SNN Q1 2023 Earnings Call
Operator: Hello, and welcome to today's Smith & Nephew First Quarter Trading Report. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions] Certain statements in this presentation are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those -- in those statements due to a variety of factors. Most information about these factors is contained in the company's filings with the Securities and Exchange Commission. I would now like to pass the conference over to Deepak Nath, Chief Executive Officer. Deepak, please go ahead.
Deepak Nath: Thank you. Good morning, and welcome to the Smith & Nephew first quarter trading update. I'm Deepak Nath, Chief Executive Officer; and joining me is Chief Financial Officer, Anne-Francoise Nesmes. I'm pleased to report this quarter's numbers. We've maintained the growth momentum from the end of 2022. The 60% of our business in Sports Medicine and Wound Management continues to be consistently strong. In Orthopaedics, we've had another better quarter with improvements in commercial execution and product availability, allowing us to take more advantage of the strong market. Revenue growth of almost 7% is a good first step towards our full year target. There does look to have been a stronger environment for elective procedures in the first quarter, and Anne-Francoise will take you through the detail of what we've seen shortly. However, we're not relying on outside conditions for success. Our priority is to deliver on the 12-point plan to transform Smith & Nephew and position us for sustainably higher growth. In Orthopaedics, we've made further progress this quarter on the fundamental rewiring to improve our competitive position, although we're still less than halfway through the 2 years of the plan. On innovation, our growth investments are producing a high cadence of new launches, including in robotics and sports medicine. And we're working hard on productivity, including completing the detailed planning for the cost actions we announced with our full year results. I'll cover our progress in a moment, but for now, I'll hand you over to Anne-Francoise to take you through the details of the quarter.
Anne-Francoise Nesmes: Thank you, Deepak, and good morning, everyone. Our first quarter revenue was $1.4 billion, with a 6.9% underlying growth. All the franchises contributed to growth and maintained a good momentum from the end of 2022. When we look at the revenue by region, the performance growth was driven by established market, with our U.S. business growing at 11.8% underlying and other established markets growing at 7%. Significant factor was that health care systems across the Americas, Europe and much of Asia Pacific saw stronger elective procedures volume than anticipated. With improvements coming through from the 12-point plan, we were better able to take advantage of these conditions, which benefited our surgical businesses, particularly in the early part of the quarter. We were, therefore, able to offset the decline of 7.3% underlying in emerging markets, which reflected the expected slower quarter in China. VBP remained a headwind with an additional effect from the renewed COVID wave that began late in 2022. This resulted in fewer surgeries and slower shipments into the channel for much of the quarter in China, with a recovery coming only late in March. Looking at the detail by franchises. Orthopaedics grew 3.9% underlying. Knees and hips are the parts of our business where we see the effects of VBP. As we move through the next quarter, we'll begin to lap the implementation, and the headwind should fall on our way entirely by the second half of the year. Excluding China, growth was 12% in knees and 10% in hips, reflecting the strong procedure volume recovery that I just mentioned. Other reconstructions growth of 17 -- of 19.7%, sorry, was driven by accelerating the adoption of robotics. Around 20% of our U.S. knees are now implanting -- implanted with robotic assistance. We also reached a development milestone in March with the first surgical procedure using the CORI Digital Tensioner. Deepak will talk more about the new device shortly, which is the first of a series of addition we have planned for CORI in 2023. The 0.8% decline in Trauma & Extremities reflects our exit from China. We'll fully analyze that in the second quarter of 2023 and also lap further exits in Europe during the second half. Growth would have been 1.8% without China and around 4%, excluding all market exits and should therefore accelerate as the year progresses. The U.S. is already showing what our portfolio is capable of with high single-digit growth in the quarter. More broadly, our work to build the portfolio in Orthopaedics around best-in-class and differentiated assets is ongoing, and we believe this will be a significant growth driver for the segment. This is most visible in knees today with cementless and CORIs revision capability and will be more evident in hips and Trauma & Extremities over time. Moving to our Sports Medicine & ENT franchise, which grew 10% in the quarter, despite some ongoing external supply chain challenges and the impact of the COVID wave in China. Joint repair grew 7.3%, with strong performance across all procedure types. Developing new market segments and the steady stream of innovation have been key components of long-term growth in sports, and that was again the case in Q1. In biologics, REGENETEN continued to reaccelerate with strong double-digit growth in the quarter, and we added a further growth driver in knee repair, showing our new solutions for ligament reconstruction at AAOS in March. AET grew 9.1% in the quarter. Core COBLATION and the ongoing ramp of FASTSEAL were the major contributors, along with a soft prior comparator from supply constraints in 2022. I know there is interest in the recent data collection process in China that includes some sports medicine products. We are in regular contact with the authorities to discuss future plans, but no decisions have been taken yet on any next steps. And to give you a sense of what it's being looked at, the data request in China was limited in scope and covered only some joint repair categories in China, representing 1% to 1.5% of group sales. And finally, ENT growth of 30.8% reflects the post-COVID recovery in tonsil and adenoid procedures. We expect moderation of the growth rate during 2023, as end markets approach more normalized levels. But ENT is an attractive growth area beyond this market recovering. Despite facing some ongoing supply challenges hereto, Advanced Wound Management grew 7.9% underlying. As in previous quarters, Advanced Wound Care delivered solid performance across most major regions, with underlying growth of 1%, reflecting a strong prior year comparator. Bioactives grew 15.2% on the line. Shipment timings effect on SANTYL added some growth, but the primary driver here was double-digit growth in skin substitutes. The acquisition of Osiris in 2019 has been a good example of our tuck-in M&A strategy, both adding to the growth of the franchise and delivering attractive financial returns. A key valuation metric for M&A is ROIC exceeding WACC within a reasonable time scale, and those are past our hurdle in 2022. Advanced Wound Devices growth of 12.9% reflects a similar