Smith & Nephew plc

Good morning, and welcome to the Smith & Nephew Q4 and full year 2024 results presentation. I'm Deepak Nath. I'm the Chief Executive Officer, and joining me is our Chief Financial Officer, John Rogers. Looking at our full year numbers, I'm pleased to be able to report that the 12-point plan is delivering financial outcomes. Our operational and commercial actions have combined with the high cadence of innovation to produce consistently higher growth than in the past. Margin expansion is beginning to follow. driven by both operating leverage and productivity improvements, which are becoming more visible as macro headwinds ease. Better working capital discipline and asset utilization also mean that our profitability is coming with higher cash generation. Overall, for 2024, we delivered 60 bps of margin expansion, 95% cash conversion, which is ahead of our target, and high heroic at 7.4%. The fourth quarter was a good finish to the year with 8.3% underlying growth. Volumes were solid across most regions and the company is now set up operationally and commercially to benefit from better demand as we saw at the end of the quarter. That also meant we realized more of a benefit to our surgical businesses from the two extra trading days that we expected to see during the holiday season. Importantly, this growth did not depend on improvement in China, which increased as a headwind, just as we indicated with our Q3 trading update. Overall, China costs 280 basis points of group growth in Q4. We're now poised to deliver a further step up in returns in 2025. Our outlook is unchanged. We expect revenue growth of around 5% and significant trading margin expansion to between 19% and 20%. This will come from continued operating leverage and as the cost savings from the optimization of our manufacturing network begin to benefit the P&L. In the early years of the 12-point plan, savings primarily went to offsetting macro headwinds. From here, higher savings and reduced headwinds mean we can deliver meaningful margin expansions. And I want to emphasize that 2025 is not the endpoint. We expect continued margin accretion in 26 and in 27 with many of the components of delivery that are already in place. I'll come back to these themes. So this next slide will be very familiar to you by now, but that reflects how fully the 12 point plan has been embedded in Smith and Nephew. The plan is how we've been improving performance, both for individual teams and for the company as a whole. It also represents a more rigorous way of working that will continue beyond the specific initiatives. We're now at a point where the outcomes are becoming more visible. So before we get into the quarter's financials, I'd like to set out some of our key achievements of the plan. Firstly, we delivered a truly comprehensive program. The 12-point initiatives have covered all aspects of the business, with KPIs and targets that have been defined for each. We've also moved the organization to a global business unit model, further embedding the culture of accountability and helping us drive better commercial execution at pace. While there's still more to do, we're increasingly seeing the financial benefits come through across revenue, profitability, return on capital, and cash flow. On revenue, we've delivered four consecutive years of growth above our historical average. That's backed up both by the operational improvements of the plant and also successive waves of innovation across our portfolio. On profitability, we've delivered 80 basis points of trading margin expansion since 2022, even in the face of some profound external headwinds. And we're set to deliver a step up in 2025 and in the years beyond. On returns, our ROIC is rising and should return to above our cost of capital in 2025. While on cash, inventory days are down, restructuring costs are down, and free cash flow was up to more than half a billion dollars in 2024. We'll go into each of these in turn, starting with revenue. If I look back to 2019 and before, the company averaged around 3% underlying growth. That was largely steady over time, but we were growing below our markets and there was a clear opportunity if we could take that to a different level. Our priority was to reposition Smith and Nephew as a consistently higher growth business with the ability to drive leverage through the P&L. As I mentioned, 2024 was a fourth straight year of growth above that historical average. We've had to deal with some significant headwinds, such as supply chain challenges, our recon business taking time to improve, and VBP in our China recon and joint repair businesses. Even with all of that, we've delivered a clear acceleration, and we expect that to continue in 2025 with our guidance of around 5% revenue growth. This step change has been underpinned by improvements from the 12-point plan. Firstly, we fixed the foundations of product and capital supply. Availability across our portfolio was at or above our target levels in 2024, having been below industry standards at the start of the plan. We've been able to bring down overdue orders by around 90% since 2022, and we're a better place to support our existing customers and pursue new businesses. We're also showing better commercial execution. Sports Medicine and Moon had already moved to consistent good delivery. When I get into detail of the quarter, you'll