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.

Thank you. If you would like to ask a question, please. followed by one telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Robert Davies with Morgan Stanley. Your line is open.

Yes, thank you for taking my questions. My first one was just, I guess, on the progress you're making from a growth perspective on the orthopedic side. Obviously, a large part of that was driven by the other recon segment. But just maybe kind of walk through the underlying trends you're seeing in both HIP and NEED and any significant sort of regional variations you've got there. And then my second one, your commentary around the margin outlook for the full year around 17.5. I guess There's some debate of whether that's doable, I guess, with the investor community, but looking forward through 2024 and beyond, are you still comfortable with the 20% margin target, and even with the sort of new moving parts that you've highlighted today? Thank you.

So, Robert, so first off, in orthopedics, we're pleased with The overall growth, as I mentioned, other recon, which reflects the uptake of Cori, not only in terms of placements, but actually also utilization, where we're now up to 25% of our business, U.S. business, flowing through robotics, is encouraging. But in addition, as Anne-Françoise mentioned, it's not just Cori, but it's actually trauma as well that's contributing to growth. And on top, you've got hips stabilizing and knees continuing to grow where the soft spot remains the U.S. So in terms of regional variations, in terms of the market continued to be strong in Q3, not as robust as Q1 or Q2, but continues to be strong. And the fact is on the back of the operational improvements we're making we were able to participate in the market upside which was not always the case as you'll recall robert and if i look at outside the united states our commercial execution on top of product availability which is coming from operational improvements has enabled us to really participate in that growth in the u.s We're continuing to do that. Hips is better than knees. And the reason knees are behind primarily has to do with continuing supply challenges, particularly on auxinium. So when you look at the product mix in the U.S., the particular constructs and particular SKUs in the U.S. were different. were impacted, and that also had an impact both in replenishment and sub-delivery. The good news is, as we exited September, we saw significant improvement in oxynium supply that contributed to SEPs starting to flow again in the U.S. So I expect the momentum we built up in September to continue into Q4. So hopefully that gives you a bit of color on the drivers of growth, the regional variation. So, in terms of margin around 17.5, obviously, we've indicated that we expect to step up in 24 and in 25. We expect more of it in 25 than we do in 24, but it's not going to be a hockey stick. Though it won't be linear, we don't expect a hockey stick from between 24 and 25. I continue to feel good about our position relative to our midterm guidance. As you mentioned, there are different – there are more moving pieces. There are more headwinds than at the time that we issued the guidance, the primary headwind being China, particularly around the sports VBP. But on top of that, there's been, of course, some – some effects from the anti-corruption campaign that's rolled out in China, and we saw the impact of that in Q2. So that remains an uncertainty. But even with that factor, then I feel at least at this point good about our ability to hit our midterm targets.

Thank you. Maybe just one follow-up around the advanced wound bioactive. Could you just give us a little bit more color on where the softness in that particular business came from in the quarter?

Yeah, so first off, there was a comp topic, Q3 22 versus this. Secondly, we made the decision several years ago to transfer production in-house. We had previously been manufacturing Curaçao. And in Q3, we completed the transfer into our Fort Worth facility. That was done for resilience reasons. It was done as part of our cost reduction or productivity program. And as we transferred that production, we hit a couple of bumps within the quarter that we were able to resolve and get back on track actually as we hit September. So we're in a good place as we exited Q3, and we expect that to continue into Q4. So we get into more normalized comps in Q4, and with our factory now humming in Fort Worth, we expect that to kind of normalize.

Understood. That's great. Thank you very much.

Our next question comes from Veronica with Citi. Your line is open.

