Half Year 2022 Smith & Nephew PLC Earnings Call

I have been held back as a result.

So I've spent some time going after the root causes.

Although there was already some work underway. We've now developed a new structure program execution with a deep level of oversight that I know is required to deliver this type of program.

At pace.

This work has already started.

Turning to our results I would say our first half performance was mixed.

And sports Medicine continues to be on track.

Whereas orthopedics was held back by execution.

And supply chain challenges and of course, the impact of China Pvp.

We've adjusted our 2022, our guidance, reflecting the supply chain challenges.

And the difficult macro environment.

And France was will walk through the Q2 and H one results and then I will come back and talk in more detail about our comprehensive action plan for the future.

Right.

Yeah.

Okay.

Okay.

Thank you Deepak and I agree with you, it's Anthony mainly going to be in person for the first time in tea is as far as I'm concerned. So thank you for making the effort to come and but I still think Zane I'll start by going through the detail of.

The second quarter, So grace in the second quarter was one 2% underlying.

Gross than we saw in the second than the first quarter, mainly reflecting a number of known factors.

He's with one fewer trading day, then in 2021 in.

The implementation of China of EVEP in hips and knees.

And Lockdowns in some region of China, which particularly affected our sports franchise.

Looking at our growth by geography, the U S was the fastest growing region at 2% for the quarter as a whole.

Emerging markets grew <unk>, 8%, reflecting the headwinds in China were offset by strong growth in India, the middle East and Latin America.

As I established markets were flat, reflecting a slow quarter in Asia Pacific.

Going into the detail of the franchisees overall orthopaedics revenue fell by one 1%.

As I mentioned earlier GBP implementation was a significant headwind.

If we exclude China orthopaedics grew by around 2%.

In reconstruction knees grew two 7% in hips declined three 7%.

As well as the EVP impact on our out of U S revenue the quarter reflects the need for improved execution and supply chain management that Deepak will talk about shortly.

We're also continuing to rollout on cement less knee in the U S.

And while it's too early to have moved Greg significantly in the quarter, we do expect to become a more visible in the second half.

Although our construction returned to double digit growth and Robotics course was well ahead of the overall segment.

Our offering is continuing to develop the first Korean <unk>.

And cement less knee procedures were completed in the quarter.

So second half we expect to become the first company to have a robotics, if you've seen any revisions.

Trauma and extremities declined 6% and was slow across most regions.

As you may be aware, we opted not to participate in a broader rollout of the provincial Thomas tenders in China, which explains part of the decline in the south.

Sports Medicine on TNT grew one 9% with strong prepay agreeing to one and our first call picked on enabling technology declining by 0.5%.

As I mentioned earlier sports medicine was particularly impacted by the impact of Covid outbreaks in China.

Without China, the Sunshine with franchise growth would have been around 5% with 7% in joint repair and 2% in <unk>.

Otherwise the drivers of the business were very similar to the first quarter.

The recovering knee repair market continues to drive our growth in established markets as level of physical activity return to normal.

So we have recent launches such as traffic flex unforeseen, which continued to track ahead of our plan and are making an increasingly important contribution to the group.

As we've mentioned before that availability of electronics remains a challenge and this is continuing to be a headwind in <unk>.

TMT growth of 11, 2% reflects continued post COVID-19 volume recovery also helped by successful price increases in the U S.

And finally advanced wound management grew by three 8% within that advanced wound care grew three 3% driven by good growth from our infection management portfolio and a strong quarter in Asia Pacific region.

And in July we launched our wood composite applique clinical support.

Which is a tool to help health care professionals first one and choose the most appropriate treatments.

It's a great example of our cross franchise digital capability and also the value of our brewed evidenced backed portfolio.

Bioactive grew two 4% in the quarter driven by our skin substitutes portfolio in advanced wound devices grew seven 9% with continued double digit growth in Pico.

I will now move to our first half financial results.

I'll start with revenue, which was $2 6 billion in the first half up three 5% on that underlying basis compared to <unk> 2021.

Reported revenue was flat, including a foreign exchange headwinds of 350 basis points, given the strength of the U S dollar against other major currencies.

And as you can note here the M&A effect was minimal.

<unk> seen the Champ Sports Medicine, Unwinds showed mid single digit underlying growth.

And as we have in the second quarter all of these growth rates reflect one fewer trading days in 2021.

Moving to the summary, P&L the gross margin in the half in the first half was 79%, which is an increase of 30 basis points.

A variety of factors at play here and are important to note inflation is offset by some price increases on the tailwind in the first half from the timing benefit of our hedging strategy.

The trading margin, however was lower at 16, 9% compared to 17, 6% in 2021.

And that comes from higher SG&A cost, where we felt the inflationary pressure in freight and logistics that you see across the economy.

And we've also increased commercial activity as patterns of engagements with customers return to normal.

I'd also like to highlight that in line with our strategic commitment to innovation, we've maintained our R&D ratio at five 7%.

And continuing down the P&L adjusted earnings per share declined by 2% to $38 one.

Youll notice of course, that's ahead of the development in our trading profit jewel.

A lower tax rate than in the first half of last year.

An interim dividend of $14.04 per share per share sorry is unchanged from 2021.

Okay.