pattern to the previous quarter, with double-digit growth for single-use product PICO and a significant contribution from traditional platform RENASYS. And finally, I'll move to our full year guidance, which is unchanged. We continue to target underlying revenue growth of 5% to 6%. We expect continued above-market growth in Sports Medicine and Advanced Wound Management and improved Orthopaedics performance compared to 2022. We'll deliver that through better commercial execution and growth from new products as we continue to implement the 12-point plan. Our growth in the first quarter is an encouraging start, and the recent growth headwinds in China orthopedics will ease as the year progresses. However, as I mentioned before, the first quarter also benefited from higher-than-expected surgery levels in established markets, which are 85% of our business. Our guidance did already achieve some market strength in the second half. So while the timing through the year has changed, the overall expectation has not. We do not assume that the end market strength at this level persists for the whole of 2023. Our guidance for the full year trading margin is also maintained for at least 17.5%. As we have previously mentioned, we expect the trading margin to be H2 weighted, reflecting our historically normal margin seasonality, together with the accumulating benefits of productivity improvements throughout the year. And now, I'll hand you back to Deepak.
Deepak Nath: Thank you, Anne-Francoise. I'm sure this slide is familiar to you by now, setting out the 12-point plan. This plan covers the biggest opportunities for the company around fixing Orthopaedics, improving productivity throughout the value chain and further accelerating Sports Medicine and Advance Wound Management. The plan is central to how we'll deliver our midterm targets, and we're continuing to drive these initiatives each quarter. We updated you in previous quarters on our work to redistribute instrument sets and on our progress on product supply, with lifer and back orders on a path of recoveries toward our eventual targets. This is a wide-ranging plan with a lot to do. And today, we can show progress in further areas around logistics, sales force delivery, robotics and productivity. Last-mile logistics is another important part of rewiring our commercial delivery for both better growth and greater asset efficiency. Our project team has been working with our local distribution centers to standardize processes around fulfillment, inventory and asset management, and we're seeing some early wins. One example is kit cycle time, which is the time taken to process a set post surgery and make it available for another procedure. We've reduced that by 40% in just a few months, which means better availability of sets to customers and better asset turns by reducing downtime. We've also made progress in kit health. The team has identified and reconstituted in complete sets that were previously not turning at all. And the number not ready for surgery is now down by more than 50% from the first quarter of 2022. In sales force delivery, we're moving our field force to a new digital platform that supports the full range of a rep's activity from training and sales targeting to case scheduling and deal processing. We have some of these digital capabilities already, but with more than 80% of reps already on the new platform, they should be used more consistently in the future. And importantly, we've also rolled out new sales incentive structures in the first quarter, shifting from a historical emphasis that rewarded retention to growth. Finally, on Orthopaedics, we've continued to invest in our robotics platform and commercial approach, including the launch of the digital tensioner, which I'll touch more on in a moment. And as Anne-Francoise mentioned, we're seeing a clear reflection point in utilization. In the category of improved -- improving productivity, we finalized the associated cost of our manufacturing network and go-to-market optimization work stream. As a reminder, we announced a package of productivity measures along with our full year 2022 results. It's broad ranging, with cost levers across manufacturing, sales and marketing and G&A. The plan is to deliver at least $200 million in annual cost savings by 2025, with the areas for savings shown on the slide. At that point, there were still some detail to be finalized on network optimization and potential market exits. The teams have completed this work, and we can now also say that we expect associated nontrading restructuring charges of around $275 million. Around 3 quarters will be cash costs and around half of the total P&L charges will be taken in 2023. Finally, I'll go a little more into our recent innovation. Returns on our R&D investments are one of the building blocks of our growth targets, and we expect a higher cadence of launches than in the past. Those of you who could make it to AAOS will have seen the CORI Digital Tensioner for soft tissue balancing and knee replacement. It's the only tensioner for robotic-assisted surgery that can take measurements to inform the procedure plan before the surgeon starts cutting bone. The current standard practice uses less reliable methods like manual or mechanical tools, and case series data shows a 64% reduction in variability when using the CORI Tensioner instead. This adds another point of differentiation for robotics platform at a point when all major players are marketing devices. In Sports Medicine, our focus has been on delivering a steady stream of innovation across procedures. And our new devices for ACL reconstruction are part of that approach. ACL reconstruction is one of the established major categories in knee repair. And a new guide system for graft harvesting, together with the expanded ULTRABUTTON family, supports an increasingly surgical preference for the partners and attending. When I step back and look at the whole Sports Medicine portfolio, we now have a recently launched and high-growth products across all of our shoulder repair, meniscus repair, ACL, biologics and the [ talent ]. More broadly, innovation is a central element of our growth model. More than 60% of revenue growth in 2022 came from products launched in the previous 5 years, and we expect the proportion to remain at least at 50% in 2023. I'm excited about the pipeline still to come and will bring important launches across the franchises throughout 2023. So in summary, we're pleased to have started 2023 with a solid first quarter of growth. We were able to take better advantage of higher elective surgery volumes, particularly early in the quarter, but we're also accumulating evidence of more sustainable progress in our 12-point plan -- 12-point improvement plan. Sports Medicine and Advanced Wound Management are delivering the consistent performance that we're aiming for. We're continuing to work through the fix of Orthopaedics, and our growth investments are delivering, whether it's the acquired skin substitutes and bioactives or the high cadence of new launches from our R&D investment right across our portfolio. We remain focused on driving that transformation through the 12-point plan and look forward to updating you further as the year progresses. And now we can take your questions.
