Smith & Nephew plc 2026 Q2 Earnings Call

Good morning, everyone. Welcome to the Smith & Nephew Q2 and half one results presentation. I'm Deepak Nath. I'm the Chief Executive Officer, and joined by John Rogers, who is our CFO. This quarter, we delivered underlying revenue growth of 1.6%, which was lower than expected. Sports Medicine and ENT performed strongly once again, with consistent delivery across regions and categories, and we saw double-digit growth from many of our key products. However, this was offset by softness in U.S. Orthopedics, and in Advanced Wound Bioactives. In U.S. Orthopedics, knees remain weak, reflecting similar dynamics to Q1, although we saw sequential improvement as expected, and we do anticipate further improvement through the remainder of the year. U.S. hips were affected by a delay in Catalyst Stem deployment and a tough comparator, with growth expected to resume as deployment increases during the balance of the year.

Within Bioactives, SANTYL growth was primarily impacted by strong distributor demand in the prior quarter, which did not repeat. This should normalize over the balance of the year. Despite the slower start on revenue, trading profit was strong at $566 million. Excluding M&A, trading profit grew by 9%, supported by stronger than expected efficiency savings and tariff refunds that fully offset the forecast tariff headwinds. Taking into account revenue performance, we now expect underlying revenue growth of around 4% for 2026. We recognize that Orthopedics is not where we would want it to be, but we remain focused on delivering better performance as we strengthen the portfolio and build on the margin progress that we have made. We have clear growth drivers across all three business units that support our outlook for the remainder of the year.

Importantly, despite the revised revenue outlook, we still expect to deliver our original guidance for profit, trading profit, free cash flow, and ROIC. This includes an additional $50 million in efficiency savings that we identified for 2026, taking our total expected savings from $150 million to $200 million, and a broadly neutral impact from tariffs, net of refunds. The changes that we implemented in our 12-point plan have made the group more resilient and better able to respond to these challenges. With that, I'll hand over to John to take you through the financial performance, and I'll come back after you start.

John. Thank you, Deepak. Revenue for the quarter was $1.6 billion, representing +1.6% underlying growth and 2.8% reported, including 120 basis points tailwind from foreign exchange.

Geographically, the U.S. declined by 1.3%, reflecting softer performance in Orthopedics and Advanced Wound Bioactives. Other established markets grew by 1.7%, with performance led by Canada on Australia and New Zealand, continuing the good momentum seen in the first quarter. Emerging markets grew 10.6%. Excluding China, group growth was 1.4% on an underlying basis, and we continue to expect China to be broadly neutral to growth for the full year. Let me now take you through the business units in more detail. I'll start with Sports Medicine and ENT, which had another excellent quarter and grew 8.6%. Within Sports Medicine, the underlying growth drivers remain unchanged, reflecting the continued momentum of our key growth platforms and consistency of performance across the portfolio.

Growth was broad based across regions and Joint Repair. Again, delivered double digit growth, supported by strong demand for Q-FIX KNOTLESS and REGENETEN. In AE/TE, Fast Seal and services continued to be the main contributors to growth. In China, after intentionally restricting inventory in the channel at the end of last year and ahead of the implementation of VBP, we saw strong demand for our products during the quarter. We continue to expect VBP to be implemented in the second half. Sports Medicine revenue again exceeded our recon and robotics revenue. Turning now to ENT. Outside of China, we saw strong growth globally, including double digit growth in other established markets and emerging markets, as well as in our ARIS ablation wands for turbinate reduction and our HALO wand for tonsil and adenoid surgeries.

In China, we continue to reduce inventory in the channel ahead of VBP implementation, which had a negative impact on our growth. We still expect the profit headwind for China VBP to be around $15 million-$20 million for the full year. Let's now look at Advanced Wound Management, which declined by 2.1% in the quarter. Within that, Advanced Wound Care grew 3.7% with good growth overall, led by U.S. ALLEVYN and strength in our emerging markets. Our ALLEVYN COMPLETE CARE launch is off to a strong start in the U.S. with good early momentum, and we were pleased to launch in Europe in this quarter. In Bioactives, revenue declined 12.7% for the quarter, driven by the reimbursement change in skin substitutes and a soft quarter for SANTYL. SANTYL benefited from strong distributor demand in Q1, which resulted in a softer Q2.

We've also seen some impact from one of the payers introducing prior authorization for certain doses of SANTYL. Underlying demand remains healthy, but the change is creating friction in the prescription process, and we're taking action to address this and expect SANTYL to return to growth in the second half. In our skin substitutes business, we continue to face headwinds in the U.S. as a result of CMS reimbursement changes that came into effect at the start of the year. We saw a sequential improvement from the first quarter, driven by hospitals. However, volumes and pricing in non-surgical settings remained under pressure, particularly in mobile, where we have limited exposure. The market is adapting more slowly than expected, which continues to affect billing efficiency and inventory levels across the channel.

