Good morning and welcome to the Smith & Nephew Q4 and Full Year ‘23 Results Presentation. I’m Deepak Nath, Chief Executive Officer. And joining me is Chief Financial Officer, Anne-Francoise Nesmes. As you know, this will be Anne-Francoise’s last set of results for Smith & Nephew. It has been an absolute pleasure working with her. I’d like to thank her personally for all that she has done in her time as CFO. I’d also like to take this opportunity to welcome our incoming CFO, John Rogers, who is here today in the audience. He brings a wealth of experience to the company, and I very much look forward to working together. John will be up here with me going through the numbers at our Q1 trading update in May. I am pleased to report a good finish to 2023 with underlying revenue growth ahead of the guidance that we already raised during the year. And all three of our business units grew by over 5% for the full year, which is a clear demonstration of the strength of our portfolio. Sports Medicine and ENT had a very good year, accelerating to double-digit growth despite a slow China market. And Advanced Wound Management has also maintained its momentum. Fixing Orthopaedics is still a work in progress, but I’m encouraged by the 12-Point Plan progress and the higher overall growth that we’ve delivered. I’m also very pleased that we have achieved our target margin of 17.5% for the year despite macro headwinds from inflation, transactional FX, and a slow China market. That included a significant year-on-year step-up in the second half, and the organization showed what can be done with growth, focus and cost discipline. The company is well positioned going into 2024. We continue to transform the way we operate Smith…

Thank you, Deepak. Good morning, everyone. As Deepak said, this is my last set of results, and I’m pleased to be presenting to you a good set of improving financial results. So I’ll start by covering the fourth quarter numbers that Deepak referred to. Revenue was $1.5 billion with a 6.4% underlying growth and a 6.8% reported growth after 40 basis points benefit from exchange rate. The growth, as you can see, was across all of our regions and businesses. And factors behind the strong finish included the contribution of recent launches, better product availability, and the rebound in Bioactives following the successful transfer of SANTYL manufacturing to Fort Worth, which we completed in Q3. Looking at the performance by geography. Growth in the quarter was broad-based with the U.S. growing by 6.2%, established markets rising by 6.1%, and emerging markets growing by 7.6%. Growth in emerging markets includes, of course, the headwinds ahead of Sports Medicine VBP implementation in China. I’ll now move to the details by business units as we traditionally do, starting with Orthopaedics, which grew 4.9% in the quarter. Global Hips and Knees grew by 3.6%, with strong out-of-U.S. growth, reflecting improved product supply and commercial execution. U.S. Recon was a little slower, and this was due to a combination of factors, which we’re continuing to address through the 12-Point Plan. There were still some areas where product availability impacted key U.S. SKUs during the quarter, before improving by year-end. We also made further progress in set deployments although, again, there is a lag before this reflects into the sales. Slow asset deployments earlier in the year were still costing us growth in a stronger market. And together with some anticipated rep turnover, this limited our ability to win new business and offset the usual revenue…

Great. Thank you, Anne-Francoise. So I’ll now cover our outlook for 2024. So we’re guiding for underlying revenue growth of 5% to 6%. So within that, you should expect further progress in Orthopaedics driven by improvements in supply and execution improvement, especially in U.S. Recon and the continued rollout of our key growth products. We also expect to continue our strong performance in sports outside of China and in Advanced Wound Management. VBP for some sports medicine products will be the main headwind with close to 2% of our Group sales that are within scope, and the implementation, as Anne-Francoise mentioned, expected in the second quarter. Overall, this amounts to another strong year expected for the portfolio as a whole with revenue growth continuing above historical levels even after the effects of Sports VBP. There’s also phasing to consider through the year, with a number of factors driving slower growth in the first quarter. These include a strong U.S. comparator from higher-than-normal surgery volumes than the start of 2023 and a slower first quarter for Bioactives as the strong SANTYL sales at the end of 2023 unwinds. In addition, trading days will initially be a headwind before benefiting growth later in the year. There’ll be one fewer trading day in Q1, then one additional day in Q2, and 2 additional days in Q4, for a total of 2 extra days for the full year. We also expect meaningful trading profit – trading margin expansion to reach at least 18% for the year. There are a lot of moving parts behind that, and the chart on Slide 19 shows the major components of the bridge. Macro headwinds should be lower than in 2023, but have not gone away. Input cost inflation will continue to be a headwind, much as it was…

Good morning. Veronika from Citi. Can you guys hear me?

