Smith & Nephew plc

Good morning. Thank you for attending today's Mids and Nephews quarter one trading report. My name is Sarah and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, press star one on your telephone keypad. I'd like to pass the conference over to our host, Deepak Nath, Chief Executive Officer. Please go ahead.

Thank you. Good morning and welcome to our Smith & Nephew first quarter 2026 trading update. As just mentioned, I'm Deepak Nath. I'm the chief executive officer. I'm joined today by John Rogers, who is our chief financial officer. We made a good start to the year. In the first quarter, we delivered 3.1% underlying growth or 4.7% on an adjusted daily basis, which was in line with our expectations. Performance across the group was positive overall, with growth across all business units and regions. We saw strong growth in sports medicine and resilient results in advanced wound management, despite the headwind from CMS changes to skin substitute reimbursement. As expected, U.S. needs were softer in the quarter, reflecting deliberate tradeoffs and continued focus on discipline execution. The rest of orthopedics delivered solid performance, and this underscores the strength of having a well-balanced, diversified portfolio. Innovation continues to be a key driver of our performance, accounting for more than half of our growth. We saw strong momentum across a broad range of products spanning all business units, including Catalystem, Atos, QFix, Regeniton, Carnihil Agility, FastSeal, Oasis, and Leaf. Overall, our Q1 performance supports our confidence in the full-year outlook which remains unchanged. We expect growth to strengthen over the remainder of the year, driven by the ramp-up of new product launches, stabilization in U.S. skin substitutes, and improving trajectory in USDs, as well as an additional trading day in the fourth quarter. Today, we're also announcing that after seven years with the group, including the last two as the president for FedEx, Craig Gaffin will be leaving Smith & Nephew to pursue a new opportunity. We've appointed a highly qualified successor, Nathan Volker, who will join us later in the month, and I'll return to this later in the call. Finally, I'm pleased to announce a $500 million share buyback. This reflects our strong balance sheet and confidence in our 2026 performance and demonstrates our continued commitment to a balanced approach to capital deployment, supporting future growth while returning incremental value to shareholders. With that, I'll now hand over to John to take you through the financial performance in more detail.

