Full Year 2022 Smith & Nephew PLC Earnings Call
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Speaker 2: So good morning.
Speaker 2: And welcome to the Smith & Nephew full year 2022 results presentation. I'm Deepak Napp, Chief Executive Officer and joining me is Anne-Francois Nesmes, who's the CFO of the company.
Speaker 2: So I'm pleased to report a good finish to 2022, underlying growth rate accelerated versus the first nine months, with all of our franchises contributing. We've continued to outperform in sports and balloon management, which generate together 60% of group sales.
Speaker 2: We're still early in our work to fix orthopedics, and although growth improved there too, it still takes on time for us to get to where we want to be.
Speaker 2: The company is well positioned going into 2023 and we're transforming the way we're operating Smith & Nephew through our 12-point plan, driving greater rigour and execution as we deliver our strategy for growth.
Speaker 2: Delivering the 12-point plan is progressing and our KPIs are already moving in the right direction and I'll share some of that data with you later. But with improving operations and a good exit to 2022, we expect both faster growth and margin expansion in the coming year. We're also updating our midterm targets.
Speaker 2: On growth, we feel very good about the outlook. We're continuing to execute well in our outperforming businesses. And the fix of orthopedics is underway and we're delivering a high cadence of innovation.
Speaker 2: For the margin, the macro environment has been more challenging than me or anyone else expected back in 2021. Inflation has been higher and global supply chains have stayed disrupted for longer. And our midterm goals reflect offsetting most of that additional pressure through a range of cost actions.
Speaker 2: However, it's also meant moving the date of our margin target back by a year. Shortly, I'll cover how we'll deliver the targets of consistent 5% growth or above, and at least a 20% trading margin by 2025. I see the delivery.
Speaker 2: and more importantly, the fundamental improvements we're making required to achieve them as the first step to our ambition to transform Smith and Nephew. But first I'll begin with the highlights of our four year numbers. So revenue was up five.
Speaker 2: That was at 5.2 billion and that's 4.7% growth on an underlying basis with one less trading day in 2021. Reported growth was at 0.1%.
Speaker 2: Trading profit was 901 million, which is a 17.3% trading margin, and we generated $444 million in trading cash flow, which is a 49% conversion.
Speaker 2: Adjusted earnings per share grew 1.1% to 81.8%
Speaker 2: of proposing an unchanged dividend of 37.5 cents for 2022.
Speaker 2: I will not pass you to end once was to go through the detail of today's results before I come back to discuss our outlook in more detail. Good points ?????ates family interactive educational torh
Speaker 3: Thank you Deepak and good morning everyone. I always wonder why nobody sits on the first row, so hopefully you can see me behind the lecture here. So I'll start by covering the fourth quarter revenue which was 1.4 billion dollars.
Speaker 3: which represents a 6.78% on the line growth. I think back said, all three franchises contributed to the strong finish. And the factors behind that included reduced BPP headwind in the quarter and the contribution of new products.
Speaker 3: We've also made progress with the availability with product availability which has limited our growth in recent quarters. Our internal supply chain performance is starting to improve and while there are still challenges in the availability of external inputs like semiconductor, resin, sterilization capacity, we've seen some easing.
Speaker 3: Looking by geography, the performance was broad-based. The US grew by 4.8%, other established markets grew 7.3% and the emerging markets grew 12.1%.
Speaker 3: Acceleration in emerging markets reflects largely a return to growth in China, which represents 6% of our group sales. And while VBP was still a headwind in Q4, there was also an easier prior comparator due to the inventory adjustment and the provision that we took back in Q4 2021. The renewed COVID waves in China as the country changed its approach to the global economy has been a major part of the global economy.
Speaker 3: Now this is the part of our business which is impacted by VBP. Without China, growth in the quarter would have been 1% higher in me.
Speaker 3: 2 percentage points higher in HAPES and 0.4 points higher in trauma and extremities.
Speaker 3: That aside, innovation across the portfolio is a key part of our picture and our performance. Recent launches are already contributing to the growth and together with our robust pipeline are improving our growth outlook for the coming years. In Heaps, I'm Neve.
Speaker 3: We've advanced with our plan to improve our performance, including new product launches. First, our cement-less total knee, Legion Come Salat, continued to ramp up with strong sequential grace.
Speaker 3: With this as an option, we have an impressive knee portfolio. We have the only kinematic knee.
Speaker 3: We have the OXINIUM Surface Technology.
Speaker 3: We have cemented and cementless options and the robotics platform uniquely covering all of total uni and revision knee surgery. Our implant availability also improved over the previous quarter.
Speaker 3: Overall growth is not yet where we aim to be, but we are in a better position here that we were when we initiated the 12-point line and we expect further improvement in the coming quarters.
Speaker 3: Other recon, which includes Cori, was faced by component availability for much of the year. However, we still made progress in 2022, both in developing the technology and expanding the utilization of Cori.
Speaker 3: We had a series of major FDA clearance including a unique revision indication, the unique digital tensioner, the HIP software and porous knee.
Speaker 3: And we expect a similar cadence of clear answers in 2023. This is part of our robust pipeline of innovation that will continue to drive growth in the coming quarters.
Speaker 3: On penetration for Cori, we also expanded our install base by around 25% in the year and the volume of new procedures by around 50% globally. And we should see adoption accelerate in 2023 as supply improves and we expect our install base to grow by more than 300 units in the year. And finally trauma and extremities return to growth at 0.6%
Speaker 3: short-term headwind in the quarter.
Speaker 3: Now moving to sports medicine and ENT franchise which grew by 9.2% despite a challenge supply chain. Joint repair grew 11.5% with double digit growth in both shoulder and knee.
Speaker 3: And Regenet N has been a multi-year driver of growth. We've continued to invest in new indications in new regions and evidence, and we're now in growth, we accelerate.
Speaker 3: There's also significant potential for regenerating as we launch in Japan in China and India in 2023.
Speaker 3: 80 grew 4.2% driven by both the core 80 and werewolf asyl and a softer prior comparator. And ENT grew 1.7% as the post-COVID recovery in tonsil and adenolic procedure volumes continued.
Speaker 3: As I said earlier, this is in the context of headwinds from semiconductor, resin shortage, sterilization capacity constraints, so a very strong performance.