Hi, guys. Good morning, and thank you for taking my questions. I will keep it to two as well. The first one is just, Deepak, I know you're not going to give us 2024 guidance, but just curious on some of the moving parts that you see as you move into next year. Maybe if you could comment, one, on how you feel about the market. Obviously, I think J&J made some pretty strong comments recently about how they expect elevated utilization and volume growth to continue. And also, do you think 2024 is the year when we start to see some improved momentum in knees and hips on a full-year basis? And maybe for Anne-Francois on that as well, just in terms of the P&L moving parts, I'm thinking FX and inflation, if you have any high-level thoughts at this point in time. to help us as we think about 2024, that would be super helpful. And then my second question is just maybe a follow-up to comments that Deepak you've already made, but just for avoidance of doubt. Obviously, now that you have more clarity on VBP, do you still feel confident in your ability to achieve the 20% midterm targets? And what are some of the offsets that you see against that sort of increased scope of the CPP process in sports meds? Thank you.

Thanks for the questions, Veronica. So just on the guidance of some of the moving pieces, right? We do expect positive impacts as we go into 2024 from revenue leverage. We start to see that come through in Q3, and we're going to build on that in Q4, and we expect that to continue in 2024. Pricing, there's, of course, the inflation offset, but some of the more strategic work we're doing on pricing will expect to start to, or not start to, but continue to pay dividends as we go into 2024. Also, ongoing productivity gains under the 12-point plan will be a factor as we head into 2024. Then I mentioned, of course, the VBP in sports medicine that will act as a headwind, and Francoise talked about. which previously we had guided to around 1% to 1.5% of group sales being impacted by VBP. Based on the expanded kind of scope that we see, we think it'll be more like 1.5% to 2%. So that will have an impact that offsets some of the factors that I mentioned. In terms of transactional effects, it had been a headwind in 2023, but we don't expect that in 2024. And also, we don't expect the same scale of headwind in terms of input cost inflation in 2024. So the bridge that we provided at H1 gives some good indication as to the major factors that we see influencing a margin step-up as we go into next year and beyond, including materials and staff cost, inflation offset, or online rather, our COGS and manufacturing optimization and the cost reduction programs taking, having full year effect in 2024 in terms of what we started in 23. And of course, as I said, the growth leverage. So as I indicated, you know, I feel good about leaving our guidance for 2025 unchanged. And in terms of the shape of the trajectory from 23 levels, as I said, We don't expect it to be linear, and more of it will come in 25 and 24, but we also don't expect it to be hockey stick. So hopefully that gives you a bit of color. I think I made the comment around FX already. So hopefully that addresses that. your first question. Your second question around VBP, I think I incorporated that into my response. So in terms of the factors that we believe will offset the more expanded scope, it really comes down to the factors I enumerated earlier. It's growth leverage from other parts of the portfolio. It's the cost reductions having the full year effect. our productivity initiatives, the unwind in terms of input cost inflation. So those are some of the factors. And also to keep in mind that in China, not all aspects of sports medicine are covered. Regenitin, we expect to launch in China. We expect to be a growth driver. Of course, the AET part isn't included in the VVP guidance. So we expect that to be a growth driver as well. So hopefully those pieces all make sense, Veronica.

No, that's very clear, Deepak. And maybe just quickly, if I can squeeze a quick follow-up, I think you've alluded to this in the press release, so you're starting to make progress on some of the manufacturing footprint optimization. When can we expect to hear more from you on sort of how this is underpinning the 2025 margin target and anything you can share high level about how that's going at this stage?

Sure. I mean, you should expect more in our full year results, Veronica. But as I shared, you know, our network optimization efforts continue. So we've announced that we're going to be closing two of our smaller factories within our network that represents about 20% reduction in footprint. in manufacturing. We've also reduced headcount as part of this process as well. And so we'll give you an update specifically on the numbers in full year. So combination of those factors we expect will contribute towards our gross margin improvement efforts.

