Half Year 2023 Smith & Nephew PLC Earnings Call
Margin development in the first half was in line with our expectations and this should represent the peak of the macro driven.
Cost pressures.
In the second half, we expect a clear step up in both trading margin and cash generation as we drive productivity gains and start to bring down days of inventory.
And importantly, we're continuing to build the foundations for sustainable performance by delivering the 12 point plan.
Overall I'm pleased with the progress of the plan and as with any initiative of this depth and breadth. There are varying degrees of completion, but most elements are either on track or ahead, and we're already seeing the benefits coming through.
Product availability in orthopedics was much better than it was on the back of our own operational improvements, although external supply interruptions and shortages continued to hold back overall group performance.
Later on I will share with you the updated kpis on operations and how we're positioned to convert those into better outcomes in the coming quarters.
So our high cadence of innovation has continued right across the portfolio and we've added new growth drivers and robotics and in extremities.
We're also pleased with our progress on a number of other initiatives, including order to cash excellence pricing.
Pricing management and the pursuit of cross unit business unit deals and Asc's.
For now I'll hand over to.
Amtrust wants to take you through the detail of the quarter in front of us.
Okay.
Yeah.
Thank you Deepak and good morning, everyone. So I'll stop between the second quarter revenue, which was $1 4 billion, representing a Dallas, representing a seven 8% underlying grace and a 6.6% reporting performance.
Performance was broad based with all business units and all regions contributing.
Coming to the detailing the moment, but you can see that orthopedics accelerated compared to Q1 and sports maybe seen in advanced wound management continued to perform well.
Looking by region established markets Gray has remain above historical levels. Our U S business grew by six 3% following a very strong first quarter.
Famished markets maintained their performance on great eight 5% with elective procedure volumes remaining a high level across Europe and Asia Pacific.
In 19 markets grew 11% largely driven by recovery in China with surgical activity return to more normal levels. After COVID-19 outbreaks earlier in the year.
I'll now go into the detail of each business unit Orthopaedics grew five 8% underlying.
Growth in knees, and hips reflected us lapping the impact of EVEP.
As a reminder, the low of Edp pricing from the tender was gradually implemented.
During the second quarter of 2022, so while China is to reduce growth by around two <unk> and four points in hips.
We fall away for the rest of 2023.
Although reconstruction growth of 21% was driven by the ongoing adoption of robotics.
Now installed base of capital is increasingly nicely across both coffee tolls on the AC passing 615 units in total with a growing funnel.
Our customers are showing their confidence in the platform by buying second and third glories in multi system deals the range of surgical applications.
He is being recognized with the majority of deals, including all hip software.
Trauma and extremities grew two 5% on the line. This was the first quarter after lapping the trauma exit in China.
And they should be further of course, they'll place to come as we lap other market in the second half looking.
Looking beyond those effects, we can see our investments are starting to pay off U S. Trauma grew 7% in the quarter with Evo sludge place place, both driving growth and showing the value of our complete solution by pulling through the use of small place.
In extremities, we reached another innovation milestone with a five 10-K clearance and the launch of VITAS on next generation shoulder.
Improving also predicts performance has been a key priority and we are now seeing multiple train brake is lining up in quick succession, and Deepak will cover shortly the progress we've made in improving employment availability.
And we are resolving supply chain challenges that limited on instrument deployments in the quarter, we have the highest pace of core sales activity. We've seen evil squirrel growth has accelerated already Anita shoulder makes us competitive for the first time in that large and high growth categories.
So putting diesel together, we excited or wants to come forth a pdx in the coming quarters.
Now moving to sports Med D C 9 million T, which grew at 12% based on a multi a stream of innovation across both capital and consumables playing an important role.
Productively PDT remains somewhat of a constraint in the quarter with restricted capacity at some component suppliers.
Either we were still able to drive an attractive level of grace.
I'm looking by segment junk repair grew 12, 5% with broad based strength across procedures on region rich.
Rich anything.
Although shoulder repair products and on knee repair portfolio. All grew at double digit growth, we need growth helped by the new ACO solutions that we launched earlier in the year.
A T group grew four 6% in the quarter.
With where we'll fall field and mechanical resection, both seeing major being major contributors offsetting a slower quarter in video.
And of course, I know there is interest from many of you in the developments and any developments in and around the V P and in China. Our team remains in close contact with the Chinese government and we expect a policy to be finalized later in the year.
PMT growth of 38 38, 9% reflects the continued post COVID-19 recovery, you know call it home solar mandate annoyed business.
We expect to ramp to return to a more normalized level of growth later in this year as we lap more of the market recovery.
E N T continue to be an attractive growth area a beyond these for us.
Now moving to look at advanced wound management, which grew six 2% on the line within that advanced wound care grew two 7%, mainly driven by a firm dry dressings on a strong quarter in Europe .
<unk> grew three 1% on the line with a slower growth on Q1, mainly reflecting a normalized why a comparator.
<unk> skin substitutes remain the primary driver ILEC geez, our portfolio has been growing ahead of the market.
We believe the outstanding clinical evidence around graphics in particular positions us for continued strong performance.
Finally advanced wound devices grew 21, 4%.
<unk> double digit growth from both our traditional and single use platform with similar drivers to recent quarters in the traditional segment, we on driving account conversions to renesys with a good pipeline of other opportunities and we're continuing to expand the single use market with increasing penetration of P codes.
Accelerating growth in negative pressure is a key component on top of a 12 point plan as you know.
Now I'll move to the financials for the first half.
Revenue was $2 $7 billion in the first half up seven 3% on an underlying basis compared to H, one and 2022.
Reported revenue was up five 2% <unk>.
Including a foreign exchange headwind of 210 basis points from the strength of the dollar against major currencies.
As you can see this chart growth was balanced across all businesses with all three units contributing.
Now moving to the summary, P&L for the first half gross profit was $1 $9 billion.
Results in the gross margin of 69, 8%, which is 110 basis point decrease from the prior year.
Operating expenses grew faster than sales driven by increased spending on sales and marketing.
And this results in trading profit of $417 million with a margin of 15, 3%.
I'll explain the drivers of the lower margin over the next slide.
Slide 12 shows a more detailed trading margin breach there were three major headwinds.
To the first half of 2022 with the first two representing what we expect to be the peak of the macroeconomic pressures.
