made significant steps forward on some of the priorities we talked about in February and May, particularly around innovation and launch execution in the opportunities and ASCs and the development of our people. Let me go next page, and you'll see that one priority was our renewed commitment to innovation as a driver to improve our growth. Our recent launches are already making a difference, and we continue to invest in R&D. Importantly, we've also been able to secure important regulatory clearances and approvals in major markets, in line with our plans. For some examples, we've secured FDA clearance for the total knee application on CORI, following the earlier clearances in for UNI knees, and also for the INTELLIO Connected Tower in Sports Medicine. In Europe, we completed requirements for CE marking REGENETEN in April, as mentioned. So these launches are all under way.

Part of our approach across our portfolio has also been to adapt with the new ways of engaging with our customers, of course. Traditional medical conferences has not been taking place, so we've used digital conferences to continue to reach out to customers. For example, more than 11,500 people visited our virtual AAOS booth. Also on professional education, we've held a global webinar series during the second quarter, reaching across our product categories with more than 25,000 participants in total. Our medical education team was quick to recognize the digital opportunity and has been able to replace traditional in-person lectures and case discussions without the need to travel and without taking the surgeons out of the hospital. Now we're not yet at a point where every aspect of traditional training can be conducted remotely, and we are supporting lab-based training and visiting surgeon programs with appropriate safety protocols. You can also see the strength of the early take-up of OR3O in our hip growth, and that demonstrates that we're still able to launch effectively in this changed environment. That is impressive. That is important, given the impressive pipeline that we have and the innovation that we'll continue to bring to the market. We've also identified ASCs as a strategic cross-franchise opportunity for Smith+Nephew for the opportunity to bring Orthopaedics and Sports Medicine together. There were already good reasons to expect acceleration of joint replacements in the setting of ASCs, including Medicare reimbursement total knee replacement in the ASC for the first time in 2020.

It has also become clear over the quarter that part of the U.S. healthcare system response to COVID has been to accelerate this shift. We've already seen a significant increase this year in the proportion of joint replacement procedures taking place in ASCs in both knees and hips. We're also seeing changes in choices made by physicians as they change settings, and that does support our view that the shift can be an opportunity for us and for market share changes at the same time. We believe we're well positioned to benefit from the shift through our service offering for ASCs through branded positive connections and with our enabling technology, including the launch of CORI. As I mentioned, CORI is our next-generation robotic surgery system. It is faster, is more compact than NAVIO, continues to be a modular design that will enable us to bring more applications to the platform over time. And it does not require CT, which is important for ASCs. So while it's early days still in the growth opportunity at ASCs, we see the developments this year as validating both our view for the potential for Smith+Nephew and for the approach to this high-growth segment. Another key priority was the ongoing focus on our people. As restrictions have eased in each country, we've been stepping up production and opening our offices. Employees are still being encouraged to work remotely where they can, and we put precautionary measures in place at all of our sites to ensure that when employees are there, they can work in a safe way. The period of lower business activity has also been an opportunity to further develop our employees' capabilities and so further enhance our long-term effectiveness as an organization. As an example, in the first six months of the year, our sales force more than doubled the amount of time spent on product and other professional training compared to the prior year.

The large majority was delivered by distance learning, and we're building on that capability by developing new specific training content for a wider range of functions. Our teams have also used our resources to support our communities in the fight against COVID-19. We have now assembled more than one million face shields at our Memphis and Costa Rica facilities to help meet the increased demand for PPE. And in whole, we're supporting the trial of a technology design to support distancing between employees in manufacturing environments. So in summary, we have made excellent progress. Before we entered the COVID crisis, we had really good momentum throughout the end of 2019 and the start of 2020. Managing the immediate pressures has obviously been necessary, but we've also kept developing in line with our strategy and advancing our focus areas for 2020. Our priority remains to sustainably accelerate the underlying growth of our business while focusing on delivering innovation, strengthening our talent and capabilities and improving profitability at the same time.

So with that, I look forward to your questions. Thank you very much.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Patrick Wood. Please ask your question.

