Earnings Call Transcript - SNN Q4 2025

Deepak Nath, CEO

Good morning. Welcome to the Smith & Nephew Q4 and Full Year '25 Results Presentation. I'm Deepak Nath, the Chief Executive Officer, and joining me is John Rogers, our CFO. I'm pleased to report a strong finish to 2025, delivering results at the high end of our guidance on revenue growth, margin, and free cash flow. For the full year, we achieved an underlying revenue growth of 5.3%, with all three business units growing by over 5%. Sports Medicine & ENT, particularly in Joint Repair, had another strong year. In Orthopaedics, we made significant progress in our U.S. recon business, especially in Hips and Trauma, while there's still work to be done in U.S. Knees. Our international Knees business has remained robust throughout the year, leading to a record number of CORI placements globally and continuous growth in the adoption and utilization of our robot. Advanced Wound Management also performed well in 2025, spurred by growth in AWD and Bioactives. Innovation is at the core of our strategy, with over 60% of our growth in 2025 coming from products launched in the last five years. Innovations across all three business units delivered double-digit growth for the year, including notable products such as Q-FIX, REGENETEN, FASTSEAL, LEGION CONCELOC, CATALYSTEM, EVOS, AETOS, PICO, and LEAF. In terms of profitability, we achieved 160 basis points of margin expansion, which was driven by our enterprise-wide cost savings program and various improvements in our Orthopaedics business. This included optimizing our manufacturing network, enhancing productivity, and introducing new sales and operation planning processes. We anticipate further benefits from these initiatives, in conjunction with our Ortho360 operating model and continued revenue growth, which will increase our Orthopaedics margin to over 20% by 2030. We've also improved our working capital management by reducing inventory days and cutting restructuring charges. Alongside growth and increased profitability, this has raised our free cash flow to $840 million, representing a 52.5% year-on-year increase. This allowed us to complete a $500 million share buyback program in the second half of 2025. This marks the successful conclusion of three years of hard work under the 12-point plan, during which we've consistently met our targets, positioning us well for further growth and returns as we enter the first year of our new RISE strategy. Looking ahead to 2026, we forecast a 6% revenue growth and around 8% trading profit growth, both on an organic basis, consistent with our guidance shared at our Capital Market Days in December, with trading profit growth outpacing revenue growth. We have also announced the acquisition of Integrity Orthopaedics, and we are now guiding to a trading profit of approximately $1.3 billion, including the effects of this deal. John will provide more details on guidance during his section. Let's now summarize our financial performance over the last three years under the 12-point plan with actual figures. We've transformed Smith & Nephew from a historically low single-digit revenue growth company to one achieving mid-single-digit growth, with a 5.7% CAGR from 2022 to 2025. Additionally, we increased our trading margin by 240 basis points from 17.3% in 2022 to 19.7%, despite facing significant challenges such as VBP in China, foreign exchange volatility, and higher inflation. Excluding the total impact of the Sports Med VBP during this period, our 2025 margin would have been 20.9%, 120 basis points higher than reported. Our intensified focus on cash and capital returns has led to a 15-fold increase in free cash flow, and our ROIC has risen by 170 basis points from 6.6% to 8.3%, or by 330 basis points when excluding the 160 basis point headwind from portfolio rationalization. I am incredibly proud of the achievements of our team throughout the duration of the plan and excited about what we can accomplish over the next three years under our new RISE strategy. I will revisit this next phase of our growth later, but for now, I will turn it over to John to discuss our results in detail.