And then just to add to this, Veronika, I think two elements. One is the efforts of the network optimization will be more visible in orthopedics. I mean, there are actions across the whole network in terms of lean and continuous improvement. But clearly, orthopedics will benefit the most. So as you look at the segmental analysis, you'll see the margin improve. And one of the drivers will, of course, be revenue leverage, but the other is also the action around the network and the manufacturing cost. I think the second as well, it's important to understand, it doesn't flow immediately through the P&L. As you know, there's a phasing impact of cost of goods, inflation, etc. And Deepak talked about the shape of the guidance. Part of that is because the savings from manufacturing take longer to flow through as you build into your inventory, and the savings only flow through as you release the inventory that will be produced at a lower cost, so that will take some time.

Great. Well, I look forward to hearing more about that. Thanks, guys.

Sure thing. We now turn to Lisa Clive with Bernstein. Your line is open.

Hi there. First question on Cori. Can you just comment on what the current commercial strategy is for Cori? I'm aware some of your bigger competitors are placing robots for free. So what proportion of your Cori installments are sold, leased, placed, et cetera? And how should we think about that evolution going forward? And then second, just on... Utilization of Cori increasing. Can you just comment on why the total USME business was down this quarter and how we should think about the timeline for that recovering? That would be helpful to hear a little bit more on that.

Sure thing. So with Corey, our interest is not just placements, but it's placements plus utilization. So that's what we're looking for, which is why I reported on the utilization number. The mix of business models in terms of cash sales and, you know, rentals and lease models and so forth, they do vary across geographies and actually within geographies as well. And that does vary from quarter to quarter. I'd say we're competitive and we do our best to address the needs of customers. And, you know, some customers prefer cash sales, others in lease models, and we're responsive to the needs of our customers. But in the end, the strategy we're running, though, is not to place robots willy-nilly, but rather to place them where we expect to see utilization. So that combination is important for us. We're also looking at where we place them, and we're encouraged by the uptake we've gotten not only in academic medical centers, where historically we've had a weaker presence, and we're starting to see and gain traction in that, but also in the ASCs, which, as you all know, is a growing segment, and Corey is very well positioned within that segment as well, and we're pleased with the uptake we're seeing there. In terms of the U.S. knee business, the primary factor in Q3 really was around some product supply challenges. Although Leifer overall has improved in orthopedics, that is product availability overall has improved in orthopedics, the particular skews in the U.S. and our U.S. business tends to be heavy on journey auxilium. Some of those cues continue to experience challenges in Q3, particular challenges in Q3 that impacted not only replenishment of implants, but also our ability to place complete sets that can be utilized in procedures. As I mentioned, when we look within the quarter, September was where we saw significant recovery of that. And we continued that improvement actually into the first month of this quarter as well. So we're pleased with the improvement there, and we expect now in Q4 to recover in U.S. and East. So hopefully that addresses both of your questions there.

Great. And just one last thought, just on cementless needs, what proportion of that 25% done with Corey are done with cementless? Just trying to understand whether there's a mixed improvement opportunity if cementless is still sort of not used very widely. Thanks.

Yeah, we don't break out cementless versus other. What we're really looking at is constructs. And in particular, cementless is not what's driving Cori. So for us, it's about selling the portfolio. We're very pleased with our portfolio's position relative to our competitors. So we're actually really looking at whole constructs, not any one particular product line.

Thanks.

Yeah. Our next question comes from Jack Reynolds-Clark with RBC. Your line is open.

Hi there. Thank you for taking the questions. Two for me, please. The first was on pricing. I think you touched on it earlier, but I was wondering if you could give a bit of color around the contribution of pricing to your growth in the quarter. I guess that has two parts to it. The first is the development of price erosion or lack thereof through the quarter. but then also kind of the initiatives that you're implementing as part of the kind of the 12 point plan. And then the second question just was on core replacements. Obviously appreciating that your focus is on kind of penetration and utilization, which obviously seems to be trending quite nicely. But I was wondering if you could give some color on kind of where you are on that 300 placement target for the year. And then also how that's split between kind of ASCs and hospitals.

Yeah, sure. So, go ahead.

