Smith & Nephew plc

Good morning, everyone. Welcome to the Smith and Nephew Q2 and half one results presentation on Deepak Nath. I'm the chief executive officer and joined by John Rogers, who is our CFO. So this quarter, we delivered underlying revenue growth of 1.6%, which was lower than expected. Sports Medicine and ENT performed strongly once again with consistent delivery across regions and categories and we saw double digit growth from many of our key products. However, this was offset by softness in US orthopedics and in advanced wound bioactives. In US orthopedics, knees remain weak, reflecting similar dynamics to Q1, although we saw a sequential improvement as expected. And we do anticipate further improvement through the remainder of the year. U.S. HIPS were affected by a delay in catalyst stem deployment at a tough comparator, with growth expected to resume as deployment increases during the balance of the year. Within bioactives, santal growth was primarily impacted by strong distributor demand in the prior quarter, which did not repeat. This should normalize over the balance of the year. Despite the slower start on revenue, trading profit was strong at $566 million. Excluding M&A, trading profit grew by 9%, supported by stronger-than-expected efficiency savings and tariff refunds that fully offset the forecast tariff headwinds. Taking into account revenue performance, we now expect underlying revenue growth of around 4% for 2026. We recognize that orthopedics is not where we would want it to be, but we remain focused on delivering better performance as we strengthen the portfolio and build on the margin progress that we have made. We have clear growth drivers across all three business units that support our outlook for the remainder of the year. And importantly, despite the revised revenue outlook, we still expect to deliver original guidance for profit, trading profit, free cash flow, and ROIC. This includes an additional 50 million in efficiency savings that we identified for 2026 taking our total expected savings from 150 million dollars to 200 million dollars and a broadly neutral impact from tariffs net of refunds. The changes that we implemented in our 12-point plan have made the group more resilient and better able to respond to these challenges. So with that, I'll hand over to John to take you through the financial performance and I'll come back after you start. John.

Thank you Deepak. Revenue for the quarter was $1.6 billion, representing plus 1.6% underlying growth and 2.8% reported, including 120 basis points tailwind from foreign exchange. Geographically, the US declined by 1.3%, reflecting softer performance in orthopaedics and advanced wound bioactives. Other established markets grew by 1.7%, with performance led by Canada on Australia and New Zealand, continuing the good momentum seen in the first quarter. Emerging markets grew 10.6%. Excluding China, group growth was 1.4% on an underlying basis and we continue to expect China to be broadly neutral to growth for the full year. Let me now take you through the business units in more detail. I'll start with Sports Medicine and ENT which had another excellent quarter and grew 8.6%. Within sports medicine, the underlying growth drivers remain unchanged, reflecting the continued momentum of our key growth platforms and consistency of performance across the portfolio. Growth was broad-based across regions and joint repair, again delivered double-digit growth, supported by strong demand for QFIX Knotless and Regeniton. In AET, FastSeal and services continue to be the main contributors to growth. In China, after intentionally restricting inventory in the channel at the end of last year and ahead of the implementation of VBP, we saw strong demand for our products during the quarter. We continue to expect VBP to be implemented in the second half. Sports medicine revenue again exceeded our recon and robotics revenue. Turning now to ENT, outside of China, we saw strong growth globally, including double-digit growth in other established markets and emerging markets, as well as in our ARISC ablation wands for turbinate reduction and our HALO wand for tonsil and adenoid surgeries. In China, we continue to reduce inventory in the channel ahead of VBP implementation, which had a negative impact on our growth. We still expect the profit headwind for China VBP to be around 15 to 20 million for the full year. Let's now look at advanced wound management, which declined by 2.1% in the quarter. Within that, advanced wound care grew 3.7% with good growth overall, led by US Alevin and strength in our emerging markets. Our Relieve and Complete Care launch is off to a strong start in the US with good early momentum and we were pleased to launch in Europe in this quarter. In bioactives, revenue declined 12.7% for the quarter, driven by the reimbursement change in skin substitutes and a soft quarter for Soundtel. Soundtel benefited from strong distributed demand in Q1, which resulted in a softer Q2. We've also seen some impact from one of the payers introducing prior authorisation for certain doses of Santil. Underlying demand remains healthy, but the change is creating friction in the prescription process. And we're taking action to address this and expect Santil to return to growth in the second half. In our skin substitutes business we continue to face headwinds in the US as a result of CMS reimbursement changes that came into effect at the start of the year. We saw a sequential improvement from the first quarter driven by hospitals however volumes and pricing in non-surgical settings remained under pressure particularly in mobile where we have limited exposure. The market is adapting more slowly than expected, which continues to affect billing efficiency and inventory levels across the channel. We now expect the trading profit headwind from skin substitutes to be towards the upper end of the previously guided 20 to 40 million range. We remain confident in the long-term fundamentals of the segment and see opportunities to benefit as the market normalises. Advanced wound devices grew 3.8%. Leaf delivered double digit growth reflecting strong demand. Both Pico and Renesys performed very strongly