Smith & Nephew plc

Good morning. Welcome to the Smith & Nephew Q4 and full year 2025 results presentation. I'm Deepak Nath. I'm the Chief Executive Officer and joining me is John Rogers, our CFO. I'm pleased to report a strong finish to 2025, delivering results at the high end of our guidance on revenue growth, margin, and free cash flow. For the full year, underlying revenue growth of 5.3%, and importantly, all three of our business units grew by over 5%. Sports medicine and ENT, and in particular, joint repair within that, had another strong year. And in orthopedics, we saw meaningful progress. In our U.S. recon business, particularly hips, added trauma. There was more work to do in U.S. knees. Our OUS business, knees business, has remained strong throughout the year. So we had a record year of Cori placements globally and saw continued growth in adoption and utilization of our robot. Advanced wound management also had a good performance in 2025, driven by growth in AWD and bioactives. Innovation remains central to our strategy, with over 60% of our growth in 2025 came from products we've launched in the last five years. And innovation's in all three business units delivered double-digit growth for the year, including QFIX, Regeniton, FastSeal, Legion Consul Lock, Catalyst STEM, EVOS, ATOS, PICO, and LEAF. On profitability, we saw 160 basis points of margin expansion driven by our enterprise-wide cost savings program and the benefits of all the work we've done in our orthopedics business dropping through to our P&L. This includes optimizing our manufacturing network, improving productivity, introducing our new sales and operation planning processes, and portfolio rationalization. We expect to see further benefits from these initiatives combined with our Ortho360 operating model and continued revenue growth that will drive us to more than 20% margin in orthopedics by 2030. The Wall Street has shown greater discipline around working capital management, bringing down days of inventory, and we've reduced restructuring charges. Alongside growth and higher profitability, this has lifted free cash flow to $840 million, a 52.5% increase year-on-year. This enabled us to complete a $500 million share buyback program in the second half of 2025. This is a great way to finish off three years of incredibly hard work and focus under the 12-point plan during which we've delivered, consistently delivered our targets each year and sets us up well for further acceleration of growth and returns as we go into the first year of our new rise strategy. Turning now to 2026, we expect growth of 6% revenue and around 8% trading profit growth, both on an organic basis and consistent with what we laid out at our capital market days in December, with trading profit growth ahead of our revenue growth. Since then, we've announced the acquisition of Integrity Orthopedics, so we're also now guiding to trading profit of around $1.3 billion, including the impact of the deal. John will cover guidance in more detail in his section. So let's now round out our financial performance over the last three years under the 12-point plan with actual numbers. We've moved Smith & Nephew from a historically low single-digit revenue growth company to mid-single-digit growth, delivering 5.7% CAGR from 2022 to 2025. And we've expanded trading margin by 240 bps from 17.3% in 2022 to 19.7%, despite facing significant headwinds from VBP in China, FX volatility, and higher inflation. If we exclude the total impact of the SportsMed VBP over this period, our 2025 margin would have been 20.9%, 120 bps higher than we've reported. Our increased focus on cash and capital returns has yielded a 15-fold increase in free cash flow, and ROIC has increased by 170 bps from 6.6% to 8.3%, or by 330 bps, excluding the 160 bps headwind from the impact of portfolio rationalization. I'm incredibly proud of what the whole team here has achieved over the life of the plan and excited about what we can deliver over the next three years under our new strategy, RISE. I'll come back to talk about this next phase of our growth later, but for now, I'll pass you over to John to take you through the detail of our results. John.