Patrick Wood -- BofA Merrill Lynch -- Analyst

Thank you very much. I'll keep it to two, please. The first would be just maybe a little bit of color, please, on the reinvestment rate that you guys are thinking of that cost savings pool, let's say, if the top line recovers? I mean if we have 2021 looking more like a normal year for Smith+Nephew, should we expect the majority or all of that cost savings pool to be reinvested? That would be the first question. The second one, I'm just curious if you can give us any color and thank you for the monthly data so far, but very roughly, the shape of what you've been seeing in July, a little bit more color on that in terms of the sequential improvement relative to June. That would be really helpful.

Roland Diggelmann -- Chief Executive Officer

Thanks for the question, Patrick. On the first question, obviously, we want to continue to invest because the fundamentals, mid and long term, remain positive. We have actually also ring-fenced R&D in the first half because we believe strongly in innovation and in the growth opportunities in the markets in general. So we will be cautious, and we'll be behind monitoring closely the developments in the market, and we'll invest behind those. As you pointed out, the majority of the savings in the first half were discretionary costs. So that we've already secured $150 million of savings. So I think what you can see is we have the opportunity to generate those savings. We'll monitor the market development. If need be, we can introduce more savings. If the markets recover, though, we're ready and prepared to continue to invest to support the growth and the recovery. On July, I'm happy to report that July has been, I would say, a good month. If I look at the trajectory from April onwards, I am positive and optimistic. We're not at the end of the month, of course. And at the same time, as you will know, a lot of uncertainty remains, but the trend generally is positive.

Patrick Wood -- BofA Merrill Lynch -- Analyst

Thanks for taking my questions.

Roland Diggelmann -- Chief Executive Officer

Thanks, Patrick.

Operator

Thank you. Your next question comes from the line of Kit Lee. Please ask your question.

Kit Lee -- Jefferies -- Analyst

Thank you. I have two questions, please. Just firstly, on your Capital Equipment business, when do you think there will be more clarity on hospital budgets and your customer decisions on buying both SAEs or other equipment? And then my second question is on the provisions. How should we think about that for the second half? Do you think there'll be more provisions on the way or is that $50 million enough for the full year?

Roland Diggelmann -- Chief Executive Officer

Thank you, Kit. I'll take the first question, and then Ian will take the second on provisions. Well, indeed, as expected, the hospitals were, of course, slower in making capital equipment decisions very understandably. I think, as the markets recover, this will actually accelerate again. There's no reason to believe that capex or larger equipment sales will be more difficult in the future because the trends will continue. If I look at the tower that we have on offering in Sports Med, the intelligent it's a great solution. Continue to be very excited about our Sports Med and the positioning. And then we had a very strong trend toward robotics entering this crisis, so I believe we'll continue to see that as technology evolves. I'm very positive about our next-generation platform here with CORI. It's a great solution, great technical features, it fits very well in the ASCs and in the trend toward decentralized, more modular approaches. And I believe we also have beyond the technical features, I think, we also have a very positive financial proposal here.

Ian Melling -- Interim Chief Financial Officer

Yes. Thanks, Roland. On your second question, Kit, as you've seen, we're not guiding on the second half, and that logic applies to the provisions as much as it does anything else. But what I would say is, if we continue to see a recovery that we've seen across Q2 coming into Q3, then there will be much less pressure on those provisions. If we saw a second dip approaching Q2 levels, then it might be a different story.

Kit Lee -- Jefferies -- Analyst

Okay, that's great. Thank you.

Ian Melling -- Interim Chief Financial Officer

Thank you.

Operator

Thank you. And your next question comes from the line of Kyle Rose. Please ask your question.

Kyle Rose -- Canaccord Genuity -- Analyst

Great. Can you hear me all right?

Roland Diggelmann -- Chief Executive Officer

Yes, we can.

Kyle Rose -- Canaccord Genuity -- Analyst

Great, thank you for taking the question. This morning, So just a couple of questions for me. One, specifically on the knee business. Obviously, I understand that those procedures are a bit more deferrable than the hip side. Just wanted to see what you've seen as far as month-over-month trend on the knee side. How and when you expect that business to return to growth? The second question, Roland, you talked about the ASC channel, so I appreciate the commentary. But you also talked about seeing potentially different choices from physicians in that channel. Can you maybe help us understand what that means? Does that mean different type of implants, different type of treatments? And then the last question is just your overall M&A and thoughts about capital allocation in this period.