We generated trading cash flow of $154 million in the period with trading cash conversion at 35%.

That is lower than in 2021 under decrease was primarily driven by higher inventory, which you've seen the working capital outflow of $304 million.

Part of that is that we've increased book buying of raw materials and component to secure supply and mitigate the risk of shortages.

There was also a further effect from the phasing of other working capital movements that we expect to unwind in the second half.

Yes.

And moving to the balance sheet net debt ended the half at $2 4 billion as shown on the slide.

That's an increase of $355 million in the first half.

With 89 million coming from the acquisition of engaged surgical in January and.

$133 million coming from share buyback.

The effect of all of that is that the leverage ratio finished the half at one nine times adjusted EBITDA, which is very similar to recent levels.

And I'll finish with our guidance for 2022.

Firstly, we're continuing to target underlying revenue growth of 4% to 5% for the full year.

The first six months have you seen growth was three 5% underlying even despite the COVID-19 restrictions in China, and we continue to expect stronger growth for our business in the second half.

For the trading margin, we expect it to be around 17, 5% for the full year.

This reflects the prolonged and higher impact of inflationary environment on our business, particularly in freight and it also reflects continuing external supply challenges.

Clearly we are continuing to manage input costs, but we also maintaining critical investments in the future like R&D and we do expect some of that to have an impact on our margin.

And with that I'll hand back to Deepak to cover all action plan.

Okay.

Okay.

Great. Thank you Francois.

So having covered our first half performance similar to share with you My assessment, that's about the nephew and how we are moving forward.

So I'll start with the opportunities I talked about our right to win and that is critical because it gives us the confidence that you'll be able to deliver our growth aspirations as we improve our execution.

In orthopedics that right to win comes from our portfolio.

Our technology on the portfolio, we now have a full product range across hips knees.

Can offer to our customers.

There were major gaps in the past, but they've now been closed and we're now starting to open a gap of our own against peers. For example, with engage some Atlas unity. That's always our product range is too wide and I'll talk about that later.

Are important technologies that are differentiated.

We have the kinematic profile of the journey <unk> with motion closer to the actual me than competitive systems.

We have a proprietary materials technology and <unk> with.

With applications across multiple devices and outstanding long term outcomes.

Does the overall trio hiccup that takes that material and apply such as dual mobility approach.

Trauma, we're completing our highly competitive <unk>.

Plating system with large fleets that gives us a comprehensive.

<unk> use system that addresses all fragrance surgical needs.

And those are robotic enabling technology.

Platform, Corey as far as the economic and portability advantages of Corey.

It was designed from the beginning to be able to work on a range of other hardware and in a range of indications.

We're just at the start of the plan functionality and Youll see start to see unique indications in assets added as early as later this year and in fact as an update to what was just mentioned just overnight.

We got approval for indication organization need that she had telegraphed so.

Really good good development for us as we continue the journey with Corey.

Sports Medicine, you also have a complete offering.

For our customers through joint repair.

Altra, Scopic tower and customer service.

So most competitors either have gaps or just selling equipment without the deep relationships in the segment.

We have leadership positions in the various segments, including being the number one company in enabling technologies and biologics.

And we have scalable synergies with other areas such as through Corey and cross selling opportunities and the other ambulatory surgical centers.

And in wound we have deep broadest portfolio offering solutions across all key wound types, bringing together phones devices biologics I just heard from mud pulse was digital.

Leading negative pressure platform with huge potential for market expansion and.

And we have a catalog of strong evidence across our categories, showing proven clinical outcomes and economic value and that sets us apart from the low cost segment of the market. So.

So let me turn to these two franchises sports route we're demonstrating that as a company we're more than capable of capitalizing on the advantages we have.

As a reminder, as I mentioned, 60% of our revenue comes from these two segments.

Sports has been outperforming the market for many years when I look at why I see commercial excellence built on a deep understanding of customers and a precise targeted approach for engaging with them.

Yes.

And.

There's also a steady stream of innovation across procedures and a successful integration of assets that we've acquired.

<unk> team has done many of the same things as that franchise has accelerated over the last few years.

We've made good use of our structural advantages by focusing on portfolio strengths.

Breath and evidence based selling.

We also executed well on high growth acquisitions like skin substitutes.

And Leif.

And importantly, we've successfully driven margin improvement at the same time.

So both are well placed to continue in the same way.

In sports Medicine, we've refreshed the capital equipment.

The last two years and added a new innovation platform with biologics.

There's still an opportunity to deepen the penetration with <unk>.

Vance treatments with wounds to date, either not being adequately treated or not being treated at all.

Finally, as I mentioned this is an exciting pipeline across these categories.

Turning to orthopedics, that's clearly where our key challenges are.

It had been a long term outperformer, but has trailed the market certainly since 2020.

A key priority for me has been to understand why that happened.

And what we need to do to get back to winning.

The aim in orthopedics.

Is to be a procedure innovator.

With best in class implants.

<unk> and.

And paradigm changing enabling technology on the core platform.

As you know we had a major product up not having a cement less knee hurt us for a number of years.

Fixed for this is in place with the cement less region. That's rolling out now wasn't perceptible and first half results as well as mentioned, we expect that to start to registered in the second half and going forward.

There are more structural factors as well.

However, and that's around execution and supply chain.

