Smith & Nephew SNATS H1 2025 Earnings Report

Smith & Nephew SNATS EPS Results

• Actual EPS: N/A
• Consensus EPS: $0.79
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Smith & Nephew SNATS Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $1.51 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Smith & Nephew SNATS Announcement Details

• Quarter: H1 2025
• Date: 8/5/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 5, 2025
• Conference Call Time: 3:30AM ET

Smith & Nephew plc engages in the development, manufacture, marketing, and sale of medical devices. It operates through the following segments: Orthopaedics, Sports Medicine and ENT, and Advanced Wound Management. The Orthopaedics and Sports Medicine and ENT segment consists of the following businesses: knee implants, hip implants, other reconstruction, trauma, sports medicine joint repair, arthroscopic enabling technologies, and ENT. The Advanced Wound Management segment includes advanced wound care, advanced wound bioactives, and advanced wound devices businesses. The company was founded in 1856 and is headquartered in Watford, the United Kingdom.

Smith & Nephew SNATS H1 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Smith & Nephew delivered 6.7% underlying revenue growth in Q2 with sequential acceleration across all regions and business units, including an 8.7% increase in the US and 7.4% in other established markets.
• Positive Sentiment: First-half trading margin expanded by 100 basis points, slightly ahead of expectations, keeping the company on track for its full-year guidance of 19–20%, driven by efficiency savings and easing China VBP headwinds.
• Positive Sentiment: Trading cash flow rose by 70% and free cash flow reached nearly $250 million in H1, enabling a fully funded $500 million share buyback in 2025 without raising leverage or compromising growth plans.
• Negative Sentiment: Uncertainty around evolving US tariffs poses a £15–20 million headwind in 2025, while China volume-based procurement impacts have peaked but remain a risk until they fully unwind in H2.
• Positive Sentiment: Innovation continues to fuel momentum, with 75% of H1 growth from products launched in the past five years, including new offerings like the Catalyst Stem hip system, TriGen Max nailing system, and expanded CORI robotics capabilities.

Presentation

[Deepak Nath, CEO at Smith & Nephew]

Welcome to the Smith and Nephew second quarter and first half results meeting. I'm Deepak Nath, I'm the chief executive officer and joining me is chief financial officer John Rogers. So 2025 is a key year of delivery for Smith and Nephew. I'm pleased to announce the results that put us firmly on track for both our full year growth target and the guided step up in profitability. On revenue 6.7% underlying growth in the quarter reflects sequential acceleration across all regions and business units.

[Deepak Nath, CEO at Smith & Nephew]

In sports medicine, we've maintained the strong momentum across joint repair and AET outside of China. In wound, the continued performance of AWD and the rebound in bioactives produced double digit growth for the business unit as a whole. In orthopedics, we delivered yet another quarter of growth and in line with our previous commitment, our recon and robotics business sustained its recent improvement both internationally and importantly in The US. This is now the fourth quarter of sequential improvement in US Recon and Robotics. On profitability, 100 basis points of first half trading margin expansion is slightly ahead of what we indicated as we brought some efficiency savings forward.

[Deepak Nath, CEO at Smith & Nephew]

We remain on track for our full year margin guidance of 19% to 20%, which includes the impact of tariffs. There's a lot of uncertainty about where tariffs will settle, but we continue to expect a net headwind of about 15,000,000 to 20,000,000 in 2025. As previously indicated, we expect that margin expansion will pick up further in the second half. This should come from cost savings increasingly dropping through to our P and L, particularly from our manufacturing network optimization of the last two years, together with the reduced year on year headwind from value based procurement in China. I've talked already about the improvements in growth and profitability.

[Deepak Nath, CEO at Smith & Nephew]

At the same time, better alignment of the commercial organization and operations has enabled us to bring down days of inventory. The delivery of our ambitious cost savings and a move to ongoing efficiencies has also brought down restructuring charges. The result is a 70% increase in trading cash flow and almost $250,000,000 of free cash flow in the first half. Finally, I'm also pleased to announce an additional element of value creation for shareholders with the $500,000,000 share buyback in the 2025. This is made possible by the operational efficiencies delivered under the 12 plan and will be fully funded by the 2025 cash flow and existing balances.

[Deepak Nath, CEO at Smith & Nephew]

So it can be delivered while maintaining our leverage and without compromising any of our growth plans. I'll return to some of these themes later and John will talk more about profitability, cash and returns in his presentation. For now, I'll take you through the detail of the quarter. Revenue in the quarter was $1,600,000,000 with 6.7% underlying growth and 7.8% reported following a 110 basis point tailwind from foreign exchange. Growth also included a headwind from one fewer trading day than in the prior year.

[Deepak Nath, CEO at Smith & Nephew]

All business units accelerated sequentially and I'll come to the detail in a moment. Geographically, The US grew 8.7% and other established markets grew 7.4%. Emerging markets declined point 2% reflecting strong double digit growth across The Middle East and India and the impacts of volume based procurement in China beginning to ease. Middle Excluding China, emerging markets grew by 12.2%. As we indicated in our Q1 announcement, we have passed the peak of the China impacts and we expect these to continue to ease through the second half as distributor destocking in orthopedics reduces and as we lap the effects of joint repair VBP.

[Deepak Nath, CEO at Smith & Nephew]

For business unit performance, I'll start with orthopedics which grew 5.5% underlying and this is an overall solid performance. Total reconstruction robotics grew 5.2% with The US growth of 4%. This is the fourth quarter of sequential growth improvement in The US on an ADS adjusted basis. Global knees and hips grew by 2.93.4% respectively. Growth remains higher outside The US with knees benefiting this quarter from the timing of a tender order in The Middle East.

[Deepak Nath, CEO at Smith & Nephew]

Almost half of our recon business is outside The US where we're demonstrating that our portfolio can deliver with good execution. As you know, China has been a headwind in recent quarters due to destocking at distributors. Their inventory levels have continued to come down and have approached more normal levels at the June. In addition, we expect the destocking to ease during the third quarter. So we should see the China headwind on our OUS sales start to fall away in the second half.

[Deepak Nath, CEO at Smith & Nephew]

US hips and knees together showed acceleration over Q1 with 2% underlying growth and 3.6 adjusted for the one fewer day. A measure we refer to as average daily sales or ADS. This is the fourth quarter of sustained improvement for US hips and knees combined. Hip performance was strong as we continue to roll out the Catalyst Stem hip system, which makes us more competitive in the high growth direct anterior segment of the market. We'll accelerate set deployment in Q3 and are also preparing to bring the platform to other markets starting in Japan.

[Deepak Nath, CEO at Smith & Nephew]

The softer U. S. Knee growth was due in part to some slowing in procedures toward the end of the quarter among our active surgeon base. As well as positive actions that we're taking to increase profitability through streamlining the portfolio and focusing on higher volume accounts. Reassuringly the balance of competitive wins versus losses has continued to remain favorable.

[Deepak Nath, CEO at Smith & Nephew]

On an ADS basis, U. S. Knees grew 0.1% and hips at 9.1%. Other recon grew 39.8% and reflects another good quarter of robotics placements particularly in The U. S.

[Deepak Nath, CEO at Smith & Nephew]

Where we're seeing strong growth in ASCs and in teaching institutes. This should mean we're well positioned as the market continues to pivot away from the inpatient procedures and ideally placed to capture future leading surgeons. We'll also continue to develop our offering with the launch in June of the choreograph pre operative planning and modeling for shoulder replacements. Trauma and extremities grew four point four percent. The ATOS growth contribution is steadily increasing as we deploy more capital and convert new surgeons while the EVOS plating system continues to be a key driver.

[Deepak Nath, CEO at Smith & Nephew]

Partially offset by a slower quarter for some of our legacy systems. We're continuing to refresh the portfolio with the launch this quarter of the TriGen Max tibia nailing system, which could expand our indication range and features modernized instrumentation. Further nail launches are expected in the coming quarters and we expect trauma and extremities to return to stronger growth in the second half. Sports medicine and ENT grew 5.7% in the quarter. Within that joint repair growth was 8.4% including the expected headwind from VBP in China.