Speaker 3: Finally, in advance, food management grew 8% underlying and the recent pattern of balanced performance
Speaker 3: in the quarter, across all regions and all categories continued. In advanced wound care, Europe and Asia-Pacific showed particularly strong growth as the skin substitutes business in bioactive.
Speaker 3: Advanced wound devices grew 14.9% with double digit growth from our single-use negative pressure of productive home.
Speaker 3: And our traditional platform, Renesys, is another product that was limited earlier in the year by component availability.
Speaker 3: The situation improved in Q4 and Renasis returned to more significant growth as a result. And we also reached a significant milestone as we obtained 510k clearance from the ATA for the Renasis Page in the US.
Speaker 3: Now I'll move on to the detail of the full year financials. Revenue for the full year was $5.2 billion, up 4.7% on a underlying basis compared to 2021. Revenue was flat at 0.1%, reported revenue, sorry, was flat.
Speaker 3: at 0.1% due to foreign exchange headwinds of 460 basis points given the strength of the US dollar compared to other major challenges. As you see on the chart here.
Speaker 3: Sports medicine and wounds shown 6.7% growth, a 6.7 and 6.4% growth respectively, and also PDX3 1.9%.
Speaker 3: This full year growth rate also reflects one fewer trading day than in 2021 as Deepak mentioned earlier. Now having covered revenue in detail for Q4 and the full year, I'll now move to the summary of our P&L before expanding on some of the key elements of the P&L. The underlying growth profit was 3.7 billion resulting in a...
Speaker 3: and other movements in the inventory valuation.
Speaker 3: The STNA line here in the P&L reflects higher inflation and freight and logistics, as well as sales and marketing expenditure levels returning to normal after COVID. The new profit was $901 million with a trading margin of 17.3%.
Speaker 3: and I'll walk you through the evolution of the margin. So looking at slide 13, you'll see a more detailed explanation of our trading margin. The major headwind for the year in 2022 came from the China VBP and the input cost inflation.
Speaker 3: On input cost, if you remember, we had guided initially 225 basis point headwinds at the start of 2022, but the pressure increased as the year progressed and ultimately came to 210 basis points for the full year. And we worked hard to offset the headwinds.
Speaker 3: Notably, we were able to drive price increases, improving margin by 80 basis points. And then we had quite a lot of activities. On the slide here maybe it's too much of a summary, but there's a lot of moving path behind the net pricing and the net cost savings you see here of 130 basis points.
Speaker 3: In particular, the 130 basis points reflect the benefits of significant cost reductions and operating leverage of setting labour inflation.
Speaker 3: Now looking further down the P&L, adjusted earnings per share grew by 1% to 81.1 cents and that's primarily driven by lower net financial expenses and a lower tax rate due to adjustments in respect of priorities.
Speaker 3: And looking at our cash flow, we generated trading cash flow of $444 million in the period with trading cash conversion at 49%, which is disappointing and lower than our typical level.
Speaker 3: We do expect our trading cash conversion to return to more normal historical levels in 2023.
Speaker 3: The change in 2022 was mainly due to a higher inventory, which you can see in the capital outflow of $477 million.
Speaker 3: And we want to illustrate and explain the change in the inventory and what growth the inventory growth. The largest single contributor of inventory growth was strategic raw material buying as part of managing through the unproductive vulnerability of some materials. You can also see here the impact on inflation, on the average value of our inventory.
Speaker 3: of 2021 was already too high and particularly in orthopedics. This is why inventory is one of the key focus areas in the 12-point plan and we expect to reduce inventory days as we move to 2025 with pay-dee progresses each year. So to conclude on the financial net debt ended the year
Speaker 3: dollars from a share buyback.
Speaker 3: The effect of that is the leverage ratio finished at 2 times adjusted beta, which is similar to recent level and in line with our target of 2 to 2.5 times.
Speaker 3: And now I move to the outlook for 2023. You will assume this morning that we're guiding for underlying revenue growth of 5 to 6%.
Speaker 3: Within that, we expect continuation of the above-market growth in sports medicine and advanced wheel management, and we also expect further improvement in orthopedics.
Speaker 3: This will be driven by better commercial execution and growth from new products as we continue to implement the 12-point plan. There will be phasing effects through the year. We will be seeing the renewed COVID waves in China impacting surgical volumes.
Speaker 3: and therefore we also still have another quarter before we fully lap VDP during Q2. So that means that Q1 will be slower with acceleration as the year progresses and the China headwinds subside. On trading margin we expect the 2023 trading margin.
Speaker 3: We'll continue to see margin headwinds from the macro environment which remains uncertain.
Speaker 3: However, we more than expect to offset those headwinds. That will come from a combination of positive operating leverage and productivity improvements.
Speaker 3: on the 12-point plan, including specific cross-pactions that we're setting out today.
Speaker 3: Looking at the detail on the chart on the right, you can see that transactional effects will be a headwind of around 100 basis points from the dollar strength in 2022. There's also continued raw material cost inflation and some of that is a delayed impact as we work through inventory.
Speaker 3: that's based on higher purchase prices. We partially offset this through pricing actions and product improvement in cogs and manufacturing. Higher than usual staff cost from wage adjustments in the second half of 2022 and the usual merit increase in 2023 will largely be offset by commercial and GNA savings and revenue leverage will provide the remaining offset.
Speaker 3: So taking all these variables into account, we expect trading margin expansion in your
Speaker 3: We've also updated today our midterm guidance, and I'll hand you back to Deepak to cover that.
Speaker 2: Thank you, Francois. Because, you know, we issued the midterm guidance.
Speaker 2: last about a little over a year ago. And since then, a lot has changed. The macro environment has been more challenging for everyone with higher inflation and longer disruption, as I said earlier, to our supply chains. And that continued all the way through 2022.
Speaker 2: We've also made progress. We've started the implementation of our 12-point plan. That's fundamentally transformed how we operate as a company. Our new mid-term goals reflect both the changes in the macro environment.
Speaker 2: over the last year and also the actions we are taking to offset the pressures and drive higher top-line growth. On revenue, we are now targeting underlying growth consistently at 5% or higher.
Speaker 2: that's above historic levels. And in a moment, I'll show you the building blocks of how we are making that change. We're also targeting trading margin in excess of 20% in 2025 and beyond.
