Smith & Nephew plc

Good morning, and welcome to the Smith & Nephew third quarter trading report call. As mentioned, I'm Deepak Nath, and this is Chief Executive Officer, and joining me is Chief Financial Officer Antoine-Francois Nesmes. So before I begin today's presentation, I'd just draw your attention to our announcement today that John Rogers will succeed Antoine-Francois as Chief Financial Officer in the first quarter of next year after the publication of our annual report and accounts. John is an experienced FTSE 100 CFO, having held the post at WPP in Sainsbury's, and I have no doubt his financial acumen and expertise in leading transformation programs will be tremendous assets to us. As I've said before, I'm very grateful to Anne-Françoise for the time she has given us to ensure an orderly handover and her continued support as we close out 2023 and complete this transition. So now let me turn to our Q3 results. I'm pleased to report another good quarter, which maintains our momentum from the first half. Orthopedics growth has stepped up, as expected, with one of the highest growth quarters for many years. And importantly, the strong underlying performance in sports medicine and advanced wound management has also continued. There are puts and takes across the portfolio, as you'd expect, But the overall picture is of strong innovation-driven growth backed by improving execution. We're also advancing the 12-point plan with encouraging signs of delivery on outcomes. Our operational improvements under the plan are continuing to drive key metrics toward their targets, particularly around product availability. In orthopedics, you can see that translating to better revenue growth for more lines of the business. Our productivity measures are also progressing. We've made cost savings as planned for 2023. And for the longer term, we announced the closure of two of our smaller factories within our network. With nine months done, we're refining our guidance for the full year. We now expect revenue growth to be towards the higher end of our 6% to 7% guidance range, reflecting our good momentum and improving execution. And on profitability, we're seeing the expected step up in the second half with the seasonal uplift and cost improvements coming through. There is some additional headwind in China as well. And we're reflecting that with trading margin guidance now of around 17.5%. I'll come back to our outlook shortly. But first, we'll take a look at the detail of the quarter. Third quarter revenue was $1.4 billion. representing 7.7% underlying growth, with all business units and regions contributing. Ed Francoise will cover the performance of the business units in more depth in a moment, but you can see that orthopedics has continued to accelerate as the year has progressed, with a slower quarter in advanced wound management. Looking by region, growth was broad-based, with 7.2% growth in the U.S., 7.8% in other established markets, and 9.2% in emerging markets. Within emerging markets, China's sales were down 1.4%, with improvements in knees and hips performance, but a slowdown in sports medicine, where there are some significant moving parts. To cover that and the rest of the business unit detail, I'll now hand over to Anne-Françoise.