Thank you, Deepak. Revenue for the quarter was $1.5 billion, representing plus 3.1% underlying growth and plus 6.6% reporting, including a 350 basis points tailwind on exchange. Those growth rates include the effect of one fewer trading day compared to the first quarter of 2025. And on an adjusted daily sales basis, underlying growth was 4.7%. Geographically, the US grew 2.1%, and other established markets grew 1%. Emerging markets grew 10.5%, and excluding China, growth was 2.9% on an underlying basis. And we expect China to be broadly neutral to growth for the full year, making it the first time since 2021 that it will not be a major headwind to revenue growth. Let me now take you through the business units in more detail. So, I'll start with sports medicine and ENT, which grew 6.7%. Within sports med, all regions contributed to growth. We saw double-digit growth in joint repair, driven by Cufix, Knopflus, Regeniton. Carter Hill Agility also grew very strongly, albeit of a small base. We continue to roll out these products in more geographies outside of the U.S., primarily across Europe. It's still very early for Tendency, which we acquired with Integrity Orthopaedics earlier this year, but integration is progressing well. AET growth was led by Farseal and services. In China, we had intentionally restricted inventory in the channel at the end of last year, and with the implementation of BDP delayed by a few months, we saw strong demand for our products there during the quarter. We now expect BDP to be implemented beginning January, As a result of this strong performance, our sports medicine revenue exceeded our recon and robotics revenue for the first time ever, and we expect that to continue to be the case going forward. Turning to ENT, we saw particular strength in other established markets in Latin America, as well as in our ARIS completion bonds for turbulent reduction. In China, we continued to reduce inventory in the channel ahead of VVP implementation, which had a negative impact on our growth. And we still expect a profit headwind from China BDP in 2026 to be around $15 to $20 million. Let's now look at advanced wound management, which grew plus 2.2% in the quarter. Within that, advanced wound care grew 4.9%, with good growth overall led by an even life and strength in emerging markets. Our even complete care launch in the U.S. is off to a strong start. It takes time to win new contracts, but we're pleased with what we're seeing so far, and we'll be expanding the launch into Europe in the second quarter. Turning to bioactives, which were down 1.7% for the quarter, we saw strong growth in Santal offset by a decline in skin substitutes. And as a reminder, our skin substitutes business is facing headwinds in the U.S. as a result of CMS reimbursement changes that came into effect at the start of the year. This is driving a decline in both volumes and pricing in non-certical settings, particularly in mobile, where we have limited exposure. We have also seen reduced billing efficiency and elevated inventory clearing in the system. The market is adapting slowly to these changes, but the impact we are seeing on our business is in line with our expectations. We set out our full-year outlook. We contemplated a range of outcomes, and we continue to expect the trading profit headwind for the full year to remain within the 20 to 40 million range we previously guided to. Looking ahead, we remain convinced of the long-term attractiveness of the skin substitute segment beyond this transition year. Advanced wound devices grew 1.9%, partly reflecting a strong prior year comparative. Leaf and Pico both performed well, reflecting good demand. Pico growth reflects our focused efforts to improve penetration in the surgical setting. Sales of Renesys in the U.S. continue to be soft in the acute care channel, while performance in the post-acute channel remains strong, and we're continuing to expand into emerging markets. Orthopaedics grew 0.8% on an underlying basis. In the U.S., hits grew above market for the fourth consecutive quarter, driven again by the strong uptake of catalyst spend, particularly in competitive accounts. Trauma and extremities also grew strongly, driven by EVOS, shoulder, and iron nails. These results reflect sustained momentum in segments where we have benefited from the combination of the strength in commercial organization and the differentiated portfolio. Where our portfolio aligns with underlying market trends, we are able to perform well. U.S. needs were weak in the quarter, consistent with the softness we previously guided to for Q1. This reflects our continuing and deliberate trade-offs to balance growth, profit, and asset efficiency ahead of the launch of our new kinematic needs system, Landmark. We are being disciplined about set placement and in managing our customer tail to improve the quality of our base. At the same time, the market continues to shift from cemented towards cementless needs, and our ability to compete effectively will increase when we launch the cementless version of Landmark expected in Q3 of this year, which will be followed by the launch of the cemented version in Q2 of 2017. Additionally, as mentioned earlier, we had a headwind for one fewer trading day in the quarter. Looking ahead, we continue to expect softness in the USD performance relative to the market this year as a result of these actions. but we anticipate an improving trajectory from here. We are stepping up set deployment for Legion MS, enhancing the competitiveness of Legion, which accounts for around half of our installed base. MS is performing strongly in the market, and only six months into the launch, 15% of procedures with Legion implants now utilize MS inserts. This will, in turn, support incremental growth in Legion Consulat, our cementless version of Legion, which is currently growing double digits. Outside of the U.S., both hits and needs grew above market. Needs were particularly strong in emerging markets, and hits and trauma in experimentaries performed well overall, with some isolated weakness in specific markets that we are addressing. Finally, other recon grew 6%, reflecting a strong prior year comparator and contract mix. During the quarter, we signed our largest ever multi-system Corrie deal with the USPTC. and we continue to see encouraging trends in utilization and penetration. I'll finish now with the outlook. We continue to expect around 6% organic revenue growth and around 8% organic trading profit growth per year, translating into approximately $1.3 billion of trading profit, including marginal dilution from the integrity acquisition. We remain on track to deliver around $800 million of free cash flow and a return on invested capital above 10%. We continue to expect a stronger second half to the year compared to the first half for both revenue and profit growth, with phasing now expected to be further weighted to the second half, driven by some commercial deals moving to the second half from the first. Acceleration will be driven by the ramp-up of product launches, stabilisation in scheme substitutes, and an improving trajectory in the U.S. median class, as well as an extra trading day in the fourth quarter. And as Deepak mentioned earlier, today we announced a $500 million share buyback to be completed over the next 12 months. This underscores the strength of our balance sheet and cash generation, as well as our confidence in the business while remaining fully consistent with our capital allocation framework. The program will be funded through free cash flow and existing cash balances and builds on the completion of our $500 billion buyback in 2025.