In terms of execution has become more complex and less agile that our larger peers.

Both in terms of our portfolio and the ways in which we work.

For example, we're still supporting multiple hips stems a knee systems in parallel when peers are increasingly focusing on just one by one.

One family.

We also haven't recognized that operations and commercial had become disconnected, where they need to be working even more closely together for top class execution. The.

The result is the supply is not always well aligned with the commercial needs.

Finally capital management does not been deficient.

Instrument sets are not always often replaced with full sets et cetera that may not need them and not enough sets elsewhere.

The financial effects as that asset turns are lower than they should be.

And on an investment that's about half of our top capex.

So let me turn to supply challenges in.

In manufacturing and supply chain like everyone else, we're feeling the effects of increases in raw materials and freight across our businesses.

But it's also apparent that our current solutions to the split the nephew specific issues and that's in orthopedics not imbued in sports.

Working fast enough.

We're addressing the root causes sufficiently.

So we've made good progress in addressing the operational issues in Memphis that hurt us in 'twenty. One for example, staffing shortages that you alluded to the fundamental efficiency and reliability of our supply chain is not where it needs to be.

The effect is not just the outright shortages that we saw last year and continuing into this year, but also that reps have spent.

<unk> too much of their time, managing existing customers rather than acquiring new business.

For example in the case of trauma. The majority of our reps are spending 40% or more of their time managing logistics of inventories.

These challenges Werent always there.

Some were made worse by Covid and for others. The disruption of the pandemic had problems as they developed.

We know the importance of getting this fixed and the work is underway.

Building on our previous work the team has put together a comprehensive 12 point program of execution in the last two months, but cover the biggest opportunities for our company.

These are the highest level regaining momentum in orthopedics really fixing orthopedics.

Across recon in robotics and trauma.

Improving productivity.

Throughout the supply chain.

And of course further accelerating sports and mood.

The elements have been worked out in quite some detail and are backed by robust structures for accountability and I'm, taking personal oversight I'll come back to that in a moment.

But for now I wanted to give you a bit more detail on orthopedics and some of the things we're working on.

Our picked out on the slide.

We are rewiring.

Commercial deliveries there.

There are a range of aspects to this but examples are the greater focus on differentiated products and procedural innovation.

Aligned incentives.

More detailed customer segmentation.

Secondly, we're going to streamline our portfolio by reducing the number of implant systems, we support in the category for.

For example in hips, we go from 11 systems down to six.

That will include renewing our sales efforts on the priority brands and will bring benefits from simplification and focus throughout the organization.

We also will improve our asset utilization, particularly with instrument sets, we're establishing clear principles, where we prioritize placements where they use consignment, where we used loaders and rolling out analytical tools to support management. This work has started already.

And we're rebuilding the demand planning process closer collaboration between operations and commercial will address short term tactical supply chain decisions and longer term signals to better align production with market needs. There is a lot more behind this and I'll keep you updated on progress and provide additional.

Detail in the coming quarters.

Turning back to the program.

Some of you notice driven this type of program successfully before.

My experience is a big part of the success of this work will be having the right governance and accountability to ensure that the plans are followed through the changes become a normal part of how we operate.

Yeah.

We already have refreshed leadership in commercial and operations with areas specific experience and track record you already know Brad Canada ahead of orthopedics.

Our head of Orthopedics and sports and of course, the orthopedics leadership team that report into Brad.

On the operations side, we have Paul Connolly, who is our head of our head of operations and last summer we brought in.

Our new head of orthopedics operations and rebuilding the important areas.

Our new head of orthopedic operations has driven similar turnaround ops turnarounds elsewhere, and our head of supply chain and new head of supply chain previously ran an optimization process in another orthopedics business.

And our new site leader in Memphis also has deep orthopedics expertise.

On the Ashworth delivery in terms of these programs. This program that I talked about Theres, a responsible named owner for each area.

<unk> established a high cadence of interactions with responsible teams that support monthly meetings undermining direct oversight.

Each area also have specific action plans with meaningful forward, indicating kpis to track progress and again ensure accountability and transparency reporting with reporting going all the way up to our board.

Getting the full benefit of this work will take some time.

We'll start to see operational benefits from some elements quickly.

Such as asset optimization and further benefits will continue to accumulate over the next two years.

As you've heard me say there are more opportunities than challenges with Smith <unk> nephew is a great company with a great outlook and I believe we're not far away from showing this externally in all aspects of our business.

There are challenges, we need to address but things are starting to light up even in orthopedics, where we're poised for an inflection.

We have an outstanding portfolio already and we're bringing the next wave of innovative implants to market.

The cement less knee the engage uni knee.

Evo is large and the next generation shoulder.

We are enabling technology leadership already with Corey.

And a unique platform extensions to come I talked about one of them just now.

We have a revitalized management team.

We're getting on with revised literally rewiring, our commercial delivery with energy and pace.

ICD is and if it is these initiatives as part of our transformation journey.

As an innovation led portfolio medical device company.

We're aligned with the strategic framework that we previously communicated a strengthen accelerate and transform.

As these foundations are fixed and orthopedics it will free up our people and capital to take much better advantage of a clear right to win.

We will keep investing in innovation and continue with M&A across our portfolio.

Sports Medicine.