I can hear you, Veronika.

Okay. Fine. Perfect. Three questions for me. The first one is just on the Knees performance. Obviously, in the fourth quarter, it seems like things went a little bit backwards relative to your peers. So just would love to understand exactly what went wrong in Q4 and what you guys are doing about it as you move into 2024. So that’s my first question. My second question is just on the manufacturing initiatives, and I think you promised, Deepak, that you would give us more this quarter in terms of what exactly is happening and what the expected cost savings are. So if you could elaborate on that just to give us a little bit more insight into what you’re shutting down, where you’re moving manufacturing to, and how much money that is going to save. And then my last question, and thank you for your comment on the phasing of growth in 2024, I’m going to ask a follow-up, as you expect, which is the phasing of margins and how you guys are thinking about the margin improvement first half versus the second half. Obviously, bearing in mind the easy comp from H1 last year, but also appreciating that you have the VBP headwinds probably more H1 weighted than 2H weighted. Thanks.

U.S. Knees, we’ll start with product availability against the backdrop of overall improved – improving and actually to near target levels overall in terms of life or for the portfolio. U.S. Knees specific SKUs were slow to come, particularly OXINIUM related and the benefits didn’t start to flow through until really September – late September-ish. So that impacted not only replenishment, but also sets. So set delivery, which we had targeted early in the year, didn’t come through into – really well into Q4. So that impacted our ability to drive new growth. And typically, when you put a set, takes anywhere from 45 to 90 days before those sets start to turn to target levels. We had expected churn as we implemented performance management – tighter performance management and incentives. I talked about that in previous forums. It was a bit later in the year than we expected because the first half of the year was – the market was quite frothy. And so the expected kind of turnover didn’t materialize into the second half of the year. So what ended up happening was we had turnover. It came later in the year. Set and replenishment availability was impacted in U.S. Knees. And there’s, of course, commercial performance that layered on top. So the combination of all of those effects led to a weaker-than-expected performance in U.S. Knees. But when I look to the fundamentals of how we work our way out of it, first and foremost, the sets are flowing now. They came later in the year than we expected, but they are flowing. I think we – the chart that we had showed relatively speaking, where hips are versus knees, right? Hips are pretty much at target levels. We’re getting there on knees. Roughly speaking, knees are…

Actually, on margin, if I may come back to manufacturing, because you focus very much on the network optimization. So that’s aligning capacity with volume. There are other elements and a significant amount of work around the cost base. So if you look at the 12-Point Plan, working with our suppliers to get better raw material cost, being smarter, more disciplined. So that’s one. The other is around lean and looking at our overheads and how can we reduce. So if you take – you’ve aligned your volumes, you’re reducing your cost base, that’s what takes time, but delivers from ‘25 and ‘26 onwards.

Hi, good morning. David Adlington, JPMorgan. Two questions, please. Just wondered if you could quantify your pricing expectations for ‘24, what you’re sort of coming out with there. And it’s taking slightly longer-term, so I know you’re not quite levied on ‘25 margins yet, but beyond ‘25, is a setup here for further annualization of the cost savings on the manufacturing side, but also ongoing operating leverage so we get some further margin expansion beyond ‘25?

Sure. ‘24, there’s two things. One is inflation-related pricing. So we expect that to start to come down, in terms of our ability to pass through. So it will be – we expect a lower impact of that in ‘24 compared to ‘23. Layered on top is our efforts around strategic pricing, which is really the substance of the pricing component of the 12-Point Plan where we’ve not been, as an organization, as mature relative to best-in-class around our strategic pricing efforts. We’ve made tremendous progress over the last year. We just had a review of that not too long ago, very pleased with the capabilities we have built up as an organization to take ourselves to the next level. And the benefits of that will start to flow into our P&L starting in 2024. So you put those two effects, net a little bit less than in 2023, but we expect to see pricing benefit as we move forward. As to how we think about the world after ‘24, obviously, we’re not giving specific guidance beyond 2025. We have reaffirmed 20-plus in 2025. The world doesn’t end then. So we expect to continue to realize the benefits that we’ll start to accrue in 2025 as we move forward beyond. So continued improvement from 2025 onwards. But we’re not guiding specifically to those numbers.