[Deepak Nath, CEO at Smith & Nephew]

This is expected to be the last quarter before we lap the effect of the implementation in 2024. Excluding China joint repair growth would have been 13.7% representing an acceleration in Q1 twenty twenty five with a very strong quarter across our other markets. Growth was double digit across all of knee, shoulder and hip repair with the REGENETEN and QFix Nautilus suture anchors remaining the key contributors. We expect this good momentum to continue as we extend Vgenitin into hip and Achilles and as we further roll out Q Fix. We are developing CartiHeal Agility C as a longer term growth platform including a new disposable instrument set which we expect to launch in the near future.

[Deepak Nath, CEO at Smith & Nephew]

Arthroscopic Enabling Technologies grew 2.3% again improving sequentially. We saw continued growth from Merwolf Fascele which is supporting strong coblation revenues. ENT grew 3.6% with good growth driven by our ARRIS for turbinate reduction offsetting a softer quarter for tonsils and adenoid procedures in The U. S. Looking forward, we expect ENT to follow sports medicine with the VBP in process in China that's expected to take effect in 2026.

[Deepak Nath, CEO at Smith & Nephew]

To give a sense of the size of our business total ENT sales were on 35,000,000 in 2024. So while VBP would be a noticeable drag on ENT growth it should be a significantly more modest headwind at a group level than previous VBP processes. Looking now at Advanced Wound Management where growth increased to 10.2% following the strong rebound in bioactives. In Advanced Wound Care 2.6 growth reflected continued strong performance in foams, films and skin care. Offset by a decline in infection management.

[Deepak Nath, CEO at Smith & Nephew]

In bioactives growth came from the expected sequential recovery in Santal alongside double digit growth in skin substitutes. Although we'll face tougher competitors in H2 as we lap the launch of Graphics Plus, we now anticipate mid single digit growth for bioactives in the year. You'll have seen the proposed updates to Medicare reimbursement of skin subs in the outpatient and physician office setting including moving to a single payment. Since no products were excluding from participating in the market, it is unclear how clinical practice will be impacted. So while the details of the proposal are yet to be finalized we anticipate that this will be a headwind to both Advanced Wound Management sales and profitability in 2026.

[Deepak Nath, CEO at Smith & Nephew]

And that would be before any mitigating actions. Finally Advanced Wound Devices revenue grew by 12.7% led by our single use negative pressure platform PICO and with strong growth from Leaf, our patient monitoring system. In traditional negative pressure competitive wins are an important part of our growth opportunity. I'm delighted that we were recently awarded a U. S.

[Deepak Nath, CEO at Smith & Nephew]

Department of Defense contract for Reticus Touch succeeding in a competitive tender process having demonstrated clinical efficacy and operational fitness. With an initial term of five years which can be extended to ten years, this contract is worth up to $75,000,000 Coupled with an ongoing broader refresh of AWM, we are confident about the long term outlook for Wound. And with that, I'll hand over to John.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Thank you, Deepak. Revenue was $3,000,000,000 in the first half, up 5% on an underlying basis compared to half one twenty twenty four. Reported revenue was up 4.7%, including a foreign exchange headwind of 30 basis points from the relative strength of the dollar against most major currencies versus the same period last year. As the dollar weakened in the second quarter, the ForEx headwind on revenue became a tailwind, and we now expect a circa 50 bps ForEx tailwind on revenue for the full year. Performance in China was in line with expectations.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And excluding these headwinds, growth would have been 7.2% on an underlying basis. This represents a two twenty bp headwind in half one, in line with our guided full year impact of circa 150 bps as the impacts of Sports VBP unwind in the second half. Performance was broad based, with all three business units contributing significantly to the overall group. Orthopedics grew 4.1%. Sports Medicine and ENT grew 4.1%, although, again, excluding China, growth would have been 9%.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Advanced Wound Management grew 7.1%. Overall, a good set of growth figures and particularly good to see that three quarters of our growth is drawn from products launched in the last five years. Moving now to the summary P and L. Gross profit was £2,100,000,000 resulting in a gross margin of 70.5%, which is a 40 basis point increase from the prior year, driven by positive variances on price and volume. We saw a further 60 basis points of positive leverage across our operating expenses as we benefited from operational savings in SG and A and and only a small uptick in R and D spend driven by half one, half two phasing.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Operational savings were slightly ahead of expectations as we accelerated some of our operational savings into the first half. We also expect to catch up some of the shortfall in R and D spend in the second half as well as absorb the bulk of the 15,000,000 to £20,000,000 tariff impact Deepak outlined earlier. So overall, profit grew 11.2 to £523,000,000 with a margin of 17.7%, up 100 bps. And I'll explain the various drivers of the margin expansion on the following slide. Slide 12 shows the detailed trading margin bridge.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Going through the moving parts, we absorbed headwinds of 130 basis points from input cost inflation and 140 basis points from the introduction of VBP in China. These costs were more than offset with 190 basis points of revenue leverage from price and volume and 170 basis points from productivity improvements, not only in manufacturing, but also across all other areas of operating expense. FX movements contributed 10 basis points. We have now sustained a trend of revenue leverage offsetting input cost inflation, which means, VBP aside, cost savings have been able to drop through to trading profit. As previously guided, we expect the impact of VBP China to unwind in the second half such that the full year impact is around 110 basis points.

[John Rogers, CFO & Executive Director at Smith & Nephew]

We expect operational savings to step up slightly in the second half versus the first, albeit not as much as previously cited given the acceleration of savings I mentioned earlier. Furthermore, we expect the bulk of the 15,000,000 to £20,000,000 tariff impact to take place in the second half as well as some catch up on R and D spend. The net effect is that we expect a step up in margin in the second half such that the half one to half two margin uplift remains comparable to previous years to deliver margin in line with our guidance of 19% to 20% for the full year. I'll now come on to trading margin by business unit. As you can see from this slide, the majority of the margin expansion came through orthopedics, where our transformation initiatives to reduce inventory, streamline instrument set allocation, portfolio simplification and focus on higher volume accounts resulted in two thirty basis points margin expansion in half one twenty twenty five.

[John Rogers, CFO & Executive Director at Smith & Nephew]

We expect these dynamics to continue into the second half. Sports Medicine and ENT margin declined 130 basis points, reflecting the VBP impact in China. If we stripped out China from these numbers, we would have seen margin accretion in the first half. As we annualize the impact of VBP on joint recovery, we expect to deliver margin accretion in the second half. Advanced Wound Management margin increased 160 basis points due to mix ongoing efficiency gains and the timing of Santal revenues in the prior year.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And for 2025, we reiterate that the bulk of our margin expansion will come from orthopedics at over 200 basis points, with an accretion of around 50 basis points coming from sports medicine and advanced wound management combined. As we've already mentioned at previous results, we've changed our central cost allocation process to better align costs to the appropriate business unit. With this fuller allocation in place, only £28,000,000 has remained as truly central costs, in line with prior year and our previous guidance that these will be broadly flat year on year in 2025. The purpose of the change was to create transparency and accountability, and there are already positive behavioral changes as a result. We've seen greater scrutiny of spending plans, lower demand for new projects, and greater discipline in constructing robust business plans for new IT investment spend, as an example.