They were around 400 basis points from raw material in stock on cost inflation.
And another 120 basis points from transactional FX.
And as you know the transactional FX is a result of a strong dollar.
On a disproportionately dollar based manufacturing cost base delayed by from our hedging program.
The final headwind was around the increased selling and marketing spend as part of refreshing our commercial approach for bracing orthopedic transport and came to 110 basis points.
But they were also significant positive offsets in the first half we still around 220 basis points of positive leverage from volume and pricing growth.
And around the third of which was driven by the 12 point plan.
They also significant productivity gains with around 150 basis points from operations and procurement savings.
100 basis points from other cost savings initiatives, including restructuring.
And I'll come to the outlook in a moment, but one thing you can see from this bridge is that while the panels went down waynesville here to stay for some time the headwinds are either one off in nature or should significantly ease over the next period.
The increase in orthopedics and sports commercial spend is not intended as a repeating exercise. We currently expect transactional FX to be broadly neutral in 2024.
And the first half should represent the peak of the pressure from input cost inflation.
Looking further down from the P&L adjusted earnings per share declined by 8% to $34.09.
Slightly more than trading profit, mainly due to a higher interest expense without average net debt higher than in the first half of 2022.
The interim dividend of $14.04 per share is unchanged.
Trading cash flow in the period was $110 million with trading cash conversion of 26%.
Is lower than in 2022 due to a working capital outflow of 326 million.
And whilst we reduce all receivables as a result of the order to cash initiative in the 12, one time the biggest drive of the capital working capital increase is a first half in the first half was inventory.
So let's look at the inventory movement and there are three main drivers to the increase by we expect robust.
Firstly, we've added some stock to support acceleration in negative pressure wound therapy.
This is a compelling opportunity for the business by carry some upfront inventory requirement.
We expect to gradually consume as this segment grows.
In addition, we've had some accumulation of both products and instruments that are not yet deployed.
And I'm currently being how does inventory.
As a result of ongoing supply constrained for a small number of components, which hold back assembly set deployment.
The completion, sorry, and consequent deployment ton Deepak will cover in a moment that we expect to accelerate deployments in the second half, which will start bringing down inventory.
And then we think these driver of inventory growth. We've also had some excess factory inventory from spot buying our raw materials to protect our manufacturing against external supply disruption.
Well see some areas with tight availability.
General and improvements in the reliability of global supply change mean that were valuable to bringing tighter controls.
Raw materials buying and we can certainly see the level of raw materials inventory coming down in the future.
And finally as you would expect there has been inventory growth tracking the overall growth of revenue and that component is neutral to date, the ESI, but we should still see improvement in that portion as we execute the 12 point gone.
And much of our inventory as you know 15 orthopedic and orthopedics.
He is not the driver of the difference here in the photo in the first half, but we are continuing to focus on driving down youth a pdx inventory.
And the role we are committed to bringing DSI law and you should expect to see clear progress by the end of the year.
Now to conclude on the financial net debt ended the half year at $2 $8 billion.
This is an increase of $314 million from the start of the year, including 200 on $1 million, we paid for the final dividend of 2022.
The effect of that is I believe rich finished the half at two three times adjusted EBITDA, which remains within our target range of two times to two five times.
And now I'll finish with our updated guidance for the full year.
On revenue, we are now targeting underlying growth of 627% versus our previous expectation of 5% to 6%.
This reflects a strong growth in the first six months further operational improvements in orthopedics as we execute the 12 point plan and.
And continued outperformance in sports on advanced would may be seen.
While also recognizing.
The more difficult growth comparison in the second half of the year.
Our guidance for the full year trading margin is maintained for at least 17, 5% with headwinds from input cost inflation offset by growth and productivity gains.
I'd highlight that we expect to deliver Destocking also I hope so after absorbing 120 basis point headwind from transactional FX.
Or how do you. Therefore, we presents what would be substantial margin progress on a constant currency basis.
So I'm sure that you've also works out bound guidance implies a step up in the second half of the year in line with our previous commentary.
Our guidance was H, two weighted margin and cost pressures would peak in H one.
So to give more perspective on the drive of the step up slide 18 details the components of the margin expansion in the second half.
Part of the step up is a return this year to our historical margin seasonality.
You should add around 270 to 300 basis points over the first half margin.
And this year. We also expect the survey effect of productivity improvements accumulating over the course of the year.
Cost reductions, including productivity on the 12th one time savings on the unwind of calls should together come to at least a further 250 basis points of second half Martina piece.
Incremental cost inflation should be real actually modest move around an 80 basis point headwind from the merit a place we made are in H one.
Yes.
So for what this will look like in your model you should expect gross margin to be higher in age two.
SG&A spend to be lower in absolute dollar than in the first half.
And finally as you think of IPSA. We have also updated our technical guidance on expecting a full year tax rate from trading results to be around 17%.
And with that I'll hand back to Deepak.
Yes.
Thank you Anne Francoise.
I'll start with a reminder of the transformation that's underway.
Back to you Firstly, we're becoming a higher growth company with a target of consistent.
Five plus percent growth for 2025.
This more than in the past and we have a clear path to get there.
We're fixing the foundation supports a P <unk> <unk>.
During the continuing strength of sports medicine, and advanced wound management, which are already outperforming and converting the increased R&D investment.
Innovation driven growth.
Each of these elements is a step up from where we were pre COVID-19, which contributes to building a more attractive group hopes for growth profile that would be part of the past.
We're also committed to driving profitability and returning our trading margin to at least 20% for 2025.
We're coming through a period of elevated macro pressures and then rebuilding our margin through manufacturing and Cogs optimization productivity improvements and gross leverage.
On Slide 12, 21, the 12 point plan provides a detail of how we do this we're now approaching the halfway point of the two years on slide 21 is an overview of where we are today based on the milestone completion for each underpinning initiatives.
Taken as a whole the plan is showing good progress.
The varying stages of maturity reflect the breadth of the program, including some initiatives that could move forward immediately.
Others, they by nature would need longer preparation such as portfolio streamlining or manufacturing optimization.
We're now well advanced with our work to Rewire orthopedics.
Refocused our commercial organization.
Simplified the selling organization introduced.
We introduced enhanced commercial processes.
Gold out of new growth oriented incentive structure.