Okay, thank you.

Good morning, guys. Sam England from Berenberg. Firstly, just a follow-up on pricing. Does the commentary around positive pricing across the portfolio, I mean that all three segments are positive or just positive in aggregate across the Group? And then can you dig into some of the drivers of the stronger growth in Wound Devices and negative pressure specifically? And on the 12-Point Plan initiatives, what’s being sort of most impactful in driving the levels of growth that you’re seeing there?

Yes. So pricing, as we indicated, it’s not in the aggregate. In fact, each of our businesses contributed to the positive. And it’s actually quite refreshing to see, it was not only was it across each of the businesses, but also across geographies. The levels vary, right? Depending on the geography, but it was quite broad-based. So that’s the short answer to that question. Secondly, in terms of negative pressure and the 12-Point Plan, we are launching RENASYS, RENASYS EDGE, and it’s new product driven growth. We’re still in the very early stages of that. So we expect that to be a multiyear platform for growth. And so, expect to see continued traction. But it’s new product launch – launch driven. Yes. Jack next. You waited for you to be called upon and now you’ve got two microphones.

I was too keen. Thanks for taking the questions, I had three, please. First, on VBP. So you mentioned that, that 70 basis point headwind is without any kind of mitigations. Could you just remind us what mitigation you may be able to implement and kind of the magnitude of those? Second, on CORI. As you mentioned, the placements in the year was slightly below your target. I’m just wondering if you’re expecting a rebound in 2024, if you had a rebound already, and whether you can kind of give us some color on your target for this year. And then my third question is on demand. So there’s been a bit of kind of debate around market level, whether we’re still having some COVID rebound, whether it’s kind of secular drivers there. I was wondering if you could give us your – kind of how you see that progressing through 2024.

Yes. So regarding mitigating effects for VBP, it’s restructuring around the organization, how we go to market in response to VBP, the types of actions that you expect us to take when you – when you’re faced with that kind of an impact. We’ve been through that in Orthopaedics. We’re able to offset some of the margin impact from price. Not all of it, of course. But there’s things that you do commercially in terms of your channel and how you go to market, and those are the steps we expect to take. I do want to remind the group that, in Sports, what’s impacted is joint repair and certain components joint repair capital is not impacted. We’re also launching REGENETEN in China. So there’s a bunch of factors that are going into it. And so we will – having experienced this with Orthopaedics, we kind of have a way to adapt our commercial model in response to this, right? So that’s the first question. The second question is around CORI. I think that was the second one. So CORI, we fell short. I’d said, sitting here where I’m sitting, about 300, last year, we came in at 240. The primary delta there is China. We had expected a more robust market for CORI. And largely because of the anticorruption drive in China, there was a significant impact to the uptake of robotics. It’s not us, it’s just the market. That’s the biggest source of the delta. As Anne-Francoise called out, our CORI placements were above our relative share with it. So I’m actually genuinely pleased with the traction we’ve gotten. We saw a step-up actually in Q4, to your question about what – what does the momentum look like? The momentum in Q4 was great, U.S., OUS. What I’m…

Hi. It’s Seb Jantet with Liberum. Two questions, if I could. One, just on the revenue guidance for the year, I am just wondering what type of headwind from a revenue perspective you baked in for VBP in Sports Medicine. And the second one is just picking up on Advanced Wound Care, quite a slow kind of quarter and certainly a slowdown if you look over long-term in the growth rates in Advanced Wound Care. I wonder if you can comment a little bit on that and what you are doing to try and stimulate the growth there.

Yes, sure. So, on the VBP, we had said about 2% impact on the group sales is how VBP – is what translates. In terms of wound care, your question was overall wound or – wound care, so yes.

What we have said in the presentation as well, that you should expect Joint Repair growth to be impacted by about 5 percentage points, so for the full year.