in emerging markets as we continue to expand geographically. Pico sales in other established markets were impacted by doctor strikes in Spain in the surgical sector and the timing of tender offers. In the US, sales of Renesys remained soft in the acute care channel while performance in the post acute channel was good. Turning now to Orthopaedics. This declined 1% on an underlying basis, primarily reflecting the ongoing issues in US needs ahead of new product launches and temporary headwinds in US hips. Following four consecutive quarters of above market growth in US hips, we saw softer performance this quarter against a tough comparator. Catalyst STEM continues to grow strongly, but Q2 was impacted by delay in set deployments and an increasing proportion of existing customer retentions versus competitive conversions. We see a clear path to re-acceleration over the remainder of the year as Catalyst STEM set deployment increases. As the product moves into its third year post-launch, growth should remain strong, albeit at a lower rate than during the initial launch phase. US needs remain weak, but we are seeing gradual improvement as expected. The underlying dynamics are unchanged. Deliberate portfolio and capital discipline, combined with an ongoing market shift towards cementless, continue to influence performance in the near term. Sequential improvement was driven by strong uptake of Legion MS and double digit growth in Legion Conslock, our cementless offering. Legion MS now represents almost 20% of our Legion mix, up from 15% in Q1, and is enhancing the competitiveness of our in-store base. We continue to expect improvement through the year, driven by increased Legion MS set deployments. This will remain the main driver until landmark launches. Outside of the US, knees were impacted by a large tender order in the Middle East in the prior year quarter that did not repeat. Hips benefited from the launch of catalyst stem in Japan, although we saw some isolated weakness in Australia where we await regulatory approval of catalyst stem. Trauma and extremities performed well overall. We continue to see good growth in EVOS, IM nails, and shoulder driven by our ATOS implant. We are seeing the impact of competitor launches in the US, but we expect growth to strengthen in the second half as we launch EVOS, Pelvic, and ramp up TrigenMax. Finally, other recon grew 0.8%. This business can show some quarter to quarter volatility as revenue is influenced by contract timing and mix. This was more pronounced in the period given another strong prior year comparator. That said, we saw double digit growth in Coro deployments globally alongside continued growth in utilization and penetration. and we expect growth to accelerate in the second half supported by an easy comparator in Q3, continued strong demand for our robotic platform and good uptake across ASCs and teaching institutions. Now I'll move on to the half-year financials. For the half year, revenue was 3.1 billion, up 2.3% on an underlying basis, and up 4.6% on a reported basis. There was one fewer trading day versus the prior year, with underlying revenue growth of 3.1% on an average daily sales basis. Consistent with the performance in Q2, we saw strength in sports medicine, offset by softness in US orthopaedics and advanced wound bioactives. Moving on to the summary P&L. Underlying gross profit was 2.2 billion, representing a gross margin of 71.1%, up 60 bps year on year. This was driven by greater than expected efficiency savings across manufacturing and procurement, which more than offset cost inflation and the headwind from inventory revaluation. Tariff refunds fully offset the forecast tariff headwind to gross margin. Trading profit increased 43 million to 566 million, with trading margin expanding 60 bps to 18.3%, reflecting the benefits of higher gross margin and ongoing cost savings. Moving further down the P&L, IFRS operating profit grew 4.3% reflecting temporary higher restructuring charges driven by further optimisation of our manufacturing network and higher acquisition costs driven by, of course, our acquisition of integrity. Basic earnings per share grew ahead of this at 6.2% reflecting the buyback we announced at Q1 and adjusted earnings per share grew by 11% to 47.7 cents. The interim dividend of 15.6 cents per share is up 4% on half one, 2025. I'll now take you through a more detailed bridge of our trading profit growth. We absorbed 119 million of headwinds from cost inflation, inventory revaluation, changes to wound reimbursement, and China VBP, while continuing to invest 33 million in our growth. This was more than offset by 59 million of operating leverage and 128 million of efficiency savings, which I'll discuss in more detail shortly. While we had previously guided to an incremental tariff headwind in 2026, refunds received in the first half meant net tariffs were broadly neutral to profit growth. Foreign exchange also had a broadly neutral impact. As a result of all this trading, profit growth was 9%, excluding 4 million dilution from the acquisition of Integrity Orthopaedics. As I said, turning now to efficiency savings, we've delivered around 133 million in the first half, well ahead of expectations. Of this, approximately 50 million came from the 12-point plan and zero-based budgeting initiatives. and as a result we have now achieved 330 million of cumulative savings since launching these programmes reaching the lower end of the 325 to 375 million target that we set ourselves at our 2024 interim results, more than a year ahead of schedule. We expect further benefits to be realised through the remainder of 26 and into 2027. The remaining £80 million in the first half came from additional opportunities across procurement, manufacturing, sales and marketing and business support functions. We expect a further £70 million of savings in the second half from both the 12 point plan and ZBB and other opportunities. This takes forecast efficiency savings for the year up from around £150 million previously to around £200 million. The additional 50 million is expected to come primarily from manufacturing, including from ongoing footprint optimisation, as well as procurement and sales and