And Ian T and advanced wound management are already showing.

What we can achieve when we combine leading technology and getting the execution right.

And I see significant opportunities to invest further.

It's well performing franchises.

I'm truly excited by what's ahead.

And now we'll take questions.

Yeah.

Yeah.

Hey, Patrick was first with his hand up.

Charles.

Okay.

Yeah.

Perfect. Thank you.

Obviously, Patrick Bank of America.

Just three quick ones I guess.

Short term the supply chain that's.

Let's call. It Q2 situation it sounds like Memphis got better so maybe a little bit of details in terms of the.

The other hiccups I guess outside of Memphis, that's the first one second one I appreciate it might be a difficult topic, but mid term margins.

And any commentary that given a tougher jumping off point, let's say given the environment and the last one you touched on it in terms of the orthopedics.

Walk that Youre looking to do.

Am I, taking the rights that.

You feel like you've got the right people in place whether it's below the leadership team on further down and its more about intensity in culture, where do you feel that further down the structure that might be need to be some new people coming in.

Do you want to characterize the two that axa. Thanks.

Thanks, Patrick for the question So first let me.

Talk about the.

The Memphis part of it so as I noted.

In terms of product availability in orthopedics.

We indeed made have made improvements in that that's the biggest issue we face last year was around staffing and we're largely on the other side of it knock on wood right.

Certainly on the other side of stopping anywhere ever.

In this environment, but we've lapped that.

The issues as I find in terms of product available in orthopedics.

As supply is a piece of it but the rest of it is in our hands the connectivity between commercial and operations is not where it needs to be.

Which has led to.

Product availability challenges and one of the highest levels of inventory in this business. So we've got stuff to put it simplistically. It's in the wrong places and what we're doing and we.

We didn't just get there overnight.

Got there over a period of time, because our wiring wasn't working as intended so we understand that the problem now.

We've got a fixed continue to improve our Memphis operations, but we've got to fix this wiring and that's the work that's underway. So that we can better connect demand at an account level to a production plan and in the near term when I talk about how we improve asset utilization were going to embark on a structured program to.

Move.

Inventory and sets from low consumption accounts tend to high consumption accounts. So we've been doing this sporadically in certain places, but we're doing has taken a step back undergoing a structured program and looking at this globally versus kind of optimizing and we believe over the next two quarters that will have a benefit.

By effectively putting steps, where they can be consumed and that will free up some of the.

Some time from our reps related to that.

What I believe we've underestimated and we view this at one point, but somehow we've lost our way to the importance of logistics, particularly last mile logistics.

In orthopedics, so we're embedding.

Logistics experts.

Our commercial teams at the right level of aggregation, let's call. It metro areas. That's the change to how we've operated in the recent past so that will help offload.

All of the logistical burden that's now falling on reps on to people who are trained in this area and we're able to take bring at the right level of focus so that's the first.

Answer to your question so regarding indeed, the difficult topic of.

Second half of this year.

What we see that we had obviously planned for certain level of inflation.

And inflationary effects at the time, we set our budgets.

And our guidance, what we're seeing is significantly higher than our worst case in Ohio. So these models and when we put that into context with other factors and bill we've seen inflationary pressures, it's we've called out freight and distribution, but there are other impacts of that elsewhere as well. So when we look at the add up and we see the macro fab.

Just lining up believes the responsible thing for us to do is to call out how we see the business evolving with the risks. So that's that's why we've taken the approach that we've taken.

Now in terms of the leadership team.

What I want to emphasize of course some of you have met Brad.

We've given them expanded responsibilities. He was previously responsible for just for sports, but now. He is also responsible for orthopedics, but these are distinct organizations underneath that would have called out is significant changes thoughtful changes we've made in commercial in franchise management and an opera.

<unk> not only at the one level that reports into Brad, but a level or two.

Below that.

Many of these folks have.

<unk> just now become effective in their roles I mean, the average tenure for the new folks are between six months nine months something like that right. So they are just now come into place getting acclimatized and starting to really.

Impact the business in the way that we hope for them to be so in my assessment.

Got a good team in place that is experienced.

The drawn from the industry. They know what good looks like and they are bringing those best practices into it and these are people who have joined us understanding.

Understanding the challenges that we have right they want to come into this building because they believe in the product portfolio and I can tell you personally I've been coming to this.

Struck by the strength of our portfolio. This is not what I expected to find coming into it as an outsider into orthopedics and some of the folks who come and joined US from leading companies are drawn to that add to our culture. So I feel very good about the team several levels underneath in terms of the capability the temperament of the culture that.

We want to build.

January Therapeutics also wanted at this point to call attention to the fact that we've got our challenges in orthopedics.

But sports we're working well, we're working well we've got the right culture, we've got the right execution the right folks.

As I mentioned combined with innovation so.

Thank you.

That's about the midterm.

<unk> guidance, which was also some oh, yes, I'm sorry.

Mitch and I are focused on this first half yes. The jump off point of course is is more more challenging.

And we're going into an uncertain, we are in an uncertain environment with unprecedented.

Macro factors, we're focused on doing the things that we need to do to secure that three year plan that we previously outlined so has it gotten harder absolutely. The jump off point is different but having said that the things that are outlined in orthopedics, but things that we're doing around productivity.