We now expect the trading profit headwind from skin substitutes to be towards the upper end of the previously guided $20 million-$40 million range. We remain confident in the long-term fundamentals of the segment and see opportunities to benefit as the market normalizes. Advanced Wound Devices grew 3.8%. LEAF delivered double digit growth, reflecting strong demand. Both PICO and RENASYS performed very strongly in emerging markets as we continue to expand geographically. PICO sales in other established markets were impacted by doctor strikes in Spain, in the surgical sector, and the timing of tender offers. In the U.S., sales of RENASYS remained soft in the acute care channel, while performance in the post-acute channel was good. Turning now to Orthopaedics. This declined 1% on an underlying basis, primarily reflecting the ongoing issues in U.S. knees ahead of new product launches and temporary headwinds in U.S. hips.

Following four consecutive quarters of above-market growth in U.S. hips, we saw softer performance this quarter against a tough comparator. Catalyst Stem continues to grow strongly, but Q2 was impacted by a delay in set deployments and an increasing proportion of existing customer retentions versus competitive conversions. We see a clear path to re-acceleration over the remainder of the year as Catalyst Stem set deployment increases. As the product moves into its third year post-launch, growth should remain strong, albeit at a lower rate than during the initial launch phase. U.S. knees remain weak, but we are seeing gradual improvement as expected. The underlying dynamics are unchanged. Deliberate portfolio and capital discipline, combined with an ongoing market shift towards cementless, continue to influence performance in the near term. Sequential improvement was driven by strong uptake of LEGION MS and double-digit growth in LEGION CONCELOC, our cementless offering.

LEGION MS now represents almost 20% of our LEGION mix, up from 15% in Q1, and is enhancing the competitiveness of our installed base. We continue to expect improvement through the year, driven by increased LEGION MS set deployments. This will remain the main driver until LANDMARK launches. Outside of the U.S., knees were impacted by a large tender order in the Middle East in the prior year quarter that did not repeat. Hips benefited from the launch of Catalyst Stem in Japan, although we saw some isolated weakness in Australia where we await regulatory approval of Catalyst Stem. Trauma and extremities performed well overall. We continue to see good growth in EVOS, IM nails, and shoulder, driven by our AETOS implant.

We are seeing the impact of competitor launches in the U.S., but we expect growth to strengthen in the second half as we launch EVOS Pelvic and ramp up TRIGEN MAX. Finally, other recon grew 0.8%. This business can show some quarter-over-quarter volatility as revenue is influenced by contract timing and mix. This was more pronounced in the period, given another strong prior year comparator. That said, we saw double-digit growth in CORI deployments globally, alongside continued growth in utilization and penetration. We expect growth to accelerate in the second half, supported by an easier comparator in Q3, continued strong demand for our robotic platform, and good uptake across ASCs and teaching institutions. Now I'll move on to the half-year financials. For the half year, revenue was $3.1 billion, up 2.3% on an underlying basis and up 4.6% on a reported basis.

There was one fewer trading day versus the prior year, with underlying revenue growth of 3.1% on an average daily sales basis. Consistent with the performance in Q2, we saw strength in Sports Medicine offset by softness in U.S. Orthopaedics and Advanced Wound Bioactives. Moving on to the summary P&L. Underlying gross profit was $2.2 billion, representing a gross margin of 71.1%, up 60 basis points year-over-year. This was driven by greater than expected efficiency savings across manufacturing and procurement, which more than offset cost inflation and the headwind from inventory revaluation. Tariff refunds fully offset the forecast tariff headwind to gross margin. Trading profit increased $43 million to $566 million, with trading margin expanding 60 basis points to 18.3%, reflecting the benefits of higher gross margin and ongoing cost savings.

Moving further down the P&L, Our operating profit grew 4.3%, reflecting temporarily higher restructuring charges, driven by further optimization of our manufacturing network and higher acquisition costs driven by, of course, our acquisition of Integrity. Basic earnings per share grew ahead of this at 6.2%, reflecting the buyback we announced at Q1, and adjusted earnings per share grew by 11% to $0.477. The interim dividend of $0.156 per share is up 4% on half 1, 2025. I'll now take you through a more detailed bridge of our trading profit growth. We absorbed $119 million of headwinds from cost inflation, inventory revaluation, changes to wound reimbursement, and China VBP while continuing to invest $33 million in our growth. This was more than offset by $59 million of operating leverage and $128 million of efficiency savings, which I'll discuss in more detail shortly.