Our renewed demand planning processes in place and starting to bear fruit and our asset utilization is moving in the right direction, which set turns now around 30% higher than at the start of 2022.
With better foundations in place and the delivery of key R&D projects and robotics and in extremities. We're now poised to start delivering on that second block of initiatives.
Better market share with our technology.
I'll drill into more detail about our progress in a moment, but on improving productivity, we are quite advanced in our initiatives on value and cash processes.
We've implemented better pricing.
Across our portfolio and as unfolds was set out earlier, we're driving dsos down that inventory days are poised to follow in the back half of the year.
What will still take time as the work around manufacturing optimization, we've identified opportunities in our network and there's a process to follow before we can move ahead.
The opportunities from simplification and the cost of gossip efficiencies along with it will come later in the plan.
These initiatives represent an important part of the midterm margin targets or margin improvement targets.
You've talked less about the initiatives to accelerate sports and advanced wound management.
Wherever they are overseen by the same governance structures as the rest of the plants that are being driven with the same urgency, but their dedicated teams with both initiatives being able to move quickly at the start of the plan, we're starting to see progress and competitive conversions and negative pressure and the pace and cross business unit deals into a S.
Which is more than doubled.
Just in 2023.
Yeah.
Orthopedics still the single biggest lever, we're changing our financial outcomes and it is where we've had the most work to do particularly around commercial delivery.
The good news is that the fix in our orthopedics foundations is now well underway.
Our kpis of product availability.
Due to improve and the charge update some of the metrics that we showed you with our full year results.
Lastly, the value of overdue orders has continued to fall.
These are power since the peak in 2022 and with another 25% reduction since the beginning of the year.
We've also showed data on light life reward line item fill rates.
<unk> measures the percentage of customer orders that had been built so it's an indicator of how well we are meeting demand are.
Our target is to bring our non set life for to a level that matches industry best practice as you can see in the chart. Our Kpis continued on its improvement.
Now progressed to about 80, 85% of the way to our goal from the trough level.
The Doctor of industry standard is now small, but LIFO for key priority products is actually moving in the right direction.
In particular Evo small as recent maintain the target level and journey to our key products and recon is more than 80% of the way there.
An important part of how we've made this improvement has been the new planning process that we introduced a little over a year ago.
Better matching supply to demand at both the volume and mix level as the Navy there'll be improvements in order fulfillment as well as in other operational benefits.
So that's happened alongside other measures like improved logistics with a 60% improvement in customer replenishment speed.
And significantly improved scores for the health of kits that are already deployed in the field.
Putting all of that together, we've been able to reduce our total production, while continuing to improve product availability and this in turn will ultimately enabled reductions in inventory and manufacturing capacity.
To convert implant availability into the sales growth, we now need to step up the deployment of new instruments.
Customers.
Sheer number of components in an instrument set makes this a complex process.
So rely significantly on third party providers or just a single missing component.
Could be enough to stop deployment and that has been the case in recent months with supply chain disruptions, resulting incomplete sets.
Even so.
Already made good progress.
Yes, and resolving these challenges for example in trauma, which was a challenged area in Q1, we had more than a 3300% increase in evo sets deployed in Q2.
So we expect this pattern of greater set deployment to also follow in hips and knees in the second half and this is being supplemented by redeployment redeployment of around 10% of existing sets across our network.
I refer to this last year around this time.
So greater pull through of the more readily available implants should then follow.
So innovation is another key component of our growth once.
You may remember from when I talked about this in February that we expect more than half of our growth to come from products launched in the last five years. We also said that we expect to launch 25, new products in 2023, which is a clear step up for more on our average over the previous three years of around 18.
So I'm pleased to report that we've delivered 13 in the first half of this year, which is a notable inflection from our past.
It's well on track to deliver our full year expectation.
So that includes our <unk> shoulder system, which is an important part of our growth plans for trauma and extremities.
<unk> is designed with both patient and surgeon benefits in mind.
The medicine aligns with the market trend toward minimally invasive short stem devices.
Sure stems are easier to implant.
Improved bone preservation and are a better fit to anatomy.
Also its compact trade system for procedures allows for shared instruments between the short stem or existing long stem shoulder and also future auctions.
So we're continuing to work on a stimulus variant and also to bring compatibility with Corey.
Potentially adding <unk> to our offering enables smith <unk> nephew to be competitive.
In the shoulder market. This is one of the fastest growing segments in orthopedics with a $1 3 billion dollar market growing at around 9%.
With this new shoulder opportunity along with the completed <unk> platform in place since crews and the improvements in product and implement supply instrument supply trauma and extremities is well position to step up to a higher growth rate.
We've also added a further feature to Corey with assault based solution. So this provides an adjustable cutting guide based solution.
Into the existing Corey total knee workflow.
And this without the need for additional incisions that come with traditional pins. This features allows or adds powerful versatility to corey appealing to an even broader range of surgeons with varying preferences by offering both milling and selling those options.
This is another step in our journey to adding features and functionality to Korea.
So in recent quarters, we've highlighted the introduction of revision capability and a unique digital tension or the addition to the source solution highlights our intention to continue to build out Corey at an accelerated pace.
The delivery of this project is a testament.
To the speed of innovation, that's being driven by the 12 point plan as well as the agility of our teams and acting quickly to bring these features to market.
We just received FDA clearance that's in June and expect the rollout to begin in the second half of the year.
Finally, I want to mention a further development in our plans to strengthen the underlying foundations of the business and how we operate.
The early changes from the 12 point plan more settled it's now an appropriate time for us to move to a more focused way of operating.
We recently began the realignment of our commercial model from franchises and regions to global commercial business units with.
With birdie class commercial teams for orthopedics for sports Medicine and mood.
T is already operating in the structure.
And my own experience.
Across the industry. This is a better way of doing business.
It drives greater accountability.
Faster decision, making and execution and increased customer focus in every area of our portfolio.
The previous regional marketing are the organizations will also roll in to the global business units. So it will have a single point of accountability for upstream and downstream marketing and sales and better alignment and resourcing across regions and countries.
The business units are led by dedicated presidents for each of Orthopedics sports Medicine, and advanced wound management with full global P&L responsibility.
This structure industry veteran broad tenant is solely focused on leading the transformational changes required in orthopedics.
Scott Shofner, who is already leading sports medicine joined the Executive Committee as business unit President.