Operator: [Operator Instructions] Our first question today comes from the line of Jack Reynolds-Clark from RBC Capital Markets.
Jack Reynolds-Clark: Had a few for me, please. So first one is just around guidance for the year. Obviously, you talked about the outlook for the rest of the year implying a deceleration of growth through the remaining quarters. Just wondering if you could provide some more detail around your assumptions here, kind of why you're expecting a slowdown and kind of any visibility you have on revenues through the rest of the year. The next question is around the cost environment. How are you seeing that unfold so far? And how again are you expecting things to develop through the rest of the year? And then the question -- the last question was on kind of pricing. How much of the growth in the quarter so far has been from pricing, both, I guess, in terms of price and easing of kind of deflation and also your own kind of active initiatives to improve pricing?
Anne-Francoise Nesmes: Jack, I actually start with the -- Anne-Francoise here, obviously. I'll start with the question on pricing. And if you recall, we saw a changing trend as we exited 2022. We've been very focused on pricing through the 12-point plan, both from a short-term perspective to offset some of the inflationary headwinds, but more longer term as well from a strategic pricing perspective. We're continuing to see a positive trend in pricing. We've moved away from the deflation. We've seen the historical price erosion we've seen in the past. It has continued in Q1. Either -- I think it's important to say that this is not what drives our midterm guidance, and that's not a tale we'll be building on. You want to take the -- you want me to continue to talk on the -- so I'll come back to your first question then around the outlook and the implied deceleration. So it is fair to say that the first quarter has seen improvement in elective procedure. What we have assumed -- our assumption is that, overall, the market growth and the market momentum for the full year will not change. So there might be a phasing difference compared to our initial assumptions, but we do not see the overall momentum and market growth to be fundamentally different from our initial assumptions. And that's why we reiterate our guidance of 5% to 6% revenue growth. I would also say, clearly, that it's one quarter. And you've heard me say it before, one quarter doesn't make a full year. There will always be variability. And then the second question around cost. Clearly, if -- there's 2 elements that will drive the margin. Historically, we always have a margin that is higher in the second half. So that is more weighted to the second half, as you see the seasonality of the cost and the revenue. There's also this time as well, something to bear in mind, is the productivity improvement flowing through more into the second half. So that's really what we -- the point we made at year-end and the point we are reiterating today, sorry, around the 17.5% margin guidance, where you should expect to see a better second half. I think I've covered your 3 questions.
Operator: The next question today comes from the line of David Adlington from JPMorgan.
David Adlington: Firstly, just on the new incentive structures for the sales team. I just wondered if you could -- obviously, that shift towards rewarding growth rather than retention, just wondered how that had been taken by the sales force and how that's sort of changing behaviors already. And sort of slightly connected to that, I'm just wondering, given the hotter market environment, I'm just wondering how you're seeing the competition for labor and, therefore, wage inflation panning out from here. And the second one, just on the technical guidance. Obviously, your associate numbers changed quite a lot since February. I just wondered what changed so much in the last 2 months. And is that just by vendors?
Deepak Nath: Great. So David, the headline answer is the sales force responded very well to the new incentive scheme. We had a chance to roll that out of the national sales meeting back in February, and the response was good. There's increasing confidence. Obviously, the confidence in our portfolio was always there, but product availability and the improvements of the sales force feels has given them confidence to be able to achieve quota. And indeed, in the first quarter, quota attainment was actually quite high, not only in terms of the overall sales force. The distribution of quota attainment was also kind of in the range of what we're targeting. So overall, good reception to the new incentive scheme, increasing confidence from the sales force, particularly on product availability. And one quarter in, the quota attainment is where we expected to [ nod ] on this point in the year. And regarding your second question, Anne-Francoise, do you want to take that?
Anne-Francoise Nesmes: So indeed, you're right, David, it's the loss associated to Bioventus. We took a further -- our technical guidance reflect the loss we took in Q1 on the CartiHeal changes within Bioventus.