John Rogers, CFO

Thank you, Deepak. Good morning, everyone. Revenue for Q4 was $1.7 billion, which indicates a 6.2% underlying growth and an 8.3% reported growth, factoring in a 210 basis points boost from foreign exchange. We had one extra trading day year-over-year. On an average daily sales basis, growth was at 4.5%. The growth was widespread across business units and regions. The U.S. saw a growth of 5.6%; other established markets grew by 7.2%; and emerging markets had a growth rate of 6.4%. Excluding China, the underlying growth rate was 7.2%. Now, I will move on to specifics by business unit, starting with Orthopaedics, which experienced a 7.9% underlying growth rate, marking the strongest quarterly growth in over two years. The extra trading day contributed to this, but even when adjusting for that, average daily sales showed strong growth and a nice acceleration compared to Q3. In the U.S., we observed our third consecutive quarter of growth exceeding the market in Hips, alongside an acceleration in Knee growth and sustained strong growth in Trauma & Extremities. The performance of Hips continues to be driven by increased adoption of CATALYSTEM, and we are witnessing good competitive conversions. We plan to increase our CATALYSTEM set deployments to foster growth in 2026. U.S. Knee growth improved this quarter following the launch of LEGION MS, which allows us to take advantage of the market shift to medial stabilized inserts. We are pleased with our competitive successes regarding the product and continue to receive positive feedback from both existing and new users. In international markets, performance in Knees, Hips, Trauma, and Extremities was strong, with some localized weaknesses in Hips in certain distributor-led markets. Post the launch of CATALYSTEM in Japan, we anticipate growth in our international Hips market over the upcoming quarters. In Trauma & Extremities, we continue to experience strong growth from our TRIGEN MAX Tibia, EVOS Plating System, and AETOS Shoulder. Other Recon saw a growth rate of 40.8%. We are encouraged by the increasing placements of CORI in teaching institutions and the percentage of CORIs deployed in competitive accounts. In this quarter, 45% of CORIs were deployed in ASCs. The deployment of CORI is crucial because Knee growth is significantly higher in accounts where CORI is established, indicating the potential for further enhancement in Knee growth as CORI penetration and utilization continue to increase. Let’s take a closer look at U.S. Recon growth. In Hips, since the start of 2024, there has been consistent improvement both in standalone growth and relative to the market, and we have outperformed the market for the last three quarters of 2025. This improvement is attributable to changes we've implemented in our commercial engine, product availability, and our portfolio with the introduction of CATALYSTEM, which addresses the rapidly expanding direct anterior segment of the market. We have also been narrowing the gap in the Knees segment compared to the market. We experienced a solid quarter in U.S. Knees in Q4, but we acknowledge that quarterly performance has not been as consistent as we would prefer. In 2026, we anticipate continuing to close this gap with U.S. recon market growth. We project U.S. Hips to align with or exceed market growth, while U.S. Knees might start with a quiet first quarter, reflecting our ongoing mindful trade-offs to balance growth, profit, and asset efficiency. We will then aim for growth in Q4, aided by the launch of the Cementless version of our new Landmark Knee in the latter half of the year. Landmark combines the established clinical benefits of our Knee portfolio into one platform that offers advanced kinematics, personalized options, robotic assistance, and easier implantation while enhancing capital efficiency through existing instrumentation. Now shifting to Sports Medicine & ENT, which achieved 7.3% growth, supported by double-digit growth in Joint Repair as we navigate the impact of China’s VBP. This year marks a significant milestone as our Joint Repair business surpassed $1 billion in revenue for the first time. Growth has been propelled by REGENETEN and Q-FIX KNOTLESS, with robust performance in small joints outside China. We also observed further acceleration of AGILI-C, albeit from a small base. AET exhibited strong growth, led by FASTSEAL and patient positioning with solid improvements in our U.S. markets outside of China. Despite ongoing softness in the U.S. tonsil and adenoids market, ENT recorded significant growth with double-digit growth as well as strong international growth, again excluding China. We have AET and ENT China VBPs on the horizon, but the projected headwinds in 2026 will be considerably smaller given the relative scale of these businesses. We are proactively managing our inventory in anticipation of implementation. Advanced Wound Management grew by 2.8% this quarter. Within that segment, Advanced Wound Care saw a growth of 4.4%. Although we are still early in our launch of ALLEVYN COMPLETE CARE, we are pleased with the initial performance and expect momentum to build as we roll out the product across the U.S. Moving on to Bioactives and Devices, it's worth noting that both had exceptionally strong prior year comparisons of over 20% growth. Bioactives saw a slight decline of 0.5%. We experienced a slowdown as we compared to the GRAFIX Plus launch in Q4 2024, and we also noted a decrease in skin substitutes in physician offices and outpatient settings in advance of the CMS reimbursement changes that took effect at the beginning of this year. Advanced Wound Devices achieved a growth of 5.4%. Both LEAF and PICO performed well, showcasing strong market demand. PICO growth continues to highlight strong demand, reflecting our efforts to enhance market penetration in surgical settings. U.S. RENASYS is experiencing challenges due to softness in the acute care channel, while performance in international markets remains robust. Now I will summarize the full year financials. For the full year, revenue reached $6.2 billion, marking a 5.3% increase on an underlying basis, surpassing our guidance of around 5%, and a 6.1% reported growth. Excluding the headwinds from China, growth would have been 7% on an underlying basis. It's