[John Rogers, CFO & Executive Director at Smith & Nephew]

We showed you this slide at our interims last year. As a reminder, it details the gross run rate savings of £325 to £375,000,000 we are targeting for 2023 through 2027. As we set out at our prelims in February, including 2023 and 2024, we have delivered a cumulative savings of £210,000,000 This comprised £150,000,000 £155,000,000 relating to the 12 plan and zero based budgeting and £55,000,000 relating to earlier programmes. That's actually the faint dotted line you see there on the 2023 column. On zero based budget implementation is on track across all business units and central functions.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Across our five work streams, 51 initiatives have been mobilised, of which over half are now complete. We anticipate £120,000,000 to £130,000,000 of savings coming through in 2025. And as you saw from the margin chart earlier, we delivered circa £50,000,000 of these in the first half, slightly ahead of our plan as we were able to bring some efficiency savings forward from half two into half '1. In total, therefore, that delivers run rate savings from the 12 plan and ZBB of circa £275,000,000 to £285,000,000 at the 2025, with a further 50,000,000 to £100,000,000 of savings to come through in 2026 and 2027, very much in line with what we set out on this chart this time last year. We've now embedded our ZBB approach into our standard processes, in line with our culture of continuous improvement.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Looking further down the P and L, earnings per share grew strongly, up 37% to 33.5¢, and adjusted earnings per share grew strongly, up 14% to 42.9¢, reflecting both revenue leverage, operational savings and significantly lower restructuring costs, which were £8,000,000 in the first half compared to £62,000,000 in the first half last year. We remain on track to incur an estimated £45,000,000 of restructuring charge for the full year. The interim dividend of $0.15 per share is up 4.2% on half one twenty twenty four, in line with our policy set out this time last year of paying 40% of prior year full year dividend as the interim dividend. As you know, inventory management has been a key priority of our 12 plan, and I'm pleased to report a further forty six day reduction in DSI across the group to five zero six inventory days, in line with our full year 2024 year end position. The reduction in DSI delivered a 69,000,000 reduction in inventory value at constant currency.

[John Rogers, CFO & Executive Director at Smith & Nephew]

All business units contributed to this performance, with the biggest reduction in Sports Medicine and ENT. There was still an overall increase in inventory for launch products in the first half versus the same period last year, and this means our inventory mix has also improved, with units of the slowest turning quartile of SKUs down by 14% in half one twenty twenty five versus half one twenty twenty four and down 22% since the start of 2023. Longer term improvement will be down to improved forecasting and better alignment of production plans with the commercial needs at the SKU level enabled by the improved SIOP process. There is still more work to do here, including aligning our SIOP process with our financial forecasting in a truly integrated business plan. Inventory reduction remains a focus, and we expect further progress in half two twenty twenty five.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Trading cash flow in the period was £487,000,000 with trading cash conversion of 93%, well ahead of the 60% in half one twenty twenty four. The improvement came from lower working capital outflows, particularly from the inventory day reductions I detailed on the previous slide. Capital expenditure was slightly lower year on year, but we expect to catch up some of this in the second half of the year as we continue to progress the development of our new manufacturing facility in Melton. We expect to exit the year at a similar level of spend to last year. For the full year, we continue to target trading cash conversion of over 90%.

[John Rogers, CFO & Executive Director at Smith & Nephew]

With lower restructuring costs offset by slightly higher tax, free cash flow increased over 500% to two forty four million We expect to deliver free cash flow of well over £600,000,000 for the full year. This strong cash generation broadly covered the cost of CapEx, dividend and other costs in the period, meaning net debt at the 06/28/2025 was only £38,000,000 higher than at year end 2024. The leverage ratio has also decreased slightly to 1.8 times. As we maintain and build on this improved cash generation, capital allocation continues to be a focus. This is our capital allocation framework that you should now all be familiar with.

[John Rogers, CFO & Executive Director at Smith & Nephew]

As Deepak mentioned in his introduction, the good start of the year in terms of profitability and cash conversion has enabled us to increase our cash returns to shareholders in line with our capital allocation policy. We intend to complete a £500,000,000 share buyback during the 2025. This will be fully financed from free cash flow and existing cash balances that can be delivered while keeping our leverage ratio broadly stable for the full year and without compromising any of our growth ambitions. I'll finish with our outlook for 2025, which, as you can see, is unchanged. We expect to see a step up in margin in half two, in line with what we experienced in both 2023 and 2024, reflecting the timing of cost savings and reduced China headwinds.

[John Rogers, CFO & Executive Director at Smith & Nephew]

The tariffs announced by the U. S. Government early in the year have continued to evolve, and it remains to be seen what the final outcome will be, but we continue to expect a net headwind of around 15,000,000 to £20,000,000 mainly to impact in the second half of the year. We expect to deliver well over £600,000,000 free cash flow for the full year, and the strong start to the year in terms of profitability and cash conversion has enabled us to increase our cash returns to shareholders with a £500,000,000 share buyback during the second half, as I've just mentioned. You should see this as further demonstrating our commitment to value creation for shareholders in addition to our extensive operational improvements. And with that, I'll hand back to Deepak.

[Deepak Nath, CEO at Smith & Nephew]

Great. Thank you, John. So when we launched the 12 plan, one of our core ambitions was to reposition Smith and Nephew as a consistently higher growth business. We're very much on track. The first two years of the plan, we delivered growth of over 75% respectively and in the first half of the year we've delivered yet another 5% despite some significant headwinds. That includes two fewer trading days for the half and while China headwind has passed its peak, it still had an impact on H1. So if you look through the detail of the quarter, you'll see we're doing what we said we would do.

[Deepak Nath, CEO at Smith & Nephew]

Sports medicine and wound continue to grow well. In U. S, The U. S. Recon specifically, we're showing progressive improvement quarter by quarter.

[Deepak Nath, CEO at Smith & Nephew]

Our investment in innovation is supporting the acceleration in revenue grade. Let me take a moment to go into more detail on these two last points. A year ago, we highlighted the strong performance in trauma and extremities based on new product introductions, implant supply, capital deployment and improved commercial execution. We also detailed that all the same elements were in place to improve performance in our U. S.

[Deepak Nath, CEO at Smith & Nephew]

Recon and robotics business as well. As with T and E, these actions have driven four consecutive quarters of sequential improvements in U. S. Recon and robotics revenue growth. On implant supply, key product line item fill rate reached its target in the 2023 and capital availability followed soon after.

[Deepak Nath, CEO at Smith & Nephew]

With hip, set shipment also was at goal in 2023 and knee sets started reaching their goal in the 2024. This is also being supported by a steady stream of product launches over time, such as the newly launched Short Stem hip. We also launched 10 new features on CORI between 2022 and 2024, further contributing to the recent recovery in our hip and knee implant sales growth. We have further new product launches planned to continue this positive momentum. Innovation has been a key significant driver in our transformation to a higher growth business.

[Deepak Nath, CEO at Smith & Nephew]

Across '23 and '24, more than half of our underlying revenue growth came from products launched in the previous five years. In H1, this proportion was three quarters of 75%. We continue to invest in our innovation pipeline and introduce new products across all of our business units in the first half of the year, which we're confident will help us sustain our improved revenue growth profile. In orthopedics, we expanded our nailing range with a new system for stable and unstable tibial fractures. TriGen Max builds on more than two decades of proven performance and industry leading design from our TriGen nails portfolio.

[Deepak Nath, CEO at Smith & Nephew]

In robotics, we received FDA clearance for choreograph pre op planning and modeling services in total shoulder replacement during the 2025, which expands our offering to cover all joint replacement procedures, knees, hips and shoulders. In sports medicine for the first time Smith and Nephew is able to market REGENETEN for extra articular ligament injuries in The US creating opportunities to reach more patients with soft tissue injuries around the body. With an initial focus in hips capsule repair, we have future expansion plan in other extra articular ligament repairs. In addition to new products, we also announced a number of significant evidence milestones during the 2025, supporting the adoption of key product families. For instance, a recently published randomized control trial of Smith and Nephew's handheld robotic system demonstrated the value for patients and surgeons of robotically assisted total knee replacement with Journey two BCS.