And margin expansion and.

Around accelerating wound.

And sports I believe are the right things to be doing then we will see how that plays out.

Yes.

Okay.

Thank you.

John This is clarke from RBC.

So just on the sports med and <unk> in China is that more on the demand side or the manufacturing side.

Still sluggish situation that probably won't improve without a change in approach to tell you that from from the Chinese leadership. So is there any opportunity to it.

Looking ahead the game.

And then just another quick question about guidance, so what level of inflation is already baked into guidance.

The revised guidance yeah.

And what specifically has worsened, particularly in the last two quarter. Thank you.

So I'll take the first one I'll tee off the second one and I'll hand over to endpoints was so good [laughter] I'll give you. The I'll give you all the hard question to ask one question.

So on the first point regarding sports medicine, the impact indeed as from the Lockdown, it's not in manufacturing.

Related topic in terms of the specific impact of China, It's a demand topic right in orthopedics.

GBP. So just wanted to contrast, the impact of China across those businesses.

There are.

Supply chain challenges in wound and in sports as well as it related to electro mechanical components and chips those are supply chain, but they are not specific to China theyre just writ large the costs across the enterprise. So that's the thing that addresses your China question in terms of the inflationary pressures that we see as I.

Mentioned, where we're seeing a higher level than forecast impact is on freight and distribution and thats.

Not just us I mean, it's the nature of our network right.

We feel that as we do.

But it is an industry wide topic and.

We'll see how things evolve, but if you wanted to comment more than that okay. Thank you for a little bit more color I mean, clearly I had spoken and we've spoken about having done a range of scenarios.

You know things have gone on it since we spoke and you know there's been various geopolitical tensions as we know.

Pricing is a key element frightened of warehouses.

Just to give you a feel all cost have gone up by 14%.

Yeah.

So that investment banking is one of the key element the other of.

Of course is painful.

And I know we've spoken about we have done a salary liaising with beginning of the yet but there is a cost to cost of living areas of cost that you can retain people answer would create a nice feeling faint, albeit a smaller component.

And this morning, along with testing that I'm actually my final question quite well.

Raw materials and that is a small element again, you know you were talking about the anthem Microchip suggests now electronics has gone up by 38% I mean, there was no significant shifts.

Many industries are facing and Thats why we have to digest as well and we're you know we're working hard to offset as much as we can and then some of it will flow to the bottom line.

Yeah.

Maybe two questions.

Okay.

Go ahead please.

Thank you if you would like to ask a question. Please press star Lake by one of your telephone keypad I remember to Amit lately.

Our first question comes from Hassan Al <unk> from Barclays. Please go ahead.

Hi, and apologies if these questions have been answered we'd been on other management results calls this morning.

Firstly Deepak thanks for your update I Wonder what you put the historic on the performance of the business down to them.

How do you think execution will change going forward and should we expect a meaningful resumption in M&A activity.

Secondly, where is cost inflation running at for the business.

Where was it for the first half and what is your expectation for the second half and could you break out the margin bridge for the year and if it's just the 125 basis points that is changing or if indeed, it could be anything else.

Perhaps BBB getting worse.

And then finally, just following up on the mid term targets.

Could you walk us through the margin bridge to 24, where you see the key opportunities and the key risks in light of what you've talked about today. Thank you.

Sure.

Colin I once was for the second part of your question, but let me take the first here.

Hassan.

So as I indicated in my presentation.

The execution related.

Issues have been in orthopedics.

In sports.

Boon <unk>.

We have been executing well, we've got a great portfolio and we've got.

The results to demonstrate that.

<unk> as I look back on it it's.

It's a.

Fundamentally we've had in the past.

Portfolio gaps.

That has been set.

US and have impacted our commercial performance as I mentioned now we've closed those gaps we've got a full range in hips and knees across families, but we've got a full range and in Korea. We've got a platform. That's still in the early stages of in terms of functionality and indications that were.

Adding to it.

Most recently overnight so thats a change from the past, where we now have a portfolio and we've got enabling technologies to drive growth.

The other piece of this is the connectivity between commercial and operations that account for the product availability challenges that we see that really has hampered us it's hampered our growth as our reps focus on inventory and logistics challenges and serving existing customers rather than.

Going out and acquiring.

New business. That's one example of the impact of that the second is.

The fact that we've got high levels of inventory of that product.

In the wrong places if you will right. We haven't been good we haven't had the process of ensuring that we're matching our supply and availability to customer needs. That's a process topic. So it's an end to end topic that connects customer demand to our production plan and be havent gotten that.

Right.

I don't believe you wherever particularly good at it.

But we were okay for the scale of business, we had COVID-19 really impacted that and Thats had a significant impact on us over the last the last couple of years. So the good news for that is we know what the issue is this.

Begun to work on addressing the issues as a process thing theres not some big.

Spend we've got to do Theres not some big.

Structural barrier to us improving that and we know what we need to do.

On a good path to getting there right. So that's the that's the second piece of it that are that we're working on.

So I think I addressed your.

First part of your question on inflation I think he is looking for a breakdown in terms of the levels I'll turn to enforce wants to kind of comment some of it which recovered in the last question, but perhaps you Werent you won't answer that part of it and Francoise. If you wanted to in terms of them. There were two parts to your question Hassan.