2% group, 5% Joint Repair. For AWC, there is two factors. One, we are impacted by supply historically. There were periods of time when we just didn’t have regular supply. And we put – our teams were commercially on the back foot relative to that. We have had now a couple of quarters of more steady supply in wound care. So, we are in a more front-footed posture relative to that. It takes time for us to recover some of the share we have lost there, but that is one factor. The second is, from a product standpoint, we have made investments where there is a gap between us and competitive offerings. That will start to come through in about 18 months’ time where there will be new product offerings to make us even more competitive from a product lineup standpoint. That will continue to drive better performance. Right now, the focus is on commercial. We are coming off of a period of interrupted supply. And so the way these things ladder up will be going forward, you should see improved AWC growth numbers.

Thank you. Good morning. Richard Felton from Goldman Sachs. Two questions, please. The first one is on the medium-term margin targets and the implied step-up in ‘25. So, thank you for the color you gave us in the presentation. One of the building blocks to better margin in 2025 was easing of inflationary pressures. So, my question is, what level of visibility or confidence do you have either through hedges or your discussions with suppliers that inflationary pressures can actually ease in 2025? And then also point of clarification on your 2025 margin expectations. Is there any FX assumption embedded in that guidance? Then the second question on free cash flow. It’s obviously better performance this year. You both alluded to more to come, particularly on inventory. So, as you benchmark your business either against peers, your own history, how big is that opportunity to drive better inventory performance from here? Thank you.

So, the first one around inflation, sorry, I need to reground myself. Around inflation, what I remind this group is there is about a year lag as inflation flows through our P&L – flows through inventory and impacts our P&L. So, we have got visibility now in terms of the type of contracts we are doing as part of the procurement efforts. It’s one of the elements of the 12-point plan. We see the benefits what we are seeing through the negotiations that Anne-Francoise mentioned. So, we have got some visibility to how that’s coming down. Now, we have called out the impact in ‘24 relative to ‘23, which is really at comparable levels. The double-click within that is, within Orthopedics, the particular raw materials that we see, there hasn’t been a lot of change from ‘23 to ‘24, right. So, that part of it is going to be slower to unwind. But when you look across the portfolio, we have a reasonable sense as to how this will start to flow into our P&L 2025. So, in other words, a year removed, we have got some visibility. The second thing, around the working capital and inventory, as we have said, we have turned the corner in 2023. Our biggest challenge on inventory is in Orthopedics. So, there is two pieces, right. There is recon and there is trauma. On the recon side, actually this comment applies to both. Our ability to connect commercial and operations were historically not very good. We have made tremendous progress over the last 18 months in doing that. Our new S&OP process has led to a significantly better ways to connect supply and demand down at a SKU level, right. Not just from the product family or a category level. And that has been…

And is there any embedded assumption for FX.

For FX. I was hoping you don’t go back there. I don’t have a crystal ball, so certainly, as you know, we hedge some of our FX. So, we are guiding to a lower transactional FX impact in ‘24 of 30 basis points versus the 120 basis points we have seen in ‘23. In ‘25, we assume normalize on that. That’s a variable. That’s part of the pluses and minuses you face when we forecast, but if I try it and get FX right. There are some questions on the phone.

Our first question from the phone line is from Julien Dormois from Jefferies. Julien, please go ahead. Your line is open.

Hi. Good morning Deepak. Thanks for taking my questions, I have three. But before, I would just like to say [Foreign Language] while also wishing John a warm welcome. So, my three questions related to products. The first one is on CartiHeal AGILI-C. I was just curious whether there is a timeline for the full product rollout? What is the total addressable market and whether we shall see an early contribution to Sports Medicine sales already in 2024? The second question is you guys are – seem to place great emphasis on the AETOS shoulder system. Is there any plan on that side of making it available with CORI, because I think one of your competitors has just received approval for the first time robotic application on that side? So, wondering whether you have similar plans on the agenda. And my last question coming back to the knee business, I am just curious whether you have set some sort of internal KPI for 2024 of maybe growing the knee business at or above the market growth in the U.S. specifically.

