Smith & Nephew plc

Welcome to the Smith & Mathew second quarter and first half results meeting. I'm Deepak Nath. I'm the Chief Executive Officer and joining me is Chief Financial Officer John Rogers. So 2025 is a key year of delivery for Smith & Mathew. I'm pleased to announce the results that put us firmly on track for both our full year growth target and the guided step up in profitability. On revenue, 6.7% underlying growth in the quarter reflects sequential acceleration across all regions and business units. In sports medicine, we've maintained a strong momentum across joint repair and AET outside of China. In wound, the continued performance of AWD and the rebound in bioactives produced double-digit growth for the business unit as a whole. In orthopedics, we delivered yet another quarter of growth, and in line with our previous commitment, our recon and robotics business sustained its recent improvement both internationally and, importantly, in the U.S. This is now the fourth quarter of sequential improvement in U.S. recon and robotics. On profitability, 100 basis points of first half trading margin expansion is slightly ahead of what we indicated as we brought some efficiency savings forward. We remain on track for our full year margin guidance of 19 to 20%, which includes the impact of tariffs. There's still a lot of uncertainty about where tariffs will settle, but we continue to expect a net headwind of about 15 to 20 million in 2025. As previously indicated, we expect that margin expansion will pick up further in the second half. This should come from cost savings increasingly dropping through to our P&L, particularly from our manufacturing network optimization of the last two years, together with a reduced year-on-year headwind from value-based procurement in China. I've talked already about the improvements in growth and profitability. At the same time, better alignment of the commercial organization and operations has enabled us to bring down days of inventory. The delivery of our ambitious cost savings and a move to ongoing efficiencies has also brought down restructuring charges. The result is a 70% increase in trading cash flow and almost $250 million of free cash flow in the first half. Finally, I'm also pleased to announce an additional element of value creation for shareholders with a $500 million share buyback in the second half of 2025. This is made possible by the operational efficiencies delivered under the 12-point plan and will be fully funded by the 2025 cash flow and existing balances. So it can be delivered while maintaining our leverage and without compromising any of our growth plans. I'll return to some of these themes later and John will talk more about profitability, cash, and returns in his presentation. For now, I'll take you through the detail of the quarter. Revenue in the quarter was $1.6 billion with 6.7% underlying growth and 7.8% reported following a 110 basis point tailwind from foreign exchange. Growth also included a headwind from one fewer trading day than in the prior year. All business units accelerated sequentially, and I'll come to the detail in a moment. Geographically, the U.S. grew 8.7%, and other established markets grew 7.4%. Emerging markets declined 0.2%, reflecting strong double-digit growth across the Middle East and India, and the impacts of volume-based procurement in China beginning to ease. Excluding China, emerging markets grew by 12.2%. As we indicated in our Q1 announcement, we have passed the peak of the China impacts, and we expect these to continue to ease through the second half as distributor destocking in orthopedics reduces and as we lap the effects of joint repair VBP. For business unit performance, I'll start with orthopedics, which grew 5.5% underlying, and this is an overall solid performance. Total reconstruction robotics grew 5.2% with the U.S. growth of 4%. This is the fourth quarter of sequential growth improvement in the U.S. on an ADS adjusted basis. Global knees and hips grew by 2.9% and 3.4% respectively. Growth remains higher outside the U.S., with knees benefiting this quarter from the timing of a tender order in the Middle East. Almost half of our recon business is outside the U.S., where we're demonstrating that our portfolio can deliver with good execution. As you know, China has been a headwind in recent quarters due to destocking of distributors. the inventory levels have continued to come down and have approached more normal levels at the end of June. In addition, we expect the destocking to ease during the third quarter, so we should see the China headwind on our OUS sales start to fall away in the second half. U.S. hips and knees together showed acceleration over Q1, with 2% underlying growth and 3.6% adjusted for the one fewer day. a measure we refer to as average daily sales, or ADS. This is the fourth quarter of sustained improvement for U.S. HIPs and these combined. HIP performance was strong as we continued to roll out the Catalyst STEM HIP system, which