We're still committed to cross business unit opportunities driving them through the governance of the 12 point plan structure.
Earlier this year, Dr <unk>, putting them up put them all but.
Expanded his role to president of R&D, and our E&P business, which is already operating in this Verde class model.
SUNS blend of clinical and technical expertise and business acumen and experience, bringing novel therapies to market will help strengthen our focus on E N T.
Last month, Dr. Rohit Kassapa joined as President of advanced wound management.
Following Simon Frasier's decision to retire.
Rohit is a seasoned customer and team focused leader with significant global multifunctional experienced in wound care and surgical management rose career includes more than 20 years at facility, where he was one of the principal architects of the company's strategy.
Its execution.
Immediately prior to joining split the nephew Rohit was president of wound and surgical businesses and Chief commercial officer of my medics, where for the past three years has led the business has turned around and culture and performance to achieve consistent growth.
As an example of the caliber of talent, we're seeking and attracting to continue continue to drive and deliver growth.
And increase our potential as a company.
Others include a new head of U S orthopedic sales.
And operations team for orthopedic specialists to be brought together in 2022.
So you'll have the opportunity to hear from the President's in due course, including at our meet the management event. That's planned for November 29 of this year.
So in summary.
Pleased with how the first half of 2023 has developed.
<unk> delivered growth ahead of our plans.
Driven all three business units and have improved our fundamental positioning through the continued operational fix and turning our innovation investments into a greater intensity of new launches.
There is clearly still work to do in some areas. We're at an early stage one offs predicted productivity initiatives and are stepping up our profitability and cash generation in the second half as.
As we deliver that we'll exit this year with momentum that puts us solidly on course to meet our midterm commitments.
Before I finish I would like to say a few words about Anne francoise.
And her decision to step down as CFO next year.
I am saddened to lose her as a colleague.
I understand why she feels that as we make our progress with the transformation of Smith <unk> nephew now is the right time for her personally to reflect upon what she wants to do in her next career.
It's hard to encapsulate the impact that that plus was has made on Smith <unk> nephew during her time, our CFO she was instrumental.
In us navigating the financial challenges in the pandemic and in laying the foundation for the 12 point plan.
She has also been a champion of our culture and purpose and there's been a strong leader.
On a personal wrote.
Am grateful for the support and the Council that she has provided me during my time at the company.
Most of the grateful that she has given us ample time far far more than she was required to.
For us to identify a successor.
And ensure a smooth transition.
And it is good that we will have her for the next few quarters.
So now I'll take your question, so I will take your questions.
Okay.
Thank you Bill.
Moderate.
Thanks for taking questions Jonathan was calling from RBC.
Starting with the revenue upgrade mostly.
It implies.
Changing your assumptions around kind of grace through the history of edge to wondering how much of that is coming from kind of your changes trying to do some things around market growth versus execution.
Second question on pricing I think you mentioned two two percentage points of kind of leverage coming through.
On volumes and pricing wondering kind of how much nice pricing how much of that is kind of.
The results of your own pricing initiatives versus kind of general mills.
Generally more favorable pricing environment.
Then on the on core.
Detailed in your release around the core replacement and I'm just wondering what your utilization level of Korea's if I remember I think last time, you disclosed is about 20%, yes. So let me talk about.
The revenue picture.
Our step up.
In the second half.
Is reflects seasonality.
But our confidence comes from the fact that our revenue growth has come across all of our business units orthopedics and sports. So this wound and we expect that to continue so the primary driver for US increase our guidance is our own commercial execution. There is of course market tailwind and that's primarily in north of.
<unk> X factor and we expect to be able to better take advantage of that as you'll recall, we have not always been able to take advantage of that market tailwind and in years past. So we expect to be able to better take advantage of that but it's fundamentally your own commercial execution that underpins the confidence in that step up.
In the second half of the year pricing is a component to that.
We've been at it is one of the elements of the $12 plan actually endpoints was has been personally leading that particular initiative. So there it's about our reaction to to inflation and our ability to pass along some of that.
Price onto our customers, but the more fundamental work, we're doing is actually greater price discipline across our portfolio.
That work should persist well pass the cards inflationary periods. So that's really the more fundamentals of our commercial execution that we plan to improve around Corey.
Please go ahead Sir.
No no no because you referred to the 220 basis point. So we have seen picture, what deepak sent by referring to the second half we have seen positive price momentum.
First off and we're continuing the strong discipline.
What we are saying what the split is.
You can assume that there is a port pricing peanuts compared to historic price deflation that we use tissue.
In positive territory for price.
We successfully managing and.
I gave a kiss a lot of credit for the discipline are driving around that and coming to your third question around Corey.
We were pleased with the utilization so we're interested not just in <unk>.
Placement of Corey right the numbers of Korea less important to me, what's much more important role that Cory place and driving our orthopedics business driving our full portfolio and that utilization I gave you the 20% numbers only improved even further.
Since that so it is a key metric that we track we don't necessarily report on that every quarter.
As I've said in previous previous forums.
It's a means to them and it's the number of core placements as a secondary.
Our secondary importance to me.
Okay.
Hi, Hassan Al <unk> from Barclays I have three questions. Please firstly again on the management change Deepak we've.
Clearly seen a lot of management change at Smith, <unk> nephew I Wonder if you can elaborate on why this is happening now and particularly early on in your turnaround and related to this Deepak do you remain confident on the medium term margin that you've highlighted given the significant ramp required beyond this year.
Of in excess of 250 basis points over two years.
Secondly, the strength in knees looks to be driven O U S with U S growth of two 8% below some of the peers, who have already reported.
Do you put this down to and how do you consider the cement less knee ramped in the U S and then finally.
I'd love some commentary around how you see the U S environment and backlog.
Has the increased utilization peaked in and when do you expect a more normalized level of growth. Thank you sure.
That's on the first crusher on management changes so these.
On the one hand, I talked about the importance of building a strong foundation for our business.
And the move from a franchise to a business unit structure is a key part of that what I'm trying to achieve is greater accountability greater levels of accountability in the organization speed of decision making.
Remove inefficiencies delayering the organization and simplifying how we operate so those are some of the thinking behind the boot from franchises into business units.
And I believe in my experience they will stand us in good stead over the long term and Thompson of specific changes some of those are associated with.