Roland Diggelmann -- Chief Executive Officer

Thank you, Kyle. I'll just start with your last question on M&A. I would first want to mention that our M&A strategy remains unchanged. We continue to look for technologies and innovation that fit with our general strategy, that we could leverage through our existing commercial footprint. We continue to look very actively in the marketplace. There may be some distressed assets here and there, but what we want to maintain is a clear, strategic approach here and also have the ability, actually, to be seen as a good owner out in the market. We have made five acquisitions last year. I think this has really been, I would say, a watershed moment for us as an organization. So we continue to be interested in M&A, of course. And while, initially, of course, the focus was on liquidity and cash flow, we have a very solid balance sheet, and that is a positive. On the ASCs and then the different choices by physicians, there's typically there's an opportunity here because the ASC setting, of course, is a different one.

You do also have a different patient selection. So we see it as an opportunity twofold: one, on the implant choices; and second, of course, on the access that we have toward the ASCs because we're selling into these accounts for the most part already through our leading Sports Medicine franchise. We see the opportunities of converging there. And then in the future, we also see the opportunity, of course, with robotic solutions with CORI with a small footprint, modular, non-CT-requiring solutions. On the knees, we continue to monitor situation. As I mentioned, the hips were faster to recover. I think it's two elements here. One is the fact that there is more trauma-related joint replacements on hips. The second one being a very successful launch of OR3O, the Dual Mobility. But I have no reason to believe that the knees won't pick up either. They're just lagging a little bit behind the hips at this stage, but I'm confident that they'll continue to grow as the markets recover. And here, again, we have a great portfolio. And of course, we have CORI coming to the market, which will support that growth.

Operator

Your next question comes from the line of Chris Gretler. Please ask your question.

Chris Gretler -- Credit Suisse -- Analyst

Yes, good morning, Yes. It's Chris. Ian, Roland, I have two questions actually, and it relates to the cost savings. First of all, the $150 million you quoted, is this actually a run rate exit at the half year end? Or is this basically the total cost saving you experienced in the first half?

Ian Melling -- Interim Chief Financial Officer

So thanks, Chris. I'll take that one. So the $150 million is the cost saving that we realized in the first half against our expectations. So just to be clear, it's not a year-over-year cost-saving number. It's a cost saving against our expectations coming into the year in the first half.

Chris Gretler -- Credit Suisse -- Analyst

Okay. And then the second question is now on the restructuring program. I think, earlier this year, we had an expectation that there might be some more programs coming up eventually. Is this in the current environment still a topic or you basically just wait and see kind of how the pandemic develops before coming up with any incremental program on top of APEX?

Ian Melling -- Interim Chief Financial Officer

Yes. Thanks, Chris. We have incurred some modest costs in the first half on the new program, but also some things have been delayed as a result of COVID, and we are considering our plans in that area. So we're still working through the full impacts of those, and we'll come back to you all in due course with an update on that. It will also give Anne-Francoise a chance to come in and see those plans as well. So still on the cards, still work in progress and expect to see something in due course.

Chris Gretler -- Credit Suisse -- Analyst

Okay. And maybe one last question. Just quickly on these ASCs. Actually, what percent of your knees and I guess there is not much in hips, at this stage, it come from ASC for you guys?

Roland Diggelmann -- Chief Executive Officer

It's still a small number, of course, because the majority of the capacity is in the central hospitals. I would say, for us, it is close to about 10% of our knee sales. It is a higher proportion, I believe, than for others. And it has and I think that's the more important message is we have seen a good growth in ASCs during this crisis, albeit at the low level because the entire volumes were depressed, but we continue to see this trend evolving, and we feel that we're very well positioned to benefit from the move to decentral and ambulatory.

Chris Gretler -- Credit Suisse -- Analyst

Okay, thank you. Appreciate your comments.

Ian Melling -- Interim Chief Financial Officer

Thank you, Chris.

Operator

Thank you. Your next question comes from the line of Julien Dormois from Exane. Please ask your question. Your line is now open.

Julien Dormois -- Exane -- Analyst

Hello? Sorry. Can you hear me now?

Roland Diggelmann -- Chief Executive Officer

Yes.