makes us more competitive in the high-growth direct anterior segment of the market. We'll accelerate set deployment in Q3 and are also preparing to bring the platform to other markets starting in Japan. The softer U.S. knee growth was due in part to some slowing in procedures toward the end of the quarter among our active surgeon base, as well as positive actions that we are taking to increase profitability through streamlining the portfolio and focusing on higher volume accounts. Reassuringly, the balance of competitive wins versus losses has continued to remain favorable. On an ADS basis, U.S. knees grew 0.1% and hips at 9.1%. Other recon grew 39.8% and reflects another good quarter of robotics placements, particularly in the U.S., where we're seeing strong growth in ASCs and in teaching institutes. This should mean we're well positioned as the market continues to pivot away from the inpatient procedures and ideally placed to capture future leading surgeons. We'll also continue to develop our offering with the launch in June of the choreographed preoperative planning and modeling for shoulder replacements. Trauma and extremities grew 4.4%. The ATOS growth contribution is steadily increasing as we deploy more capital and convert new surgeons, while the EVOS plating system continues to be a key driver, partially offset by a slower quarter for some of our Mega-C systems. We're continuing to refresh the portfolio with the launch this quarter of the Trigen Max tibia nailing system, which expands our indication range and features modernized instrumentation. Further nail launches are expected in the coming quarters, and we expect trauma and extremities to return to stronger growth in the second half. Sports medicine and ENT grew 5.7% in the quarter. Within that, joint repair growth was 8.4%, including the expected headwind from VBP in China. This is expected to be the last quarter before we lap the effect of the implementation in Q3 of 2024. Excluding China, joint repair growth would have been 13.7%, representing an acceleration in Q1 2025 with a very strong quarter across our other markets. Growth was double-digit across all of knee, shoulder, and hip repair, with the Regenitin and Q-Fix knotless suture anchors remaining the key contributors. We expect this good momentum to continue as we extend Regenitin into hip and Achilles, and as we further roll out Q-Fix. We are developing CardiHeal Agility as a longer-term growth platform, including a new disposable instrument set, which we expect to launch in the near future. Orthoscopic enabling technologies grew 2.3%, again improving sequentially. We saw continued growth from Mervol Facile, which is supporting strong coblation revenues. ENT grew 3.6% with good growth driven by our ARIS for turbulent reduction offsetting a softer quarter for tonsils and adenoid procedures in the U.S. Looking forward, we expect ENT to follow sports medicine with the VBP process in China that's expected to take effect in 2026. To give a sense of the size of our business, total ENT sales were around 35 million in 2024. So while VBP would be a noticeable drag on ENT growth, it should be a significantly more modest headwind at a group level than previous VBP processes. Looking now at advanced wound management, where growth increased to 10.2%. following the strong rebound in bioactives. In advanced wound care, 2.6% growth reflected continued strong performance in foams, films, and skin care, offset by a decline in infection management. In bioactives, growth came from the expected sequential recovery in Santal, alongside double-digit growth in skin substitutes. Although we'll face tougher competitors in H2, as we lap the launch of Graphics+, we now anticipate mid-single-digit growth for bioactives in the year. You'll have seen the proposed updates to Medicare reimbursement of skin subs in the outpatient and physician office setting, including moving to a single payment. Since no products were excluded from participating in the market, it is unclear how clinical practice will be impacted. So while the details of the proposal are yet to be finalized, we anticipate that this will be a headwind to both advanced wound management sales and profitability in 2026. And that would be before any mitigating actions. Finally, advanced wound devices revenue grew by 12.7%, led by our single-use negative pressure platform, PICO, and with strong growth from LEAF, our patient monitoring system. In traditional negative pressure, competitive wins are an important part of our growth opportunity. I'm delighted that we were recently awarded a U.S. Department of Defense contract for Renesas Touch, succeeding in a competitive tender process, having demonstrated clinical efficacy and operational fitness. With an initial term of five years, which can be extended to 10 years, this contract is worth up to $75 million. Coupled with an ongoing broader refresh of AWM, we are confident about the long-term outlook for wound. And with that, I'll hand over to John.