Speaker 2: Clearly, the margin guidance implies a nonlinear path over the next three years, thus due to the higher inflation headwinds as assumed in 2023 and productivity gains from operations coming more towards the end of the period, particularly around manufacturing.
Speaker 2: We do still expect to make year-on-year improvements throughout this period. That's only the first step. From beyond 2025, we'll be in a fundamentally changed position. We'll have a choice of how much we want to reinvest on more growth opportunities and how much we allow the flow into further margin expansion.
Speaker 2: Before I go into the detail of how we do that, I just want to anchor and remind you of our fundamental competitive position. I have no doubt that we have the right to win in all pre-Franchisers.
Speaker 2: In orthopedics, that comes from a full product portfolio and technology. We have highly differentiated implants, particularly in knees and also with auxinium, as Anne-Francois mentioned.
Speaker 2: We've got platform technologies robotics with unique indications and assets on our query platform. In sports, we have a full offering with leading positions across joint repair, enabling technologies and biologics.
Speaker 2: There are also clear synergies between orthopedics and ENT, for example, in the ASC channel. And in Moon, which is the heritage of Smith and nephew, we've got the broadest portfolio across all segments.
Speaker 2: clear synergies between orthopedics and ENT, for example, in the ASC channel. And in Moon, which is the heritage of Smith and nephew, we've got the broadest portfolio across all segments. With biologics.
Speaker 2: devices, films, and dressings. You've got a leading position in negative pressure. We also have strong clinical evidence for our portfolio that sets us apart from the value segment of wound.
Speaker 2: Our 12-point plan that we introduced in July of 2022 is fundamentally changing the way we operate as a company to drive that higher growth and also to improve our productivity. It's central to how we'll be addressing our remaining challenges.
Speaker 2: We've been held back by supply chain constraints that resulted in product availability issues and by execution and that's mainly in orthopedics.
Speaker 2: Sima that is of course related to external factors like semiconductors particularly impacted core
Speaker 2: But a lot of it actually is in our hands, both on the growth side and on profitability. Slide 22, that's the slide that we're on, summarizes the initiatives as we set out back in November .
Speaker 2: Seven of these levers are primarily growth enablers from strengthening our commercial foundations particularly Northopedics.
Speaker 2: driving each franchise and accessing the cross-franchise opportunity that I mentioned in ASCs.
Speaker 2: The other five are around productivity across our manufacturing, procurement, and value and cash processes. As we walk through the detail of our growth and margin bridges up to 2025, you'll see each of these initiatives contributing.
Speaker 2: are around productivity across our manufacturing, procurement, and value and cash processes. As we walk through the detail of our growth and margin bridges out to 2025, you'll see each of these initiatives contributing. So I'll start with revenue.
Speaker 2: While we're targeting consistent 5 plus percent underlying growth, this slide puts that into context of our recent history. So 2020 and 2021 were dominated by COVID disruption. But if we looked to the four years before that, our average growth rate was a little bit under 3%.
Speaker 2: Our mid-term guidance therefore represents a move to consistently higher rate than Smith and nephew is delivered in the past. So at point of three building walks that will help us get there, first, we're fixing orthopedics.
Speaker 2: As we rewire our commercial delivery, we'll more consistently realize the full potential of our technology than we really have been able to manage up to now.
Speaker 2: The second building block is continuing the strength of sports medicine and our Wound Management franchise. Sports has been high performing for many years now, but the recent performance of Wound is a clear step up from where we were in 2019 and prior.
Speaker 2: Just maintaining this outperformance from here therefore contributes to consistently higher growth rate from the past. And thirdly, there's the return on our renovation. The company took a strategic decision.
Speaker 2: over the last several years to increase our spend in R&D. We're now seeing the return of that higher investment coming through in the form of a revitalized portfolio and a greater growth combination coming from new products.
Speaker 2: So I'll get into each of these in turn. On orthopedics, the process of fixing the foundations is now well underway. We've said from the beginning that this would take two years to work through and work through skin care to make this a bridge forht a. Inowner in the third portion would HAAnd
Speaker 2: But our KPIs are already starting to move in the right direction, with early and ongoing improvements in product supply.
Speaker 2: Two metrics are shown on the slide, but there's a bunch of others that we look at, of course, internally. The first is simply the value of overdue orders.
Speaker 2: We had already brought that down in Q3 and I made mention of that in our release. There was even further reduction of more than 20% during Q4.
Speaker 2: In total, orthopedics overdue orders are now sitting more than 35% below the peak in the first half of the year. The second metric we look at around availability is LIFER, which is line item fill rate, and that measures the percent of customer orders that are completely filled.
Speaker 2: line items and all of that's completely felt. So it's an indicator of how well we're meeting demand. Now these are bumpy data because we tend to look at this on a bi-weekly or a monthly basis. So there are variations from month to month. There are impacted by external factors. For example, we had an ice storm come through Memphis.
Speaker 2: the last part of December and that's significantly impacted the numbers for that peak and the peak beyond. But it is important that we're taking a look at this at a high frequency. But what you can see is non-set life of orthopedics is on an improving path. It's not a target yet, which would target a set of what we consider to be in good industry practice. But we've made
Speaker 2: more than 75% progress towards the level from the croff that we saw in 2021. So within that, before the prioritized our strategic products, and these are in better condition again. So US LIFE for our journey to NE has made more than 80% progress from croff to target.
Speaker 2: And both our PolarStem and HIPS and EVOS, small trauma, in trauma, have reached their targets already. There's clearly more to do to make product availability more reliable, but the early KPIs are encouraging. And as supply improvements continue, sales rep time will be freed up and customer confidence will continue to build.
Speaker 2: and we believe that we'll be in a better position to pursue new business. The continuing strength of sports and the second building block and stepping up our growth rate.
Speaker 2: Sports has already been outperforming the market for many years, as I noted, and we expect to continue that. When I look at the reasons for the on-product performance, they're sustainable and fundamental.
Speaker 2: There's commercial excellence built on deep understanding of our customers, established customer relationships, and a steady stream of innovation across procedures. New segment development and biologics.????????????????????
Speaker 2: we were just getting started, and of course successful integration of acquired assets.
Speaker 2: Looking forward, we're continuing to deliver a high cadence of new products across our major categories of knee and shoulder repair including fixation technologies and biologics.