Julien Dormois -- Exane -- Analyst

Okay, sorry. Thank you. Good morning. I have two questions, please. The first one relates to the comments that you made during the Q1 call where you alluded to the risk of pricing pressure mounting in the industry as hospitals will exceed the pandemic with damaged financials. What are your latest thoughts on that topic? Have you seen anything or is that not happening at all at the moment?And the second question relates to the underlying growth momentum. You have clearly stated that the strategic focus remains on accelerating top line. And we see lots of reason to be optimistic in Orthopaedics and Sports Med with the high rate of innovation. But what are your thoughts about Wound Management? Is there did you have plans here to come up with maybe more innovation or more acquisitions in order to reinvigorate growth in this segment that has been lagging for some time?

Roland Diggelmann -- Chief Executive Officer

Thank you, Julien. I'll go with the question on pricing and the pricing pressure first. I'd say initially, we haven't seen anything that would indicate more price pressure in the short term. I think everybody has been very busy in managing the COVID crisis and the situation. We've always had price pressure in our industry. I think that's something that we know how to deal with. We'll just have to observe and see what the future brings here. So I'm relatively positive here as well. In terms of the underlying growth on Wound, you're absolutely right there. In Sports Medicine and Orthopaedics, I think, have seen very good growth coming into this crisis, very good momentum.

In Wound, I think, if I look at the three subsegments in Wound Care, we've made good progress in Europe coming into this situation. We've had some challenges in the U.S., but I think we can manage that. In Bioactives, we have made the acquisition with of Osiris. So that gives us a really nice play in the bioactive field of Wound. And with Grafix and Stravix, we have some great products. We are have now cross-trained our sales forces between Osiris and Smith+Nephew, and we're also going to be launching this product over time outside of the U.S. So I'm positive in that sector. The one area that's been the most impressive in the crisis is actually the one we've been strongest in, which is devices, which is very much linked to surgical procedures. So and with PICO and then the next-generation PICO coming to the market next year, I'm very optimistic that we can continue that positive trend and actually grow market share.

Julien Dormois -- Exane -- Analyst

Okay, that's clear, thank you very much.

Ian Melling -- Interim Chief Financial Officer

Thank you, Julien.

Operator

Thank you. Your next question comes from the line of Michael Jungling from Morgan Stanley. Please ask your question.

Michael Jungling -- Morgan Stanley -- Analyst

Great, thank you and good morning all. I have two questions. Firstly, on the Q3 sales growth expectations. And I'm just curious how you're thinking about Q3 pent-up demand being worked down by physicians? I'm trying to understand whether there is a meaningful possibility, in your eyes, where there's seasonally a low-volume quarter, at the same time, pent-up demand being used by surgeons to catch up could feasibly result in, for you, a sort of a bit of growth, actual positive growth in the quarter for Orthopaedics? And then question number two is on cost savings. Is that sort of correct that the $150 million in discretionary savings for the first half was slightly better than what you had suggested earlier? And how does one think about sort of $50 million of additional savings in the context of $150 million in the first half? I'm trying to understand how much flexibility you have in that spend. It seems to me that you have quite a lot, but if you could quantify it and how you are thinking about it, that would be very helpful.

Roland Diggelmann -- Chief Executive Officer

Sure. Thank you, Michael. So on Q3, obviously, there's a lot of uncertainty still in the market, but I think you described it quite well. I absolutely believe it's possible that we will see a continuing good recovery and good trend. There is indeed some pent-up demand. It's not the same in every geography, of course. You have to factor in when the different geographies went into the lockdown and into deferring surgeries. So we're going to see probably this evolving geography-by-geography. But given the fact that the U.S. is accounting for almost half of our sales and relatively quick recovery, I'm also optimistic here. We've seen two things happening, of course, the pent-up demand being worked on and then an ongoing demand being managed because the fundamentals remain the same. The patients are out there. They need and they demand surgery and care. And so there is an incentive of the entire system and all stakeholders to provide these solutions to patients. On the savings, Ian, can you give some color?

Ian Melling -- Interim Chief Financial Officer

Yes, absolutely. And I'd just add to what you said, Roland, that just in response to your comment, Michael, but August is our lowest sales month in seasonally. So August is going to be a little harder to interpret, but I think, as we come out of the quarter with September, we should have a clearer view. In terms of the savings, yes, I think we're pleased with the $150 million in the first half. It's in line with maybe slightly better than our expectations, but not significantly so. In terms of what to expect in the second half, I think it will depend on the top line. So if the top line comes back strongly and we see the recovery we just discussed, then we'll have lower cost savings and we'll be spending more in variable areas and on sales rep compensation and the like. Yes, travel is looking like it's going to come back a little slower maybe, but we will see. Depends on whether travel comes back or not. There's lots of variables in there. I think it will be very dependent on the top line. So yes, if we...