David Adlington: I suppose the follow-on question is how do you see that panning out beyond this year.
Anne-Francoise Nesmes: So at this point, the financial exposure is early -- please note as well that it's a noncash cost, but we adjusted the value of Bioventus at the end at December 2022. So the exposure is very limited, and it's noncash. The biggest adjustment was at the end of '22.
Operator: The next question today comes from the line of Kyle Rose from Canaccord.
Kyle Rose: I appreciate the incremental color on the CORI business. In the U.S., it sounds like 20% of U.S. knees on CORI. Wondered if you could give us a similar metric on cementless knees in the U.S. and just how that rollout is trending. Secondarily is plans for the Engage knee. When should we see that in the U.S. market? And then with respect to inventory improvements, glad to see that some of those headwinds are easing. Maybe you could just help us understand where are you still seeing headwinds from an inventory perspective. And when should we expect those headwinds to alleviate as we move through the year?
Deepak Nath: Sure thing. So in terms of CORI, we're pleased with the rollout. As you note, 20% of our procedures in the U.S. now are robotic enabled. In terms of our porous knee, we continue to see good traction and uptake, of course, in the United States, now a material part of our growth. We don't break out individual product sales. It's part of a broad portfolio of product. What the porous knee offering has allowed us to do is get into competitive accounts in a way that we couldn't do prior to us having the offering. We have an initial offering with LEGION CONCELOC. Of course, there's further launches to commence around that portfolio. But we're very pleased with the uptake with LEGION CONCELOC today. We're very pleased with our ability to go into competitive situations in a way that we could not before. And it is one element now of a more comprehensive portfolio in knees and hips. So overall pleased with where we are with that. Engage is another differentiated element of our portfolio around unicompartmental knees. The early results are good. And we're going through a staged and careful market introduction for Engage, but it's -- but one element of, again, a broad portfolio of innovations we bring to market. So it's important to underscore that we're not depending on any one factor to drive growth, but it's really about the -- around the portfolio. The third question was on inventory. As we've acknowledged, we've had high levels of inventory in Orthopaedics, especially, and that really started even before COVID and is persistent right through COVID. And we've talked about steps we're taking to bring that inventory down. What we're trying to balance is make sure that there's -- we've got inventory to fuel growth and new product launches and make sure there's product available to serve our customers. Equally, in 2022, we called out the fact that there were understandable reasons for inventory increasing last year, particularly around strategic raw material buys in the context of supply chain disruptions, revaluation of inventory. So these were known factors in 2022. So we're undertaking deliberate steps to bring that inventory down. And to do this, there are more aggressive ways than we're currently undertaking to bring that down. But we believe that would compromise sales growth and our ability to serve our customers. So there is a tension there, but I believe that the targets that we have around sales of inventory, DSI, takes into account these trade-offs. So I'm pleased with the progress -- the operational progress we're making around that topic.
Operator: The next question today comes from the line of Sezgi Oezner from HSBC.
Sezgi Oezner: I have two, please. First of all, the difference in terms of the cost actions, you detailed that you expect $275 million one-off restructuring cost [indiscernible] this year. And this, of course, changes from the guidance earlier in February from -- in your guidance update, it rises from $70 million to $200 million, the restructuring cost that you advised for 2023. So it will be good to hear the changes that you see. What were the moving parts? And my second question relates to the expansion of CORI. We've seen a higher other construction growth this quarter. Part of it, I presume is attributable to CORI. What do you see in terms of the expansion plans internationally as well for CORI? I know it's a very nascent subject, but it could be probably meaningful for the midterm. I'll stop there.
Deepak Nath: Sezgi, just on your first point around restructuring, the buckets that we see are around our network optimization, our G&A and sales and marketing levers. Those buckets haven't fundamentally changed. We've gone through the work now to crystallize our plans in those areas that gives us a better handle on what is actually going to take to deliver the $200-plus million in annual cost savings. As I indicated, a big chunk of those costs, in fact, are in network optimization, as we strive to bring our capacity in line with demand on the back of improving asset efficiency. So more than half the costs are actually related to that. And then we also broke out what our cash and noncash costs associated with these. We also want to flag that around half of those costs will be in 2023, with the remaining over '24 and '25. And in terms of benefits, half the benefits will accrue in '23, '24, with the remaining half coming in 2025. So we've got a better handle on the phasing of benefits and phasing of costs and also more clarity of what cost are expected to be. So that's your first question. The second one now is around CORI. CORI is really -- it's about a global launch. It is global today. So we've gotten traction not only in the United States, but in markets across Europe and Asia. So we have a pretty good view as to where we want to go, where the priority markets are for us. And as important as placements are, Sezgi, it is -- what we're actually more interested in is having the appropriate level of utilization. And as you called out, other recon showed strong double-digit growth, and that reflects increasing uptake of CORI not only in terms of placements, but, also importantly, utilization of CORI. And we cited the metric of roughly 20% of our knees currently today robotically enabled. So those are the different pieces in terms of how they come together.