So, Ajak, in terms of pricing, you know, it's an important element of the 12-point plan. It's part of one of the initiatives, as you mentioned yourself. It's also important to try to offset some of the inflationary pressure we're all seeing. And we've continued to make good progress. in updating and standardizing our pricing controls across the portfolio. So we have continued to see positive pricing, like we did at the end of last year, that's continued into a low single digit, positive through the third quarter. So we're pretty pleased on the progress we're making here, and it's really great collaboration between all the teams here, from commercial, the selling organization, to finance, Now, looking further out, there is more strategic work to do on pricing, as we've discussed before, you know, when we launch new products, how we are pricing ladder, et cetera. But we do not depend on pricing as a following integration guidance.

On on Corey that will update you in terms of numbers of placements that at full years we're making progress towards the goal that you mentioned Jack and in terms of ASC. leaves that better than kind of overall share in ASCs. In other words, we're pleased with the kind of traction we're getting at the ASC, which is a big growth driver. So we'll come back to you in terms of specific numbers of placements. We just don't want to get into the every quarter kind of updates and numbers on Cori's.

Yeah, no, understood completely. And then if I could just squeeze in another one around ATOS. I'm wondering what your thoughts were, if you had any further developments around introducing that on Sikori following the launch.

Yeah, so as you know, shoulder is a growth market within orthopedics. Our entry into that, into an important segment with ATOS, We're pleased with the initial kind of results, primarily so far the activity has been around design surgeons, but we've also taken it beyond that initial group. So overall, you know, good traction that we've gotten. As I indicated, I think on the H1 call, maybe it was a Q1 call, I forget now, but overall, We see the potential of Cori in shoulder. The form factor of Cori is very well suited for the shoulder application. So it is in our pipeline, and we look forward to kind of updating you on that at the right time. But where I'll leave it is very excited about the potential for Cori in shoulder.

Okay, great. Thanks a lot.

Yep.

now we now turn to david adlington with jp morgan your line is open hey guys thanks for the questions uh firstly again back onto corey i just wondered if you could give us some comments of what you're doing differently to drive that big step up in growth and how sustainable you thought that was uh and then secondly uh just on the glp-1 impact maybe i'm going to touch on it so uh Maybe not so much on ortho, but I just wanted to get your thoughts in terms of wound care, given the importance of diabetic and venous leg ulcers for that business. Thank you.

Sure, David. In terms of Cori, Cori is not something we're driving in isolation. At the end of the day, what matters to us is selling the portfolio that we have. We're very excited about the differentiation that we have. uh, within, uh, across orthopedics, but certainly within, uh, within me. So the focus is on selling the portfolio quarry together with journey and legion. Um, so, um, it's that combination. So, um if you're executing six plays um that um take into account um our differentiation and where we think uh we can win um so our poor results are to be viewed in the context of the broader commercial execution improvements that we're making on the back of investments in innovation. So, you know, in terms of constructs, Journey 2 obviously is exciting in terms of true next-gen construct that we have. We have some great differentiators of our own. Glory is the only robotics platform to have a revision indication Also, the knee tensioner that we released recently onto Cori, we enabled surgeons to do soft tissue balancing before making Plex, right? Cori is the only platform that doesn't require imaging. And now with added functionality onto Cori, the ability to do cutting, you know, saw-based solutions on top of milling, all of these things come together for us to put together an attractive solution value proposition for our customers is selling the whole portfolio so that's really the differentiator for for us in terms of uh glp ones and uh and wound uh you know just narrowing in on say diabetic foot ulcers they're about um i think about 20 of the wound market and uh people who have diabetes um with diabetic foot ulcers that take 10 to 15 years for these ulcers to manifest. And for this group, GLP-1s have been available for some good length of time already. And so these issues occur as a result of issues with glycemic control, not obesity per se. So some of the data that you're seeing on GLP-1 and obesity is not directly applicable to DFUs. So putting those things together, we don't expect a significant impact to our wound business as a result of GLP-1s or some of the new data that's coming out on GLP-1s.