With that move, but they've been independent things. So in wound for example, some inflation deciding to retire was a personal decision for him to retire and nothing to do with the organizational changes so the appointment of Robert crush up as a.
As a result of Simon's decision to retire.
And I previously talked about a broad tenant.
Focus into orthopedics is a veteran of the industry with a long track record of success given the scale of our of changes that we need to make in orthopedics I needed.
Someone of his caliber of his kind.
Kind of track record focused solely on orthopedics and that has already.
Yielded great benefits in terms of how it will be off.
Operate and the progress we've made on the transformation journey. So each one of these changes had a particular context around that but taken together I believe that there are much much better position.
As a company and one final point on that.
Which I mentioned in my remarks in operations, we've assembled a team within operations that are drawn from the industry.
It's the first time, we've had such a group that are not only strong operations, our leaders, but actually come from the industry focus on driving the improvements in the operations area that are key to transforming orthopedics. So taken together I believe he will be a stronger as a company.
Moving forward. So that's the ops or the management changes 0.2nd do I have confidence in the midterm guidance absolutely.
We've maintained our guidance of <unk> of at least 17, 5% for the year, we've kind of given you what the components of that are from <unk> into <unk>.
Fully confident in our ability to deliver that and you asked about midterm and the latter up from.
2023, well into 2025, we provided some bridges in the past for them I think there is a full year results I am.
100% confident on our ability to deliver to that it's not just words, but rather the initiatives to underpin how theyre going to get there. So that's your second point in terms of.
The comment on <unk>, you're right.
B had compared to our peers, who have reported so far.
Clearly, our our head outside the United States than we are in the U S. In the U S.
We are in the early stages of improving our operations I talked about the appointment of a new U S sales leader that.
That occurred in Q2 in addition to that there's several other components of changes first is we've simplified the organization we've de layered the U S organization, we've gone from having six regional heads in the U S down to three and made for the simplification is downstream and that organizations, which is first.
Important to that the second component is fundamentally as I mentioned, our commercial processes.
We're not where you would expect.
Us to be and the new process that was rolled out starting in Q1 right through into Q2 are starting to bear fruit, but I do believe as the quarters progress that would really start to pay off the third piece isn't isn't incentives.
And you change a change in incentives, where we had been in orthopedics, primarily focused on retention.
Now have incentive programs that are more growth oriented and that is on the back of improved product availability.
We've already seen I've shown you some of the metrics around that which is the third.
The point of that and our fourth and final component is refocusing the efforts of our commercial team are around our portfolio right that required some fairly intensive training that we invested in the first half of the year that we alluded to.
So the combination of all of those things will start to yield obviously the performance isn't quite there in the U S. Yet, but I do believe we're well positioned in the back half of the year and.
So that was I believe your third and final question I think there was another one that Mr. Snee Symantec Awesome Atlas neat Oh, yes, so we are seeing sequential improvements.
In terms of growth with our with our leisure comps luck.
We obviously have multiple offerings.
And some Atlas.
The journey rocks construct.
<unk> is an important component to that.
So we're pleased with the progress we obviously don't break out individual product families.
Family sales, but.
We're continuing to see good.
Good uptake in that area.
I'm sorry.
Yes.
Yesterday I knew there was a fourth one.
I've lost track of that.
So.
Fundamentally.
Our growth assumptions are or the guidance that we provided are based on our.
Our improved and improving commercial execution.
Our guidance that we provided over the midterm does not assume some exceptional tailwind, but it's built on more or less normalized.
Kind of macro factors or procedure environment.
Having said that we do see a tailwind we saw that in Q1, we're seeing that obviously in.
Q2 to a lower level than that in Q1 in terms of how long that.
And that persists or where they come from whether its backlog or something else.
We don't really have the visibility to be able to call that right.
As a number four player in orthopedics as I've said in the past, where we're going through the performance improvement program. It can be difficult to kind of parse how much of it is you and how much of it is is the market right. That's in orthopedics.
But having said that.
Thought you'd be at this stage and have your act to adopt any of them as you've moved along that you've come across.
Difficulties and then secondly on Cory adoption can you give us a sense of what proportion of those placements were in the ASC channel versus hospital are more broadly how did all of those sales to the IFC channel Fad Jerry in the past I'll sure.
So with the top line plan.
We are about where I thought it would be at this point of view, we called out 45%. It's it's based on.
Progress in each of the underpinning initiatives and kind of relative to the schedule that we're on right. So it's built up or the combination of those.
And those initiatives, so 45% you know about where we expect it to be.
I'm, particularly pleased with and as I said there are some.
For the most part either on track or ahead in terms of Kpis and that's true across the board, having said that there are some areas that are better than that than others.
In terms of where I'm pleased yeah pricing is clearly an area we called out as one of the elements. The 12 point plan very pleased with the progress there the order to cash initiative very pleased with the progress that we're making there the cross business unit deals, which is the Tulsa element to the $12 plan.
<unk> and trumps the volume of deals the number of deals I am pleased with the progress that we're making right. We're really are taking advantage of the opportunity we have in the ASC. So those that's the third one wound we're on track I would say against a fairly aspirational plan that we had around negative pressure product availability.
You know, there's two components to it it's improving lifer, which which is really tied to replenishment.
That's right in orthopedics is how well are we replenished necessitated already out there you see the progress that we've chartered that's good the part that's not good with that is we are driving down the sales dsi's related to it that that has been slower, but we understand why it's slower it fundamentally is because the.
<unk> had supply interruptions right individual components in the Q1 it was cross-link polymer.
That are a key part of certain contracts that we were challenged in terms of supply so that inhibited our ability to complete sets of replenish replenish that certain portions of our sets. So there's things that are set as Anne francoise et cetera stuck in inventory rather than being deployed in the field right. So there's good reasons for why it is.
It is but the underlying.
Improvements in process around our commercial operations and really our manufacturing operations and our ability to connect.
Marshall and sales that we've made tremendous progress and so and there it's moving from kind of high level volume base kind of forecast to forecast that are tied to mix actual SKU level and that's the real improvement that we need to make in order to better match supply to the back there I feel good about the progress progress, but the kpis.
Inventory clearly we've got work to do that right to give you. An example of where we are not where we needed to be in terms of how do we need to make and we needed to make adjustments.