Sezgi Oezner: If I may just quickly follow up on the cost actions. Does this network optimization imply additional exits as compared to what you previously mentioned? And does this have growth implications over the mid and long run?
Anne-Francoise Nesmes: No, really. So here, it is effectively incremental optimization of the network, particularly looking at the overcapacity that we have in Orthopaedics. As we adjust our processes, clearly, we're becoming more efficient, and that's what we're reflecting. It's difficult to talk a little bit more. We're working through -- the details are not finalized. We need to engage with the team, et cetera, but that's really reflecting the work we're doing around the Orthopaedics.
Deepak Nath: But the short answer to your question around whether it's going to impact growth or not, key consideration in all of this is not to compromise growth in any way. We feel confident in our ability to take out capacity, while certainly release the market and importantly, fuel its growth.
Operator: The next question today comes from the line of Chris Gretler from Credit Suisse.
Christoph Gretler: I have -- the first question I have is with respect to your emerging market business. I noticed that there was a substantial step down also in absolute dollar sales. Could you maybe discuss that business briefly? And if you have maybe also a number of that business growing, excluding China, that will be great.
Deepak Nath: Sure, Chris. So the overwhelming effect of emerging markets, of course, in terms of the reported numbers is China, and we'll get you the ex-China number momentarily. But in terms of our ability to compete in those markets, we're actually pleased with the progress we're making in important markets, whether in India or other places. The traction we've gotten with [ CORI ] and other parts of our portfolio, we're actually pleased with. So what's also important is to make sure we're able to compete effectively and not just drive growth, but actually profitable growth in these markets. And so there, we're looking at where we're able to effectively compete. So for example, we talked about Trauma and an ability to kind of drive profitable growth, and Trauma made the decision strategically to exit. So that's an important consideration in terms of how we effectively compete in these markets. So we've got a broad portfolio. We're able to tailor our participation in these emerging markets to effectively capitalize on the opportunity there. And so in terms of the other factor with emerging markets, just to come back to the point that I started with, there's about a 4-point growth headwind just from FX in emerging markets when you take China -- the effect of China out of this, Chris.
Christoph Gretler: Okay. And then maybe just the other question was on your comment about the beginning of the year and the elective surgery procedure momentum. Is that solely a U.S. phenomenon on the kind of the COVID base -- comp base? Or did you observe this kind of pattern also in other developed countries?
Deepak Nath: It's not just the U.S. We have seen that recovery actually in other markets as well in developed markets. We've called out the effect in China as well, particularly in the last month of the quarter. Post-COVID, we saw a recovery in procedures as well. There are a couple of different drivers for it, whether it's staff -- amelioration of staff shortages or actually pent-up demand. It's kind of hard to tease out the specific factors there. But it's more than just the U.S. market. And we've been better able to capitalize on that market recovery on the back of operational improvements that we've making as part of the 12-point plan.
Operator: The next question today comes from the line of Hassan Al-Wakeel from Barclays.
Hassan Al-Wakeel: I have three, please. So firstly, can you talk about the progress you're making on cementless? Do you think you're closing the gap in terms of share losses versus peers overall here? We've only seen one of your peers report thus far, and the gap is still significant. And I wonder if you see any fundamental reason behind this. Or do you think it's more VBP driven, where you would be overexposed to VBP? And then secondly, could you talk about the request for information on China VBP for Sports Medicine? How likely a risk do you see this to be? I know it's early stages. And how much of the Sports Medicine business in China do you think potentially could be impacted? And what's your base case in terms of when we will get some clarity? And then thirdly, I'd love to get an update in terms of pipeline of potential higher growth assets for M&A and how you're thinking about capital allocation.
Deepak Nath: So first off, around cementless knee, we don't break that out separately. But as I indicated in response to a previous question, I'm pleased with not only the sales of LEGION CONCELOC, but more importantly, our ability now to go after competitive accounts now that we have a cementless offering. And it's important to note that there is more cementless products to come in the future. Equally as important is the portfolio that we have. The role of cementless in our portfolio is perhaps different from that of our other competitors. So as I've always said, it's the portfolio, it is the various elements now that have come together for us to have a fuller offering that we've had in our past and closing important gaps that we previously had in our portfolio. So it's about the portfolio that I'm looking at. And in fact, the gap in U.S. knees as we see it has actually narrowed. Hassan, it's also important to note that we're less than halfway through our improvement journey in terms of the 12-point plan, particularly on fixing Orthopaedics. We had not, at this point in our improvement journey, targeted getting to market or above market. We've got some ways to go in terms of rewiring our business, continuing to address the fundamentals in order to be able to better capitalize on the opportunity before us. As I've indicated, both at full year '22 results and also today, I am pleased with the progress we're making, I'm pleased with us achieving the interim targets that we've set out against the 12-point plan, but we have some ways to go before we're going to be in -- at or above market in terms of [indiscernible]. So second question regarding China VBP, we're still early in the engagement. As you know, a request for information covering a range of categories have -- has gone out. We remain in active discussions with the authorities around our business, around the various categories there. Based on the scope of the data request, just to reiterate what Anne-Francoise has mentioned, this covers roughly 1% to 1.5% of our group sales that it covers. We break out China in the first half results and full year results in terms of overall sales. So it's early going into -- as far as your question around timing, we're not necessarily planning for this to be a 2023 impact and unlikely into future years, but I don't want to get too far ahead of where the government actually is at the moment. So what you should know is we've bracketed roughly what the impact is likely to be on our business. It's still early going to say what the level of impact is going to be. There has been no decisions taken by the government. And once we have that, we'll obviously come back and characterize that for you.