see that our US recon business has also shown progressive improvement as we've gone through 2024 and is on track to be in line with the market by the end of 2025. And that's in line with our target. Also in orthopedics, trauma and extremities. has been transformed into a high growth platform through execution on key launches across the EVO plating system and ATO shoulder. Innovation more broadly remains a key component of our growth story. In 2024, more than 60% of revenue growth came from products launched in the last five years. That means for consecutive years, around 3.5% of group growth have come from innovation. New products alone are taking us to above our historical growth. And we're producing successive waves of technology that keep coming over multiple years. First, we continue to add further lengths of value to existing platforms, such as Cori and Regeniton. For Cori, we've already added 10 new features since 2022. The combination of unique functionality and the flexibility to support a range of surgeon preferences have helped us drive adoption with the installed base now exceeding 1,000 units. We're now building towards a fully enabled hip platform on Cori with 3D navigation as the next element to come through. Expansion to shoulder replacement is a further priority where the anatomy of the shoulder is particularly well suited to Cori's handheld milling. Pre-op planning with Choreograph will be the first step to come in 2025. For Regenitin, the new tender repair applications are already contributing, and we believe more than 10% of use is now outside of rotator cuff. We're still looking to bring this technology to more groups of patients, and we have recently received 510K clearance for use in extra-articular ligament repair. Second, another wave of launches is already underway. ATO Shoulder is a product we're very excited about. We've launched a short stem implant and plan to build out a complete platform. We have a stemless implant that's targeted for 2025, and I've already mentioned our work to bring shoulder replacement to Cori. We've also added Catalyst Stem in the third quarter of 2024. This is a new shorter stem hip system optimized for the direct anterior approach, which represents around half of the U.S. market, growing double digit. Early utilization has been running ahead of our plans with excellent customer feedback so far. You'll also see a further wave beginning to appear in 2025. At our Capital Markets Day just over a year ago, we talked about a number of exciting new platforms, including cross-business unit digital capability. We're planning to show our first next-generation digital product at AAOS in San Diego, which will add video-based navigation to the arthroscopic tower and bring the more consistent patient outcomes and more efficient decision-making that we've seen before in orthopedics. We're also developing a new generation of IM nails in trauma. This is a $1.3 billion category globally, meaning we already have a good presence with Inertan and Trigem. We're working on both tibial and hip fracture products, and we'll come back with more detail as we move towards launches. At the same time, we've significantly reshaped our company. both in our organizational structures and our cost base. In 23, we began the realignment of our commercial model from franchises and regions to global commercial business units with verticalized commercial teams for each of orthopedics, sports medicine, ENT, and mood. I believe this is a better way of doing business. It drives greater accountability, faster decision-making and execution, and increased customer focus in every area of our portfolio. We're now positioned to capture that at Smith & Nephew with a single point of leadership for upstream and downstream marketing and sales, better alignment across regions and countries, and dedicated presidents with full global P&L responsibility. We've been operating in this structure for a year now and have continued to enhance accountability by fully allocating attributable costs. John will give examples of what we're already seeing from these changes, and I'm confident that the benefits will continue to accumulate. A second major change is how we've addressed the cost base. We started with an initial program of $200 million of savings at the beginning of the 12-point plan. In 24, we built on that by applying a zero-based budgeting approach to identify further opportunities. Total gross cost savings are now expected to be between $325 million and $375 million, backed by a comprehensive and detailed set of plans across 40 different initiatives. The largest chunk is from manufacturing and procurement, but there are savings really right across all parts of the business. We've already made substantial cost savings since 2022 of around 410 basis points. Much of it was needed just to offset external headwinds, which were either greater than expected at the start of the plan, or in the case of sports VBP, not known at all. In particular, we faced above normal inflation that we were not entirely able to offset through leverage. even with the higher level of revenue growth that we delivered throughout. However, our intense focus on costs has enabled us to still increase our profitability. In total, we faced almost 700 basis points of headwinds and still delivered 80 basis points of trading margin expansion since 2022. 