[Deepak Nath, CEO at Smith & Nephew]

Patients experienced significantly better outcomes including reduced pain, improved function and higher satisfaction compared to conventional surgery at the one year time point. In conclusion, I've talked a lot about our 12 plan. We're now in the final year of our three year transformation that I first set out for you in July 2022. And Q2 performance is yet another proof point that we are on track to deliver our ambitions. Each of the three parts of the 12 plan is delivering great progress.

[Deepak Nath, CEO at Smith & Nephew]

The rewiring of our orthopedics business is well underway with sequential growth acceleration over the last four quarters at the global ortho, U. S. Ortho and U. S. Recon and robotics levels.

[Deepak Nath, CEO at Smith & Nephew]

Orthopedic inventory levels have improved and we've seen the associated expected step up in ortho margin. Both sports medicine and wound management have shown consistent momentum since the start of the program and productivity improvements are clearly visible in the P and L. In other words, our operational improvements are increasingly translating into financial gains. In Q2, once again, we delivered revenue growth ahead of historical levels even with headwinds from trading days and China. This higher organic growth is underpinned by fundamental competitive strengths, better commercial execution and a high cadence of innovation across our portfolio.

[Deepak Nath, CEO at Smith & Nephew]

Cash flow has also stepped up significantly in the last twelve months with better control of inventory to the point where we can start returning excess cash to shareholders through our $500,000,000 share buyback. There's still more to do around profitability, but the 100 basis points of expansion puts us on track to deliver the guided step up in full year margin. As a reminder, we've delivered two forty basis points group margin expansion from H1 twenty twenty three to H1 twenty twenty five despite greater headwinds than we expected when we first laid out the plan in 2022. As I told you in the fiscal year full year 2024 results, since the start of 'twenty three, we've successfully offset over 700 basis points of headwinds from inflation, foreign exchange and VBP. Finally, these improvements are sustainable.

[Deepak Nath, CEO at Smith & Nephew]

A key objective of the 12 plan has been to drive increased accountability and greater discipline and execution, both of which are now embedded in our culture and our ways of working. As I've said before, the 12 plan is a necessary step, but it is not the limit of our long term ambitions. We'll set out the next stage of our strategy at a Capital Markets Day in early December. I'm looking forward to seeing you all there and formal invitations will follow shortly. So with that, we'll now take your questions. Jack?

[Jack Reynolds-Clark, VP - European MedTech Equity Research at RBC Capital Markets]

Thanks very much. Jack Reynolds Clark from RBC. Three, please. The first is on revenue guidance. So with Q2 having been, I guess, stronger than I think people were expecting, does that imply that there's upside to the 5% target for the full year?

[Jack Reynolds-Clark, VP - European MedTech Equity Research at RBC Capital Markets]

Or are you expecting things to slow down elsewhere in the business? Then on margin guidance. So I appreciate you mentioned some kind of moving around of R and D and possibly some other expenses as well. But could you walk us through, John, the bridge in H2 margin and whether the kind of upper end of the 19% to 20% margin range is possibly more achievable? And then the last question was on U.

[Jack Reynolds-Clark, VP - European MedTech Equity Research at RBC Capital Markets]

S. Knees. So could you just run us through some more detail of the work you're doing there? And kind of how much the weakness was driven by the market versus your own activities? And how you're thinking about kind of growth versus margin in that segment going forward?

[Deepak Nath, CEO at Smith & Nephew]

Sure. I'll frame this up and I'll leave it to John to kind of give you the margin guidance. So overall, as we mentioned, given all the puts and takes that we see, we feel good about guidance for the full year. So there are positives and negatives as we go through.

[Deepak Nath, CEO at Smith & Nephew]

We will continue to improve commercially in the back half of the year, but we do have a step up that we expect, right, both from a revenue standpoint and from a profit standpoint. We're in a more uncertain environment. We've characterized for you what we expect the impact of tariffs to be, but fundamentally there is a much more uncertain period. That coupled with the step up that we need to see in the back half of the year particularly around margin and all the various effects around competitors, China, VBP falling off and other things. We feel at this point is prudent to maintain the guidance that we've given both in terms of revenue and margin.

[Deepak Nath, CEO at Smith & Nephew]

In terms of US knees as we unpack that a little bit. The headline is that at a US orthopedics level including trauma and recon, US recon and robotics level, and at a global orthopedics level we're seeing sequential improvement. And that those are very very strong proof points that the improvements in supply and product availability, commercial execution, our ability to connect all the different pieces together is delivering the desired effects. So that's the headline in terms of where we are and I'm pleased with the progress we're making. The softness in knees which were offset by the greater than expected strength in hips.

[Deepak Nath, CEO at Smith & Nephew]

It's a couple of factors. First, we are going through a step to refocus a commercial organization to the higher volume accounts. I've said in previous settings that we've got a relatively long tail of accounts where we have surgeons use our products on a on an occasional basis with you know particular patient populations or what have you. Well that's an important part of our business. We do want our commercial activities focused on driving kind of key primary use of knees or hip hip platforms.

[Deepak Nath, CEO at Smith & Nephew]

So, that's some concerted effort there going on. There's also some level of portfolio rationalization work that we're doing and I've highlighted that in the past. So, we've got three knee families that are relevant in The US. We are trying to get all that down to two knee platforms Legion and Journey. And, there's work involved in having the transition surgeons in doing that.

[Deepak Nath, CEO at Smith & Nephew]

By and large, we're successful in retaining most of our customers when we go through that process, but not all. And, that does have an impact on top line. But, actions actually get us to a better position as far as our US business is concerned from a margin standpoint. And these steps do contribute on the back of all the other improvements we're making in the factory and in terms of inventory control for the the margin step up that John talked about. But what we also saw related to this was particularly in the end of the quarter that we saw some slowdown in terms of the number of procedures in our active surgeons.

[Deepak Nath, CEO at Smith & Nephew]

And that just did contribute to the numbers that we see. So with that John do you want to take the

[John Rogers, CFO & Executive Director at Smith & Nephew]

Yeah, I've got a question. And just to sort of build on a little bit what you said into you know we saw the two thirty bps of margin accretion in orthopedics in the first half, which was a reflection of those changes that Deepak has just talked about. And that very much puts us on track to deliver the margin expansion that we set out last year So we ended last year just below 12%. And if we look forward to this year, we should end north of 14%.

[John Rogers, CFO & Executive Director at Smith & Nephew]

So a big step up, a big improvement in margin for orthopedics. In terms of setting a little bit of color on the revenue guidance, I mean, you're right to highlight that we did say that we would expect to see a step up in Q3 given China annualizing, given the reversal of the impact of trading days. So in Q3, we've got level trading days year on year as opposed to two less in the first half. So we will expect to see a step up in Q3. That said, important to remind you that Q4 for us last year was a very strong quarter, particularly in The U.

[John Rogers, CFO & Executive Director at Smith & Nephew]

S. So we've got quite a tough comparator. So I would say that we're only six months of the way through the year. There continues to be significant uncertainty over macro and external conditions like tariffs, for example. So now is not the time to be changing our guidance.

[John Rogers, CFO & Executive Director at Smith & Nephew]

In terms of the margin phasing, again, we talked about bringing savings forward from half two into half one. And of course, those savings will repeat in half two. So that's an upside. At the same time, we've got the impact of tariffs, the GBP 15,000,000 to 20,000,000 that we made reference to. And that will, of course, primarily hit us in the second half.

[John Rogers, CFO & Executive Director at Smith & Nephew]

So that broadly offsets that. And then also, we've got the U. S. O U. S.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Mix in Q4 as well. Again, we had a very strong U. S. In Q4 of last year. So again, at this stage, I would say now is not the time to be changing our guidance on margin in 19% to 20% holes.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And we've said in the past that we expect it to be broadly center of that range. And actually, if you look at the bridge from half two twenty four to half two twenty five, so I'll give you a little bit of color here, we'd expect sort of cost inflation of around 1.9% or so. VBP on China will be about a drag of 80 bps or so. If you remember, we said it was going to be 110 bps for the year. So that's averaging out half one, half two.