Morning, and two parts the first around the inflation in H, one and H Chan as you can see just looking at our trading margin and they have an impact on the trading margin is down year on year and when you look at the elements in the P&L and inflation in our cost of goods line.

As a parent as you would think because actually on the face of their own question. Argentina is increasing there is inflation starting to feel free as we are selling on the chaos that has.

It's been built on a higher cost base nicely, but that's offset by the timing benefit of our hedging strategy from a file.

A foreign exchange perspective, but you can see the cost increases in SG&A, which as I said earlier, which is significant and that's why we see the freight and warehousing costs. We've talked about so that has an impact on H, one and we expect that to continue to increase the nitrogen potentially a phase III. The Cogs line. So you know when we.

Pull all of that together and to your question what does that mean for the full year. We had talked about three I think leave us and you know clearly when you gave the initial guidance, we talked about inflation being a headwind on <unk> hundred 25 basis points I talked about and we talked about quite frankly as you say the GBP.

Which we mentioned that 60 basis point GBP is about our current estimate.

And about the same positions will be slightly better.

Because of the delay in the first few months of the year. So that's not a material change in the fourth yeah. What has changed is really all assumptions around inflation, which is probably 100 basis points higher than what we have seen and that's it.

Any lab, where we are on and the reason for the change to our guidance now offsetting that we how we all and we have taken price increases seen in our price.

Is there any though we can push but as we've always said, we can offset all of the price increases and we are also continuing you know on the savings on the productivity improvements we have planned.

The rail link and the changes that the macroeconomic environment and the inflationary pressure.

And therefore that it's back in the meantime, the items or any opportunities as you see and then get back in.

That was a lot of.

That's right I mean, just to repeat Hassan what I, what I indicated earlier.

Jump off point is is of course different.

Now maybe its forecast.

In terms of the steps that we need to take to achieve.

Our midterm guidance of 21% margin.

And 4% to 6%.

Underlying organic growth.

<unk>.

Discussed with your take in terms of fixing orthopedics.

And enhancing our productivity and accelerating sports and movement are the things that we are working on are the levers that we have to pull in order to get there and what we now have as a program under which the steps will be executed in order to get there. So we're focused on doing that.

Asked about M&A.

Previously we had communicated.

Our strategic framework of strengths and accelerate and transform that M&A would be a component of that and I do see M&A being a component of it as I mentioned.

In some ways, we're a tale of two cities to invoke.

Analogy b.

Have to fix orthopedics, we'd know what the issues are working at pace to fix them would then be have 60% of our revenue base to two out of our three franchises. They are actually working very well.

Were all the elements are combining and working as they as they assure them. So we see opportunities to further invest behind that.

Thank you that's very helpful I guess.

What I was trying to understand is the margin bridge between the 17 and a half and the 21%.

By 2024 are you able to unpack.

The key components of that please.

Sure I think this is something that Oh.

Give you a top line answer maybe you follow up with you.

So.

The big contribution.

There is as the impact of of growth as I mentioned from orthopedics coming back.

<unk>.

222 levels that we've targeted b.

We see as we expect a step up in the second half of the year. Some of that is the seasonality of our of our business right.

But in general on the back of not only seasonality, but product launches, we expect to see a step up in growth. So that's one part of it and we see that continuing.

As we see the full impact of things like our cement less knee getting traction in the market Corey placements driving for the utilization of it.

Pull through of implants.

Bring that forward.

Engage our unique compartmental knee.

Getting traction in the market. So there is quite a bit when I talk about doctors lining up.

Not any one factor that's that's particularly huge is the combination of these factors of the add up of these factors that I believe is going to drive the inflection point in orthopedics. So the big component as we walk across from 17 five into 'twenty. One is the impact of <unk>.

And then of course in terms of margin, we need to see in productivity.

Continuing the work to drive efficiency into our factories, the big opportunities in Memphis, as I mentioned Theres good progress along the way, but it's I didn't mean to signal that all the work is done and it's definitely continued impact.

The initiatives, we have in place around productivity that we expect to see it.

And then of course.

<unk>.

But I talked with the opportunities in orthopedics, we see really good opportunities in wound and in sports medicine on the wound side as I mentioned.

<unk> into the company I'm struck by the opportunity to expand the market to drive penetration.

Some of our products for example negative pressure broader adoption than than is currently the case.

Procedures, and we're very well positioned to do that and in the portfolio breadth. We have when you look at film and so when you look at dressings and we look at.

The biologics those are skin substitutes those are all great products, great outcomes, great clinical data that underpin them. So we see two opportunities to accelerate and I've I've called out negative pressure previously so thats. The other aspect of this and the add up of all of these Ah I believable.

If we execute this right, which we are.

Well on the way to we will get to the 21%.

Okay.

Perfect. Thank you.

Sure Hassan I.

Thanks Julien.

Our next question comes from Julien <unk> from BNP powered by Julian. Please go ahead.

Good morning, Deepak good morning, Thanks for taking my questions I have three if I may So first of all you are right. David in your comments that you would expect growth in the second half to be much stronger than in H. One. So it would be interested if you could walk us through what are the main areas in terms of.

Fedex Sports Medicine, and when management that would explain the setup that could be helpful. Dave.