2025 is a key year of delivery. when we should see the more significant margin step up that we've been working towards. The elements of how we do that are largely in place with a further increase in cost saving and inflation naturally offset by growth leverage. On costs, that includes the closure of four orthopedics facilities that will start to benefit the P&L in the second half of this year. We've also reduced our headcount by around 9% overall, with a significant portion coming in late 2024. So again, flowing through to the P&L this year. Inflation headwinds are also less impactful than in the early years of the plan, with the net of inflation and leverage being broadly neutral in 2024 and expected to be in balance again in 2025. And importantly, that is not the endpoint. We're well positioned for further expansion beyond 2025, enabled by better aligned supply and demand, capacity reductions coming through in our manufacturing network, and the timing of lower costs as they pass through inventory and reach RP&L. Another important set of achievements is around our cash generation and returns profile, which is returning to a much healthier position. John will take you through the detail, but overall, we're seeing clear improvement across multiple metrics where we've had longstanding challenges, and there's still more to come in 2025. I'll now move on to the detail of the fourth quarter before passing on to John to cover our full-year financials. Revenue was $1.6 billion with 8.3% underlying growth, with 7.8% reported growth after a 50 basis point headwind from foreign exchange. As I mentioned, these growth rates reflect a strong December and include the benefit of two additional trading days. The overall acceleration was consistent across our business units, which all grew faster than in the first nine months of the year. Looking by region, the U.S. was particularly strong with 11.9% growth in the quarter, while other established markets grew by 8.2%. The 2.3% declining in emerging markets primarily reflected the continued headwinds in China across both recon and sports medicine joint repair. For the business units, I'll start with orthopedics, which grew at 6% in the quarter and 8.1% excluding China. A priority has been improving performance of U.S. recon, and it's good to see that growth again improved sequentially in the quarter. Two extra trading days helped the reported numbers, but if you normalize for that by looking at average daily sales, growth still accelerated over Q3. OUS recon growth reflects the expected slow quarter in China. Our distribution partners have continued to reduce their holdings of implants following slow end customer demand earlier in the year. Inventory in the channel has come down significantly, but is not yet at normalized levels. So as we indicated in November, the largely paused ordering is likely to continue through the first quarter of 2025. Excluding China, our OUS growth was much healthier at around 7 points higher in knees and 6 points higher in hips. Other recon grew 23.9% driven by robotic sales. Cori continues to stand out for its flexibility and broad functionality, and adoption is progressing well. We had a record number of new Cori placements in the quarter, and our global robotics install base was over 1,000 systems by year end. As you know, our reporting practice in recon and robotics has been to recognize all of robotics capital, services, and consumables under other recon. During 2025, we'll change this to be more in line with our orthopedics peers. Robotics consumables will move to being recorded under the procedure where they're used. Capital and services revenue will remain as part of other. There's some work to do first, but this change will increase the comparability of both our implants and our other revenue growth. Trauma and extremities grew 9.5%, which is a return to the segment's recent stronger growth profile after a slow Q3. The EVOS plating system continues to be the primary growth driver, and there's an increasing contribution from the ramp of the ATO shoulder, which, although still at an early stage, provided around a quarter of the overall growth. I'll take a moment to look more closely at U.S. recon growth. Acceleration in consecutive quarters is what we said we expected with improved product availability and commercial execution under the 12-point plan. The sequence of underlying growth rates is affected by trading dates with two more days in Q4-24 than in the prior year quarter. One more in Q2 and one fewer in Q1. The slide shows the growth in average daily sales as a way of adjusting for these trading day effects. There are two points I'd like to highlight. Firstly, while the curve flattens a little, there's still clear sequential improvement in both U.S. knees and hips. Secondly, these average daily sales growth rates are a more representative measure for how the business exited 2024 compared to the unadjusted growth rates. We're therefore using them as a starting point for thinking about the beginning of 2025, when both Q1 and Q2 will have one fewer trading day than in 2024. Moving on to sports medicine and ENT, which grew at 7.8%, the segment as a whole continues to grow well, and consistent performance over several years means sports medicine now has a level of sales comparable to our recon and robotics business. Joint repair grew 5.3% overall