Speaker 2: and of course the adjacencies in the orthoscopic tower. In short, the innovation pipeline continues to be productive and broad, feeding into a commercial channel that executes at a high level. That all gives us confidence that the franchise can keep delivering more of the same.
Speaker 2: And that's Moon Management's art performance is more recent. It was in 2021 that this franchise moved to above market performance and higher growth than in previous years. That means that just maintaining performance from here is going to be additive to the group.
Speaker 2: growth rate compared to recent history. And again, there are good reasons to expect that the franchise can sustain and even build on the recent growth rate.
Speaker 2: Firstly, the step up in performance has been based on sustainable and fundamental drivers. Part of that is commercial execution. The organization is focused on our differentiated strengths, such as a unique portfolio breadth among our larger peers and evidence-based selling that differentiates us from the smaller valued players.
Speaker 2: There's also an attractive portfolio mix. We have a leading position in the high growth negative pressure balloon therapy segment.
Speaker 2: We've also driven bioactive growth structurally higher by scaling up and successfully integrating our skin substitutes acquisition from 2019.
Speaker 2: And there are still opportunities for further growth, again, particularly in negative pressure. In the traditional segment, we can win more share. Today we have less than 10% share of the $1.7 billion market, with a larger competitor selling much of it through single source contracts.
Speaker 2: So we've already been converting accounts as contracts expire and Renis' edge creates a further opportunity for us to address the broader market.
Speaker 2: The single-use opportunity is more about market expansion, and we're ideally placed to access that with our PICO's number one position. The segment is expected to keep growing in the teams in the next five years, and we believe a multiple of today's size is possible just through increased use in surgical incisions.
Speaker 2: The third building block of higher growth is innovation. Put simply, we've allocated more capital to R&D than we have in the past.
Speaker 2: which should drive more innovation, and we're now seeing the returns of that coming through. That step up in investment has been significant.
Speaker 2: Over the last three years, our R&D spend has been 25% higher relative to sales than it was in 2017. That included maintaining our commitment both through COVID and as our sales later recovered.
Speaker 2: last three years, our R&D spend has been 25% higher relative to sales than it was in 2017. That included maintaining our commitment both through COVID and as our sales later recovered. To give you a sense of how central
Speaker 2: to our model innovation is more than 60% of revenue growth in 2022 came from products that we launched in the five years prior. That's also a clear step up from less than 40% of growth in 2021 coming from new products. And we expect this proportion to remain at least at 50% in 2023.
Speaker 2: We can also see the change in the absolute number of launches. We expect 25 product launches in 2023, which is a clear step up from an average of about 18 in the period 2017 to 2022. It isn't just about numbers. We're bringing key strategic products to the market across all of our franchises. So for example in 2021 and 2022, we opened this market balance. In 2022, we're going to move around the market balance approach. steel construction.
Speaker 2: We entered the cementless category with Legion Consulock. And with more cementless launches still to come, we added a range of applications also to Cori, including a unique knee revision indication for the only robotic platform to carry that.
Speaker 2: and launch our next generation meniscal repair device, FastFix Flex. I have to say that with lozenges in my throat. And that will continue in 2023. So we'll further build our Cori's functionality, including the unique knee tensioner for soft tissue balancing.
Speaker 2: So we'll launch the next generation of Rennasis, as I just mentioned, and ATOS, which will be our entry into next generation shoulder.
Speaker 2: So now move on to profitability. So think about how we reach our target of a trading margin in excess of 20% in 2025.
Speaker 2: It's useful to look at what factors have taken us to our current level. The pressures are in three groups. First, there have been one-time rebasing efforts, which are transactional exchange, foreign exchange, and BBP.
Speaker 2: Clearly, we don't know how foreign exchange will develop from here, but BBP is a permanent market change. Secondly, there's a balance of cost inflation, pricing, and leverage. For most of the last three years, we've had continuation of the past price deflation.
Speaker 2: higher cost inflation, and underlying growth that hasn't been high enough to offset those factors. During COVID, the decision was taken to maintain the size of the organization so the cost base was not adjusted at that time, and we retained excess manufacturing capacity.
Speaker 2: And thirdly, there's been dilution from our growth investments, both from a rising R&D spend as I talked about just now, and initial dilution from M&A since 2020.
Speaker 2: These are investments that we decided to maintain again through COVID as part of our strategic focus on growth. When we look at my franchise, it's really orthopedics that's caused most of the group margin decline. And repeating the analysis shows the same factors.
Speaker 2: have been amplified here in orthopedics. Of the one time factors, orthopedics is more affected by dollar strength, given the dominance of Memphis manufacturing. And VBP, of course, is specific to orthopedics.
Speaker 2: On inflation and leverage, orthopedics revenue has been slower to recover since COVID. That has meant less of a growth offset for the recent cost inflation.
Speaker 2: and the price deflation that was a feature of the market up to 2022. That has again left us with excess costs. Putting all that together, there are a few important observations. First, the market is a very big market.
Speaker 2: Whether you look at the group margin or orthopedics, only minority of the pressure over the last three years has come from rebasing efforts. Secondly, most of the rest either reflect slower revenue growth in the past or is due to our decisions to invest for higher growth in the future. With the higher growth that we're now positioned to deliver, we'll be better placed to drive.
Speaker 2: the positive operating leverage that Antoine-Franz mentioned. Thirdly, many of these headwinds should abate going forward or fall away entirely, particularly after 2023. VBP will fully annualize during the first half of this year, and inflation is expected to moderate after this year. And we don't intend for R&D spend to further rebase upwards.
Speaker 2: So that leads us to the bridge to the 2025 margin target. There'll still be a further transactional FX headwind in 2023, but as I said, VBP stops being an incremental headwind as we move through this year. We do not assume that inflation goes away in 2023. As I said out in our guidance, it will be a headwind again this year, but after that we expect it to moderate. We're going to offset that pressure through productivity and cost actions that includes the network.
Speaker 2: optimization initiative that we already announced in the 12-point plan, and also a detailed set of cost actions mainly focused on OPACs. Together we will deliver over $200 million in annual savings by 2025.
Speaker 2: initiative that we already announced in the 12 point plan, and also a detailed set of cost actions, mainly focused on OPEX. Together, we will deliver over 200 million in annual savings by 2025. That final lever is growth.