Michael Jungling -- Morgan Stanley -- Analyst

But it sounds to me that you've got quite a lot of discretion in the EBITA that you want to show because, let's say, if the second half grows at minus 5%, you seem to have quite a lot of discretion in terms of how much you want to spend on travel, on consulting, all those things that you've mentioned in the press release. Is that a fair statement?

Ian Melling -- Interim Chief Financial Officer

We have some discretion, and we have some variable costs in there as well, where it's more a case of it it'll be variable with sales. So yes, there is some discretion. But clearly, we if the customers are going if people are visiting customers, then we'll want to be visiting customers. So we won't want to be behind the competition by restricting spend and preventing us attending events or visiting customers.

Michael Jungling -- Morgan Stanley -- Analyst

Okay. And the final follow-up, please, is the inventory obsolescence charge of $46 million in the first half, have those products been scrapped or can they still be sold in the second half?

Ian Melling -- Interim Chief Financial Officer

The majority would still be able to be sold, Michael. It's not a binary thing across the whole portfolio. There will be some exploration issues in a but the majority would still be available for sale.

Roland Diggelmann -- Chief Executive Officer

Maybe just one more comment on the savings. I think, from a management perspective, I think what's important to us is that we find the right balance between the savings and then, of course, investing such that we are in the best possible shape for the recovery. Because we all know the recovery will come, the fundamentals are positive. The question is when and in what shape are we. And that's why we've taken some deliberate decisions to also protect the R&D line, to ensure that we're ready with new product innovation, but also with the sales capability for when the markets restart. And again, that restart is something that has a lot of uncertainty, and that looks very different in different geographies, just looking at the U.S., then China, then at some markets in Europe. So it comes down to individual decisions at the market level, but we want to make sure that we are very ready and very strong when the markets recover.

Michael Jungling -- Morgan Stanley -- Analyst

Very good color, thank you.

Ian Melling -- Interim Chief Financial Officer

Thank you, Michael.

Operator

Thank you. Your next question comes from the line of David Adlington from JPMorgan. Please ask your question.

David Adlington -- JPMorgan -- Analyst

Hey guys, thanks for taking questions, I'm afraid a couple of numbers clarification points, please. I just wanted to check the $50 million splits of provisions. And I may have missed it, but the split between the trade receivables and inventory and just double check the inventory sitting and cost of goods and receivables within sales and marketing. Secondly, just in terms of the technical guidance because the slides are missing again. I just wondered any updates there, particularly with respect to foreign exchange, please.

Ian Melling -- Interim Chief Financial Officer

Thank you, David. So just on the numbers, of the about $50 million of provisions, the majority is inventory. Very rough cut, 80% inventory; 20% bad debts. The inventory charges are in cost of sales. The bad debt charges are in SG&A within the P&L. And foreign exchange, there's no significant update, David, but we'll follow up with you off-line on that one.

David Adlington -- JPMorgan -- Analyst

Okay, Thanks.

Operator

The next question comes from the line of Veronika Dubajova from Goldman Sachs. Please ask your question.

Veronika Dubajova -- Goldman Sachs -- Analyst

Good morning, gentlemen, and thank you for taking my questions. I'll start with one, and then I'll have a follow-up. Just kind of curious, Roland, to get your thoughts and when you look at the pace of recovery and in particular, sort of what you're seeing in July in the U.S., what do you think is a realistic time frame for the business to return to growth? Just a sort of approximate guess on when you think you might be at a point where, on a year-on-year basis, the business is back to growth, I mean, assuming no second wave or large outbreak somewhere.

Roland Diggelmann -- Chief Executive Officer

Thank you, Veronika. You're obviously asking the big question here that I wish I could give you a precise answer. I think we just don't have enough data points to give you a very precise answer. What I can tell you is that the markets in the U.S. have recovered quickly. I think there is a common incentive by all stakeholders to return to a certain sense of new normal. We have seen patients being willing to go back to hospitals, which has not been the case in other markets or to a lesser extent. We have also seen all 50 states allowing elective surgeries again. We're also seeing that, even when new lockdowns or new restrictions are introduced, since everybody has learned, this doesn't necessarily mean that elective surgeries are not performed or delayed again. So we're seeing a lot of positives in the way the market has recovered and the speed it has recovered in the U.S. But I wish I could give you more precise information. I can only give you a little glimpse into what we are seeing in July, although the month hasn't finished, of course. But we've seen a very good trend and a very good continuation of that initial trend in the month of July as well.