Thank you, Deepak. Good morning, everyone. Revenue for Q4 was 1.7 billion, representing 6.2% underlying growth and 8.3% reported, including a 210-bip tailwind from foreign exchange. We had one extra trading day year on year, and on an average daily sales basis, growth was 4.5%. Growth was broad-based across business units and regions. The US growth grew 5.6%, other established markets 7.2%, and emerging markets 6.4%. Excluding China, underlying growth was 7.2%. I'll now move on to the details by business unit, starting with orthopedics, which grew 7.9% on an unblind basis and delivered the strongest quarterly growth for more than two years. One extra trading day helped, but even if you normalize for that by looking at average daily sales, growth was still strong and accelerated nicely ahead of Q3. In the US, we saw a third consecutive quarter of above market growth in hips, acceleration in knee growth, and continued strong trauma and extremities growth. Hit performance continues to be driven by the uptake of Catalyst STEM, and we are seeing good competitive conversions, and we plan to increase our Catalyst STEM set deployments to support growth in 2026. U.S. knee growth improved during the quarter following the launch of Legion MS, which enables us to benefit from the market shift to media-stabilized inserts. We are pleased with our competitive wins with the product and continue to receive positive feedback from existing and new users. In AUS, knees, hips, trauma, and extremities all deliver strong performance, except for some localized weakness in hips in certain distributor-led markets. Following the launch of Catalyst Stem in Japan, we see growth improving in AUS hips over the coming quarters. In trauma and extremities, we continue to see good growth from our Trigen Max tibia, EVOS plating system, and ATOS shoulder. Other recon grew 40.8%. We're pleased with increasing Cori placement in teaching institutes and with the percentage of Coris deployed in competitive accounts. We also deployed 45% of Coris in ASCs in the quarter. Cori deployment is important because knee growth is 850 bits higher in accounts where Cori is established, underscoring the potential for further improvement in knee growth as penetration and utilization of Cori continues to grow. I'll take a moment to look more closely at US recon growth. In HIPS, you can see consistent improvement in growth standalone and versus the market since the beginning of 2024. And we've grown above market for the last three quarters of 2025. This is driven by the changes we've made to our commercial engine, product availability, and our portfolio with the launch of Catalyst STEM, which addresses the fast-growing direct planteria segment of the market. In NEIS, we've also been narrowing the gap versus the market. We had a good quarter in US NEIS in Q4, but we recognize quarterly performance has not been as consistent as we would like. In 2026, we expect to continue to close the gap versus US recon market growth. We expect US hips to track in line with or ahead of the market growth and expect US knees to start off with a softer first quarter, reflecting our continuing and deliberate trade-offs on balancing growth, profit, and asset efficiency. We will then build towards market growth in Q4, supported by the launch of the cementless version of our new landmark knee in the second half. Landmark brings the proven clinical benefits of our knee portfolio into a single platform that combines advanced kinematics with the next level of personalization, robotic enablement, and ease of implantation, while unlocking capital efficiency by leveraging existing instrumentation. Landmark will also feature best-in-class tray efficiency, making it particularly suitable for ASCs. Turning now to sports medicine and ENT, which grew 7.3% driven by double digit growth in joint repair as we annualize the impact of China VBP. We reached an important milestone this year with our joint repair business surpassing 1 billion in revenue for the first time. Growth continues to be driven by Regeniton and Qfix-Knotless, along with strong performance in small joint outside of China. We saw further acceleration of Agility C, albeit still off a small base. AET delivered strong growth led by fast seal and patient positioning with strong growth in our US markets ex-China. Despite continued softness in the US tonsil and adenoid market, ENT saw good growth with double digit growth in nose as well as strong international growth again ex-China. We have AET and ENT China BBPs ahead of us, but the headwinds in 2026 will be much smaller given the relative size of these businesses. we are already proactively managing our inventory ahead of implementation. Advanced wound management grew 2.8% in the quarter. Within that, advanced wound care grew 4.4%. We are very early in our launch of a lead in complete care, but we're pleased with performance so far, and we expect momentum to grow over the coming quarters as we roll out the product across the U.S. Moving on to bioactives and devices, it's important to remember that both had very strong prior year comparators of over 20% growth. Bioactives declined by 0.5%. We saw softness as we lacked the Graphics Plus launch in Q4 of 24. And we also saw a slowdown in skin subs in the physician office and outpatient setting prior to the CMS reimbursement changes that