Anne-Francoise Nesmes: And Hassan, if I may, just to be clear, as we mentioned in the presentation, this is a subset. The data request only concerns a subset of joint repair in China. So it's very narrowed. And as Deepak said, therefore, the data covered 1% to 1.5% of revenue -- of group revenue.
Deepak Nath: Right. And then finally, your third question around M&A., as you can imagine, we have a robust program looking at the market and looking at opportunities for value creation in that. And obviously, I'm not going to get into specific targets here on this call.
Operator: The next question today comes from the line of Seb Jantet from Liberium.
Sebastien Jantet: Two, if I may. So first of all, just going back to the strength in Q1 in electives. I know in the comments that you said that it was particularly strong in the quarter. So I guess, what I'm wondering is, have you seen the sales growth during the quarter moderate? And is that what's kind of driving your cautious kind of guidance for the full year? Or are you expecting things to get worse from here? Second question is around Advanced Wound Care. So just looking at the kind of the growth there, I understand there were some tough comps, but can you give any more color on why the growth was quite so slow in this quarter?
Deepak Nath: So Seb, so as far as our outlook for the year, we had in our guidance assumed that there would be market recovery in 2023. And what we're flagging is although we saw some of that in Q1, perhaps earlier than we had anticipated, we don't expect this kind of high level differences throughout the year. So what we're reflecting is that this market recovery we have assumed already in the guidance and we don't see reason to get much more bullish than we had already incorporated into the guidance. So that's what you're seeing. And do you want to take the wound point, Anne-Francoise?
Anne-Francoise Nesmes: On the wound point, Seb, the only -- Advanced Wound Care, the 1% the performance in that segment has been strong across all regions and products. And really, it's a factor of the very strong prior comparator that you see here coming.
Operator: [Operator Instructions] The next question today comes from the line of Graham Doyle from UBS.
Graham Doyle: Just two for me, please. On the -- so it's obviously been pushed a few times around the guidance. Obviously, a strong Q1. I suppose we've seen this with peers as well. Just is there any reason to think that there's sort of a pull forward in demand, and that's why you have this kind of super strong Q1? Or is it just, again, general caution as to why there's no change here? And then just a follow-up on VBP, just a slightly different one. The -- when does the actual ortho lapping events happen within Q2, just to get a sense of that? And then would you be able to give us a sense as to how Sports Medicine within China itself has been growing, just to understand that as well?
Anne-Francoise Nesmes: I'll take the VBP, the ortho VBP -- Graham, sorry, I'll take the ortho VBP. We'll lap through Q2. And I can't give a precise but if you recall, probably we have implemented at different times. So by the end of Q2, we'll have fully lapped it, but it will be throughout the quarter that we'll still see the impact, depending on the various rollout and the provinces. In terms of the guidance for sports -- sorry, on sports, again, I want to reiterate, no decision has been taken, and we are more overweight in sports in China than we were in ortho. But as we said, we've narrowed the range of impact. When you look at the data that has been requested, it represents 1% to 1.5% of group sales. And of course, what will ever happen, but no decision has been made, we can mitigate some of that. In terms of the guidance, I reiterate, it has been a strong Q1. We saw elective procedures coming back, particularly in the early part of the year. We saw that particularly in the established markets, but it is too early to tell. The overall market growth in our view for the full year does not change, and that's the basis for our guidance remaining where it is. It's only 1 quarter. I'll remind again people on the phone, we have 3 quarters to go, and there's no reason to believe the market growth will be higher than what we assumed for the full year.
Graham Doyle: That's super. Maybe just a quick follow-up then because you -- obviously, you keep pointing towards obviously 3 more quarters to go and a little bit of caution. It's early days in April, but is there anything you've seen that has given you a sense of that, that we should be thinking about the Q2 is going to be slightly different? Or is it, again, a little bit too early tell?
Anne-Francoise Nesmes: We're taking a full view on the full year. So I'm not going to comment on Q2 today. That's not the purpose of the call. My position is really on the full year view of our market growth.
Operator: [Operator Instructions] Next up, we have a follow-up question from Jack Reynolds-Clark from RBC Capital Markets.
Jack Reynolds-Clark: Just a follow-up on CORI. I was wondering if you could give an update on your progress on that -- so 300 placement target that you have through the -- throughout 2023. And then just kind of bearing in mind what you -- what Deepak said about kind of the utilization being the most important point, just could you just give some color around kind of what levers sales teams have to kind of drive that utilization in kind of placed accounts?