Veronika Dubajova -- Goldman Sachs -- Analyst

And sort of my follow-up on this is, we're hearing, I think, a lot of the surgeries that are happening now are effectively rescheduled backlogs that docs are working through. Do you have a sense for what the new demand generation looks like? So I'm thinking about ambulatory visits that are sort of leads into surgeries two, three months from now. I think some of your peers have kind of discussed the risk of maybe a W-shaped recovery. So we have a strong rebound, but they dip down once that backlogs are worked through. How are you guys thinking about it? And maybe if you can share some anecdotes from the ground on what you are seeing in terms of that new demand funnel.

Roland Diggelmann -- Chief Executive Officer

Yes. Let me try, and I think it's anecdotal information that I'm sharing here, of course. What we have indeed seen is once the restrictions were lifted and elective surgery was possible, the pickup was very, very high and very quick in the U.S. I think there was a pent-up demand. And I think it is possible that there will be a bit of a you called it a W shape. I'm not sure how exactly that would look like. Anecdotally, what we are hearing is that physicians are seeing a good pipeline of new patients. They're also investing more time. They're working longer hours. They're working more days. They're scheduling more OR capacity to accommodate for both, for managing the pent-up demand and then managing the ongoing new patient demand. So I'm optimistic and positive, especially for the U.S.

Veronika Dubajova -- Goldman Sachs -- Analyst

Understood, thank you guys very much. Thanks for your time.

Operator

Thank you. Your next question comes from the line of Tom Jones from Berenberg. Please ask your question.

Tom Jones -- Berenberg -- Analyst

Good morning, thanks for taking my questions. I have ywo. One was just about the current recovery. We've discussed this the demand side of the equation quite a lot. But I wondered if you'd like to make some comments on the supply side? Clearly, there's an incentive for physicians in the U.S., et cetera, to get back to work. But is there a risk that we end up not ever being able to get back to 100% capacity, unless we make some significant changes to healthcare systems? I guess what I'm alluding to are things like enhanced cleaning protocols, more patient separation, et cetera, et cetera, reducing the overall functional capacity of operating departments, even if they are working longer hours, as you said. I know there's certainly been an issue in the U.K. where a lot of hospitals are back to operating, but at a much, much reduced pace due to the enhanced COVID protection protocols they have in place. So just some comments on the supply side would be good, if you can. And then I have a follow-up.

Roland Diggelmann -- Chief Executive Officer

Sure. I think what we have seen is the healthcare systems reacting quite quickly to this new situation with enhanced protocols, with admissions to hospitals, with all the way to managing the way visitors are allowed into hospitals or not. So I think that's been done remarkably quickly and with very different individual approaches, of course, and also differing in geographies. But I think the system has been quite agile here to react to this. Overall, again, I mentioned, the fundamentals remain strong, patient demographics, access to healthcare in emerging markets, I think this is remains unchanged. So I'm optimistic for the mid- and the long term. The question now, of course, is how we get there. We're also seeing certain healthcare systems, for instance, in China and other markets, reserving some extra capacity in the event or in the possible event that there were to be a second wave. And I think, in particular, in Europe, the main driver here is patient confidence to going back to hospitals. This has been something that hasn't we haven't seen much in the U.S., probably more in Europe. How do patients go back to hospitals? And are they willing to go back for planned surgery?

Of course, again, a trend to decentral care and ASCs is helping here. There will be, I think, an amplified or accelerated trend to specialization as well, to patient stratification; to having, I would call it, the good patients in one setting and the more complex surgeries in another setting. So all of this will have an impact. But what we've seen so far, overall and in summary, is actually the system being able to cope with that in a good way. And then, of course, at the end of the day, the clinical need doesn't go away. So we that's why we remain very optimistic.