Sure. So, I will take those. So, CartiHeal is more of a mid-term driver for growth. It’s not – there will be some impact in ‘24, but it won’t be material to the group. Where we are right now is we are in the process of training up our organization. So, we featured it in our booth in AAOS. We are putting through our reps through CartiHeal through AGILI-C training. And as we roll through the year, we expect to see traction. But in terms of the material growth driver for the group, it’s more of a mid-term thing, so it’s not ‘24. AETOS, we are scratched, we have just now entered shoulder on the arthroplasty side, right. AETOS is our foray into it. As we announced in AAOS, we have plans to build out a full offering into shoulder. You have heard me comment about my level of excitement for CORI in shoulder. Its form factor is ideally suited for shoulder given its anatomy. We have a program for shoulder – on CORI. It’s roughly 2 years out before we bring it to market. It will line up with our implant portfolio coming to line. So, those things will come together. So, it doesn’t make sense to have CORI when we don’t have an implant portfolio to go with it. So, we have got a holistic program that brings up the full shoulder portfolio and take advantage of the unique applicability of CORI to that anatomy. So, we are really excited about it and look for more progress as we continue. In terms of knee, what am I looking for in terms of market performance, what I hope to see in knee is a trajectory that we have seen in trauma, where about this time last year, we would…

Thank you. Our next question is from Lisa Clive from Bernstein. Lisa, please go ahead. Your line is open.

Hi. Just two questions for me. First of all, given all the movements in VBP in China, can you just remind us of what your exposure is in wound in case it goes in that direction? I know at least for 2022 China was 6% of your total sales, if you could just let us know for wound whether that’s sort of a higher proportion or not. And also, if you could comment on what proportion of sales in China wound are into hospitals, or whether you have a sort of self-pay segment in the community as well. And then next question is, given all the changes in your sales force in the U.S., can you just give us an overarching view of how it is set up today? Is Sports Medicine totally separate from Ortho? Within Ortho, is recon separate from trauma? How do extremities fit in? And then also, I guess in terms of the structure of those reps, are they direct employees? I know some companies do it differently. I am just trying to understand sort of what it looks like. I know Smith & Nephew has tried a bunch of different structures in the past. So, just trying to figure out why the new setup should be the sort of winning formula. Thanks.

Sure. Hi Lisa. So, VBP and wound, our position in wound is relatively small in China. Certainly, from a group standpoint, it would not be hugely material. In contrast to Sports, where we were the market leader, in Ortho, we were the market leader, so VBP implementation had significant impact not only to their businesses, but also to a group level. In wound, we are not positioned in that way. Good news, bad news story. In terms of our sales, I will need to get back to you in detail, we will do that. But I believe the majority of our sales are to hospitals versus self-pay. But let me confirm that with you, Lisa, post…

We have a smaller portion of retail.

Right. In terms of sales force, we do have distinct sales forces for trauma and recon. And we have distinct sales forces for Sports and recon. Now, there is of course, some geographies somewhere where there is some overlap. So, there are certain parts, if you will, in the U.S., where there is trauma and recon go together. There are certain distributors that we have that carry both trauma and recon. So, there are those exceptions. So, by and large, they are distinct sales forces, both – I think you asked – the question was around the U.S. It’s certainly true in the U.S. In terms of direct versus 1099s or agents, our Sports is primarily direct. Our Orthopedics is a mix. And I don’t know that I certainly want to give you that mix, but it’s a mix between direct and distributors. Obviously, as you know, you can make any model work, but that is the difference between our Sports versus our Ortho. And then in terms of extremities, that is combined with our trauma sales force. In other words, we don’t have a shoulder specific sales force, at least not at the moment. So, that’s I think, the rough answer to your question. If I missed anything, let me know, Lisa.

No, that’s super helpful. Thank you. And leading from that, given this gradual shift for recon procedures in ASCs, could you talk about what that looks like? Are these surgeons who may be doing 70% of their procedures in a hospital, but then may do 30% in an outpatient setting? Is it – how – I am just trying to understand sort of which reps are servicing that growing area. And also given your comments around potential sort of cross-selling opportunities, Sports Medicine and recon are distinct. I know some surgeons will do sort of a little bit of each, but just trying to understand sort of how you are capitalizing on that potential new opportunities?