Two our plan, what I would say, it's not major ones, but having said that there's a very tight level of governance around this every two weeks that we meet I chaired the meeting together with Anne Francoise and the reason we do that is to make decisions at the pace that we need to make to be able to run our program given the imperatives that we have broad improvement.
Within the range of those we've had to make adjustments and refinements, but not major ones and that's not because we're loads to making them. It's because we've generally call that called it okay right. So if we need to make it we will do so we've got a mechanism to do it but we haven't needed to do to to do it.
So that's the part your question around Asc's.
About a third of our.
Coreys or in the ASC.
Channel, we're seeing good growth I think the 20% growth in Asp's in our recon business. So we are all participating in the shift of procedures that are going from in the U S from hospitals into the into the assets.
Yes.
Okay.
Thank you and it's a greenfield from UBS and can I ask some questions on the margin so the in the <unk>.
Margin was historically weak and I know, we had mess you started the year it would be H two weighted but it's also kind of a historic step up in <unk>. So was this genuinely what you were expecting or is it sort of the bottom of the range of what you were expecting for the first half when I look at slide 18, and you've got the building blocks up even if I add those building blocks are not getting too much more.
And then 70 and a half so are we just less optimistic maybe than the start of the year.
Yes.
You want to take that go ahead, I'm, sorry, I was going to take this one but so clearly the amount of Haynes as we say being the statement falling in line with our expectations and as anticipated and we said at the beginning of the year that it will be the margins on the profitability will be H two weighted.
So what we have we are expecting to see is the operating any franchisee as you're pointing out to slide 18, coming frame and importantly, returning to historical seasonality. So yes. The H one margin is lower but that was implied in our initial guidance.
Given that we are returning to historical seasonality and the productivity improvements. We've always sign Fairstein went late in the second half. So we've already made progress in terms of cost savings restructuring.
On top of that we unwinding the cost.
On the cost and the selling and marketing and we're seeing in the first half. So we are you know will be in line or tracking to what we said.
And just to accentuate the point, let me say our expectations. This is what our budget was built too. So we truly are on budget to each one of the year I think the point is some of the favorability in revenue. Maybe you had that are ahead of our expectations didn't necessarily translate into favorite body.
And margin in beef kind of giving you the bridge around that but truly our budget was.
As we pivot.
Maybe we just think about next year. It's just a broader question. The there's obviously a big step up as a sample and today in terms of margin to get towards that target. What happens if you go to the market doesn't grow.
We've got a big backlog, you've got a tough comp and I know Theres. Obviously vf's remained revenue will still be quite high but you've got to say you Gotta go from taking very little share in the U S. Losing share it's taken a lot of share is that in plan yet so I.
It reflects back to power plant is constructed and what's the anchor to our guidance.
Our guidance was built in our assumption was built on more or less normal.
Orthopedic volumes any tailwind we have is a bit.
Upside right and so implied in that is share recovery and here I want to parse what that means.
Over the last couple of years.
We have lost share not because we have necessarily been displaced from accounts, but because we've given up procedures largely on the back of our failure to supply reliably right recovering that share.
Though not easy is easier than if you had to go back into accounts that veeva completely displaced one I mean to put it simply the surgeons are already trained in our systems, who have had to resort to other.
Our company's products, because we haven't been able to supply as well.
Irregular nasby should've been able to right. So is that recovery that underpins. The next couple of years. The second more structural component to that is our innovations we have invested in R&D in particular in orthopedics robotics was a big component of that but it's not just robotics.
It's the mentalist right it's in it.
In trauma and extremities and other parts of our portfolio, but let's just take robotics right Corey behalf of high level of conviction around what we're doing in the 12 point plan is accelerating certain features and functionality that was previously contemplated the pipeline, but not at the pace that we're bringing this out.
And there you see this right every quarter I talk about something related to court and that just does it doesn't it didn't just happen. It's represents an acceleration of the plants that we had and so when you take a step back and look at what we brought on to Corey right. We've got not only a milling based approach now we've accelerated programs to bring a cutting based approach.
Onto Corey right is a platform that now has cutting and milling and the intention is that it appeals to a broader range of surgeons. So that represents an acceleration of the digital attention or as another thing right. So which is another capability, where surgeons are able to plan right, they're they're they're they're procedures before it ever making a cut right.
That's a unique selling feature of the digital attention or.
We brought that out last quarter again, not to go down the rabbit hole of any one feature but in totality.
A significant investment we believe in Korea, I believe that will be a driver of growth not just in Trump's of robotics right you see our other recon line, which is where we park our robotics numbers was reasonable amount of growth, but it's really how do we use Corey to drive the rest of our portfolio. That's the refocus of our commercial organization.
Innovation that I'm talking about right. So there I do feel.
Good about how we're positioned for the midterm. So hopefully that gives you a bit of color around around tower guidance is built up.
Thank you there was a question on the phone Vicki I don't see that we've got three questions from the phone.
And the first of which is broad acre from Citi. So perhaps it goes to that before we go to other questions.
Yeah.
Ranke tube agenda from Citi. Your line is open.
Excellent good morning, and thank you guys for squeezing me in I have two please.
First one is.
Deepak maybe Q2.
To follow on a little bit on the competitive environment and how you're feeling about your performance in orthopedics.
And.
Maybe you can tie this also to the changes that you've made to the sales organization in the U S year to date. The obviously when we look at the growth rates clearly the gap between you and peers has narrowed this quarter I appreciate there's a lot of comp.
In fact generic noise, but do you feel you are starting to make progress.
Versus where you were 12 months ago, and I guess, maybe just talk to how the commercial organization changes, including the training program and the restructuring done year to date.
To that and really what your ambition is as you move into the back half of the year and into 2024, and then I'll have a follow up after that but maybe we can start there.
Yes, sure Veronica thanks.
So first off I mean, the headline answer is.
I feel good about where we are as you as you correctly note.
The gap relative to competitors at least the the we'd be we're ahead of one of them we've narrowed the gap relative to the other competitors reported so far right.
So I am.
He used with where we are but this is were very much in the early stages of the improvement journey on commercial right you rightly note.
The changes in organization that to changes in commercial process.
The U S where our biggest challenge lies in terms of commercial performance in the U S.
<unk>.
We brought a lot of these together in Q2, which started in Q1 actually some of that.
The seeds were sown back in 2022, they've come together in Q2 <unk>.