[John Rogers, CFO & Executive Director at Smith & Nephew]

We'd expect to see revenue leverage of around 200 bps or so and then operating savings of a similar amount to get us up to the circa 19% to 20% margin for the full year. So that gives you a little bit of color on the half two bridge.

[Jack Reynolds-Clark, VP - European MedTech Equity Research at RBC Capital Markets]

Thanks very much.

[Deepak Nath, CEO at Smith & Nephew]

Richard?

[Richard Felton, Equity Research Analyst at Goldman Sachs]

Thank you. Richard Felton from Goldman Sachs. First one, just a follow-up on margin. John, can you remind us the drivers of the operating savings in H2? How well advanced are those programs?

[Richard Felton, Equity Research Analyst at Goldman Sachs]

How much visibility do you have that, that is going to be achieved and fully derisked? And then also, what elements of those operating savings are structural? And how should we think about that dynamic into FY 2026? That's the first one. The second one, just a follow-up on U.

[Richard Felton, Equity Research Analyst at Goldman Sachs]

S. Knees, Deepak, you mentioned at the end of the quarter, a slightly softer procedure environment. Why do you think that happened? Why was that the case? And have you seen that continuing into Q3? Thank you.

[Deepak Nath, CEO at Smith & Nephew]

Sure. I'll take the U. S. And East part. So this is in our base of customers, right?

[Deepak Nath, CEO at Smith & Nephew]

And it's it's hard to speculate. We don't know the reasons really. I mean we can talk about vacation schedules because there's vacations every year you know on that time frame. So it's hard to kind of really define that. So it's it's hard to tell what what drove that.

[Deepak Nath, CEO at Smith & Nephew]

What we can tell is there was a slow down in our base. I've in the past been somewhat loath to comment on market. We're in a period of performance recovery in orthopedics business where it's sometimes difficult to parse how much of something is you, us versus, the market. Right? We can do that in women, we can do that in sports.

[Deepak Nath, CEO at Smith & Nephew]

I've been loathed to comment on that. Now we're in a better place actually, much better place even in orthopedics in The U. S. Than we were a year ago or two years ago. But having said that, what I do feel comfortable is talking what's happening with our account base, right.

[Deepak Nath, CEO at Smith & Nephew]

And so but there seems to be at least from what we can tell in our numbers, some slowdown related to vacations. Surgeon transitions was another factor as surgeons were moving practices in some cases from hospitals to ASC settings or across networks that did have an impact unless something within our base. What's encouraging for me is when I look at churn, you've heard me comment about that in the past. Where you know much through much of '23 and early twenty four, we're net unfavorable. In other words, we lost more surgeons than than we gained.

[Deepak Nath, CEO at Smith & Nephew]

For a variety of factors retirements and those types of things were the large factor and we had some competitive losses too. But we also commented in the previous period that those have turned favorable starting in really the Q3, 2024. And I'm pleased to report that that trend has continued even into Q2 building off of Q1. So, I feel good about the operational progress that we're making. And I do feel confident that as we go through the second half of the year, we'll be in a good place.

[Deepak Nath, CEO at Smith & Nephew]

And again, I come back to in the end, there's different ways to slice and dice this, but what I'm looking at in addition knees and fees and we're looking at knees and hips separately as well. But in the aggregate, when you look at U. S. Recon, we're seeing nice sequential improvement and we are closing the gap to market. We'll see, of course, not all of our competitors reported in the quarter.

[Deepak Nath, CEO at Smith & Nephew]

But when we look at the trend, you know, q three twenty four, q four twenty four, q one of of twenty five, We are closing the gap at The U. S. Recon level. And of course, outside The U. S, we've seen some strength now over the last couple of years.

[Deepak Nath, CEO at Smith & Nephew]

We've continued to maintain that. So overall, feel good about where we're positioned. So I'll hand it to you, John, for margin.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Thank you. So in terms of the savings and where they're coming from, again I'll point you to the slide that we've got in the deck which sets out I hope quite clearly. They come from across the board. There's a big chunk clearly that come from procurement, but there's also warehousing and distribution, business support, sales and marketing. We're seeing savings across the entirety of our business.

[John Rogers, CFO & Executive Director at Smith & Nephew]

We had 51 different programs, most of which are all of which are already in train and many of which are already complete. And so in terms of visibility of those savings, I feel pretty confident that we'll see that margin accretion come through in the second half, as we said consistently before. In terms of 'twenty six and 'twenty seven, again, pointing you to the chart, we should expect to see another £50,000,000 to £100,000,000 of savings flow through in 'twenty six and 'twenty seven as a consequence of some of the changes we're making now as we see those flow through in future years. So again, we should see a little bit of support for margin improvement as we go into 2026 and 2027.

[Richard Felton, Equity Research Analyst at Goldman Sachs]

Thank you very much.

[Graham Doyle, Executive Director - Equity Research at UBS Group]

Thanks. It's Graham from UBS. Just two for me, please. On the ortho inventory, in terms of the lower cost inventory started to flow through post the site closures over the last twelve, eighteen months, have we seen much of that yet? I think we always thought that would be like a H2 sort of weighted story.

[Graham Doyle, Executive Director - Equity Research at UBS Group]

Interesting to get some color on that. And then just on tariffs, one of your peers appears to be able to not pay tariffs on hips and knees. So just to get your sense as to have you explored the Nairobi treaty for that and on protocol? And is there anything to do there? Thank you.

[Deepak Nath, CEO at Smith & Nephew]

Thanks Graham. So in terms of inventory, you're right, we've previously called out that the big the accumulated benefits of all of the network optimization efforts we've done will fully manifest in the second We remain kind of on track to that. So that will be one of the key drivers of the continued margin step up from where we are today into the back half of the year. But it's not like we haven't seen the impact of that already.

[Deepak Nath, CEO at Smith & Nephew]

So, those have come over the period of time, one at a time. And so, mechanically what happens is you close a site obviously there's upfront costs associated with the site closure. We'll typically build up some level of inventories as safety stock in terms of what we manufacture there and then we transition that production to elsewhere within our network. So, the impact of all of that will flow through and there's a time scale associated with it. What we're actually doing also in addition to that is as part of improving our product availability which has twin objectives.

[Deepak Nath, CEO at Smith & Nephew]

One is to improve availability and actually reduce our inventory. Right? And and there it's about how we connect supply and demand down to SKU levels. And we've been at this now since the start of the program. And there we've made really really good progress in terms of being able to to connect that at a much level better level.

[Deepak Nath, CEO at Smith & Nephew]

Now there's still more work to be done but when I compare it to where we were in '22 versus this it's kind of a night and day thing. And that's part of what John talked about in terms of our inventory health being better. So he provided some stats around what our slow turning inventory has been doing. And in fact when we started out our mix wasn't great. Right.

[Deepak Nath, CEO at Smith & Nephew]

We had too much of the stuff we don't need and not enough of the stuff we did need. Right. And part of that is because in our business trauma is relatively higher proportion compared to recon. Trauma has you know particularly high inventory requirements and they're particularly slow turning in that. So some of that is related to it.

[Deepak Nath, CEO at Smith & Nephew]

Right? But we have actually brought down the the slow turning inventory levels significantly. So that is another contributor in terms of both inventory levels down and days of inventory coming down and of course the impact of that as it flows through the balance sheet and P and L is a bit more complex. Right, there's inflation impacts that for which there are timescales associated with it. The second thing is capacity manufacturing capacity.

[Deepak Nath, CEO at Smith & Nephew]

So we've taken down capacity right but we've navigated through much of this period with excess capacity. And that has obviously complicated impacts on both balance sheet and P and L. But all these put together we are on track to delivering the margin expansion associated with this as just as we said and as you rightly call out that was the second half of the year. In terms of tariffs, obviously we're looking at all different ways including the one you measure mentioned as ways to mitigate. But as far as we can tell based on our read of the situation, we've we're calling for a 15 to 20,000,000 impact.