came into effect at the start of this year. Advanced wound devices grew 5.4%. Leaf and Pico both perform well, reflecting strong demand. Pico growth continues to demonstrate strong market demand and reflects our efforts to improve penetration in the surgical setting. U.S. renal assist continues to be impacted by softness in the acute care channel, while performance outside the U.S. remains strong. Now I'll move on to the full-year financials. The full year revenue was 6.2 billion, up 5.3% on an underlying basis, ahead of our guidance of around 5%, and up 6.1% on a reported basis. Excluding the headwinds from China, growth would have been 7% on an underlying basis. Note also that 25 had one fewer trading day versus 2024. Performance was broad-based, with all three reporting segments delivering growth of above 5%. Orthopaedics grew 5.1%, sports medicine and ENT grew 5.2%, and AWN grew 5.6%, all on an underlying basis. Overall, a good set of growth figures, and particularly good to see that more than 60% of our growth comes from products launched in the last five years, as Deepak covered, giving us confidence coming into 2026. Let's now take a moment to look at our underlying revenue growth, excluding China over the last few years. You can see that growth ex-China has been greater than 6% since 2023, and that China headwind peaked in 2025 at 170 bps. China was just over 2% of group sales in 2025. And although we still face BVP headwinds in 26, as I already mentioned, these headwinds will have much more impact at the group level. Moving on to the summary P&L. Underlying gross profit was 4.4 billion with a growth margin of 70.9%, an increase of 60 bps. We were able to more than offset raw material inflation with price increases across our portfolio and productivity measures in manufacturing and procurement. Trading profit was 1.2 billion, an increase of 162 million, resulting in 160 bps of trading margin expansion to 19.7 for the full year, at the high end of our initial margin guidance. This was driven by positive operating leverage, our cost savings program, and in particular, margin expansion in our orthopedics business unit. Moving further down the pier now, adjusted earnings per share grew by 21%, to $1.02. That's above trading profit growth, primarily reflecting the 500 million buyback we completed in the second half, which more than offset a slightly higher tax rate year over year. Our tax rate was 19.4% in line with our guidance of 19 to 20%. Basic earnings per share grew significantly faster, primarily driven due to lower restructuring charges and lower acquisition and integration costs. Our restructuring charges were 47 million down from 123 million in 2024, and we had 32.7 million acquisition and integration costs compared to 94 million in 2024. The four-year dividend is proposed to be 39.1 cents per share, an increase of 4.3% year-on-year. This slide shows a more detailed trading margin bridge. We absorbed headwinds of 250 bps from cost inflation, China VBP and tariffs with FX impact being broadly neutral. These were more than offset by 180 bps of revenue leverage from price and volume and 240 bps of productivity improvements delivering 160 basis points of margin improvement for the year. Drilling down into the details of the efficiency savings, we remain on track to deliver on the 12 point plan and zero based budgeting savings we laid out at our interims in 2024 of 325 to 375 million of savings by 2027. We've achieved 280 million in cumulative savings to the end of 2025 with further savings to come through in 26 and 27. We continue to anticipate total savings of about 150 million in 2026, half from these 12-point plans, zero-based budgeting savings, and half from other opportunities above and beyond this across procurement, manufacturing, sales and marketing, and business support. Our 2026 guidance is for 8% reported trading profit growth on an organic basis and for around 1.3 billion of trading profit, including some dilution from the integrity acquisition. We laid out some extraordinary headwinds to profit in 2026 at our London Capital Markets Day. These include inventory revaluation, tariffs, the impact of changes to reimbursement in our US AWM business and ENT BBP in China. There are no changes to any of our assumptions regarding these headwinds. We still expect 60 million impact from tariffs compared to 17 million in 2025 and 20 to 40 million incremental impact from changes to wound reimbursement. We expect revenue leverage and operational savings to more than offset these headwinds to drive trading profit growth ahead of revenue growth before the impact of any M&A. Coming now to trading margin by business unit. We saw a 340 bits increase for orthopedics to 14.9%. 