They've had impact very clearly yet, but the bigger impact is is to come in the back half of the year and in time beyond as you know in commercial.
Not a switch that you turn on right you've got to make sure you laid the foundations you make sure you're thoughtful about the changes you're making.
And of course that the organization do its job. So I do believe that we're well positioned now having brought together the major elements, but the proof will be in the pudding and that will be best judged in terms of our performance here on out but just to give you a sense of timing the accentuated a lot of these elements came together really in Q2 right. So.
I do feel good about it but obviously.
The big part of the productivity.
The improvements will come.
And in the quarters that follow.
Okay.
That's that's very clear and then maybe and I apologize if this.
This is Mike the question might come across as aggressive it is not intended the stat, but it's definitely one that has come up a lot in my conversations this morning, which is at 1.1 percentage point.
Point to spend that you've called out in selling and marketing was this always in the plan from the outfit at the ear.
The nature of the spend debate and I guess, maybe just give us the background for why we have not heard about it until now is.
It's clearly a surprise on the profitability in the first half of the year for all of us.
Yes sure.
So some of it was planned. So for example, we had always planned to bring together.
Our commercial organization for a longer period of time, then be historically do with much more intensive training that then.
Than we do and that's all about the refocus and so forth right. So that was planned the part that wasn't is Ah is Ron commissions.
So we saw.
A couple of factors there.
That were to a higher level than we had originally planned for.
So so for example.
I called out supply chain interruptions.
As a very very real factor.
For folks in the field right whether in.
In the orthopedics side.
They're counting on steps to be delivered to drive growth and with those sets aren't complete that really impacts their ability to go out and get new business right. So it's a very real impact in the field on the sports side.
We've had a.
Quite a few challenges in being able to bring that to.
To deliver.
Products needed to drive growth the teams have done a remarkable job selling through that but theres been tremendous component shortages and sports and we've had to make sure that the buffer to some extent the organization from those challenges or those that part of the selling spend related to the commission.
This was to a higher level than we expected.
In the back half of the year.
A lot of these things are coming together because we've got line of sight to what we are able to produce.
So we wont need a need those types of types.
Types of investment so to your point some of it expected.
Some of it not so.
That's very clear. Thank you guys I'll jump back into the queue.
Thanks, Bob.
So you can go back to the room and there's a couple more questions on the phone lines.
Good one in the room.
Yeah.
Hi, David Adlington JP Morgan three please so firstly on the supply constraints just wondering if you are.
To give some more color in terms of what they actually are yeah, how much of a headwind whether every rule and when do you expect the resolve.
Second one on free cash flow just wondering any guidance for the full year, whether you expect to be in positive territory for the full year or not.
And then finally just in terms of.
Chinese BB Peter Sports Medicine.
Are you expecting any destocking ahead of that.
And if so is that factored into the guidance.
So did you want to take the free cash flow.
Yes, so in terms of our free cash flow and cash conversion.
As we guided.
In a week with a full year results the the movement.
Depends on the inventory I'm quite clearly as we said today here that the drag on our cash flow has been the increase in inventory, we are looking to address that and bringing in bringing it back to more reasonable level. So we won't be quite a historical level of free cash flow or trading cash conversion, but we're getting back.
I don't think anything back to the to the Kenya or pricing those historical level as when returning country terminal.
We will position until we stop energy pricing, particularly in the BSI.
So supply constraints that could give you a little bit of color.
On sports.
We rely on basically third parties.
Ah different components that go into our into the products that we make.
We've had.
Challenges is one of the other component.
You know for quite some time historically its been semiconductors, that's really impacted our R. A T business in sports that has improved from last year to this year right.
But what is in residence was another area that I called out in times past that has largely improve not not as as you know pre pandemic levels, but improved relative to last year.
What is an improved is one or the other component where it's not some.
Big categories as an individual component related to a challenge that a particular suppliers, having either around labor or their own input raw materials. There are about six or seven of those.
Today, there was a much longer list rebuttal is down to six or seven today.
<unk> are really impacting the pace at which we produce so it's reflected in raw material inventory because we've got you know the 100 other things that we need to complete it but were for the six or seven things are waiting on.
The stuff sits in inventory some work in progress and our field doesn't get it.
And the way they are expected to ship. So it's those call it six or seven things individual components and sports against a backdrop of improving.
Overall situations semiconductor and residence, which was a topic last year for that business in orthopedics.
I want to draw a distinction between supply versus product ability. The reason, we call it product availability and in orthopedics the by far the biggest challenge for orthopedics was cost.
Our ability to connect operations and commercial that led to us not being able to provide bring the products where that needed at the time that they're needed right and they're the large part of the fix was thinks that we need to do in house you know all of the things that I've that I've talked about today and in previous points. There I feel good about the progress of our base, but that.
Doesn't mean, there were no supply challenges in orthopedics right and there were some.
The one I called I believe I called attention to in Q1.
It was cross linked polymer.
Which goes into some of the in source that we make right. It's a key part else certainly construct when you don't have it you don't have a contract that's complete and you're in a in a painful situation in the field in terms of your ability to supply customers that was a very significant impact for us.
In Q1 and impacted our ability to to complete implant sets. There are other components that go into instruments sucks right and there were more reliant on third party versus your own manufacturing and those have been I would say irregular supply.
Where we don't.
Get what we need the quantities that we need it when they need it and it's not a large number of components. So it's a it's really a small handful, but those handful can keep you from being able to complete those instrument sets and therefore all of the stuff that's in your inventory versus being deployed and being able to travel return.
So it's a different type of problem manifests in similar ways.
But like I said.
But I look out into the back half of the year I do see some improvement in terms of what we're expecting to get but hopefully that gives you the color around Oran supplied to answer your first question.
Third your third question around China V. BP, then or on Destocking.
<unk>.
But in terms of timing of when that will occur. We're obviously in close touch with the government in China around the authorities that are tasked with with.
With bringing this to life.
So it's hard to tell exactly when that will occur, but suffice it to say.
B R.
We've got a range of plans to deal with Destocking and other behaviors that you might see when something like this goes into effect be obviously have some experience with dealing with this with the orthopedics Pvp, we will apply the lessons to be blurred and that process to manage this.
As best we can.
The next question before we go to some one in the room.
As Robert.
Davis from Morgan Stanley .
Okay.
Yes. Thank you for taking my question.
My first one was just around.