marketing. Our 2026 guidance for trading profit is unchanged. We expect to deliver around 8% reported trading profit growth excluding M&A and around 1.3 billion of trading profit including the impact of integrity. We now anticipate that the year-on-year impact of tariffs will be broadly neutral to trading profit net of refunds. The headwind from skin substitutes is expected to be towards the upper end of the previously guided 20 to 40 million range and there are no changes to our assumptions regarding inventory revaluation or China VBP. As previously disclosed, the acquisition of Integrity Orthopaedics is expected to be marginally dilutive to trading profit in 2026, broadly neutral in 2027 and accretive from 2028. Coming now to trading margin by business unit. We saw a 160-bit increase for sports medicine and ENT margin to 24.7%, a 10-bit decrease for wound to 22%, and a 30-bit increase in orthopaedics margin to 13%. In sports medicine and ENT, margin expansion was driven by operating leverage and efficiency savings. In wound, the small margin decline reflected the impact of US skin substitute reimbursement changes, largely offset by savings initiatives. And in orthopaedics, manufacturing savings from network optimisation, ongoing product initiatives and disciplined cost control more than offset the headwind from inventory revaluation and softer revenue growth. We expect further margin expansion over time as we work through the inventory revaluation headwind and benefit from improving revenue growth. The impact of actions already taken to right-size our manufacturing capacity and our Ortho360 operating model. These results demonstrate the operational excellence we are driving across the business. As you know, inventory remains a key focus for us, even now that we've completed the 12-point plan. Group DSI, day sales inventory, fell by 72 days, including the reclassification of instrument sets from inventory to PPE, and by 40 if you exclude that. The bigger reduction came from orthopaedics, down 62 days, excluding reclassification, reflecting continued work to reduce the number of units in inventory and a focus on capital efficiency. We also saw a reduction in sports med DSI albeit to a lesser extent than in orthopaedics and no change in wound DSI excluding the reclassification. Both sports and wound are already much closer to industry benchmark DSIs. We expect to make further progress on inventory in 2026. Right now moving on to cash flow. Trading cash flow was 437 million in the first half, down 50 million or so year on year. But this reflects a 51 million step up in capex year on year driven by investments in our new wound manufacturing facility in Melton and in some IT investments. We do not expect this increase to repeat in the second half and cash generation should improve versus half to 2025. Other working capital was higher, largely due to the timing of bonus accruals and related cash payments. Cash conversion was 77% and we anticipate this will improve over the course of the year. Free cash flow was £231 million, down £13 million year on year, again reflecting these factors I've just mentioned and partially offset by reduced restructuring cash costs. We continue to expect free cash flow in 2026 of around £800 million driven by profit growth and continued focus on working capital offset by a modest temporary increase in restructuring costs. Net debt increased over the first half of three billion an increase of 260 million resulting in a leverage ratio of 1.8 times adjusted EBITDA within our target of around two times and the increase was driven by our investment in our business, the acquisition of Integrity Orthopaedics, growth in our dividend and of course the 500 million buyback we announced in Q1 of which we've actually now completed 260 million as of the 3rd of August. This is in line with our capital allocation priorities. Before I turn to guidance, I want to highlight the progress we continue to make across margins, working capital, cash flow and returns. This broad-based improvement reflects stronger operational controls and helps make Smith and Nephew a more resilient business, better positioned to manage through periods of revenue softness or external challenges while maintaining progress against our long-term objectives. Coming now to our updated outlook. Reflecting softer performance in US Orthopaedics and Santil, we now expect second half growth to be in the range of 5% to 5.5% and full year growth to be around 4%. Notwithstanding the lower revenue outlook, we are maintaining all other metrics of our guidance. We continue to expect around 8% trading profit growth excluding M&A for the year and this translates into approximately 1.3 billion of trading profit including marginal dilution from the integrity acquisition. This reflects the step up in efficiency savings that we are delivering across the business together with the removal of the forecast tariff headwind. The progress we demonstrated in the first half gives us confidence we can remain disciplined on costs while supporting improved revenue growth in the second half. We also remain on track to deliver around £800 million of free cash flow and a return on invested capital above 10%. Let me finish by outlining why we are confident in a step up in revenue growth. We expect second half growth of 5% to 5.5%, driven by factors across all three business units. In sports medicine, we expect continued momentum across segments, including strong growth in Regenitin and Fast Seal. In advanced wound management, we expect to see stabilisation in US skin substitutes, building on the sequential improvement we saw in Q2 versus Q1. We also expect a return to growth in Santor, further rollout of a Leave In Complete Care in Europe, the ongoing launch of Next Generation Leaf and the benefits of greater investment behind Pico. In orthopaedics we expect an improving trajectory in US knee implants driven by Legion MS and the launch of the cementless version of LAMBAR. We also expect US hip implants to return to growth as we deploy more catalyst stem sets. Of course, we'll also have one extra trading day in the fourth quarter. So with that, I'll hand you back over to Deepak.

Thank you, John.