20 bit decrease for sports medicine and ENT to 23.8 and 120 bits increase for wound to 24.9. Broadly speaking, expansion came from OPEX savings and leverage across all three business units. Within orthopedics, the increase was driven by favorable price mix, manufacturing savings from network optimization, ongoing productivity initiatives, and disciplined cost control. We expect further margin expansion to 2028 and beyond in this business unit. This will be driven by continued growth in revenues, the impact of actions already taken to right-size our manufacturing capacity, and our also 360 operating model, our way of running the business to balance growth, profit, and returns. In sports medicine and ENT, the margin decrease was driven by the impact of China VBP, which more than offset revenue leverage, operational efficiencies, and good cost management. Margin expansion in AWM was driven primarily by favorable product mix and productivity gains in operations. As you know, inventory has been a key focus under the 12-point plan. And you can see here the development of DSI, day sales inventory, over the year, both for the group and for each of the business units. Group DSI fell by 21 days, excluding the impact of portfolio rationalisation that we announced at the end of last year, and by 51, including this. The biggest reduction came from orthopaedics, reflecting continued efforts to reduce the number of units in inventory. As covered at our capital markets day, we expect inventory value to reduce further in 2026. We also saw a reduction in sports med DSI, including and excluding portfolio rationalisation, albeit to a lesser extent than in orthopaedics. And both sports and women are already much closer to industry benchmark DSIs. We've made good progress in our ROIC, delivering a 90 BIP increase in ROIC to 8.3% at a group level. The improvement is being driven by trading margin expansion, lower restructuring charges, inventory reduction, and overall better asset utilization. Excluding the impact of portfolio rationalisation that we announced in December, ROIC was 9.9%, exceeding our cost of capital for the first time in several years. All business units contributed to ROIC improvement, including a more than doubling of ortho ROIC in 2025, helped by trading margin expansion and lower inventory. We expect a further step up in group ROIC in 2026, driven by a continuation of these trends. Moving on to cashflow, trading cashflow was 1.236 billion for the year, reflecting 102% conversion. The improvement came primarily from lower working capital costs, particularly from inventory and payables. Capital expenditure was 433 million. Working capital remains a focus for 2026. Free cash flow also improved to $840 million, growing 52.5% year on year. This includes a $26 million one-off property transaction and a $58 million reduction in restructuring, acquisition, legal and other costs. The $840 million was well ahead of our initial guidance for over $600 million. We expect free cash flow in 2026 of around 800 million. We expect the usual increase driven by profit growth, offset by a small temporary increase in restructuring costs, driven by further optimisation of our manufacturing network with the closure of our Warwick site, insourcing more into Memphis and winding down manufacturing activities in Hull as we build our new wound facility in Melton. Overall, our cash generation and returns profile is now in a much healthier position, and there is more improvement to come as we execute our rise strategy. Net debt increased slightly during the year to 2.76 billion, an increase of 50 million. We finished 2025 with a leverage ratio of 1.7 times adjusted net debt adjusted to EBITDA, which is within our target of around two times. In terms of capital allocation, we continue to prioritize organic reinvestment in our business and M&A execution in order to drive top buying growth. We'll maintain our dividend ratio of 35 to 40%, and we'll then consider returns to shareholders in the form of buybacks subject to our target two times leverage ratio. Including the 2026 acquisition of Integrity Orthopaedics, our leverage still remains below two times adjusted EBITDA. Now I'll finish with our outlook for 2026. We continue to expect around 6% organic revenue growth. That includes continued good growth in orthopedics, sports medicine, excluding AET and ENT in China, and advanced wound management, particularly in AWC and AWD. Whilst we expect headwinds in our skin substitutes business, we still expect AWB to grow, supported by the ongoing strength of Santor and growth in skin substitutes out of the physician office and mobile channel. We expect around 8% trading profit growth before M&A. As I've already mentioned, we face a number of extraordinary headwinds in 2026, but we still expect trading profit growth ahead of revenue growth driven by revenue leverage and operational savings. Since providing our provisional guidance, we've also completed the acquisition of Integrity Orthopaedics. This acquisition is expected to be marginally dilutive to trading profit in 2026, broadly neutral in 2027, and accretive in 2028. Including this dilution, we expect trading profit to be around 1.3 billion. We thought it would be helpful to set out these two measures of trading profit so that you could see the performance of the business on an underlying basis, as well as the total trading profit, including the impact of the acquisition. Finally, we expect around 800 million in free cash flow and greater than 10% heroic, excluding integrity. We expect a stronger second half compared to the first half for both sales and profit growth in line with the typical phasing we see. We also expect a leaving complete care to ramp up over the year and the launch of landmark will benefit the second half. We have one fewer trading day in Q1 versus 2025 and one more in Q4. As a reminder, trading days have a more pronounced impact on our orthopedics business. And with that, I'll hand back to Deepak.