That's great. Thank you.

David. We now turn to Graham Doyle with UBS. Your line is open.

Morning, guys. Thank you for taking the questions. Just firstly, one on the short-term margin, then maybe I'll ask a follow-up on 2025. Just from what you're saying, and obviously to change the guidance from at least 17.5 to around 17.5, it kind of implies something like a 20 to 30 basis points lowering in that target. seemingly driven by China and some issues over a short period of months. So could you contextualize that? Because annualizing that would be kind of worrying when we think about next year. So maybe just contextualize what's actually happened there and how much is attributable to it. And I'll just follow up with a 2025 question after, if that's okay.

So I'll take the question on the margin. And as we've mentioned, there's many moving parts. And the dynamics we've seen so far in the second half have been, sorry, as we described with our H1 results, you know, driving productivity, driving the operating leverage. And what we're seeing now is the additional headwind from China to consider. When we gave the guidance, we did include some pre-VBP impact, but we are There are more moving pieces, moving parts at this point in time. And to your question, whilst we're working to offset the impacts of China, there's only so much that can be done within one quarter of the year remaining, and that's why we're adjusted to around 17.5%. But clearly, we are still seeing the seasonality and the seasonally higher margin, the unwind of one-time commercial costs and the planned cost reductions coming through. And we shouldn't forget that our Q4 is always the highest sales quarter, as Deepak mentioned before. So clearly, we are working through, and it's just one quarter that we cannot offset.

Yeah, and in particular, we didn't signal 20 or 30 basis points. We just said around 17.5%, just to be clear, Grant. And as I mentioned, the BBP is something that we had anticipated. We called out kind of the 1.5% to 2% group sales. The added impact of the anti-corruption campaign, we don't necessarily think that that's going to persist for an indefinite timeframe. It's hard to tell how long that will last. So, BBP, of course, is more permanent, but this impact of the anti-corruption campaign, we don't believe that will be the case. But in particular, we didn't signal 20 to 30 basis points, just to be clear.

Okay, no, I appreciate that. I suppose I just picked, I mean, above 17.5 and then around 17.5, they are different. I'm kind of picking that point. And just on 2025, so I'm just thinking of the things that have changed from when you set that guidance at the start of the year is obviously VBP itself is new. And then it sounds to me, based on the original guidance, the margin base for the end of this year is going to be lower versus where you were originally. It sounded like when we talked, I think it was the Hugh Wooden call, that the 20% target in 25 had fat or had excess in it. It's going to be difficult. Would you be able to share with us the degree of space you have in that number? Because obviously you're taking account of newer headwinds, but you still seem very confident on it. It was something you said at Q1 as well when we talked about BVP. So just to give us real confidence in that, how we think about modeling that so we know that you've got numerous levers that could have theoretically gotten you to 21% or 22%. And then we can kind of work back that way rather than starting at 20% as the optimum and sort of taking the headwinds off that.

I believe contingency is the word you're looking for, Grant, rather than fat. It's all kidding aside. You know, when you put guidance out, you try to have some amount of contingencies built in to account for things, for moving pieces, right? And so, as I indicated in Q1, but really at H1 when the question came up, based on what we knew at that point in time around BPP, which is really the only real big factor that's changed since we set out guidance. We believe that based on that, we could, you know, buffer through that and offset the expected headwinds from BPP. Even with the expanded kind of scope that we see now, we expect to be able to offset that, you know, in the guidance and still achieve what we set out in the midterms. So that's the fundamental kind of assertion that we're making. There are other positive factors as well. So as I mentioned, the 12-point plan, we continue to make progress on in some areas we are ahead. In other areas, we're just according to plan, but we are not according to plan, but there are actually green shoots there as well. So we're actually pleased with the traction that we're getting with the 12-point plan. You've seen that translate into revenue growth. You have a few years further evidence of that. I do believe we'll continue to drive growth, and that should translate into operating leverage. In terms of inflation, You know, it's anybody's guess as to how persistent that's going to be. And Francois mentioned the fact that there is latency, right? So, you know, there's about a year gap between when you see inflation start to recede from a macroeconomic perspective and how that enters into our PNL. So that's another kind of delta, right? We've assumed a certain level of inflation, persistent inflation, actually into 2024 in terms of how our guidance is built. And I would say so far in 2023, you can probably surmise from our comments that inflation isn't worse than we've modeled, right, in terms of how it's impacted. So those are some of the moving pieces that hopefully that gives you a bit of coverage.

