Smith & Nephew plc

Good morning, and welcome to the Smith & Nephew Third Quarter Trading Update. As mentioned, I'm Deepak Nath. I'm the Chief Executive Officer, and joining me is Chief Financial Officer John Rogers. We announced underlying revenue growth of 4% in the quarter. When we get into the detail, you'll see that there were several moving parts, but I'd like to call out two major components. Firstly, we've continued to make good progress on our strategic growth priorities under the 12-point plan. As part of fixing orthopedics, returning our U.S. recon business to growth is an important milestone for us. We've made significant operational improvements around product supply and commercial execution over the last year, and these are now starting to come through in revenue. Although orthopedics performance across the world as a whole was slower, our recon business still maintained its momentum in the other established markets, with growth accelerating over the first half. Aside from the effects of VBP, sports medicine also continued to perform well and advanced wound management delivered its best growth quarter this year. Both were further focus areas under the 12-point plan. The second component was a weaker than expected quarter across our surgical businesses in China, costing almost two points of growth at group level. In sports, we saw the expected price impact of VBP but with the related volume benefits yet to come through. And in orthopedics, there was a further headwind from slower in-market demand with consequent channel adjustments, particularly late in the quarter. Our assumption today is that both of these headwinds will continue for the rest of 2024 and into 2025. As a result, we now expect to finish the year with underlying revenue growth of 4.5%, and trading margin expansion of up to 50 basis points. The slower development of the VBP volume benefits also means it's likely to contribute more margin pressure in 2025 than we previously assumed. More broadly, we still see very significant margin expansion from the operating leverage, productivity improvements, and cost reductions that we're driving throughout the business. But this additional pressure will have an effect, and we now expect to reach a level of between 19 and 20%. While it's disappointing to be making this change, I feel positive about our strategic progress. The growth headwinds from China will roll off, given we will lapse sports medicine BVP as we move through 2025, and China recon sales will align with end market demand. In contrast, our better performance in established markets is more structural, driven by improvements under the 12-point plan. Operational metrics around product availability and capital have remained strong. Commercial execution improvements in U.S. recon have brought customer churn down, and we continue to deliver on longer-term growth drivers such as robotics adoption and innovation delivery. Putting all of that together, our transformation to a higher-growth company with the ability to drive productivity and operating leverage throughout the P&L remains on track. I'll come back to that later, but for now, I'll hand over to John to take you through the detail of the quarter.

John? Thanks, Deepak, and good morning, everyone. Revenue in the quarter was $1.4 billion, with 4% underlying growth. Foreign exchange was neutral overall, so reported growth was also 4%, with trading days unchanged from the prior year. I'll come to the detail of the business units in a moment, but as you can see, geographic differences were an important factor in the quarter. Our established markets business remained strong and accelerated sequentially with 4% growth in the US and 6.8% in the other established markets. However, the emerging markets were broadly flat, as Deepak has mentioned, with a disappointing quarter in China. For the business unit performance, I'll start with orthopedics, which grew 2.3% underlying. A highlight of the quarter was positive growth both of U.S. knees and hips at 0.7% and 3.2% respectively. U.S. recon has been later to improve in other areas of orthopedics, so this is an important step following the operational and commercial improvements in recent quarters. It's taken longer than we initially wanted, and there are still further improvements to be made, but the customer churn of recent quarters has reduced, and we're on an improving trajectory. Recon growth outside of the US was slower overall than in recent quarters, but with significantly different trends by regions. On the positive side, Europe and the other established markets continued their recent momentum with growth ahead of the first half. However, China lowered overall OUS growth by around five percentage points in each of knees and hips. There's been a spell of reduced end customer demand And as a result, sales to our distribution partners significantly slowed as they reduced their holdings of implants in response, particularly towards the end of the quarter. This is ultimately, of course, a temporary effect, but our expectation is that orders will remain low through the fourth quarter and into 2025. Other reconstruction grew by 13.7%, reflecting the ongoing growth of robotics, capital and consumables. Utilisation continued