Thank you, John. So the launch of Rise, our new strategy, which I laid out for you in the capital market days in December, our ambition is to accelerate growth and improve returns. It's been great to see how well this new strategy has resonated internally. with this focus on reaching more patients, driving innovation, scaling through investment, and executing more efficiently. We're building on the behaviors embedded through the 12-point plan with our way to win, our program to be better every day through our continuous improvement mindset and behaviors. So let me now highlight the key drivers shaping our performance in the first year of RISE, and I'll start here with sports medicine. First, the China joint repair VBP headwinds have now fully annualized, which means our underlying joint repair growth will improve this year. And importantly, we expect the upcoming AET and ENT VBP processes to be significantly less material given the relative size of those businesses. Second, we're continuing to build on the strength of our shoulder portfolio with our acquisition of Integrity Orthopedics. And we look forward to driving adoption of tendon seam across our customer base. So I'll come on to this in a moment. Third, we're awaiting FDA approval of Tessa, our first in industry spatial surgery arthroscopic platform. This represents a major step forward in how surgeons visualize and execute procedures. And finally, we're also seeing ongoing growth in Regenitin. The recent AAOS guideline support for the use of bio-inductive implants in rotator cuff repairs is reinforcing clinical confidence and expanding usage. I'd like to spend a few minutes on our acquisition of Integrity Orthopedics, an asset we believe has the potential to become a key growth driver for our sports medicine portfolio. We announced the deal earlier this year for total consideration of up to $450 million, including performance-based payments. Integrity Orthopedics was co-founded in 2020 by Tom Wessling, who also founded Rotation Medical, the company behind Regeniton, which we acquired in 2017. Regeniton's growth is evidence of our proven track record of successful commercial execution, scaling an innovative shoulder product with our dedicated sales force, and building the clinical evidence to drive adoption. Integrity has developed Tendency, an innovative rotator cuff repair system that received FDA approval in 2023 and addresses the $875 million biomechanical repair market. Rotator cuff repair is a large and growing category with around 500,000 procedures performed annually in the United States. Despite the scale, surgical techniques have seen little meaningful innovation in over two decades, leaving patients with re-tear rates of between 20 and 40% and long recovery times. As a result, this remains a segment with significant unmet need and where meaningful innovation can shift share. TendonSeam introduces a fundamentally novel biomechanical approach designed to distribute load across the entire tendon rather than concentrating stress at fixation points, resulting in stronger, more stable repair. Early clinical data is promising, showing potential for lower retail rates and accelerated patient recovery, while offering a shortened and easier surgical procedure compared to the current standard of care. The acquisition is fully aligned with our right strategy to accelerate growth through strategic investment by deploying capital into high growth, high value clinical segments where we already have a strong presence and thus underpinned by our strong balance sheet. The deal is expected to be dilutive to trading profit in 26 and as John mentioned, broadly neutral in 27 and accretive starting in 2028 as the product scales. While still early, integration is progressing as planned and we're focused on executing the same discipline playbook that drove Regeniton's success. Tendency is highly complimentary to Smith and Nephew's extensive shoulder portfolio. With this novel and disruptive technology, it strengthens the initial repair construct in rotator cuff tears and Regeniton then builds on that strength by promoting biological healing over time. Together, they create a differentiated end-to-end solution that addresses both the mechanical and biological drivers of successful rotator cuff repair. The total combined TAM for the two products is just under $1.2 billion. And today, we have about 25% share with Opportunity to Grow. Within fixation, we have the market-leading instability solutions, including our Q-Fix All-Suture Anchor Portfolio, which has 10 years of proven performance. In shoulder arthroplasty, our ATO shoulder system, launched in 2024 with anatomic, reverse, and stemless options, is positioned for the high-growth replacement segment with estimated $250,000 procedures annually in the U.S. in 2025. We will soon have a powerful new offering with the launch of CoriShoulder that will enable our handheld robotics to be used in the preparation and execution of shoulder replacement with ATOS, building on what we already have with choreographed pre-op planning. We now have one of the broadest, most advanced portfolio for managing shoulder pathology, spanning replacement and repair by both mechanical and biological healing technologies across our orthopedics and sports medicine businesses. Turning to advanced wound management and wound bioactives, we have plans in place to navigate CMS reimbursement changes to skin subs in the physician office and mobile setting and to grow outside of those channels. As a reminder, CMS has introduced a pricing cap starting from the 1st of January, 2026, with