and 15.9%, excluding China, with a more than 10 percentage point headwind from the impact of VVP. We will lap those price reductions in the middle of 2025. In the rest of the world, we had a particularly strong finish in the US, probably benefiting from the end of year copay effects. Regenitin remains a key driver with strong double digit growth seven years into our ownership. The broader segment is also starting to see a contribution for our developing foot and ankle business. This is an attractive new category for us, and while it's closer in scale to hip repair than to the larger shoulder or knee category, it leverages our existing sports medicine commercial organization and is synergistic with some of our specialist trauma products. Orthoscopic enabling technologies grew 8.5% with growth across the orthoscopic tower and continued strong double-digit growth from wearable fascial. However, we anticipate a year of slower growth for AET in 2025. A China VBP process on mechanical resection blades and coblation wands is expected and likely to take effect in the second half of 25. We expect a 25 sales headwind of around 25 million, including both the direct price impact and expected channel adjustments ahead of that implementation. This means that while it will be noticeable in AET, it should be a smaller factor at group level than the joint repair process. and is reflected in the guidance that John will set out in a moment. ENT grew 19.4% with multiple factors behind the stronger quarter. Q4 had a normal prior year comp after a more difficult comp in Q3. We saw some procedure volume catch up after an unseasonably slow Q3 in our tonsil and adenoid business. And that's on top of the ongoing customer acquisitions that are part of the longer term growth story. Growth has been volatile from quarter to quarter through 24, and I would take the full year growth numbers of 7.3% as more representative of the fundamental business performance. I'll finish with the advanced wound management segment, which delivered its highest growth quarter of the year at 12.2%. Advanced wound care grew 1.9%, consistent with the year as a whole, Foams were again a high growth category within AWC, which was led by Aleven. Overall business unit growth came mainly from bioactives and devices. Bioactives growth of 20.3% was driven by skin substitutes, and in particular, the launch of Graphics+. The ramp is following quite a common pattern in skin substitutes with an initial period of rapid growth that then quickly normalizes. We also saw strong growth in Santal late in the quarter, where, as we've said before, we see volatile stocking patterns. With all of that in mind, we expect bioactives to return to low single-digit growth in 2025. I know there's a lot of interest in skin substitute LCDs, where implementation has been delayed and is now scheduled for April. Our expectation is still high. that the overall effect on our business will be broadly neutral, with the benefit of good coverage for our portfolio likely to be offset by a smaller overall market size. We're now seeing the evidence of changes in the market in anticipation. Advanced wound devices growth of 20.6% was mainly from our negative pressure wound therapy portfolio. We've talked more about that what we're doing with Renesas, PICO acceleration is also a big part of our plans with the largest growth opportunities in surgical site complications and in chronic wounds. This remains a high growth category and we expect PICO momentum to continue into 2025. So with that, I'll hand over to John to cover the full year financials. John.

Thank you, Deepak. So coming to the four-year 2024 financials. Four-year revenue was $5.8 billion, up 5.3% versus 2023 on an underlying basis, and up 4.7% on a reported basis. Note that excluding the headwinds from China, growth would have been plus 6.7% on an underlying basis. Performance was broad-based, with all three reporting segments contributing significantly to the overall group. As you can see in the chart, orthopaedics grew 4.6%, sports medicine and ENT grew 6.2%, although again, excluding China, growth would have been 10%. And AWM grew 5.1%. We beat our revised Q3 expectations for the full year as a result of a very strong December. where we had somewhat discounted the benefit of the two extra trading days, which turned out to be good across our surgical businesses. We set out the challenges in the Chinese market for both our orthopaedics and sports businesses at our Q3 trading statement. And the Q4 China performance was in line with these expectations. Overall, a good set of growth figures and particularly good to see that more than 60% of our growth is drawn from products launched in the last five years as covered by DPAC. This gives us a degree of confidence coming into 2025. Looking at the trading P&L, gross profit was 4.09 billion with a gross margin of 70.3%, which is 40 basis points below 2023. The gross margin pressure came in the second half of the year as we began to see the price impact of joint repair, BBP, in China. Trading profit was 1.05 billion, up 8.2% year on year. Half 1 trading margin expansion was 140 basis points, and the half 2 margin went back 20 basis points due to the China headwinds, resulting in 60 basis points of trading margin expansion for the year to 18.1%, which is slightly above the guidance we gave with our Q3 trading update. If you unpack the 60 basis points of margin expansion, we saw a drag of 40 basis points on gross margin offset by 100 basis points of positive leverage across our operating expenses as we benefited from operational savings. 