[Deepak Nath, CEO at Smith & Nephew]

To remind you of our network, think your question was more within orthopedics referencing one of our competitors. For us, we've got two primary sites. Well, three total but it's Memphis, it's Malaysia, and we've got Switzerland. And so on the one hand because a significant part of our orthopedics production comes from Memphis. There is you know we're naturally hedged in that regard but it's not it's not zero, it's very much down to SKU level in terms of what comes from there.

[Deepak Nath, CEO at Smith & Nephew]

So, there is actually impact. Not to mention the impact of raw materials, the input you know feedstock that comes in from other places. So, look it's a very dynamic situation. It's hard to call how where things actually settle out. We've got a tiger team that's looking at this at the pace that you would expect companies like ours to look at and we're not keeping that situation under review.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Thank you. Just to build on Deepak's point there. If you look at our manufacturing network, as it happens the more of the tariff impact comes through for us on wood and sports and less on ortho because most of our manufacturing is U. S. Based for ortho.

[John Rogers, CFO & Executive Director at Smith & Nephew]

So there's a little bit more of an impact in wound and sports than there is in ortho.

[Deepak Nath, CEO at Smith & Nephew]

I think, David, you had a question.

[David Adlington, Managing Director at J.P. Morgan]

A couple from David Addington at JPMorgan. Just on the buyback, John. Given the strong cash flow in the first half, just wondered how you're thinking about ending the year in terms of net debt to EBITDA? And then secondly, also good to see progress on the inventories. As you look into the medium term, where do you think you could get down to? And how much cash could that free up?

[Deepak Nath, CEO at Smith & Nephew]

Do want take that, John?

[John Rogers, CFO & Executive Director at Smith & Nephew]

Yes. So on the buyback, notwithstanding the GBP 500,000,000 buyback in the second half, I'm still expecting us to exit the year below our two times net debt to EBITDA sort of target level, so giving us plenty of capacity for all of our growth ambitions, etcetera. So very strong cash flow, which is very positive. On the inventory side, obviously, we don't want to overly guide to what we're going to deliver in the future, but you've seen the direction of travel over 2024 and 2025. And we would expect that improvement to continue.

[John Rogers, CFO & Executive Director at Smith & Nephew]

I think when it comes to sports and wound, we're now getting down to what would be pretty good industry levels. I think the opportunity continues to exist in Ortho, and we've seen good improvement in the first half. We'd expect that to continue into the second half of this year and then further improvement in Ortho next year as well.

[Sam England, Director & Head - European Med Tech Equity Research at Berenberg]

Sam England from Berenberg. So the first one, just in hips, you called out the benefit from CatellaStem in Q2. How should we think about the market share gains you think this can drive, especially in the ASC channel, given the focus on anterior surgery? And how crowded is that space becoming now for anterior products? And then just looking at the other recon business and the growth there that you called out was driven by robotics.

[Sam England, Director & Head - European Med Tech Equity Research at Berenberg]

Can you just talk a bit about demand and placements for Cori in Q2? And I suppose is more of the demand being driven by the hospital ASC channel or just some sense for the sort of split of demand between channels?

[Deepak Nath, CEO at Smith & Nephew]

Yes. So we're pleased with the uptake of Catalystem. Obviously, not everyone of our competitors have reported, but you've seen two report. We feel good about where we're positioned. The surgeon feedback on Catalyst M has been very, very good.

[Deepak Nath, CEO at Smith & Nephew]

And so we feel good about how we're positioned there and continuing to have traction across a range of settings that not only in ASCs but also in hospitals, academic centers and community hospitals as well. So we feel good about its value proposition. As you know the market over the last three or four years has gone through a fairly profound shift from a traditional approach into direct anterior approach. So, we were among the later players not the first players to come into that into that space, but we have a very compelling product offering in a segment that's rapidly growing. So, feel good about the surgeon feedback and the resonance we're getting across a range of settings.

[Deepak Nath, CEO at Smith & Nephew]

In terms of robotics, what I'm looking at, what we're looking at is not just placements, right. We could be doing executing a place first kind of strategy. What we're looking at is both placements and utilization. We're seeing very nice uptake. In other words, where we place we've got surgeon champions are using that integrated into their kind of routine practice which is really kind of the true measure of what we're trying to do.

[Deepak Nath, CEO at Smith & Nephew]

We're also looking at whether it's driving competitive conversion, so we're using that primarily to retain our existing customer base both of which are important. So, there's multiple things we're looking at around Corey placements just being one of many many factors. And, continue to be pleased with with the progress there. We're looking at how we do in ASC channel as well as in teaching institutions where historically we've kind of skipped a beat or two. And, so the progress we're making on both of those is very very encouraging for me.

[Deepak Nath, CEO at Smith & Nephew]

So, overall very pleased with how Corey is doing across channels, across and the type of utilization it's getting in everywhere we replace them.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And just to again, just to build on Deepak's comments there. We're not going to split out obviously numbers that go into the channel, but it's fair to say that in the second quarter, we certainly over indexed in ASCs in terms of proportion of our CORI placements that went into ASCs in the second quarter, which I think is really encouraging. We said before, we think that CORI in terms of its form factor, in terms of its size and its footprint, and also its capital cost being significantly lower than the competition actually puts it in a very strong position, particularly in the ASC channel. We're starting to see that come through in terms of the number of placements we're putting into that channel.

[Deepak Nath, CEO at Smith & Nephew]

Should we turn to the phone?

[Operator]

The first question comes from Veronika Dubajova of Citi. Your line is now open. Please go ahead.

[Veronika Dubajova, Managing Director at Citi]

Good morning, Deepak and John. Thank you guys for taking my questions. Hope you can hear me okay. I have three, please. First one is just joint repair and again another impressive quarter for you guys with double digit growth excluding China.

[Veronika Dubajova, Managing Director at Citi]

Just curious Deepak if you could touch upon the drivers that are enabling you to deliver that growth and how sustainable you think that is not just into the back half of this year, but also as we think about 2026? My second question is just maybe if you can elaborate a little bit on the skin substitute exposure that you have and the risks that you might see there from the new proposal and maybe just give us a flavor for where your current pricing stands relative to the $125 that's been proposed by CMS? And then my final question is around the buyback and just to what extent you feel this year is it giving us a good indication for your ongoing recurring future capacity to return cash to shareholders? Thank you, guys.

[Deepak Nath, CEO at Smith & Nephew]

Sure. So in terms of joint repair growth, we take China out of it as we've indicated multiple times. We will annualize the impact of June repair VBP as we head into Q3. But when you look at our performance across all other regions, very, very nice double digit growth. The key drivers are Q Fix and what we've done with that and Regenetin.

[Deepak Nath, CEO at Smith & Nephew]

And Regenetin it's increased increasing adoption within rotator cuff which is was kind of our lead indication. But as we expand indications into the Achilles in particular, we're seeing a bigger proportion of Regenetin use, not bigger proportion but increasing proportion within Achilles as well and of course we're not stopping there. Know hips is another area that we're going after. So very nice uptake of Regenetin. We expect it to be a platform technology.

[Deepak Nath, CEO at Smith & Nephew]

So we're starting to see its utilization across across different joints. So Qfix, Regenitin, key drivers of joint repair growth everywhere outside of China. In terms of skin subs, you know look it'll be a net headwind both from a revenue and profit standpoint for our wound business. You know fundamentally, obviously there's the pricing that you that you mentioned, but in addition to that there was no products got taken off the market as a result of this. So, how physicians, how practice patterns change as a result of that does remain to be seen, but relative to a previous version of this where you know on the back of expected clinical evidence there'd be fewer players in the market at lower price point with some limits on adoption was for us we had characterized it as a net neutral thing for us as we pivot into this regime which of course hasn't been finalized it would be a net headwind.