Speaker 2: In the past, you've seen our growth leverage often consumed by price deflation and cost inflation. However, our 12-point plan initiative to optimize pricing put together with cost savings offset in the cost inflation will mean that you'll see structurally higher growth falling through in margin leverage out to 2025.
Speaker 2: And from 25 onwards, we'll be operating as a fundamentally changed company, and this has been the goal of our strategy and investments in recent years. And we'll be able to now then rather choose how much we reinvest in more growth and how much we allow to drop through to further margin expansion. Clearly, the productivity and cost improvements are an important part of our strategy and
Speaker 2: component of our plans, so I'll share a little more detail about what to expect. We've identified a broad set of actions with cost levers reaching across manufacturing, sales and marketing, and G&A. The plan is to deliver at pace with the full benefit coming in three years. In cost and manufacturing, the rollout of lean will bring simpler processes, more standardization, and reduced scrap. There are also still opportunities from optimizing our network where we have over capacity, particularly in orthopedics.
Speaker 2: and from sourcing materials and components. All of this comes under the productivity initiatives of the 12-point plan. Sales and marketing and the markets levers will be a second big block. As I mentioned, the level of revenue growth in the last three years has left us with excess costs.
Speaker 2: And each commercial team is committed to further new savings to bring our cost-based back And then look at country mix in each franchise, including exiting business lines when they're unattractive in a particular market. Trauma and China that we've called out is one of those examples, and there are others in Europe as well that we've already acted on in 2022.
Speaker 2: And we've identified further opportunities over the next couple of years. Finally, there's corporate and GNA. Again, there are potential savings from procurement, including in distribution. And as with the commercial cost, we've also committed to savings that are corporate and administrative costs.
Speaker 2: So in total, these actions will generate over 200 million of annual cost savings by 2025. Some elements will take time, particularly as you can imagine, in manufacturing. So while savings will already benefit us in 2023, there will also be somewhat back and loaded with around half of the expected benefits coming in the final year.
Speaker 2: So with that, I'm pleased to bring you these updated targets this morning. They represent a realistic outlook and a commitment to meaningfully improve Smith & Nephew's financial performance. wisdom
Speaker 2: So with that, I'm pleased to bring you these updated targets this morning that represent a realistic outlook and a commitment to meaningfully improve Smith & Nephew's financial performance. The 12-point plan is starting to deliver.
Speaker 2: transforming the way we operate, bringing greater rigor, and improved execution. As we continue to work through the two-year life of the plan, we'll see the operational and financial benefits continue to accumulate in growth, profitability, and cash generation. The benefit of a multi-year investment innovation is coming through, and there's much more detail behind that that we'd like to share.
Speaker 2: I'm sure some of you will be at AAOS and you're welcome to join our booth and tour to see some of our recent launches and our near-term pipeline in orthopedics. We'll also be holding a capital markets event later in the year where we'll focus much more on the developing growth opportunities across our franchises.
Speaker 2: We've had great technology and spent the nephew for a long time, but this wave of innovation can take us a whole different level. We'll be in touch shortly, we'll have a date for our Capital Markets Day, and we'd be delighted if you could join us. Now we can move to your questions.
Speaker 4: Thanks for taking the questions. Jack Reynolds, Clark from RBC. Really useful margin guidance bridge for the mid-term guidance. Just wondering if you could give us a bit more information on the timing of those components.
Speaker 4: And then thinking about 2023 margin, how do you see phasing progressing through the year?
Speaker 2: Yeah, so I can open and then I'll turn it over to Antoine-Francois. As I mentioned, we expect to start to see benefits even in 2023. Some of the actions are on GNA and sales and marketing. You should expect to see the benefits starting in 2023.
Speaker 2: manufacturing, where we're actually already underway in terms of optimizing our network and starting to balance our capacity with demand. You'll see some of it in 2023, but as I mentioned, the full impact of our network optimization will happen more in the future.
Speaker 2: the next few years, and that's the most important part of the outer years of this plan. The growth leverage part of margin, you should start to see in 2023. As we progress through the year, you'll see growth to the levels that we've guided to, and that will start to fall through into March, and that will continue to accumulate over the life of the plan.
Speaker 2: The cost actions around G&A, the marketing starting to hit in 23 and beyond operating leverage also in 23 and start to accumulate impact of manufacturing network more back and loaded. Do you want to cover that in the first place? No, I was going to move to the 23 question, Jack, which clearly you should expect.
Speaker 3: a similar pattern to what we've seen historically with a stronger second half, in part due to the fact that we were lapping VBP in the first half as well. And as we work through the savings and the component of the 12 point plan, the benefits start delivering more as well towards the back end of the year. So that's what you should expect.
Speaker 2: Thank you. Thank you. Thank you. I have two please. So firstly, if I can ask on mid-term targets, particularly the rationale for 5% plus organic growth ambition and you're increased confidence here. Thank you.
Speaker 5: I appreciate you had a stronger 2022 and particularly the end of the year, but as you show in your chart, this is meaningfully higher than what you've achieved historically. So how do you break up the 5% by segment and geography in terms of the market growth that you see and the expectation for Smith and Nephew and your growth?
Speaker 5: by business division. That would be really helpful. And is that percentage lower in orthopaedics versus some of the other businesses? And do you think you need to accelerate the cadence of launches in orthopaedics? And then on the 25 new products that you expect this year, I'd love a bit more color in terms of division.
Speaker 2: Whether you think it's iterative or are there any step changes there? Thank you. Yeah, sure. So let me take those in turn. In terms of drivers of growth, what gives us the confidence in terms of growth? We remarked that 2022, particularly in Q4, all franchises contributed to the growth and we expect that also going forward. We talked about the recent outperformance in Boon, long-term outperformance in sports,
Speaker 2: will continue to undergird our growth into the future. And we're well positioned there in terms of our execution, in terms of our products we already have in our portfolio and the pipeline that we have behind that. In orthopedics, which has not contributed to growth in the recent past, that's the change that we're expecting between the recent past and what we navigate to the future. And there, we have never had a lineup of factors that we have today. First, Corey.