No, that's really helpful. Yeah, probably fat probably isn't a word to use right now with GLV1s, but thank you very much.

I wasn't thinking that, but yeah, fair enough.

Our next question comes from Hassan Al-Wakil with Barclays. Your line is open.

Hi, good morning. Thank you for taking my questions. I have a couple, please. Firstly, on VBP, you mentioned the scope is wider now impacting companies. 1.5% to 2% of sales versus 1% to 1.5% previously. Can you explain what is incremental here? And can you also talk about the extent to which you are seeing destocking in the channel? Maybe help us by telling us what China joint repair was down by in the quarter. And then secondly, on growth, how do you think about the current procedural landscape in the U.S. and when this pent-up demand in the markets may recede. Do you think that current market expectations for 5% organic growth and 120 basis points of margin expansion next year are achievable? And I guess particularly on margin, given the extra headwinds that you are talking about incrementally today. Thank you.

Yeah. So in terms of VBP, just to ground us and to reiterate what Francois said, China cost us about three points of growth in joint repair and sports in this quarter. Then we talked about the impact on AET that isn't related to BBP, but that's related to the overall slowdown in the healthcare market, in part because of the anti-corruption campaign. In terms of the expanded scope, it's still very much an ongoing thing, Hassan. We expect another communication here, I think, in mid-November. that'll spell out the categories. So still within joint repair, but it's just particular product categories within joint repair. So it's not that AET is now in the mix where it was previously not. So it's really more product categories within joint repair that accounts for why it's bigger than we originally thought. But to ground us, it cost us about three points in Q3. So in terms of your question around how much destocking that we see in the channel. There's a couple of facts. So first of all, as we indicated, we do see that we have some experience with how ortho went to calibrate, you know, how to manage this with our distributors this time around. So what I can say is, you know, similar type of activities as we saw when orthopedics went at this point in the development of BVP. And so it's hard to actually unpick that from what's going on in the market. There's some indications that as it pertains to sports in particular, patients are waiting to have their procedures done post-VVP because their out-of-pocket kind of pay would be lower. So there is some effect around that. And of course, I mentioned the overall healthcare market slowdown that impacted not just also orthopedics or sports, but just generally in healthcare. So it can be difficult to unpick How much of this is VBP? How much of it is sports-related? Procedure slowdown and anticipation of VBP among patients and, of course, the overall healthcare market. So those are the kind of different pieces of that.

The other question was around Margie and her son, wasn't it? You're on the second question.

Yeah, it was around the current procedural landscape in the U.S. and then also expectations for 2024.

Yeah, so procedure-wise, I think Q3 was another robust quarter, but not nearly to the same level that we could see as Q1 and Q2. So in terms of pent-up demand, for us, Our growth is going to come primarily from improved commercial execution. A tailbone in the market will help, but in the end, given where we are, given what our performance in the recent past in orthopedics has been, what we're counting on and what our guidance is built on is our ability to execute better commercially within an existing market. So by far, that will be the bigger driver for us. And in terms of the margin number you indicated, obviously we're not going to be talking about 2024 guidance yet. We'll do that in February.

Okay. I guess if I can just follow up again on margins, maybe to ask in a different way, what's your current base case on when China anti-corruption impact abates? What is the current margin effect, if at all, and and to what extent could it impact your ability to hit 2025? I ask because you're talking about further headwinds today, and at H1 results, your confidence around midterm margins was abundantly clear.