Thank you, Deepak. Revenue was $3 billion in the first half. up 5% on an underlying basis compared to half one 2024. Reported revenue was up 4.7%, including a foreign exchange headwind of 30 basis points from the relative strength of the dollar against most major currencies versus the same period last year. As the dollar weakened in the second quarter, the Forex headwind on revenue became a tailwind, and we now expect a circa 50-bits Forex tailwind on revenue for the full year. Performance in China was in line with expectations, and excluding these headwinds, growth would have been 7.2% on an underlying basis. This represents a 220-bit headwind in half one, in line with our guided full-year impact of circa 150 bps as the impacts of sports VBP unwind in the second half. Performance was broad-based, with all three business units contributing significantly to the overall group. Orthopaedics grew 4.1%, sports medicine and ENT grew 4.1%, although again, excluding China, growth would have been 9%. Advanced wound management grew 7.1%. Overall, a good set of growth figures, and particularly good to see that three-quarters of our growth is drawn from products launched in the last five years. Moving now to the summary P&L. Gross profit was 2.1 billion, resulting in a gross margin of 70.5%, which is a 40 basis point increase on the prior year, driven by positive variances on price and volume. We saw a further 60 basis points of positive leverage across our operating expenses as we benefited from operational savings in SG&A and only a small uptick in R&D spend driven by half one, half two phasing. Operational savings were slightly ahead of expectations as we accelerated some of our operational savings into the first half. We also expect to catch up some of the shortfall in R&D spend in the second half, as well as absorb the bulk of the 15 to 20 million tariff impact Deepak outlined earlier. So overall, trading profit grew 11.2% to 523 million, with a margin of 17.7% up 100 bps. And I'll explain the various drivers of the margin expansion on the following slide. Slide 12 shows the detailed trading margin bridge. Going through the moving parts, we absorbed headwinds of 130 basis points from input cost inflation and 140 basis points from the instruction of VBP in China. These costs were more than offset with 190 basis points of revenue leverage from price and volume and 170 basis points from productivity improvements, not only in manufacturing, but also across all other areas of operating expense. FX movements contributed 10 basis points. We have now sustained a trend of revenue leverage offsetting input cost inflation, which means VBP aside, cost savings have been able to drop through to trading profit. As previously guided, we expect the impact of VBP China to unwind in the second half, such that the four-year impact is around 110 basis points. We expect operational savings to step up slightly in the second half versus the first, albeit not as much as previously cited given the acceleration of savings I mentioned earlier. Furthermore, we expect the bulk of the 15 to 20 million tariff impact to take place in the second half as well, as some catch-up on R&D spend. The net effect is that we expect a step-up in margin in the second half, such that the half one to half two margin uplift remains comparable to previous years to deliver margin in line with our guidance of 19 to 20 percent for the full year. I'll now come on to trading margin by business unit. As you can see from this slide, the majority of the margin expansion came through orthopaedics where our transformation initiatives to reduce inventory, streamline instrument set allocation, portfolio simplification, and focus on higher volume accounts resulted in 230 basis points margin expansion in half one 2025. We expect these dynamics to continue into the second half. Sports medicine and ENT margin declined 130 basis points, reflecting the VBP impact in China. If we stripped out China from these numbers, we would have seen margin accretion in the first half. As we annualise the impact of VBP on joint recovery, we expect to deliver margin accretion in the second half. Advanced wound management margin increased 160 basis points due to mixed ongoing efficiency gains and the timing of central revenues in the prior year. And for 2025, we reiterate that the bulk of our margin expansion will come from orthopaedics at over 200 basis points. with accretion of around 50 basis points coming from sports, medicine and advanced wind management combined. As we've already mentioned at previous results, we've changed our central cost allocation process to better align costs to the appropriate business unit. With this fuller allocation in place, only £28 million has remained as truly central costs, in line with prior year and our previous guidance that 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 spend, as an example. We showed you this slide at our interims last year. As a reminder, it details the gross run rate savings of £325 to £375 million we are targeting for 2023 through 2027. As we set out at our prelims in February, including 2023 and 2024, we have delivered a cumulative savings of £210 million. This comprised $150 million, $155 million relating to the 12-point plan and zero-based budgeting, and $55 million relating to earlier programmes. That's