Deepak Nath: Yes. So Jack, so we'll -- we haven't committed to providing you quarterly placement numbers. So we'll come back later in the year, update you on our progress towards the 300 number. Yes, I am pleased with the kind of uptake that we're seeing in the market, the kind of reception in the market, the funnel that we have, building the quality of the funnel, not only the United States, but also around the world, I am very pleased with. So overall, good progress at this point in the year. It is a back after the year weighted thing, as many of our improvement programs are. So we expect that a lot of the placements are going to come in the Q3, Q4 time frame. But the funnel is developing very nicely on that point. Regarding utilization, just wanted to cover that it's important -- the strategy we're following with CORI is not to place CORI everywhere, but rather to be strategic about where we take it and to place it where we have fully trained surgeons or this high embrace for the product and where we expect to see high utilization. So that's what I wanted to cover, which is it's not just placements for the sake of placements, but really placements where there's a high level of interest and a high level of adoption is what we're targeting with CORI. And the numbers, around 20% of utilization, reflects that strategy. So we're pleased with where we've placed CORI so far and the kind of use that it's getting where we have placed it. So that's good. We're also pleased with is the kind of enthusiasm we see from customers for those who've had exposure to CORI, the kind of differentiation in functionality that we offer. We talked about the digital tensioner. We've done the first cases with this. Already, the reception has been very good around that. Prior to that, I've also indicated that the only robotic platform to have a revision indication, that's been really well received by the market. And when I look at the pipeline that's coming with the planned fruition in 2023 and in the early part of '24, a very, very robust program there. So very exciting things already that have come on to CORI, high-level differentiation and actually even more exciting things to come as I look at the rest of the year and 2024.
Operator: The next question today comes from the line of Veronika Dubajova from Citi.
Veronika Dubajova: I had some technical issues. And two questions for me, please. The first one is just, Deepak and Anne-Francoise, would love to get your thoughts on why you think the market has started off so well. And I guess, do you think this is pent-up demand? Do you think this is staffing? And maybe just remind us, as you look at the sort of 2022 baseline, in particular in the U.S., I'm thinking, which, in your mind, last year were the worst quarters, just so we can kind of think about some of the strength that you're seeing and what's driving it and how it might translate into the remainder of the year. And then my second question, to kind of push you a little bit, Anne-Francoise, a little bit on the margin commentary. I mean, if indeed your assumption here is correct, which this is a pull forward of strength that you had expected in the second half of the year, should we be starting to have a different view on that margin phasing H1 to H2? Just trying to reconcile those 2 comments given where the Q1 organic came out. So if you can comment to that, that would be great.
Deepak Nath: Sure. So Veronika, in terms of the factors driving the market recovery, I think it's pull forward relative to the assumptions that we had made. And from what we can tell, there is some level of pent-up demand. Although from the visibility that we have, it's hard to tell whether the procedure is really a reason for -- due to pent-up demand or just normal course. Demand is kind of hard to parse that. But there's absolutely a factor in that. The second piece of this is stock shortages. I think you've seen some of the commentary from our customers around improvement in staff shortages, reliant on contract labor versus salaried employees and other things that are causing an improvement in surgical capacity that's translating into perhaps a more seamless way to do elective procedures, such as knee and hip replacement. So I think what we're seeing is perhaps earlier improvement on that front than we had anticipated. And in terms of impact to margins, there is historical seasonality in our business based on when procedures get done and also spending patterns in accounts. And what we're seeing is kind of things going back to normal levels in terms of promotional activities occur and kind of the pace of sales activity. So in that sense, we're looking for 2023 to have that normal seasonality. In terms of the [ drop-through ] of this growth into margins, fundamentally, we expect the same pattern of a stronger second half than the first half. But also, I want to bring back a point that Anne-Francoise has mentioned in terms of the accumulating benefits of productivity as part of the 12-point plan. As I mentioned, we're less than halfway through our 2-year plan of improvement -- around operational improvements around 12-point plan. And those benefits will accrue in the second half of the year. So I want to caution us in saying that we're likely to see that ahead of where we have targeted. We have a pretty good view as to what we targeted in terms of the operational improvements. We are right on track to achieving those interim targets than we expect, that in the second half, a lot of those improvements will come to fruition that will enable us to drop the growth and impact the growth to the bottom line. So I wouldn't want to get too far ahead of where we actually are in terms of the operational improvements, Veronika.
Veronika Dubajova: Okay. Understood. And I think David had asked this question, and apologies if I missed the answer, but just the cost development year-to-date. I'm asking in particular about some of the inflationary impacts, both on raw materials, freight and wages. How do those track against the expectations you had at the outset when you gave guidance?
Deepak Nath: Yes. Sorry, Jack, apologies, I didn't get to that question, but thank you, Veronika, for reminding us. So relative to our expectations, we're right on target relative to both the assumption of inflation, the level of inflation and how we thought that was going to play out. So 3 months into the year, I would say we are right on track relative to our assumptions.
Operator: The next question today comes from the line of Robert Davies from Morgan Stanley.