[Deepak Nath, CEO at Smith & Nephew]

Obviously for the year we've taken this into account and our guide had made some remarks and John did as well. So we feel good about our ability to kind of navigate through this this headwind for 2025. And of course, to 2026 as we look in the year we made we're not going to guide to that quite yet. Now is not the moment to do so. But let's just say that we are active participants in it.

[Deepak Nath, CEO at Smith & Nephew]

We remain committed to bringing forward products that have strong clinical evidence back in terms of what we're going to do. We're going to stick to what we think would be the right way to develop products that are substantiated with clinical evidence. And we'll see how the how things evolve from there. In terms of buyback, do you want to take that John?

[John Rogers, CFO & Executive Director at Smith & Nephew]

Yes, I'll cover that. Again, just to make it very clear, I'll sort of draw your attention to the capital allocation policy, which is very clearly set out. So, first and foremost, we want to be able to invest in our organic growth. That's absolutely clear. That's one of our key objectives, is to drive the growth of our business forward.

[John Rogers, CFO & Executive Director at Smith & Nephew]

Secondly, we want to be able to acquire businesses that are complementary to our portfolio that will assist in driving growth. Thirdly, we've got to pay a dividend. And then if there's anything left over from that, then of course we have the option of paying a share buyback or doing another share buyback. But I want to make it very clear that that is the last option and that the primary focus is driving our top line growth, investing in our business through organic growth and acquisitions and obviously paying a dividend. And then as the last element of the capital allocation, share buyback.

[John Rogers, CFO & Executive Director at Smith & Nephew]

So we were able to make the share buyback in the second half of this year of $500,000,000 As I said earlier on, we will expect to still end the year below our target leverage ratio and with all the capacity that we need to drive our top line growth.

[Veronika Dubajova, Managing Director at Citi]

Got it. Thank you guys. Very clear.

[Deepak Nath, CEO at Smith & Nephew]

Sure thing, Veronica.

[Operator]

The next question comes from Hassan Al Wakeel of Barclays. Your line is now open. Please go ahead.

[Hassan Al-Wakeel, Director, European MedTech & Services Research at Barclays Investment Bank]

Good morning and thank you for taking my questions. I have three, please. Firstly, Deepak, if I can follow-up on your comment on slowing procedures amongst more active surgeons in knees. I wonder if you're seeing this beyond knees. Separately, any color on the weaker OUS hip performance and any key challenges faced here?

[Hassan Al-Wakeel, Director, European MedTech & Services Research at Barclays Investment Bank]

And I guess, what are your expectations here and in U. S. Needs in the second half? And then secondly, if I can follow-up on Skin Subs. Was the stronger growth in the quarter supported by any physician behavior changes due to the LCD?

[Hassan Al-Wakeel, Director, European MedTech & Services Research at Barclays Investment Bank]

And then on the proposed reimbursement, appreciate behavior can change as can volumes. But what is the impact from the lower price in isolation? And what is your exposure to the hospital inpatient channel? And what are the mitigating actions that you could take? And then finally, how are you thinking about the pipeline of potential bolt on deals, particularly as we look into next year given the buyback announced for this year? Thank you.

[Deepak Nath, CEO at Smith & Nephew]

Okay. So what we've seen in terms of procedure slowdown was really in knees and hips and medically a different level of I would say urgency around knee replacements versus hip replacements as you know. So what we've seen in our active base was really more around knees compared to hips. So that's that. In terms of hips OUS there's a China factor, an ex China factor OUS.

[Deepak Nath, CEO at Smith & Nephew]

There's a little bit in Japan for example that we're looking at. But overall OUS orthopedics performance an area of strength. So we continue to perform well commercially and although there's quarterly volatility primarily around timing of distributor orders and things we feel good about how we're positioned OUS very large. But there are individual markets where there may be something from one quarter to the next. In terms of skin subs, in terms of physician behavior changes in response to pricing, we saw we did see some of that but it was not to the extent that that was the dominant kind of factor driving a performance there.

[Deepak Nath, CEO at Smith & Nephew]

Now we have not previously split out how much of our business is Skin Subs, but I'll just say it's material but in the realm of you know from a group impact standpoint I expect that with pricing changes here we'll be able to navigate through this. So I guess rather than get into breaking out the impact of skin subs, I'll just leave it at that. In terms of proportion of utilization in hospital versus physician office, it's about 25% of sorry 40% of use is in the physician office compared the hospital. In terms of our own activities, we've always had a strong presence on the hospital side which we continue to maintain. And, in terms of development products we continue to be focused on not just coming up with the next version of SkinCelds but also investing behind the development of clinical evidence.

[Deepak Nath, CEO at Smith & Nephew]

And that will remain the case as we go into next year and beyond. So skin subs and in terms of acquisitions as John mentioned a key priority is to drive growth top line and at the level of payback buyback that we've announced, we are not going to be limited in terms of the type of bolt on acquisitions that we're going to be able to do as a result of it. So we feel good about the opportunity set in front of us and the ability to execute on that. Bolt on M and A or M and A in general is a key part of value creation in medtech. We have an active corporate development team that's well plugged into to the ecosystem and we've got a pipeline that we feel good about and we don't feel constrained in our ability to do those bolt on M and A even with the announced buyback.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And just to add some color to your question on hips, Hassan, just looking at the numbers for the second quarter, we were actually up on an average daily sales basis. Globally, we were up around five percent for Q2. And actually, if you look at ex China, we were up 7.5%. So, you're right to highlight the OUS growth was pretty flat in the second quarter. But to Deepak's point, we expect that to significantly step up in the OUS number to significantly step up in the second half as some of the impacts on China start to reverse.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And we should see a pretty strong half two on our hips ADS growth on an OUS basis.

[Hassan Al-Wakeel, Director, European MedTech & Services Research at Barclays Investment Bank]

Perfect. Thank you.

[Operator]

The next question comes from Robert Davies of Morgan Stanley. Your line is now open. Please go ahead.

[Robert Davies, Executive Director at Morgan Stanley]

Yes. Good morning. Thanks for taking my questions. I have three. First one was just how you're thinking about the strategic position within Ortho, I guess, within the context of both the 12 plan and within the context of you mentioned the constructive discussions with the activists.

[Robert Davies, Executive Director at Morgan Stanley]

Maybe just provide us a little more color around that. The second question was around the trajectory for margins beyond 2025 and whether the sort of savings plans that you laid out has changed your views over the midterm profitability targets for the company. And then the final one was just around the sustainability of growth, I guess, and just getting a little more color on the future pipeline. You've obviously made a lot of comments over the last couple of years around the products you brought to market. I just wondered if you could provide some color around the pipeline looking forward over the next couple of years. Anything meaningful to look out for? Thank you.

[Deepak Nath, CEO at Smith & Nephew]

Yes, sure. So, with orthopedics, look, we're a portfolio company as many other medtech companies are. And in terms of orthopedics what we've said a number of times is as we look dispassionately at all different ways in which we can drive shareholder value. Far and away the best opportunity is to get orthopedics functioning as it has the potential to do and as it once did. It within our portfolio.

[Deepak Nath, CEO at Smith & Nephew]

And as I've detailed you know in this quarter and its previous presentations, we're making really good progress in our ability to do that. And, was number elements associated with it in terms of product availability, the way we connect supply and demand, our commercial execution which itself has multiple pieces around people, process, you know how we manage the business on every one of those fronts we've made tremendous progress. So when I take a step back and look at all the things we could be doing driving performance improvement along the dimensions that I've outlined is by far the best thing we can do for shareholders at this point. And we are well on a path to doing that. And I do believe we get it to where this business can perform and its ability to drive to deliver great returns whether it's in terms of revenue growth contributor, contributor in terms of margin expansion which as John mentioned earlier we're on track to go to about 14% margin this year which is more than 200 bps.