Speaker 2: We are the only true second gen robotic platform in orthopedics. So we're at a kind of an important moment in time in orthopedics where the utilization of robotics or the interest in robotics is just increased with all players kind of having a robotic offering. So it's in that context that we're launching Cori. And we feel very, very good about how we're positioned relative to competing offerings.
Speaker 2: As I mentioned, there's a set of features and benefits that are already on Corey that are already differentiated relative to the competition. I talked about revision for the only robotic platform to have revision indication. Where the only robotic platform to offer soft tissue balancing for the knee, which is an important consideration. And then there's a lineup of further benefits beyond that.
Speaker 2: So we believe Cori will be a growth driver. It hasn't been as big a driver because we've been supply constraint. And here it's less of the logistics issues that I've called, that I've flagged previously around orthopedics impacting product availability. Here it's truly, you know, broader supply chain impacts such as semiconductor availability that's impacted our ability to place as many Cori systems. But as those ameliorate, as we see that ameliorate in 23 and beyond, we expect Cori to be a driver.
Speaker 2: And then in EVOS, we've called for EVOS and Francois' nation that we now have with EVOS small, a full offering of EVOS to be able to go into RFPs and to contract to really start to compete effectively in the trauma market. And that's going to be a growth driver for us.
Speaker 2: And of course, you've got a full portfolio in knee where we have the only truly kinematic knee on the market, the highly differentiated material in auxinium that we've had for some period of time. But the combination of these factors is what gives me confidence that orthopedics will continue to add to growth.
Speaker 2: So that's the first part of where the growth is going to come from dissected by segments. The second in terms of launch intensity, there's different ways of measuring R&D vitality, as you know. We've chosen a five-year timeframe. You could look at three. Will the numbers change? Of course. We say 60% of our growth comes from.
Speaker 2: products launched in the last five years. If you narrow it down to three, it'll be a different proportion. But the point we're trying to illustrate is that innovation remains a key driver of growth in our business. So in terms of what do the numbers say, just to highlight again what I said in my remarks, over the period 2017 to 2022, on average, we launched 18 products.
Speaker 2: Now again, the number of products is one thing. It's about the revenue that each one contributes. And of course, you can parse that all different ways. But 18 was roughly the number of new products we launched in that time. We expect in 23 to launch 25. We have a pretty good view as to what's going to happen in 2024. Suffice it to say, we expect to maintain that intensity into the future.
Speaker 2: So that intensity of launches and growth coming from new products, whether you define it as five years to three years, we expect innovation to drive growth. So the third piece of your question, Hasan, around kind of disaggregating further within each of the franchises, I think I got into it in some detail.
Speaker 2: But what's important again to go back to orthopedics is we've had some recent innovations come into our back, right? Where we haven't seen the full impact of that yet commercially. So some of the indications that I mentioned on Cory relatively new, cementless offering. It's first of other launches to come.
Speaker 2: That's about a year and some change in terms of it being into our back. There's of course more to come in that regard. Whether you look at implant technology or you look at what's coming down the pike in terms of robotics and robotics enablement and orthopedics, we've got a lot coming down the pike. You asked for how that breaks up by...
Speaker 2: by year and by segment, I would refer you to Capital Markets Day that's coming later in the year. We'll detail out what that looks like. If you go to AAOS, you'll get a pretty good sense as to at least what the orthopedics part of that pipeline looks over the near future, because in the booth kind of setting, you're only able to talk like in the pipeline. So as a newcomer coming into this space, as I take a look at where we've been, and really the sheer number of new factors coming in.
Speaker 2: Great. Good morning. Kyle Rose from Canaccord. I wanted to build on Hasan's question about the medium term confidence within orthopedics. If I look historically, you have had product gaps, particularly when we think about some areas of probiotics and then on the cement listening. When you think about the sustainability of the turnaround and growth within orthopedics, how much of that is just?
Speaker 2: is just a pricing component and getting a better pricing and aspect versus taking true mix from a market share perspective. And then, you know, secondarily, in the advanced wound device, the site of the business, you know, for several years now you've called out robust growth within Pico. It would be helpful to frame out the sides of that business relative to, you know, RANASIS. And then also, I think it was maybe back in 2019.
Speaker 2: There was some bullishness just around contract wins in the United States with respect to RNSS. You're obviously continued to see positivity there, at least in the commentary you're talking about today. So how should we think about the US negative pressure when business moving forward? Thanks for the questions Kyle. So I'll take those early start with those. The first one around orthopedics, there's a role for price, right?
Speaker 2: pricing is one of the elements of the 12 point plan, particularly strategic pricing, where we haven't been as disciplined around prices as a company strategic pricing as we could have been. So there is an aspect to that that we're working on, but that alone isn't going to resurrect our fortunes in orthopedics. A very important component of that is mix that's going to drive share recapture or share growth in orthopedics. So that's an important aspect of how we get back to growth. As you noted, historically we've had gaps in our portfolio. We didn't have a robotic system, we didn't have a cement.
Speaker 2: choice of words, right? Five of the initiatives under the 12-point plan are geared towards in one way or another fixing orthopedics. And there's multiple components to that. There's a logistics component where we've gotten out of step that has impacted our ability to supply the market to have product available to customers when they need that. We're well on a journey. Lifer is one of the measures that I call that, but there's a whole bunch of.
Speaker 2: actually producing to demand. A, we have a robust demand planning process that's planned down to the right level and we've got a supply response in a factory that's producing to the right level of demand. So there's things on the operations side, there's things on the logistics side as I mentioned and then there's a third piece around commercial delivery.
Speaker 2: Historically, partly because we've had these gaps, we've tended to reward retention versus growth. We've actually recalibrated our incentive schemes, particularly in the United States, to start to actually reward growth. And we rolled that out again this year. So it's not done in isolation. It's done in the context where we've brought about changes.
Speaker 2: to how we rewire that business or how we operate that business. It's not fully done. It's a work in progress. But the new incentive scheme that we've rolled out is built on that foundation. So coming back to your question around where we need to see it, in terms of geography, US is a key part of it, where we need to execute our turnaround in terms of our operations there. There.
Speaker 2: but all geographies contribute to it. We talked about being thoughtful in terms of where we invest to compete, right? We've called out that previously we've made decisions to exit certain markets or certain business lines. China trauma is one of them, or we've called out certain markets in Europe . We've exited lines. I will continue to take a look at that, right? So that we are actually driving that.