Tom Jones -- Berenberg -- Analyst

Okay. Perfect. And my second question is really a kind of big picture, post-COVID one. There's a lot of talk about the new normal. But I wonder, from your experience so far, what permanent changes to your industry, to your business, do you think COVID might precipitate? You've already alluded to the shift to ASCs, and I guess that was a trend that was there that's now been accelerated. But I'd be interested to hear your thoughts on what other permanent changes might ensue from this pandemic. Maybe thinking marketing expenses become significantly lower, if you can do a lot more remotely, whatever it might be. Just be interested to hear what you think the new post-COVID world looks like for your industry and your company.

Roland Diggelmann -- Chief Executive Officer

Yes. Thank you. That's a great question, Tom. I think, of course, there are some trends that I think will sustain. We have an entire program internally that looks at exactly that. How will the new normal actually look? A lot of those trends that were there before, I think, will be accelerated or amplified. The trend to ASCs is one. The trend to robotics is another one. Reduce the number of instruments, for instance. But then, more generally, how we engage with customers, that will change. It's difficult to assess how we will change exactly, but we have now learned a lot how we can keep in touch with our customers, how we can engage with them through digital needs or means, excuse me.

What we'll certainly change and continue to change is how medical education is being delivered, again, through digital means. The large meetings, I think, were the fact that healthcare professionals will probably travel less, be less attending physical meetings, physical training events, training through augmented reality and other means will certainly accelerate. And then finally, also internally, we'll have we have made really good experiences with how we actually train and educate our sales force. I think that's also one of the trends that we'll sustain. So a lot of opportunities here. As you've certainly heard, there's also opportunities to deliver certain services in a less costly way, reducing the overall meeting, convention, training, travel, expenses, et cetera. And everything, every crisis also offers an opportunity here. We continue to monitor this very closely, and we've actually had really good experiences with some of these remote engagement opportunities with customers alike, as with our sales force and our own employees.

Tom Jones -- Berenberg -- Analyst

That's very, very helpful. I'll get back in this year.

Roland Diggelmann -- Chief Executive Officer

Thanks, Tom.

Operator

Thank you. And your last question comes from the line of Oliver Metzger from Commerzbank. Please ask your question.

Oliver Metzger -- Commerzbank -- Analyst

Yeah, hi, good morning. One question left from my side, it's on Wound Bioactives. So in the past, we saw this very high underlying growth rates at Osiris out of corona. So could you give us an idea of how that the business performed now during crisis compared to your legacy Bioactives portfolio? And which are your expectation how fast Osiris of Osiris business will return to growth again?

Roland Diggelmann -- Chief Executive Officer

Yes. Thank you, Oliver. Osiris, or the products from the Osiris legacy have actually underperformed relative to the overall Advanced Wound Management business. I think there's been a couple of reasons here. First of all, we were very early in the process of integration. So we are very positive now. We have taken this opportunity to cross-train the sales force from both Osiris and Smith+Nephew legacy so they can sell both ranges of products. I think that increases the access to the market. The second access to market that we will certainly improve or achieve, we'll be selling the product outside of the U.S. So far, Osiris hadn't been selling outside of the U.S. This is a process because it's registration-dependent and this is a bioactive, so the pathway is different in different markets. And then of course, the most important reason is that the product from Osiris are linked to surgeries and surgical events. And as we've had many fewer surgeries, of course, there was a direct impact on the usage of those products.

But again, as I mentioned earlier, I'm very positive. We're only at the beginning of the sales synergies here, and we have a very active role to play in the areas of Bioactives and Wound. Thanks, Oliver. Well, thank you all for your questions. Before we close, thanks again for your questions, for your interest, as always. You'll shortly be receiving an invitation for our virtual investor event. This will be taking place on September 8. We'll be having the opportunity to talk some more about some really exciting innovation, some of the pipeline at Smith+Nephew, in particular, of course, CORI and the robotics endeavor. And we hope to speak to many of you then. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Roland Diggelmann -- Chief Executive Officer

Ian Melling -- Interim Chief Financial Officer

Patrick Wood -- BofA Merrill Lynch -- Analyst

Kit Lee -- Jefferies -- Analyst

Kyle Rose -- Canaccord Genuity -- Analyst

Chris Gretler -- Credit Suisse -- Analyst

Julien Dormois -- Exane -- Analyst

Michael Jungling -- Morgan Stanley -- Analyst

David Adlington -- JPMorgan -- Analyst

Veronika Dubajova -- Goldman Sachs -- Analyst

Tom Jones -- Berenberg -- Analyst

Oliver Metzger -- Commerzbank -- Analyst

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