Yes. So, we have got a ton of experience in ASCs. About 40% of our Sports business flows through the ASCs already. So, we have got quite a bit of experience in that channel. And as you note, there is more and more joint replacements that are moving into that channel. And recognizing that, we have called that out as one of the elements of the 12-point plan. We noted the progress. We started off at a good place in ‘22. We have built upon that in ‘23 where we – I think we tripled the number of deals that we did. Now, it sounds great, but it is still a fairly modest thing in the universe of all deals that could be done. But we are pleased with the progress and the traction we are getting. We are also the only Ortho company to have a significant Sports business that’s well represented in the ASC. So, we know the channel well and there are cross-selling opportunities. By having said that, there are distinct surgeon groups that do them. There is, of course, there is always surgeons that do both procedures, but by and large, the distinct surgeons that do replacements versus Sports cases. So, we are particularly excited about the prospects there. CORI, as we have called out in previous forums like this, has resonance across the board, but in particular, in ASCs given its price point, given its form factor, it – there is a very compelling value proposition for CORI. So, as we start to capitalize on the trend of procedures moving into the ASC, we have got in CORI a great vehicle or catalyst to start to be competitive in that segment. What we are seeing as we look at our business in the ASC channel versus our hospital channel, we are seeing a relatively higher performance in ASC relative to our overall average share position. So, it’s early days yet, but I am kind of pleased with the traction that we are getting there. But we do need to keep a focus. There is a lot going on. It’s a highly dynamic market. I like the way we are positioned. But we of course have to execute commercially to take advantage of the opportunity. But the building blocks for us to do that are there. CORI and recon, a strong presence already in that channel through our Sports position and a fundamental value proposition that seeks to tie those things together where it makes sense.

Okay. Thanks.

Thank you. Our last question we have time for today is from Sezgi Oezener from HSBC. Sezgi, please go ahead. Your line is open.

Hi. Thanks for squeezing me in. Just two, please. First of all, on China in CORI, you said there is, of course, an impact from the Integra. How is it – have the sales completely come to in halt, or are you selling at a much slower pace? And also going forward, what’s your target in terms of out of U.S. CORI placements? That was my first question. And the second one, on sales incentives, you said that has an impact on the churn, and you are trying to replace that through equipment. Have you more observed the sales force going to competition? And would you be reacting in terms of changing the incentive structure to that, or would you be reacting by completely hiring new force that adjusts to the current systems – incentive systems? Thanks.

Yes. So, China CORI, it’s primarily a market effect. So, when we look at how many CORIs we did place relative to the number of robotic placements that happened in China, we were doing very, very well relative to our share. These are small numbers. So, it isn’t necessarily a value proposition question for CORI in China, but rather an overall adoption of robotics in the Orthopedic space. So, that’s by far and away the effect in China. OUS versus U.S., we are already the number one robotic. CORI is the number one robotic system in EMEA already. That was the case in ‘23, we built upon that – in ‘22 that was – we built upon that position in ‘23. So, we are looking to capitalize on the opportunities there. We have targets internally, of course, but not something that I would want to kind of put out there in a public sphere. But suffice it to say that the value proposition of CORI is quite strong in a range of settings within the U.S., but also in a range of healthcare systems. In terms of incentives, it’s incentives and also tighter performance management that led to the churn. We expected that. It just came kind of later in the year than we thought would happen. In terms of how we respond to it, the solution is not a structural change. We went through a structure change in terms of going to a more business unit first model compared to a matrix model that we had run, primarily impacted the OUS geographies. We are not looking to make further changes from a structure standpoint. We have got a structure that, at least, that I am happy with. And it’s more about trying to have the best organization that we possibly can. In terms of where our reps are going, there is a range of things, some going to competitors, some going into other fields. And in terms of our response to that, I don’t know that I want to necessarily spell that out other than we have got a great recruitment pipeline, and I expect that we will have a great – we have a great team already we are looking to add to that team as we move forward.

That’s very helpful. Thank you.

You are welcome. Okay. That’s a wrap. Thank you very much. Appreciate the attention and engagement.

Thank you.