Speaker 2: the size for us.
Speaker 2: is fairly similar, at least in terms of our book of business. And you've seen the numbers, so negative pressure continues to be a driver of growth. What I get excited about is obviously we see an opportunity to continue to execute well and to continue to take share as we have been.
Speaker 2: But there's also opportunities now for market expansion across these categories, and that's a super exciting place to be in a category like that. Anything to add to the post-possession? No, you've covered the Fiko Renatis. I'd just say, because you've referred to the past as well, that portfolio has growing very significantly and that will be in recent quarters as well. Yeah, one thing, sorry, I forgot to mention this tile. We've made remarks around...
Speaker 2: supply issues across our business. And that actually has impacted our negative pressure business, particularly around our traditional business. And here it's about, some of the conductor availability, among other components, right? And so we posted good numbers despite that, but that has been a pacing factor for us in that business. And of course, we see continued disruption through our supply chains. You know, any one category is some improvement from one quarter to the next. And, you know, we generally see the slightly better picture for 2020 to 2020 versus 2022. But generally still very much challenge. But I did want to highlight that we're operating in a supply constraint environment in that in that business.
Speaker 4: that we've continued to do well despite that. I've lost track of the order of when that's run up, so I'll leave it to others to parse that. Hi, thanks for taking my questions. Seb Janté from Neverum. Two questions, one around overall kind of, well, the midterm revenue guidance. Can you give us a sense of the price assumptions that you've baked into that revenue guidance across the kind of board? And then secondly, still on the revenue guidance, you talked about exiting some low return markets. Are those, should we think of those as being material in terms of revenue? So should we think of the gross revenue being higher than the 5%? Yeah, so we expect, I mean, there's a mix of price.
Speaker 2: and volume historically, we've seen price deflation in our business to the tune of one or 2% historically. This seems slightly better than that here. Obviously here in the immediate past, we've been able to pass through some of our price increases. We've called that out of course in previous quarters. And that is quite a contrast to how the Medtech business typically operates. Going forward, we expect to continue to try and...
Speaker 2: pass through the exceptional price increases that we've seen that, you know, honestly, are once in a generation type increases. But in the end, in terms of revenue growth, it's going to have to come, as I said, from mix and volume and continued performance relative from a share standpoint. That's ultimately what's going to drive driver growth. So that's the first point to that. The second point that I'd like to call out is from a midterm revenue growth perspective, we see again, all of the franchises.
Speaker 2: contributing to that growth over the midterm. Orthopedics is where we need to kind of bring that level of revenue growth in line with markets. So there's an implied share recapture in the numbers that we've guided to. So the numbers that we've set about five to 6% for the year and five plus percent beyond take into account all of these factors. So it's a net of all of the things that we see. Price, volume, share, capture, all of the all of the facts.
Speaker 6: Hi, Seif Gjosnair from HSBC. Thanks for taking my questions. I have two please. First of all, on KoI, I know you don't like to announce install base, but I know you closely follow the install base as well as the KPIs. So some color on that will be great. And second, on the waterfall chart on orthopedics, that was a powerful chart. Thanks for showing that. I would guess it would look different in the other two segments, sports medicine and AWM. But how would it look if you were to put it out? And do you see similar risks such as what we've seen orthopedics and BVP in other segments?
Speaker 6: And the last question, this one is for Francois, in light of the increase in leverage and continued interest in M&A. How do you see the capital policy should we continue to assume the 250-300 million buyback as well as the flat line of dividends going forward? Okay, let me address those. On Corey, the last number that we reported is 500 plus in terms of our installed base. We expect to place more than 300 units in.
Speaker 2: 2023. Most of 2022 we're in a very supply constrained situation as I mentioned earlier that really paced our ability to place um Cori and not that they'll be completely out of the woods from a supply standpoint 2023 but we expect to place over 323. So hopefully that gives you a bit of a calibration that's how we think about it. What we look at internally isn't just placements it's the quality of those placements where we're putting them what kind of utilization we get.
Speaker 2: from then and are we advancing our commercial objectives in terms of how we introduced and get Cori adopted into the market. But we asked about placement, so that's kind of how that breaks out. When we look at a bridge like that into the other franchises, there isn't a dramatic effect like VDP, right, in those other franchises. You asked about whether we think VDP will be a factor in those other franchises. It's difficult to predict.
Speaker 2: kind of what the government in China will do versus one category versus the other. We don't expect VVP in the near term in those categories, but of course, should it come, we will adapt as we've adapted in orthopedics. So hopefully that addresses that second part of your question. And in terms of the factors, as I mentioned, we've been executing well commercially in those other two franchises. It doesn't mean...
Speaker 2: were perfect, that doesn't mean there are opportunities, not opportunities for acceleration. We've called those out, right, in the 12-point plan. So continued high level of commercial execution, continued improvements in that will, you know, of the portfolio that we have will be a key driver of growth. Innovation is a key part of it. It's less dramatic than in orthopedics because we've got Cori, which is a new platform that's coming in, new way of doing things in the industry. But there is innovation in both negative pressure and, sorry, in wound and in sports, so.
Speaker 2: whether it's innovation across new categories, biologics is a significant investment area for us in sports, right? That's still early innings in terms of what we can do with regenerative, in terms of getting that broadly adopted into the market. So we're investing in biologics, continuing to invest in biologics in sports. In wound, negative pressure is an important investment category for us. And we've got a broad portfolio already and we're making targeted investments, whether it's in biologics or in skin substitutes in wound as well. So there are clearly robust pipelines in those areas as well. So as I mentioned, we look forward to giving you...
Speaker 3: to understand that the drag on the profitability has been mostly driven by orthopedics, hence our focus on that. But the other franchises are performing well, with Woon in particular being back in the 2019 level, and sports being there at revenue only, given the pressure on the cost of those cost boards. So now the final question was on buyback and whether we're committed to buyback.
Speaker 3: bottom of the range, given the challenging macro environment, the effects of COVID on our profit recovery, and also the working capital build up that you've seen in 2022. So as a result, we pose the buyback and we'll continue to keep this on the review in 23. Thank you very much.
Speaker 4: We've got two questions on the phone as well, so maybe take one in the room and another one from the phone. Thanks, David Ellington, JP Morgan. Three questions, please. So firstly, just on your midterm revenue guide, changing it from four to six to more than five, just wondering explicitly how have your pricing assumptions changed from 15 months ago? Very explicitly, how they changed from being...