to rise during the quarter and reached almost a third of our US needs being placed with Cori. Trauma and extremities grew by 3.3%. The EVOS plating system has been a key growth driver for some time now, and that continued with strong double-digit growth and acceleration over Q2. Offsetting that was a slower quarter for some of our legacy systems, and in particular, lower sales of whole surgical sets. This is a dynamic that can drive variability in trauma growth, given high values of single transactions, and was a large swing factor in the quarter. We expect higher growth to return in the fourth quarter as we continue to drive EVOS and roll out the ATOS shoulder. Sports medicine and ENT grew 3.9% underlying in the quarter. Within that, joint repair growth was 0.1%, reflecting the headwind from BBP in China. Excluding China, joint repair growth would have been plus 9.4%. Q3 was the first full quarter since VBP implementation, and the new pricing is now in place across all provinces. The scale of the headwind reflects the price impact that was already known, and also that the anticipated boiling benefits of high utilization are yet to come through. Growth was strong across all other regions, with Regenitin again a major driver, primarily from increased adoption in rotator cuff procedures. There remains a very significant opportunity for global penetration, which was still at an estimated single-digit percentage of procedures in 2023. In addition, we see expansion into new procedures such as foot and ankle. Arthroscopic enabling technologies grew by 15% in the quarter, with robust growth across all categories of the arthroscopic tower and from where we were far sealed. The quarter also benefited from a relatively soft prior year comparator. The minus 6.8% decline in ENT was more than expected, although also primarily reflecting prior year effects as we lapped an unusually strong Q3 2023, which had benefited from one-time backorder clearances. We expect Q4 to return to more normalised growth for both AET and ENT. Looking now at advanced wound management, which grew plus 6.5% in the quarter, that represents a significant improvement over the first half and our strongest quarter this year, with broad-based strength across regions and categories. Advanced wound care grew plus 3.4%. The largest driver was our leave-in range of foam dressings and also with good growth coming from our anti-infected portfolio. Bioactive's growth of plus 8% included double-digit growth in skin substitutes. This follows the launch of Graphics Plus in the second quarter, which is a new, easier-to-handle version in our lead product family, targeting the growing post-acute market. Clearly, there's a lot of interest in the Medicare local coverage determinations for the category, but as yet, we've not seen market behavior noticeably changing in anticipations. Finally, advanced wound devices grew plus 11%. We had a strong growth from both PICO and Renesys and a good quarter from the least patient monitoring system as we continue to expand the market in pressure injury prevention. So I'll finish with our updated outlook. For 2024, we continue to expect growth acceleration into the end of the year. That should come from the ongoing improvements in established markets recon through the 12-point plan. a return to high growth of trauma and extremities in the fourth quarter, and the benefit, of course, of two extra trading days, although we expect the effect to be less than proportional given the day's fall in the lower volume holiday season. However, we also see our China business remaining a headwind in Q4 due to the slow development of volume benefits of sports medicine BBP and continued slow shipments to our recon distribution partners. As a result, we expect underlying revenue growth of around 4.5% for the full year, which is below our previous guidance range of 5% to 6%. This also feeds into our trading margin outlook. As I set out with our half-run results, margin expansion for 2024 should come from the combination of productivity gains under the 12-point plan, operational leverage, which together should more than offset the headwinds from input. These same moving paths still apply, but with a reduced tailwind from the operational leverage reflecting our updated growth outlook and an increased BBB headwind. We now expect year-on-year trading margin expansion up to 50 basis points. Our target of improving trading cash conversion is unchanged at around 85%. We also expect the China headwinds to spill over into next year. Our expectation was that the 2025 margin impact of sports VBP could be largely mitigated, but the slower development of offsetting falling benefits to the known price impact means VBP is now likely to be a more meaningful incremental headwind. More broadly, we still see the same margin tailwinds that we previously set out from the operation leverage productivity improvements and the cost reductions that we're driving throughout the business, but the combination of the 2024 baseline and this additional headwind in particular will also have an effect. As a result, while we still see significant expansion in 2025, we now expect a trading margin of 19 to 20%. And with that, I'll hand back to Deepak. Thanks, John.