[Deepak Nath, CEO at Smith & Nephew]

You know as we look ahead that journey will continue. 14 is not the endpoint but it's a waypoint along the journey. So as we look ahead, we expect it to do its part in driving growth, importantly driving margin expansion as we get it back to levels at which we were you know a number of years ago. And importantly, as we move into a position where it starts to deliver excess return ahead of its cost of capital. So we've have all of those opportunities in front of us in orthopedics.

[Deepak Nath, CEO at Smith & Nephew]

I think we've with Q2 delivered yet another proof point on our journey there, but we've got more to do in the balance of 2026 and then of course as we look into the future. And that brings me to the second question that you have around continued margin expansion. We have said that the target for '25 which is '19 to '20, that's not an endpoint. It is a punctuation but we expect to continue to improve beyond that. In particular orthopedics margins we expect to continue to expand as we go into 2026.

[Deepak Nath, CEO at Smith & Nephew]

Now, the right time for us to be talking about what we expect to do would be on the back of full year 2026 results. So that you can judge how we did on the three year transformation program, where we're positioned and what makes sense in terms of reasonable midterm targets. So, we'll come out and do that. As a prequel to it, in our Capital Market Day, we'll detail out what we see as the key growth drivers. I'll take the mystery out of it.

[Deepak Nath, CEO at Smith & Nephew]

We are innovation driven company. We've said three quarters of growth in h one was from products launched in the past five years and we've commented that on that periodically. You know full year 2024 that number was about 50%. In 2023 that number was about a little over 50%, think we might have said 60%. So, we've had a good track record of bringing forward innovations.

[Deepak Nath, CEO at Smith & Nephew]

We're not always first to market, but what we bring forward and if you look at our greatest hits reel if you will, we're actually punching above our weight class in terms of the type of innovations we bring forward. And as an organization, we're very very committed to maintaining our levels of investment within R and D. That will be one of the key drivers of growth. So, going forward, we expect to to build off of where we hope to exit in 2025 in terms of further margin progression, but we'll we'll detail that out at the right time. In terms of sustainability of growth, we've gone from kind of being a low single digit growth kind of company into kind of a mid single digit growth company during this transformation period.

[Deepak Nath, CEO at Smith & Nephew]

I think at this point we've given you enough proof points in terms of our ability to do that. So, the next chapter will be to build off of where we've come. Right? So, here I'll leave this a little bit of a mystery so you can come to the Capital Market Day and see what those drivers are and then and of course with full year we'll give you that in more detail.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And just to sort of comment on the margin trajectory. As always, there's a lot of moving parts on margin. As Deepak highlighted. We've got the positives in terms of the additional savings coming through, and I talked about 50,000,000 to £100,000,000 at least coming through in 2026 and 2027. We've got the positives in terms of the continued progression on the orthopedics margin.

[John Rogers, CFO & Executive Director at Smith & Nephew]

As Deepak says, 14% is not our end game. We expect to continue to improve that over time. At the same time, of course, we've got to offset the challenges of tariffs coming in, in 2026 and also, of course, the impact of skin subs. So, there's always lots of moving parts. But we hope to set out at the Capital Markets Day clear direction of travel as to where we expect things to go forward.

[John Rogers, CFO & Executive Director at Smith & Nephew]

And also obviously the prelims in February year provide very clear guidance as to what we expect to happen in 2026.

[Deepak Nath, CEO at Smith & Nephew]

Yeah, just a quick build on what you said John, in terms of sustainability of both growth and margin. Part of being a portfolio company is being able to go through all these different factors and and offset these things to deliver more consistent kind of top line growth and margin expansion. That's part of being a portfolio company. But one another thing that I'll accentuate here is in terms of sustainability, when you look at how Q2 turned out, the growth came from all regions and all of our businesses. And, that's been a theme that if you'll go back and kind of look at our messaging over previous quarters, that is something that's been true actually for a number of quarters now.

[Deepak Nath, CEO at Smith & Nephew]

So, it's not just coming from one particular part of our business, but the growth has been relatively broad based. And that you should take as another encouraging sign in terms of the sustainability of growth as we move move out of this period of transformation or turnaround into more kind of new and improved Smith and Nephew.

[Robert Davies, Executive Director at Morgan Stanley]

Very helpful. Thank you both.

[Deepak Nath, CEO at Smith & Nephew]

Thanks, Robert.

[Operator]

The next question comes from Kane Slutskin of Deutsche Bank. Bank. Just

[Kane Slutzkin, Director - Healthcare Equity Research at Deutsche Numis]

quickly on U. S. Recon, you're obviously still targeting the market growth rates by end of year, I would assume. I'm just wondering if anything has changed in your thinking there in terms of how you get there, given the softer U. S.

[Kane Slutzkin, Director - Healthcare Equity Research at Deutsche Numis]

Knees but stronger hips. And then just secondly, you obviously mentioned you're the final year of the transformation, you're making good progress against this plan. Without being too sensational, I'm just wondering with the Sapiens stake sort of slowly building, could you sort of just provide us with any confirmation or details of any the nature of any discussions you've had with them, what the influence has been to date, if at all? And I guess, just how active have they been? Thank you.

[Deepak Nath, CEO at Smith & Nephew]

Sure. In terms of what we're targeting, as we've said before, getting to market growth in US recon remains remains a goal. Ideally, we would like to do that with all parts of our business kind of working, right. So, other words we want to continue to show progress in knees and progress in hips, right. But obviously there's multiple ways we could get there in Q2 we had over not over performance great performance in hips that offset some somewhat softer performance in knees.

[Deepak Nath, CEO at Smith & Nephew]

Right. So we expect to build on both of those things as we go into q three q four but the objective is at a US recon level to exit exit at market. So could be a different shape but that remains the remains the goal. In terms of Savian, as you know our position has always been we maintain open dialogue with all of our shareholders. We spend a considerable time John and I do engaging with our shareholders in an open and constructive way.

[Deepak Nath, CEO at Smith & Nephew]

And so, we have done that with Savian as well. The conversations so far have been quite deep, quite meaningful and constructive. And we expect to maintain that as we move forward as well.

[Kane Slutzkin, Director - Healthcare Equity Research at Deutsche Numis]

Great. Thanks guys.

[Deepak Nath, CEO at Smith & Nephew]

One more.

[Operator]

The next question comes from Dylan Van Haften of Stifel. So

[Dylan van Haaften, Director - Healthcare Equity Research at Stifel Financial Corp]

just one clarification at the end for me. Baked into your tariff guide, is are you using the Nairobi protocol for any of the, let's say, non U. S. For U. S. Business? And I'll stop there.

[Deepak Nath, CEO at Smith & Nephew]

The short answer is no, not at this time.

[Operator]

We currently have no further questions. So, I'd like to hand back to the management team for any final remarks.

[Deepak Nath, CEO at Smith & Nephew]

Great. Thank you very much for your questions. As we said, we're very encouraged by where we are in Q2 and remain confident about our ability to deliver within the guidance that we've set out. So, you for your attention today.

Participants

Analysts

• Deepak Nath, CEO at Smith & Nephew
• John Rogers, CFO & Executive Director at Smith & Nephew
• Jack Reynolds-Clark, VP - European MedTech Equity Research at RBC Capital Markets
• Richard Felton, Equity Research Analyst at Goldman Sachs
• Graham Doyle, Executive Director - Equity Research at UBS Group
• David Adlington, Managing Director at J.P. Morgan
• Sam England, Director & Head - European Med Tech Equity Research at Berenberg
• Veronika Dubajova, Managing Director at Citi
• Hassan Al-Wakeel, Director, European MedTech & Services Research at Barclays Investment Bank
• Robert Davies, Executive Director at Morgan Stanley
• Kane Slutzkin, Director - Healthcare Equity Research at Deutsche Numis
• Dylan van Haaften, Director - Healthcare Equity Research at Stifel Financial Corp