Speaker 4: and then what's what happened on the FX side.
Speaker 3: Do you want to take those on purpose? So as on the FX, as you know, we fixed 12 months. So there's always a quarter that rolls forward. So that's the main change in terms of the assumption. In terms of the inventory uplift, the impact on gross margin is the impact of inflation.
Speaker 3: there's actually two impacts, but it's inflation. So if you see that our inventory is now higher cost, effectively means that your standard cost and your cost of goods as you sell the stock is higher cost. So that's what we talk about. And that's why inflation phase through a P&L at a different rate than what you see may happen in the external environment, because you've built inventory.
Speaker 3: at a higher cost and that will flow through P&L over time. I think he also reflects that as we look to reduce inventory, a lot of the efforts is around better supply and demand alignment, but it's also better discipline in our factories and it's about better managing the capacity. That's why the network optimization, the productivity lean in operations is super important to mitigate that and to offset the pressure that we would see otherwise in the cost of goods line. And you know, as we said earlier.
Speaker 3: Price in the long term is not the driver of the revenue growth. The driver of the revenue growth is about better commercial execution and the new products innovation. In 23 in the short term, there is a price lever as we continue to look for the offset of inflation. It's not the lever in the midterm outlook. However, it's important to say we won't rest on our laurels. You know, part of the 12-point plan has a pricing component. It's about strategic pricing. You know, how do we launch new products? How do we make sure our contracts, you know, contracts compliance is improved, etc.
Speaker 3: But the lever of growth in the mid-term is really about gaining market share, launching our products and continuing to capitalise on the growth drivers we set in place in the last few years. Perfect. Let me just come back on the gross margin point. I mean, in terms of the direction of travel and for gross margin in 23, how should we be thinking about that impact in terms of the inventory uplift? So you'll continue to see pressure on the gross margin, which is why we say in particular the network optimisation, the up savings flowing 24 and 25 in particular. So that's that element of the plan where the savings deliver later in the period. On the motor basis fast, we say we hit a bottom whether you'rek.
Speaker 3: Thank you. Our first phone question is from the line of Veronica Dubojova of Citi. Veronica, please go ahead. Hi, good morning and thank you guys for taking my questions. I hope you can hear me well. I have three, please. One, can we just start with the 5 to 6% organic sales growth guidance for 2023 and would love to hear from you what that assumes for the procedure volumes or utilization and Deepak, if you can comment on how the year has started related to that, that would be super helpful. Then my second question is on the mid-term margin target and Deepak, you had made some comments about how the improvement.
Speaker 2: logistics costs and raw materials. Thank you guys. So hi Veronica. So I'll take the take the first two around the five to 6% kind of mid term mid term revenue. As I indicated last year goals were really
Speaker 2: it is spread across the franchises in terms of what the drivers of that growth are. We've talked about the price and the volume components of it. Within orthopedics, we do expect procedures.
Speaker 2: to return to normal. Honestly, in 2022, we were less able to capitalize on the return to normalcy in terms of procedure volumes for the reasons we've talked about in the past. But we don't see the procedure volume or the market procedure volume being kind of the rate limiting step for us or said differently.
Speaker 2: we expect that more or less procedures are back to normal and we will be operating within that world. It doesn't mean that hospital systems around the world aren't challenged for labor shortages or other things, right, and we don't yet know, you know, whether there'll be another spike in COVID or how that will impact procedures. But our assumption for five to six is built on essentially procedure volumes in the world being as they are today and us being able to better participate. In that than we have in the recent past. So that's the anchor to the five to six, but as I mentioned, it's not just.
Speaker 2: So I'm not saying a lot when I say that, although perhaps my second statement also has information contained in that. So I would expect, as I mentioned, I'll go back to kind of where we started the Q&A, which is there are elements of our margin expansion that will come in.
Speaker 2: sequentially from one quarter to the next revenue growth driving margin expansion. You should expect, of course, there's a seasonality to our business, right? Particularly in orthopedics, so you need to kind of factor that out, right? Because typically our second half of the year is higher margin than the first half of the year. So, you should expect the operating leverage element.
Speaker 2: of margin expansion to happen sequentially. In terms of costs, it's a bit dependent on how quickly execute on the GNA actions and whether it's the market exits or the sales and marketing kind of adjustments that we need to make. So that's a little bit in our hands and symptoms, how quickly we execute, but that is more of a near to medium term level that we feel that. Some of it, as I said, in 23, and you'll see, of course, the annualized impact of that in 2024. So that's more near term.
Speaker 2: In terms of the manufacturer, as Francois just answered, the network optimization, look, we're sitting on excess capacity in orthopedics, right? And so we need to go through steps in order to put that into balance from a network standpoint, and that will take time to fully deliver into a P&L. So that you should expect more in the 25 timeframe to fully benefit. But having said that, as I mentioned, there are under the umbrella of rewiring orthopedics as we look to improve logistics.
Speaker 2: improve how we do demand planning, how we do supply planning, and how we schedule things in the factory, you should expect some benefit also in the 23 and 24 time frame. Most of those benefits will come in the form of improved lifer, and therefore improved availability into the market, and that it comes from the ability into the market that will get reflected in the operating leverage part of it, particularly in orthopedics. Over time, as we talk about inventory is a topic for us, particularly in orthopedics, we started off not in a great place in 21, we further added to it for understandable factors in 2022, but we've got to take steps.
Speaker 2: as we rewire the business to better utilize capital and orthopedics, right? And that is one of the key elements of a work 12-point plan under the bucket of improved kind of commercial execution. So that will pay dividends ultimately in lower inventory or lower days of inventory, which is a key metric. We'll come back and report on how we're doing in that and in due time. And the final question was on inflation. So clearly, we've had to make assumptions. We don't have a crystal ball, as you heard.
Speaker 2: I'm being told we do have more time for one more question back in the room. I thought Veronica was going to be the last one. One more question in the room.
Speaker 2: we do have more time for one more question back in the room. I thought Veronica was going to be the last one. One more question in the room. Okay.
Speaker 2: So, thank you very much for your interest and attention and I look forward to seeing back your next quarter. Thank you.