actually the faint dotted line you see there on the 2023 column. On zero-based budget implementation is on track across all business units and central functions. Across our five work streams, 51 initiatives have been mobilised, of which over half are now complete. We anticipate 120 to 130 million of savings coming through in 2025, and as you saw from the margin chart earlier, we delivered circa 50 million of these in the first half, slightly ahead of our plan as we were able to bring some efficiency savings forward from half two into half one. In total, therefore, that delivers run rate savings from the 12 point plan and ZBB of circa $275 to $285 million at the end of 2025, with a further $50 to $100 million of savings to come through in 2026 and 2027, very much in line with what we set out on this chart this time last year. We've now embedded our ZBB approach into our standard processes in line with our culture of continuous improvement. Looking further down the P&L, earnings per share grew strongly, up 37% to 33.5 cents, and adjusted earnings per share grew strongly, up 14% to 42.9 cents, reflecting both revenue leverage, operational savings, and significantly lower restructuring costs, which were 8 million in the first half compared to 62 million in the first half last year. We remain on track to incur an estimated 45 million of restructuring charge for the full year. The interim dividend of 15 cents per share is up 4.2% on half one 2024 in line with our policy set out this time last year of paying 40% of prior year full year dividend as the interim dividend. As you know, inventory management has been a key priority of our 12-point plan, and I'm pleased to report a further 46-day reduction in DSI across the group to 506 inventory days, in line with our full-year 2024 year-end position. The reduction in DSI delivered a 69 million reduction in inventory value at constant currency. All business units contributed to this performance, with the biggest reduction in sports medicine and ENT. There was still an overall increase in inventory for launch products in the first half versus the same period last year, and this means that our inventory mix has also improved, with units of the slowest turning quartile of SKUs down by 14% in half on 2025 versus half on 2024, and down 22% since the start of 2023. Longer-term improvement will be down to improved forecasting and better alignment of production plans with the commercial needs at the SKU level, enabled by the improved SIOP process. There is still more work to do here, 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 half to 2025. Trading cash flow in the period was 487 million, with trading cash conversion of 93%, well ahead of the 60% in half on 2024. The improvement came from lower working capital outflows, particularly from the inventory day reductions I detailed on the previous slide. Capital expenditure was slightly lower year on year, but we expect to catch up some of this in the second half of the year as we continue to progress the development of our new manufacturing facility in Melton. We expect to exit the year at a similar level of spend to last year. For the full year, we continue to target trading cash conversion of over 90%. With lower restructuring costs offset by slightly higher tax, free cash flow increased over 500% to $244 million. We expect to deliver free cash flow of well over $600 million for the full year. This strong cash generation broadly covered the cost of capex, dividend and other costs in the period, meaning net debt at 28th June 2025 was only 38 million higher than at year end 2024. The leverage ratio has also decreased slightly to 1.8 times. As we maintain and build on this improved cash generation, capital allocation continues to be a focus. This is our capital allocation framework that you should now all be familiar with. As Deepak mentioned in his introduction, the good start of the year in terms of profitability and cash conversion has enabled us to increase our cash returns to shareholders in line with our capital allocation policy. We intend to complete a 500 billion share buyback during the second half of 2025. This will be fully financed from free cash flow and existing cash balances, so it can be delivered while keeping our leverage ratio broadly stable for the full year and without compromising any of our growth ambitions. I'll finish with our outlook for 2025, which, as you can see, is unchanged. We expect to see a step up in margin in half, too. in line with what we experienced in both 2023 and 2024, reflecting the timing of cost savings and reduced China headwinds. The tariffs announced by the US government early in the year have continued to evolve, and it remains to be seen what the final outcome will be, but we continue to expect a net headwind of around 15 to 20 million, mainly to impact in the second half of the year. We expect to deliver well over 600 million free cash flow for the full year and a strong start to the year in terms of profitability and cash conversion has enabled us to increase our cash returns to shareholders with a 500 million share buyback during the second half, as I've just mentioned. You should see this as further demonstrating our commitment to value creation for shareholders in addition to our extensive operational improvements. And with that, I'll hand back to Deepak.