Thank you, Deepak. So I'll start with orthopedics, which grew 8.3% underlying. This follows a 3.9% growth in quarter one and 5.8% growth in quarter two. So even with more difficult comps, we've continued the positive momentum we've seen in the early part of the year. Knees and hips growth included a better quarter in China, as Deepak just mentioned. The effects of VBP are now fully lapped, and China is back to being a creative to overall recon growth. When we look at our established market recon business, there are green shoots. Some regions are further along than others, but our commercial improvements are taking shape. US product availability is improving, and we are gradually stepping up set deployments across small categories. And I'll come back to that in a minute. Other reconstruction growth of 58.5% was driven by the ongoing adoption of robotics. We exited the quarter with over 25% of our new procedures being placed with a robot, and with contract wins across the sites of care, including large academic medical centers and in ASCs. We're also seeing good progress with our increased range of indications. Using revisions is already approaching the overall new utilization, and we saw the first cases completed with our new source solutions offering in the third quarter. Trauma and extremities has become an important part of orthopedics growth story, and it was a bigger sales contributor than hips in a quarter for the first time, despite us existing some markets last year, as you may recall. Underlying growth was 10.4%, with the acceleration coming particularly from EVOS and from strong double-digit growth in the US. Trauma is demonstrating what we're aiming for across orthopedics. We invested over many years to build out our plates and screws platform, starting with the EVOS mini plates, then adding small, and completing our offering with the launch of EVOS Large in 2022. Our operational improvements under the 12-point plan established better supply and replenishment of implants. And in the last two quarters, we've also stepped up the deployment of sets. Putting all of that together with better commercial execution is translating into sustainable higher growth. The next leg of growth is also ready to follow as we broaden the rollout of our ETO shoulder system. And delivery of the 12-point blind milestones is continuing to progress. And one area where that's particularly evident is in our product availability across the portfolio. There are still differences between categories, both on the supply KPIs and on the financials. And clearly, U.S. orthopedics is an area where there's still more to do. But on slide seven, you can see some of the detail. Firstly, if you look at the chart to the left, implant availability is moving in the right direction. Overall, orthopedics non-settlizer remains on an improving path ahead of our projected plans, and the value of overdue orders continue to fall. There is some variation within that, of course, and that's a factor in some of the differences you can see across segments. Availability of Journey 2 with auxinium has been lower than the average, and the greater U.S. penetration of this construct makes it particularly relevant to the U.S. NEIS growth. The good news is that Journey Lifer was stepping up as it existed a quarter and should also be on an improving path from here. A second factor to be aware of is the importance of set deployments. And again, the categories of U.S. orthopedics are at different stages of progress towards our goal. PROMA is an early example of what success looks like. EVOS product availability has been at or above target for almost all of 2023. But set deployment only stepped up strongly in Q2, and we've seen a clear inflation in revenue growth in Q3. Hips and knees are still following. In U.S. hips, instrument deployments have started to step up through Q3 and are getting closer to the target fulfillment level. Continuing this and maintaining the implant availability should also be followed by better growth in the coming quarters. Knees are earlier in the process and further from their target, but we've started to see positive momentum later in Q3. Together, with improving journey 2 and oxynium supply, we're on the same path that we've seen playing out in trauma. Moving to sports medicine and EFT, which grew at 11.1%. Our multi-year stream of internal and external innovation was again central to our growth. and that was further helped in the quarter by better product availability. There are still some areas that are constrained, but we're seeing steady improvements in fill rates and overdue order levels that can keep supporting our growth in the coming quarters. Sports medicine remains a very attractive area of our portfolio, and we're continuing to invest in further opportunities. Within sports medicine, joint repair grew 11.3%. We've broad-based strength across procedures in established markets Regenitin again grew strong double digit, and we are still adding new legs of growth six years after acquiring the product through rotation medical. Geographic expansion has continued with launches in Japan and India, and work on further regenerative applications beyond the shoulder is ongoing. AET grew 1.7% in the quarter with wearable fast seal, lens 4K, and our double flow fluid management system 4.2VC. But as I mentioned, a headwind in the quarter was a slowing market in China on both consumables and capital. Without China, growth would have been three percentage points higher in joint repair and four percentage points higher in AT. There was slower buying in joint repair as wholesalers reduced inventory in anticipation of the VVP process. And there was also market-wide delays in purchasing around the widely reported ongoing anti-corruption campaigns. We expect China to remain a headwind in Q4. And of course, we know there's interest in VBP, so I wanted to give you an update on the current state of development. The policy is still yet to be fully published, so many of the details are not yet known. For example, we still have to hear the full tender rules or details of the entry prices. Timing has also not been confirmed, but our current assumption is for a process before year-end, with the outcomes of the tender to be implemented in the second quarter of 2024. On the scope of the BBB, understanding is still that the tender will be limited to joint repair only. However, with more information, the scope looks to be wider than it appeared from the initial data requests we talked about before, and we now expect it to cover around 1.5% to 2% of group sales. Now moving to ENT, ENT growth was worth of 40.2%, was driven by our core, tonsil, and adenoid business. As we expected, demand growth has started to moderate as we lack more of the post-COVID recovery, but improving product availability meant that the port also benefited from clearing a significant volume of backorders. The process is almost complete, so we will expect to return to a more normalized level of growth as we exit 2023. And finally, advanced wound management grew 3.6% underlying. Within that, advanced wound care and advanced wound devices continued with the trends we've seen in recent quarters. AWC growth of 3.2% was mainly driven by Europe and came across the categories of dressings. 21.3% growth in advanced wound devices reflected continued double-digit growth on both our traditional negative pressure platform, Renesys, and our single-use device, Pico, and we are continuing to both gain share and expand the market. The slower quarter for the business unit as a whole was driven by bioactives, which was done 4.8% in the third quarter. The decline reflects a strong comparator from the third quarter of 2022 and also delays to central shipments in the early part of the quarter as we fully completed the transition of production to footwear. Our shipments are now back to normal with bioactives exiting September strongly, and the segment should return to more typical growth against a more normal from higher to NQ4. And with that, I'm then back to Keeva.

Thank you, Anne-Françoise. On revenue, 7.5% underlying growth in the first nine months positions us well to meet our full year target. There are a few moving parts to keep in mind for the remainder of the year. On the positive side, we should see higher growth again in advanced wound management, mainly due to improvement in bioactives. and we should continue a positive momentum in orthopedics. As headwinds, we expect slower Q4 in sports medicine with low to mid single-digit growth. This is due to the combination of the pre-VVP effects and a broader market slowdown in China, as well as a strong comp from Q4 2022 in the rest of the world. Also, as Anne-Françoise just mentioned, ENT growth should normalize after Q3. Putting all of that together, the portfolio as a whole is well positioned, and we expect full year growth to be towards the higher end of our 6% to 7% guidance range. On profitability, the dynamics so far in the second half have been as we described with our H1 results, which is encouraging. The drivers are expected H2 margin step up are all coming through, those being the usual seasonal uplift the unwind of one-time commercial costs from H1 and our planned cost reductions. There's still more to do, but as you may be aware, the fourth quarter is typically our highest sales quarter and therefore highest margin quarter of the year. The progress we've made already in Q3 means that the remaining uplift to hit our full year targets is well within the historical range. The change is the headwind from China that we've highlighted. As you know, our guidance included some pre-BDP impact. There are now other moving parts in China as well. And while we are working to offset these, there's only so much that can be done in the remaining quarter of the year. Reflecting that, our expectation for trading margin is now around 17.5%. Overall, I'm pleased with another strong quarter. progressing the fixed orthopedics, and continuing to invest in and drive sports medicine and mood. The portfolio is moving in the right direction. Our 2023 financials are trending as expected, and the 12-point plan is advancing. It's a wide-ranging program where we're on track in most areas and with green shoots in the areas where there's still more to do. We've talked a lot so far about fixing our operations, but there's much more to Smith and Nephew than that. The returns from our multi-year innovation investments are an important growth driver too. We'll talk more about that aspect at our Meet the Management event on November 29th. And I'd encourage you all to join us in London. With that, we can move to your questions.