I guess your your EBIT bridge into the second half of the year also had a couple of follow ups on that first one was just around the second half weighting of that EBIT bridge because obviously.
Higher even in the sort of pre COVID-19 levels. I know you sort of cited the sort of historic seasonality, but just wanted to if you could kind of touch on the second half weighting of the EBIT as a percentage of the overall group seems to be no I think three or 400 basis points above the previous kind.
Kind of how is the dean in terms of EBIT contribution as a proportion of the full year and then just a couple around just we had FX guidance I think of 120 basis points of transactional just where that sort of fits into your guidance and you were wanting to H margin bridge is that included in the underlying numbers.
Part of that seasonal pickup and then two sort of follow ups. One was just on.
Just on the profitability I guess at first half margins compared to a couple of years ago. You were 240 250 basis points below where you were just be curious in terms of from a divisional standpoint, where are you seeing kind of higher or lower margin versus 24 months ago by divisional basis, and then a final one if I can squeeze it in just on your innovation pipeline.
Is any of that extra ru innovation sort of spend in R&D push costing you on the margin side. Thank you.
Jordan unpack them.
And it's quite good morning, Robert There was quite a few here so in terms of the.
Waking up maybe in the second half you're right I mean, historically, it's been 45 47 to 50 355 in the second half given the pattern. It's fair to say, there's a higher percentage of in between the second half.
A lot of that driven by returning to the seasonal uplift to athene, but also the flow through of the productivity improvements and the cost savings. So that's really what's on what's driving that at proportionate.
The FX impact.
Impact is a throughout the.
You know the various proportion it show a three mostly in cost of goods because that said disproportion, where we have all our U S cost base I would say, though and that's why we should recognize 520 basis point.
Margin erosion from FX win.
We are absorbing so when we talk about 17, 5% it sounds.
Quite a headwind in FX and reshape recognize that therefore, the BFS Julien praise margin are all coming through.
From the divisional or the segmental on 14, clearly they base, there's a range on it and you can find information.
And of course from an accounting perspective, it's after allocating all cost and facilities on actually allocating exchange rate, we've seen good improvement in orthopedics and to the earlier question you know the improvement in the midterm margin is mostly driven by the orthopedics segment returning to the.
Near at TD historical profitability level, we had which is what we discussed in our full year results earlier. This year. So orthopedics is on track we're seeing good improvement sports is improving whereas when when you look at the and there's a slight dilution in west because of the investment we're making behind negative press.
So all divisions stopped tracking very well and showing you know where we want them to be.
And the final question on R&D mounting that Theres no further dilution of R&D you know we've made the step up in the R&D investment in 18 and 19, we've kept it through the Covid period, where not a right position and that's not by native tissue margin. So I think I've covered all your questions, but I can't do that.
So ASP impact trying to memorize it.
Yes.
No Mike.
Thank you very much that was very helpful.
Yeah.
Thanks, all along.
I'm told is one more on the line, Chris <unk> from credit Suisse.
Hey, good morning, Deepak untrustworthy.
Actually still have another three question left.
First is just on the.
The dressing business in wound care could you discuss that and now it looks like at least from our perspective, you are losing share on ADESA could you maybe discuss how happy you are with the performance there.
Second question would be on a toss on Corey.
You mentioned that in your prepared remarks could you maybe specify the timing of when do you expect that to become available and.
Third question is on just on the cost inflation, given <unk> stand right now.
How should we expect that to go into 'twenty. Four is obviously kind of easing substantially now in the second half note that headwind.
Maybe just give you if you could give us an indication there.
The current level of know how that would impact your business. Thank you.
Sure.
I'll take the.
The first two.
You can take the third one.
So in terms of.
Let me start with the second question, which is.
Chorion shoulder.
When do I why would I want it and I'd want it tomorrow I had my druthers, but.
We have to sequence that in which the other core programs.
Made really good progress on the there is a couple more elements that are still coming on knee.
There's a fairly robust pipeline of projects in hips.
You need to prioritize.
But I'm quite excited.
Excited about the applicability of Corey for shoulder of the anatomy of the shoulder is such that Corey is very well positioned to be to play an important role.
And children be recognize that opportunity, but recognize that the form factor of <unk> Corey is well suited for the shoulder. So it's it's in place in terms of pipeline, we just need to kind of factor it in with with the other.
Other core programs, we have in place. So we'll give you some visibility a peek behind the curtain.
We have the meet the management.
Session.
In November so so stay tuned for that.
The first question now Chris just remind me I just drew a blank there.
AWP Yeah, alright, thank you.
We're using so addressing.
Maybe I should take this take notes.
So.
Fundamentally about wound.
It's about our portfolio you're right.
There is some.
With the performance in dressings does are.
You can parse this all different ways.
But fundamentally what I'm actually pleased with is how our portfolio in wound is performing we've got the broadest portfolio in.
In the industry not only is it broad is actually quite rich in terms of what we ask in each of our categories right. So.
Our biologics portfolio is performing very very well.
Our skin substitutes business continues to be above market. This great data clinical data that we've built up over a long period of time.
That's fueling this growth I feel very very good about where we're positioned there negative pressure is called out as a 12 point plan a tremendous opportunity in the back of Renesys, a refreshed portfolio there to drive really growth in that category. So what I see those that drove drivers lineup I do feel good there's also.
Quite a robust pipeline.
<unk>, particularly around era unfolds.
And dressing so I'm very excited with what the future holds there, but when you add all these things up the story is one of <unk>.
Each element of the portfolio plays its role, but its the totality of the breath and the richness that I'm. Most excited about is the source of our competitive advantage.
Within that.
In terms of cash maybe you want to take that assumption in terms of cost to finish off I mean cannae.
Same here today.
We expect the cost pressures on inflation just peak.
In our midterm guidance always assume that Monday, no direct inflation in 'twenty four 'twenty five and while we know there is of course as you know our cost inflation will unwind through the cost of goods line as we found the inventory that we fail to Ohio cost. So you know they will be a phasing of that effect is.
I think patient comes down.
Okay, good getting a note that we.
We need to finish year, because our first meetings I guess in a few minutes.
So I want to take this opportunity to thank.
Everyone for coming thank you for your questions and your engagement.
I'm looking forward to coming back in the next quarter and continuing to show you. The story of progress. So thank you very much.