the aim of reducing historical distortions in the market that's incentivized a significant number of players, often operating in the mobile setting to charge very high prices. We expect a reduction in non-surgical volumes, particularly in mobile, now that incentives have changed and certain skin sub offerings are economically less viable to many of these players and providers. So although this will drive a value reset short-term, it also creates a more sustainable, patient-focused, and evidence-based market going forward with a long runway for growth. We see opportunities to benefit as the market normalizes. At the very end of last year, CMS also withdrew the Skincep's local coverage determinations, or LCDs. We always saw this as being broadly neutral to the business, and so this has no impact to our 2026 guidance. Even without the LCDs, we believe that clinical evidence will continue to be an important factor in this market. Towards the end of 2025, we launched a leave-in complete care, our newest five-layer foam dressing, which addresses both chronic wound healing and the pressure injury prevention market. It has 51% superior exudate management, and with the new silicone adhesive, stays in place more frequently than competitive products, making it a superior product for chronic wound healing. It also has a 55% greater reduction in strain relative to competition, making it ideally suited for pressure injury prevention. I'm confident that as we roll out a leave-in complete care to the market, we will capture market share in the largest and fastest growing segment of wound dressings. We'll also continue to drive the portfolio in high growth areas with unmet need like santal in wound bed preparation and access new patient populations like those at the risk of surgical site complications or pressure injuries with PICO and LEAF. Moving now to orthopedics, we'll continue to drive procedure growth across all joints with our Cori platform supported by the launch of our shoulder execution capability. Cori remains a core differentiator for us. Handheld robotics are increasingly popular, and Cori's size, mobility, fast setup, and low cost of ownership make it well-suited to both hospitals and to ASCs. In knees, we'll continue to build out our portfolio in 26. We've already launched our Legion medial stabilized knee to meet the needs of a fast-growing segment, and we're pleased with the early momentum we've seen so far. The next leap comes in the second half of the year when we launch Landmark, our most differentiating knee system yet that will be available first in cementless and in cemented versions and with the best in class tray efficiency that's particularly suitable for ASCs. As the ASC channel starts to grow or continues to grow, we're well-positioned to expand further, supported by a suite of tray-efficient implants like Atos, Catalyst stem, and Landmark, together with Cori. In fact, 40% of all Coris placed in 2025 were in the ASCs, underscoring the platform's fit for this high-growth setting. We also capture further efficiencies with our Ortho360 program. This is our global operating model designed to eliminate past inefficiencies by replacing fragmented region-driven decisions with unified goals, integrated metrics, and disciplined portfolio management. By maturing our sales and operation planning processes into fully integrated business planning process, or the IBP, simplifying the portfolio, reducing inventory, and enhancing capital efficiency, this should drive profitability, improve ROIC, and stronger cash generation in this business unit. I'll not give an outlook for innovation over the life of Rise, given its importance to our growth, both historically and looking forward. Looking ahead, we are stepping up our R&D investment in sports and in moon while maintaining a robust front-loaded pipeline across all areas of the group from 2026 and to 2028. Over the last three years, we successfully launched 44 products, largely on time and within budget, and we plan to increase launch cadence going forward. We launched 14 new products in 24, 15 in 25, and we expect to launch 16 in 2026. We're also building on our two major scalable technology platforms, EmTech and Biologics. In EmTech, we'll be launching Tessa and Lumos in sports med and our next generation leaf monitors for pressure injury prevention and good. We also have a rapidly evolving robotic platform to drive procedure innovation across all joints in orthopedics. And in Biologics, we'll build on our existing products with launches like NextGeniton, our next generation of Regeniton. So before I finish, I'd like to remind you of the midterm financial targets that our strategy will deliver. Through continued innovation and execution, we'll deliver organic revenue CAGR of 6% to 7% that's above our market. and our continued focus on productivity, further operational efficiencies and capital discipline will drive nine to 10% trading profit CAGR, more than 1 billion in free cash flow in 2028 and 12 to 13% ROIC. Coming back to the near term, we've delivered on 2025 in terms of revenue growth, margin, free cash flow and ROIC, and we're looking ahead to another good year. On revenue, we're accelerating growth, launching new products, and driving leverage through our P&L. We'll continue to be disciplined on our cost base to drive trading profit growth ahead of revenue growth on an organic basis. And our free cash flow generation remains strong and will deliver another step up in ROIC, significantly exceeding our WAC in 2026. So with that, I'll now take your questions, or will now take your questions.