Robert Davies: I had a few. One was on just your comments around if potential VBP impact came through in the Sports Med division. You highlighted, I think, some options to have some additional cost takeout or some offsets against that. I was just kind of wondering if you could flesh out a few more details of what you were thinking along those lines. The second one was just around the supply chain sort of balancing the supply chain against product availability, against last mile logistics. Can you just give us a bit more color in terms of where you are in that journey and, I guess, the kind of data points that we can get along the way? Because that's a pretty common question we get from investors is just how do we sort of kind of see progress as you go along on that sort of -- on that journey and just how you're sort of balancing the sort of last mile logistics against product availability. And then the last one was just really on market share positions. This is another one that's come up every now and again. Just how do you see your market share developing across your kind of key franchises? And are there areas you're willing to sort of give up or sort of step away if they're not sort of high enough growth areas? I'd just be kind of curious to hear your thoughts on that.
Anne-Francoise Nesmes: Robert, I'll take the sports VBP. And I'll reiterate, we do not -- discussions have started with the government. It's simply a data request at this point. So we try to frame to give you a feel for what the data request represent. And, as we said, it is about 1% to 1.5% of our revenue. And therefore, it's too early to talk about impact. You can refer back to the Orthopaedic VBP where we were able to take action. But again, we do not know if it will be similar to the Orthopaedic VBP. It could take a different shape. So it's far too early to jump the bridge and draw conclusion in terms of what needs to be done. And as of today, we reframed for you the revenue that is under consideration.
Deepak Nath: And just to build on that point, even if the levels get to kind of orthopedics levels of VBP, we don't see this as a reason to change our midterm guidance. The range of impact that we see are within the range of risks and opportunities that we consider in building our guidance. So we don't see a reason to change our guidance as a result of the VBP impact. It's important to underscore on this call, even if the VBP get to -- the Sports VBP price levels get to Orthopaedics levels of price reductions. Second, on your point around product availability, so let me parse this with Orthopaedics versus kind of the rest of it. In Orthopaedics, our product availability challenges have only partially to do with broader supply chain challenges. So as you've kind of suggested and implied in your questions, there's a lot around last mile logistics that we haven't gotten right that has resulted in low product availability, even as we are having high levels of inventory. And on that, we carved out improvements in lifer at the full year 2022 earnings -- or full year 2022 call. One quarter in, we've only improved upon that position in lifer. We didn't necessarily cite the number for you. But in fact, at the end of Q1, we're in even better position around lifer than we were at the end of Q4. So continued improvements in our processes that's leading to better availability for [indiscernible] . We've got a better cadence around replenishment. So we've called out some highlights for you in our commentary around that. So we've got more work to do there yet to get to where the industry is around kind of lifer will take another 3 quarters or so to get to, I would say, industry levels of product availability in Orthopaedics. But I'm actually very pleased with the kind of improvements we're making operationally to get there. Now ultimately, what we're looking to get to is really better asset efficiency, right? So bring inventory levels down at the same time,that we're improving lifer or product availability. And so we're well along that journey there. The backdrop, though, is around broader supply chain interruptions. That's really impacted our Sports business. And Wound, we're able to power through that and post impressive growth numbers in Sports and Wound, despite those supply chain challenges. But those are day-to-day, continue to be day-to-day. There's some improvements in some areas and not enough in others. So it is very much a kind of hand-to-mouth kind of thing. The categories haven't changed, the semiconductors, it's resins, it's polymers, various mechanical components. The specifics vary month to month, but we're very much not out of the woods there in terms of getting into a steady state. We had a little bit of that impact also in Orthopaedics, particularly related to polymer in the first couple of months of the quarter, but we were able to kind of work through that. So just wanted to call that out as a point that's distinct from product availability. So in terms of market share position, as I mentioned, in Orthopaedics, on the back of the rewiring, the improvements in operations, improvements in commercial, kind of operations improvements -- or the new incentive scheme we've rolled out, we do expect that to translate into at or above market growth over time. We're just not at that point in time yet. We put -- laid the groundwork. We've made some important steps. The building blocks are in place, and we've got to let that kind of play through before it translates into market share gains in CORI category. But in Sports and Wound, we continue to set the pace. We are pleased with the level of progress there and -- even relative to market. We've been in a good place, and we've consistently delivered over the course of time. And we expect to do that into the future. In terms of looking at are we willing to step away from places, I think the most salient example has come up a couple of times on this call today is Trauma in China. It's an area where we could have gone for growth at the expense of margin, and we decided that we would be cautious there and go for a more disciplined profitable growth. There are other markets. We've called out China, but there are also smaller markets where, in particular product lines, particular businesses we've chosen to step away rather than just go for roll of the ball, right? So we are prepared to do that. We have done that. Trauma is one of those places, but we're looking to do that in other places as well. So at the end of the day, we're focused on growth, but actually more important than just growth alone is profitable growth.
Operator: This concludes today's question-and-answer session, so I'd like to pass the conference back over to Deepak Nath for any closing remarks. Please go ahead.
Deepak Nath: Great. Thank you for all of your interest and the questions. We look forward to coming back to you with our happier results in 3 months' time.
Operator: This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.