Second question relates to the recent announcement by one of your main competitors in wound management.

That they are thinking about spinning off the <unk> business.

If you could either photo.

Situation, where such a company starts to be more aggressive on pricing to us.

To make the Brian look more beautiful.

What I mean, so are you worried that something like this could happen in the next few quarters and an impact of the recovery in your <unk> business and the first question is a housekeeping one just curious what was the FX impact on your margin in the first half and what we should factor in for the full year. Please.

Great Julien Hi.

So the growth in the second half maybe ill have endpoints, let's walk you through a bit of the detail that we see.

But just to kind of frame frame the answer for for <unk>. The.

The levers I mentioned, just just previously on the on the orthopedic side.

What we see is continued play.

Placement of <unk>.

<unk> of course, we're tracking not just placement robotics.

Is it really a means to an end it's ultimately to enable.

Procedures.

To drive drive implant so it's.

Thoughtful replacement of.

Corey.

And the impact not only of engage Uni.

The lesion types lock.

On their own but also the impact of pull through of the rest of the portfolio.

So these are in orthopedics.

Three of the drivers Evo is large.

Launched recently.

And so that completes our brings our <unk> family.

To a place where we can sell the portfolio of course, the impact of that will be felt over time, we'll start to see it in <unk>, but really the bigger impact will be up into into 2023.

So that's the.

Orthopedics picture writ large.

And in sports and <unk>.

Let me comment on sports or set a lot about.

<unk> B.

Highly highly differentiated offering within sports we see that.

As a continued driver of growth in that business. We also have great products a great portfolio as I mentioned, we are the leader in enabling technologies there and then in the tower. So we continue to execute on all elements of our portfolio in sports, but I did want to call out with Jonathan So.

Those are the factors.

If you want to color that endpoints was.

Great.

Or no.

Okay.

So the impact of <unk>.

The announcement of course, it's still relatively hot off the presses.

So our top line is.

We are.

I'm going to be monitoring the <unk>.

<unk> commercially obviously carefully in.

In the near term.

We expect to go about our business and go about executing as we have in terms of price pressure, but I wouldnt want to speculate how that's going to unfold, but.

I see.

Strongly belief in the differentiation of our portfolio our strength comes from the breadth we have across all the categories that I mentioned, but actually within the category.

Each of these categories and the differentiation that we have in some of our not only the lead products, but the second and third tier products.

<unk>, that's a value judgment, the secondary and tertiary products within each.

Each category are also themselves differentiate it.

Confidence in our portfolio I'm confident in our differentiation and I'm confident in our team's ability to execute where we have been doing quite well in that regard, but obviously, we'll be monitoring that.

The posture and how things evolve there.

In the field.

And in terms of FX.

Impact.

Thank you.

You can take a you made a comment already but I'll, let you cover that a bit and Francois.

In the first half there was a pause.

Hum.

Our greatest mountain in particular, as we see the timing benefits or the fact that we had done.

Mind, everyone you know 50% of our revenues are in U S.

So actually 75% of our cost base and then you asked on it.

Yes.

And we are hedging in your 12 month in advance.

Some of those costs, so cleanly as menthol.

To strengthen that quickly we do see impacts so to say the revenue much faster than on our costs.

Hedging protects us for a period of time of course that starts on winding at some point. So when we look at me.

The effects for definitely yeah, wed, probably expect solvay neutral or slightly positive impact.

Painful costume effects I'm trying to get an FX I'm going to notice the way they could anything so at this point in time with Cowen perfect. Thank you.

Thank you neutral shall we say and as you look into 2023.

We estimate a headwind of about 40 to 50 basis point on a trailing launching in 2023, so sorry <unk>.

And the question.

Okay.

Thank you and I hope that answers your questions Julien.

Thank you. Our next question comes from Chris <unk> from Credit Suisse. Chris. Please go ahead.

Thank you operator, good morning, Deepak hospitals I have two question.

You know I'm a bit surprised by the magnitude of our stakes in all these orthopedic businesses require.

Could you maybe elaborate on how that's going to impact your midterm growth ambitions I think no. They all still 4% to 6%, particularly in light of that you intend to streamline your recon portfolio and did I hear that right that you are aiming to reduce a number of entities.

12.

I think it probably has no quite a meaningful impact on the growth outlook and I guess the need will be similar could you maybe elaborate on that.

Specifically in orthopedics and maybe in general how would it affect your overall topline growth ambition.

Sure.

So.

Our growth ambition remains unchanged what I'm describing is the how.

We intend to get there.

In terms of the orthopedics side.

You mentioned the.

The.

The reduction in family on the hip side and needs. We don't have quite that many systems right. So the the magnitude of the change is going to be given that theres going to be work required to complete our family. So there's this is not a lever for the next two quarters or three quarters. This more over the medium term.

That we've talked about but in terms of our growth aspiration in orthopedics.

Strongly believe with the actions that we've outlined we are going to get there and even in this quarter.

Despite the impact of <unk>.

China, we were on the low end of that corridor that we indicated so.

What I want to highlight is or we expect to be on the low end of that quarter.

So the actions we've described are the means.

By which we can achieve.

The growth aspirations that you've laid out.

Okay, and then maybe Scott.

So I mean just to.