40 basis points of that came from slightly lower R&D costs. At the half year, if you remember, we were down 7.5% year-on-year on our R&D spend. We expected to catch up some of this shortfall in the second half, but ended broadly flat in half two due to some efficiency savings being delivered. We remain committed to our R&D spend and continue to look for ways we can drive efficiencies in this area. Our new product pipeline for 2025 is very exciting and a testament to the hard work by our R&D colleagues. Looking further down the P&L, adjusted earnings per share grew by 1.7% to 84.3 cents. That's below the growth in trading profit due to the higher tax and interest expense that we set out in our technical guidance at the start of the year. Our tax rate was 19.1%, in line with the guidance of 19 to 20%. IFRS earnings per share of 47.2 cents grew significantly faster, primarily due to the lower restructuring charges than in 2023, along with lower costs from the now-completed EU MDR programme and the provision release related to metal-on-metal. On restructuring charges for the full year were 123 million, down from the 220 million in 2023. 12-point plan spend was £66 million, bringing spend to date to £253 million and leaving around £22 million of spend to come through in 2025, to total the £275 million we guided to. We also took a reduction in our headcount in November in order to accelerate operational savings coming into 2025, and we also closed a manufacturing facility that wasn't part of our original 12-point plan. The total cost of all of these programmes over 2023, 2024 and 2025 is £324 million and they deliver annualised benefits of £239 million, so about a one and a half year payback. Overall, we expect restructuring costs in 2025 to be around £45 million, including the remaining £22 million on the 12-point plan and around a third of the spend in 2024. The four-year dividend is proposed to be unchanged at 37.5 cents per share. Slide 21 shows a more detailed trading margin bridge. We absorbed headwinds of 130 basis points from input cost inflation and merit increases, 10 basis points from FX, and 90 basis points from China VBP pricing. These were more than offset by 130 basis points of revenue leverage from price and volume and 160 basis points of productivity improvements, delivering 60 basis points of margin improvement for the year. To help you reconcile what we said at the Q3 trading statement to our outturn, the margin headwind from VVP price was around 20 basis points higher than originally expected. with a further negative effect on volume leverage of about 10 to 20 basis points, captured here in the revenue leverage bar, and in line with the circa 40 basis points we guided to at Q3. However, the better finish to the year, particularly in our higher margin US business, has dropped through strongly to trading profit. The resulting leverage, combined with a little bit more upside on Forex, has offset the predicted China effect. bringing us back to our original guidance of 80% plus for the full year. The overall picture for the full year is that revenue leverage has broadly offset input cost inflation, which means that VBP aside, cost savings have been able to drop through to trading profit. Drilling down into the details of these efficiency savings, we are on track to deliver in line with what I set out at the interims. We have already made broad-based savings across all areas of the group, including manufacturing, procurement and operating expenses. We finished 2024 at a gross saving run rate of 210 million and with significantly more to come in 2025 and beyond. Our ZBB implementation is on track across all BUs and central functions. Across our five work streams, 51 initiatives were mobilised, of which nearly half are now complete. Expected 2025 savings are slightly ahead of our initial diagnostics outlook driven by amplifying and accelerating the headcount savings I referred to earlier in Q4 of 2024. We are currently embedding our ZBB approach into our standard processes and the 2026 budgeting process design. We've been working to reduce our headcount for some time and we've made good progress. We finished the year with a total headcount around 9% lower than at the end of 2022 and with a bigger reduction in 2024 than in 2023. I referred already to the action taken in November 2024 with headcount reducing from Q4 of 2024 into Q1 and Q2 of 2025. The associated cost savings will mainly flow through to the P&L in Q2 and the second half, in line with the flow-through of savings from our manufacturing network optimisation programme, supporting our margin expansion, particularly in the second half of the year. Our 2025 trading margin guidance is for 19% to 20%. Overall for the year, we are forecasting just over 100 basis points of headwind from China VBP, as I said, slightly higher in half one and easing off a little in half two. This is more than I indicated at the interims because of the volume impact I covered at our Q3 trading statement and the additional headwinds from China, AET, BBP in half two. We expect input cost inflation and merit to be more than offset by revenue leverage supported