As I mentioned in my opening remarks, the quarter has been a story of two opposing factors. One is that we're working through significant growth headwinds in China in both sports medicine and orthopedics. However, outside of China, the rest of the business is showing the higher growth profile we were aiming for when we initiated the 12-point plan. To put some numbers around that, in the last four quarters, China has gone from being broadly neutral to group growth to an almost two percentage point headwind in Q3. Growth X China of 5.9% in the quarter and 5.1% year-to-date is well above Smith & Nephew's pre-COVID group average of around 3%. Importantly, that's also a level that can typically drive operating leverage throughout the P&L. Just putting China in context, it's still 4% of group sales and one of our largest markets. As with many other companies in the MedTech sector, we are dealing with a rapidly changing market The aim is to adapt and to build a sustainable business there. However, it's also important to recognize that the current growth headwinds should unwind as we move through 2025. In orthopedics, our sales to our channel will have to converge with end user demand over time. And in sports medicine, we'll fully annualize the VBP impact after the second quarter. In contrast, our better growth story in the rest of the business is more structural, and what's behind that is a 12-point plan. I'm sure this slide is familiar to you by now, but it's a reminder of what we've done on both growth and productivity. Specifically for orthopedics, we've rewired our commercial delivery, including better connecting supply and demand, better asset utilization with our instrument sets, and driving our key innovating products. The return to growth of U.S. recon in Q3 is another example of the 12-point plan initiatives converting into commercial outcomes. We've talked in previous quarters about the gradual improvements in operational KPIs as lead indicators of improved growth. Availability of implants and capital had mostly reached our goals by the end of 2023, with knee capital availability the remaining item that got to target in the second quarter of 2024. Improved product availability and capital deployments has been a repeating roadmap for performance improvement. Even so, it was important to show that we could also apply this to the largest area of orthopedics, as well as the earlier improvements outside the U.S. and in trauma. These improvements need to be sustained for the long term, and that means the new ways of working under the 12-point plan have to become lasting changes to the way we do business. We're starting to see evidence of that in our operational metrics. Key KPIs that we've used to measure progress and drive accountability in the 12-point plan have remained strong after reaching their targets, and many have continued to progress beyond the original goals as a culture of continuous improvements starts to become embedded in the company. Some examples are shown on the slide For implant availability, U.S. non-set LIFR for key products reached our target level at the end of 2023. For the third quarter of this year, we had not just held onto those gains, but had even improved further with the KPI more than three percentage points above an already high target level. The picture is similar outside the U.S. with international metrics of product availability also showing further improvement in 2024. Overdue orders have shown a similar pattern, falling by 85% for U.S. needs in 2023, and then another 30% so far in 2024. And on capital, our kit health, which is the percentage of sets that are available for use, reached our target level at the start of the year and has improved by another five points since. There is more to do in the U.S., and it will take time. but I've set the team the realistic target of being at least at market growth by the end of 2025. Another key element of a growth story is innovation. Through consistent delivery and good launch execution, new products from the last five years provided almost half of the total revenue growth in 2023. We continued with a good cadence of delivery in Q3 across implants, instruments, and evidence generation. and in a range of high growth categories. In recon, we had the first procedures of catalyst stem. This is our new shorter hip stem suited to the direct anterior approach, which represents now around 50% of the U.S. market that's growing at double digit. Initial feedback has been positive on the precision of placement, procedural efficiency, and reproducibility. In extremities, we've launched patient-specific instrumentation for total ankle replacements. This strengthens our position in another high-growth market, which is expected to grow at around 7% CAGR. In sports medicine, we've continued the stream of incremental innovation with 510K clearance for QFix Nautilus, a new version in our established QFix range of suture anchors. And we've continued to generate clinical evidence to support our earlier launches. In August, we presented new data for our cementless knee at the International Society for Technology in Arthroplasty. A 153-patient study found 100% survivorship of the tibial and femoral components at one year with supportive patient-reported outcomes. Radiographic data also indicated stable fixation one year after implantation, which is known to be predictive of long-term stability. Overall, this was a somewhat complex quarter with a number of moving parts. It is disappointing that the headwinds in China have offset a lot of good work in the rest of the business, and that will have an impact as we go into 2025. Coming off of our 2025 target is not what we wanted, but it's the right thing to do, balancing investment in the business for sustainably higher growth and returns, but delivering meaningful improvement year on year. We're still making good progress in the fundamental transformation of Smith & Nephew. Over the last year, the 12-point plan has enabled us to turn around the performance of most of our orthopedics business. And although there's further still to go, the last trailing area of U.S. recon has now also started to grow. VBP aside, sports medicine and wound management continue to perform well, Our innovation investments are delivering growth, and we're seeing signs that the culture of focus and accountability in a 12-point plan is becoming embedded as a new way of working with Smith & Nephew, helped by the move to the global business unit structure. Today was a sales update, but our productivity initiatives, including manufacturing optimization, and our work to improve cash generation and to focus our investments for higher returns are also continuing. I look forward to updating you on the progress in the new year. Now we'll take questions.