Accentuate again, thank you Anne Francoise.

The points that I've made in terms of the factors lining up.

We see great potential in Corey.

As a platform that.

Is a different paradigm.

We're very pleased with.

The the reaction of feedback from surgeons, who used it of course, you get a spectrum of opinion.

But we really are.

We're quite encouraged by the early results.

And I just want to remind everyone that we are at the start of that journey.

So we've added indications.

Two it it's also about adding functionality.

Not only in the NIM and the knee, but also in the hip.

Where we're really the very very beginning of adding functionality of encore for the hip so the hep remodel or that be.

Launched last quarter is the first step along that journey so.

That innovation and it is important that we maintain the level of investment that we've called out in innovation is the lifeblood of our industry. It's core to what we do at Smith <unk> nephew, we've got a great set of differentiated products across our franchises on the back of innovation that we have done over the course of time and so we.

Plan to continue that investment that will be a driver for growth. So I talked about Corey and of course on the implant side.

It's the.

It's the engage.

Unity.

As lesion costs locked in of course journey to that.

<unk> continues to lead the way <unk>.

As a highly differentiated technology.

Data that we have the five and 10 year data on senior independent registries, whether they come from the U K or Australia are excellent I mean.

In the Med Tech business in my 20 years in this business you can count on one hand, the number of <unk>.

Opportunities you have.

To talk about data that are that differentiated with auxilium and and of course different fields have different.

The role of data in terms of utilization, but having said that we see really differentiated elements of our portfolio to drive continued growth in that.

And the orthopedic side, so I hope that answers your question Chris.

Thank you. Our next question comes from David Adlington from Jpmorgan, David. Please go ahead.

Good morning, guys and also reiterate my apologies you may have covered this already but just with respect to that 24 target of 21% and then coming back to the status of note in terms of the margin bridge.

17, 1% this year.

It sounds like you got 40, or 50 basis points headwind from currency next year to the margin.

You've obviously got some probably some underlying inflationary pressures next year as well, but it was split some offsets with respect to cost savings and probably less dilution from the acquisitions.

Yes.

The Big question is if you get to 18 now of next year.

Lucky that leaves you with a 300 basis points jump into 'twenty one.

Yeah I can do this 20 odd years I can't think of a company that's done that sort of margin improvement in one year endometrial company. So any sort of comfort you can give us around that where that's coming from.

And secondly, I guess bigger picture one for you Deepak you came into the role.

Beginning of this year and I think there was some.

Some messaging given that you've sort of bought in todays topics I just wondered if you thought that they would become a bit of a millstone around your neck.

[laughter] well David.

Look.

There is there is no question that there.

There is a bigger jump off point, whether you look at it from 'twenty two into 'twenty, three or 'twenty three into 'twenty four.

Equally we're facing.

I would say relative to when the plans were put in place the scale of headwinds macro headwinds that we're getting into are significantly higher inflationary pressures being one of them.

Continued pressures on supply chains from all sorts of macro factors.

Significantly higher than anything we could have anyone could have forecasted in 'twenty. So back when the plan was put in place. So there's no question that we're going this plant now is.

Being executed on in a different macro environment that was envisioned.

Having said this.

Yeah.

I indicated when I first got here that I've embrace the strategy and embraced the set of targets with my own and I meant what I said.

What I've done over the last 100 days or.

90, some odd since that since the last time I was before you.

Is it really dig into the business and understand how we're going to get there right.

<unk> that we have thought about in December .

I needed to be refined.

Would it be.

Rethought in order to go about achieving that target that's been the focus of my work.

No College.

The delta and the steps that you've taken.

Much of what we're doing are not incremental changes.

In orthopedics is a fix right. It was a conscious choice of words, because it's not working as in orthopedics business should.

So it's not a linear kind of.

Path from here to 24.

The fixes that we expect that we're putting in place I expect to pay off in non linear kind of ways. Once we get the wiring right.

The commercial and operational teams working as they should and put the processes in place.

Any orthopedics business should have and we've got the people who know what good looks like who are kind of executing on these things I expect to have non linear jumps in terms of our performance in orthopedics that drives us.

The portfolio piece of it is key again.

We didn't have a full portfolio. We now have a full portfolio, we need to execute now with that full portfolio and in.

And the process that's in place so I expect the.

The benefits from that to accrue.

In a non linear fashion.

In.

Sports and in wound.

It's a it's a different story of course building off of an already strong base. So there is perhaps a bit more.

Kind of I don't want to say forecastable, but perhaps you can draw more of a straight line from where we are to where we where we expect to be so there. It's about really kind of changing the trajectory, but you already have in hand.

Things that work so.

Is it going to be easy no am I going to be sleeping.

Well at night every night between now and 2024 I can honestly say that I'm gonna be expecting this stuff every.

Everyday, but do I feel that the actions we've outlined are the ones that didnt get us there absolutely.

So I had the opportunity to come here and talk about a different picture right and I'm not doing that today, we're talking about this years and not about everything else in that.

It means that I've got the conviction.

But we can get there with the actions that we've outlined.

Alright, I think well.

Call. It a day that thank you very much.

Thank you. Thank you. Thank you very much.

Okay.

Okay.

Okay.

Yeah.

Yeah.

Hmm.

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Okay.

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