by the significant cost savings deriving margin expansion. As mentioned earlier, these operating savings are weighted towards the second half. The combination of this with the timing of the China VVP effects mean we expect nominal margin expansion in half one, with a significant step up in the second half, delivering a margin of 19% to 20% for the full year. Going into 2026, we expect continued margin expansion as we annualise cost savings and continue to drive greater efficiencies in our business. Coming on now to our trading margin by business unit. As Deepak covered earlier, we have transitioned the organisation to a global business unit model, further embedding the culture of accountability and helping us drive better commercial execution at pace. At the interim, we committed to providing additional disclosure on the performance of our business units and to move to fully allocating attributable central costs. Slide 24 shows the margin by business units under the new methodology. The effect of the change has been similar across the business with each segment's 2023 trading margin between 620 and 670 basis points lower than under the previous approach. All three business units delivered trading margin expansion in the year with a 20 basis point increase for orthopaedics, 120 basis points for sports medicine and ENT, and 50 basis points for advanced wound management. In each case, we would also have seen margin expansion under the previous allocation approach. Broadly speaking, expansion came from OPEC savings and leverage across all three business units. There was also some variation from mixed effects, notably in orthopedics, where the higher margin US business grew below the international business, particularly in the first half of the year. For 2025, you should expect the bulk of margin expansion to come from orthopaedics at over 200 basis points, with accretion of over 50 basis points coming from both sports medicine and AWM. With this fuller allocation in place, only £52 million has remained as truly central costs, and we anticipate these will be broadly flat year-on-year in 2025. The purpose of the change was to create transparency and accountability, and there are already positive behavioural changes as a result. We've seen greater scrutiny of spending plans, lower demand for new projects, and greater discipline in constructing robust business plans for new IT investment, as an example. Accountability at the BU level also arises at the balance sheet as well as the P&L, in particular for our inventory balances, which as you know have been a priority under the 12-point plan. Slide 25 shows the development of DSI through the year, both for the group and for each of the business units. 507 overall inventory days at the end of 2024 was a 23-day improvement. Some initial build in the year was necessary to support launches, including ATOS and Renesas Edge. Then as product shipments and set deployments ramped up, we saw DSI come down across all three business units in the second half. There was still an overall increase in inventory for launch products for the full year, and this means that as well as group DSI improving, our inventory mix has also improved, with units of the slowest turning quartile of SKUs down by 17% during the year. Longer-term improvement will be down to improved forecasting and better alignment of production plans with commercial needs at the SKU level, enabled by the improved SIOP process under the 12-point plan. There is still more work to do, including aligning our SIOP process with our financial forecasting in a truly integrated business plan. Inventory reduction remains a focus and we expect further progress in 2025. The business is increasingly focused on driving improvement in capital returns. We have made solid progress in 2024, delivering a 150 basis point improvement in ROIC to 7.4% at the group level. and we expect to see a return to a level above our cost of capital in 2025. For the last two years, most of the ROIC improvement is being driven by operating margin expansion, and particularly by restructuring charges coming down in orthopaedics. For the longer term, we're also focused on driving better asset utilisation and reduced inventory, as I've already covered. We expect a doubling of returns in our orthopaedics business in 2025, with further progress in 26 and beyond, and more measured progress in both our sports and wound business units in 2025. This work, of course, is made more precise by a recent allocation of central costs to the business units, a more granular allocation of capital, and a greater focus on capital efficiency measures such as set terms. We also remain focused on more disciplined capital allocation across our business units and greater focus on working capital, with significant improvements delivered in 2024 which is a useful segue to our cash flows for 2024. So moving on to cash flow, trading cash flow was $999 million for the year. 95% conversion was ahead of our target and well ahead of the 65% in 2023. The improvement came primarily from lower working capital costs, particularly from inventory and payables. Capital expenditure was also lower versus an elevated level of spend in 2023. Working capital remains a focus for 2025. Free cash flow also improved to $551 million, helped by a $95 million improvement in the restructuring, acquisition, legal and