Yeah. Yeah. So just to be clear, DBT, as we envisioned it, even with kind of the broader scope that we're getting indications of, would still have us leaving our midterm guidance where it is. The impact of anti-corruption campaign, it's a bit hard to tell, Hasan. We are not counting on that being a persistent effect. In other words, BVP, price reductions happen, and you're not expecting that to kind of reset, right? The additional headwind for the year is the impact of around capital sales and to some extent procedures based on the anti-corruption campaign. So I was in China just about a week ago. The indications are that there is some improvement in procedures in September and the expectation is that it would get better in Q4, but it's hard to tell, right? It really is hard to tell how that's going to play out. But for what it's worth, We don't expect that to be a persistent factor into going into 24 and beyond. And therefore, the impact on midterm margins to be negligible.

Perfect. Thank you.

Yeah.

Our next question comes from with HSBC. Your line is open.

Hello. Thanks for taking my questions. I will have two, please. First of all, in terms of the Cori expansion that we're seeing, which one do you see as the bigger of a driver, like the wider indication of Cori or the lower pricing associated with Cori? And how do you see the client base responding to that, whether the peer's free offering of query is a decision maker or whether the volume growth is more impactful at that? And second of all, if we circle back to the potential costs associated with the program, how confident are you that they will remain within the realm that you have announced so far? and that we won't see any additional costs coming, any one-off costs coming from the program within the remainder of the year, 24 and 25. Thank you.

So in terms of Cori, as I mentioned, Cori is not in isolation. It's the package, right? It's Cori plus best-in-class implants, a journey to best-in-class revision capabilities, and so on and so forth. So it's not just Cori. But as it pertains to Cori itself, it's the form factor, right, that gives it a broad appeal, not only in larger centers, academic medical centers, but also importantly in ASCs, where its form factor and its price, I think, is very attractive for that segment. As you mentioned, Cori has some great features and benefits. There are indications that are only available on Cori at this point. So, for example, a revision indication. It's the only robotic platform to offer that. You've got a great package combination of Cori plus revision implants that I think is very distinctive for us. In addition, the fact that, you know, it's a milling-based solution, but now recently it's We've offered a cutting approach, a saw-based solution. It gives great flexibility to our surgeons. Currently, Cori doesn't require imaging. Our pipeline includes the ability to offer image-based solutions as well. So we'll talk more about that at the meet-the-management session. And then I talked about the knee tensioner. Cori is the only platform to offer the ability to do soft tissue balancing before surgery. doing cuts, and we believe that's a great addition. So you put these pieces together, you can talk about any one thing, right, but really the power is in the combination, and the power is in the combination of Cori plus best-in-class implant portfolio, right? And that's really what I think will be the winner for us. And once we are through the 12-point plan, we fix the fundamental wiring of Cori orthopedics, which we're well on track to doing. So the operational improvements combined with the improvements we're making in commercial execution together with a best in class portfolio, that is what I think will set us apart in terms of driving growth. In terms of restructuring costs, Cesky, we feel good about the number we put out, and we're tracking well to that. We, of course, are keeping a close eye to that, and we report that out every quarter, you know, to our board. And obviously, we are monitoring that very carefully. We feel good about where we're positioned relative to the envelope that we indicated.

Thanks very much.

Absolutely. This concludes our Q&A. I'm going to hand back to Deepak Nath, CEO, for closing remarks.

Great. Thank you very much. As I said, I'm pleased with what was another strong quarter for us. We're making great progress in our 12-point plan. We're starting to see the results of that come through in the financials. We've got a lot to be excited about. And as I said, in addition to fixing our operations, we're very excited about what the investments and innovations that we've made are starting to deliver. And I'm very excited to be able to talk about that at our Meet the Management session on November 29th, which I hope you will all attend. So thank you very much. for your questions.