Great. Thank you, John. So when we launched the 12-point plan, one of our core ambitions was to reposition Smith & Nephew as a consistently higher growth business. We're very much on track. In the first two years of the plan, we delivered growth of over 7% and 5%, respectively. And in the first half of the year, we've delivered yet another 5%, despite some significant headwinds. That includes two fewer trading days for the half. And while China headwind has passed its peak, it still had an impact on H1. So if you look through the detail of the quarter, you'll see we're doing what we said we would do. Sports medicine and wound continue to grow well in U.S. and the U.S. Recon specifically, we're showing progressive improvement quarter by quarter. Our investment in innovation is supporting the acceleration in revenue rate. Let me take a moment to go into more detail on these two last points. A year ago, we highlighted the strong performance in trauma and extremities based on new product introductions, implant supply, capital deployment, and improved commercial execution. We also detailed that all the same elements were in place to improve performance in our U.S. recon and robotics business as well. As with T&E, these actions have driven four consecutive quarters of sequential improvements in U.S. recon and robotics revenue growth. On implant supply, key product line item fill rate reached its target in the fourth quarter of 2023, and capital availability followed soon after. With HIP Set shipment also was at goal in the fourth quarter of 2023, and knee sets started reaching their goal in the second quarter of 2024. This is also being supported by a steady stream of product launches over time, such as the newly launched short stem hip. We also launched 10 new features on Cori between 2022 and 2024, further contributing to the recent recovery in our hip and knee implant sales growth. We have further new product launches planned to continue this positive momentum. Innovation has been a key significant driver in our transformation to a higher growth business. Across 23 and 24, more than half of our underlying revenue growth came from products launched in the previous five years. In H1, this proportion was three quarters of 75%. We continue to invest in our innovation pipeline and introduce new products across all of our business units in the first half of the year, which we're confident will help us sustain our improved revenue growth profile. In orthopedics, we expanded our nailing range with a new system for stable and unstable tibial fractures. Trigen Max builds on more than two decades of proven performance and industry-leading design from our Trigen Nails portfolio. In robotics, we received FDA clearance for choreograph, pre-op planning, and modeling services in total shoulder replacement during the second quarter of 2025. which expands our offering to cover all joint replacement procedures, knees, hips, and shoulders. In sports medicine, for the first time, Smith & Nephew is able to market Regenitin for extra-articular ligament injuries in the U.S., creating opportunities to reach more patients with soft tissue injuries around the body. The initial focus in hips capsule repair will be a future expansion plan in other extra-articular ligament repairs. In addition to new products, we also announced a number of significant evidence milestones during the first half of 2025, supporting the adoption of key product families. For instance, a recently published randomized control trial of Swith and Nephew's handheld robotic system demonstrated the value for patients and surgeons of robotically-assisted total knee replacement with Journey 2 BCS. Patients experience significantly better outcomes, including reduced pain, improved function, and higher satisfaction compared to conventional surgery at the one-year time point. In conclusion, I've talked a lot about our 12-point plan. We're now in the final year of our three-year transformation that I first set out for you in July 2022. And Q2 performance is yet another proof point that we are on track to deliver our ambitions. Each of the three parts of the 12-point plan is delivering great progress. The rewiring of our orthopedics business is well underway with sequential growth acceleration over the last four quarters at the global ortho, US ortho, and US recon and robotics levels. Orthopedic inventory levels have improved and we've seen the associated expected step-up in ortho margin. Both Sports Medicine and Moon Management have shown consistent momentum since the start of the program, and productivity improvements are clearly visible in the P&L. In other words, our operational improvements are increasingly translating into financial gains. In Q2, once again, we delivered revenue growth ahead of historical levels, even with headwinds from trading days and China. This higher organic growth is underpinned by our fundamental competitive strengths, better commercial execution, and a high cadence of innovation across our portfolio. Cash flow has also stepped up significantly in the last 12 months with better control of inventory to the point where we can start returning excess cash to shareholders through our $500 million share buyback. There's still more to do around profitability, but the 100 basis points of expansion puts us on track to deliver the guided step up and full year margin. As a reminder, we've delivered 240 basis points group margin expansion from H1 2023 to H1 2025, despite greater headwinds than we expected when we first laid out the plan in 2022. As I told you in the fiscal year full year 2024 results, since the start of 23, we've successfully offset over 700 basis points of headwinds from inflation, foreign exchange, and VBP. Finally, these improvements are sustainable. A key objective of the 12-point plan has been to drive increased accountability and greater discipline in execution. both of which are now embedded in our culture and our ways of working. As I've said before, the 12-point plan is a necessary step, but it is not the limit of our long-term ambitions. We'll set out the next stage of our strategy at a Capital Markets Day in early December. I'm looking forward to seeing you all there, and formal invitations will follow shortly. So with that, we'll now take your questions. Jack?