other line, reflecting the lower peer now restructuring costs of $123 million in the year that I mentioned earlier. We expect further improvement in free cash flow in 2025 to over £600 million, driven by further improving trading profit and restructuring costs will be less than half of 2024 at around £45 million. Free cash flow will be an increasing focus in the business, as evidenced by a shift away from trading cash conversion to a free cash flow measure in the performance criteria used to incentivise our most senior people. Overall, our cash generation and returns profile has returned to a much healthier position. As I've set out, we're already seeing clear improvements across multiple metrics where we've had long-standing challenges, and there's more still to come. As a result of our strong cash flow, net debt came down during the year to £2.7 billion, which is a decrease of £67 million. We expect the trends behind our improved free cash flow to continue in 2025, including good growth and margin expansion, lower working capital costs and significantly lower restructuring costs. Capital allocation will become a more active consideration as a result. As a reminder, we are focused first on investing for organic growth, followed by acquisitions, paying a dividend and last returning any excess capital to shareholders. we finished 2024 with a leverage ratio of 1.9 times adjusted EBITDA, which is within our target of around two times. For the use of excess cash, we'll continue to look at tucking in M&A in line with our policy and growth strategy. And I would note that at the current valuation of our equity, the financial return on share buybacks is a very relevant hurdle for M&A. I'll finish with our outlook for 2025. For 2025, we expect underlying growth of around 5%. That includes continued progress in US recon on an ADS basis, noting the swing from two extra days in Q4 to one fewer day in Q1 and Q2 of 2025. We also expect continued good growth in all of sports medicine, ex-China, ENT and AWM, including bioactors returning to lower single-digit growth as a benefit of Graphics Plus launch phase. China will still be a significant growth headwind, as Deepak highlighted. Our guidance includes a total headwind of around 150 basis points for the full year, but still results in solid underlying growth overall. As previously indicated, we also expect a significant step up in profitability in 2025 with a trading margin between 90% and 20%. That step up will come from operating leverage, further operating cost improvements and the benefits of network optimisation programme beginning to reach the P&L, particularly in the second half. And these effects will more than offset the headwinds from China in inflation. There are also significant phasing considerations in 2025. On growth, we expect that some of the strong finish to 2024, particularly in US sports medicine, will be supported by year-end patient co-pay effects that will normalise in Q1. Also, China recon will remain slow in the first quarter and the growth headwinds from joint repair VBP will roll off in the middle of the year. In addition, we will have one fewer trading day compared to 2024 in each of Q1 and Q2 and then one extra day in Q4. Putting all of that together, we expect growth to be around 1-2% in Q1 and then accelerate for Q2 and the second half. We also expect the trading margin to be stronger in the second half than in the first. As I've already commented, we expect greater margin seasonality than in 2024, with only nominal year-on-year expansion in the first half. And so the full-year margin expansion will be mainly driven by half, too. As we did last year, we'll give more specific margin phase in detail with our Q1 trading update. And now I'll hand back to Deepak.

Thank you, John. So I'm encouraged by how we're positioned coming out of 2024. It's good to deliver on both growth and margin, but what's most encouraging is to see the 12-point plan benefits more visibly coming to fruition. We started out with a comprehensive program of actions which first showed improvement in operational KPIs and is now delivering an inflection across the full range of financial outcomes. We know that there's still much more to do, but we're well positioned for a key year of delivery in 25. On revenue, we're continuing to improve in U.S. recon. We're delivering successive waves of innovation, and we're demonstrating our ability to turn that into a level of growth that can drive natural leverage. We've also taken broad action on our cost base with the result that there's a step up in savings across manufacturing and operating expenses poised to flow through to our P&L in 25. So I look forward to updating you through the year as we move towards our goals. But I'd like to finish today on a personal note. As you may know, Phil Cowdy has recently announced that he will retire later this year. Phil came to Smith & Nephew 17 years ago. He had more hair then. And has been a pillar of the company across a number of roles. Most recently, he served as the Chief Corporate Development and Corporate Affairs Officer. And for me, he has been an invaluable source of support and advice in my time as CEO. I'm sure you'll join me in wishing him all the best for retirement. Phil, thank you very much for all your tremendous contributions to the company over 17 years. And now we can move on to questions.