essential to note that 2025 had one fewer trading day compared to 2024. Overall performance was broad-based, with all three reporting segments showing growth exceeding 5%. Orthopaedics grew by 5.1%, Sports Medicine & ENT by 5.2%, and AWN by 5.6%, all on an underlying basis. Overall, these results are encouraging, particularly since more than 60% of our growth originated from products launched in the last five years, as Deepak previously noted, instilling confidence as we enter 2026. Let’s take a moment to review our underlying revenue growth, excluding China over the past few years. Growth outside China has consistently been above 6% since 2023, with the headwinds from China peaking in 2025 at 170 basis points. China accounted for just over 2% of group sales in 2025. While we still anticipate VBP headwinds in 2026, as previously mentioned, their impact will be considerably less at the group level. Moving to the summary P&L, the underlying gross profit was $4.4 billion, resulting in a gross margin of 70.9%, an increase of 60 basis points. We successfully offset raw material inflation with price increases across our portfolio and through productivity improvements in manufacturing and procurement. Trading profit was $1.2 billion, up by $162 million, leading to a 160 basis points increase in trading margin to 19.7% for the full year, which is at the high end of our initial margin guidance. This improvement was fueled by positive operating leverage, our cost-saving measures, and particularly margin expansion within our Orthopaedics business unit. Looking further down the P&L, adjusted earnings per share increased by 21% to $1.02. This exceeds the growth of trading profit, largely due to the $500 million share buyback we completed in the second half, which offset the higher tax rate compared to last year. Our tax rate stood at 19.4%, in line with our guidance range of 19% to 20%. Basic earnings per share increased significantly faster, stemming primarily from lower restructuring and acquisition costs. Our restructuring charges were $47 million, reduced from $123 million in 2024, and our acquisition and integration costs were $32.7 million, down from $94 million in 2024. We propose a full year dividend of $0.391 per share, reflecting a 4.3% year-over-year increase. This slide illustrates a more detailed trading margin bridge. We absorbed headwinds of 250 basis points from cost inflation, China VBP, and tariffs, with FX impact being largely neutral. These headwinds were more than countered by an increase of 180 basis points from revenue leverage due to price and volume, alongside 240 basis points from productivity improvements, resulting in a 160 basis points overall margin enhancement for the year. Delving into the specifics of our efficiency savings, we remain on track to fulfill the 12-Point Plan and Zero-Based Budgeting savings outlined during our interim results in 2024, aiming for $325 million to $375 million in savings by 2027. To date, we have achieved $280 million in cumulative savings by the end of 2025, with additional savings expected in 2026 and 2027. We maintain our expectation for total savings of around $150 million in 2026, with half derived from the 12-Point Plan and Zero-Based Budgeting savings and the other half from other opportunities throughout procurement, manufacturing, sales and marketing, and business support. For our 2026 guidance, we anticipate an 8% reported trading profit growth on an organic basis and around $1.3 billion in trading profit, recognizing some dilution from the Integrity acquisition. During our London Capital Markets Day, we highlighted extraordinary headwinds affecting profits in 2026, including inventory revaluation, tariffs, changes in reimbursement impacting our U.S. AWM business, and ENT VBP in China. Our assumptions concerning these headwinds remain unchanged. We still expect a $60 million impact from tariffs, compared to $17 million in 2025, and an additional $20 million to $40 million arising from changes to wound reimbursement. We expect revenue leverage and operational efficiencies to more than mitigate these headwinds, propelling trading profit growth beyond revenue growth before accounting for any M&A impact. Now, regarding trading margin by business unit, Orthopaedics saw a 340 basis points increase to 14.9%, while Sports Medicine & ENT experienced a 20 basis points decrease to 23.8%, and Wound increased by 120 basis points to 24.9%. Overall, margin expansion was achieved through OpEx savings and efficiencies in all three business units. Within Orthopaedics, the margin increase was driven by a favorable mix and manufacturing savings from network optimization, ongoing productivity initiatives, and strict cost control. We anticipate further margin expansion continuing through 2028 and beyond in this business unit, supported by revenue growth and effects of actions taken to adjust our manufacturing capacity and our Ortho360 operating model, which optimizes business operations to balance growth, profit, and returns. In Sports Medicine & ENT, the margin decline was a result of the China VBP impact that surpassed the benefits from revenue leverage, operational efficiencies, and solid cost management. AWM's margin expansion was mainly driven by an advantageous product mix and operational productivity improvements. As highlighted, inventory has been a primary focus under the 12-Point Plan. You can observe the trends in days sales inventory throughout the year, for both the group and each business unit. Group DSI fell by 21 days, excluding the effects of portfolio rationalization announced at year-end, and by 51 days including it. The most significant reduction was in Orthopaedics, reflecting ongoing efforts to cut down the number of inventory units. As discussed at our Capital Markets Day, we anticipate further inventory value reduction in 2026. Sports Medicine also witnessed a decrease in DSI, both including and excluding portfolio rationalization, albeit on a lesser scale than Orthopaedics. Both Sports and Wound are already very close to the industry benchmark DSIs. We have made substantial progress in return on invested capital, achieving a 90 basis points rise in ROIC to 8.3% at the group level. This advancement is propelled by trading margin expansion, lower restructuring costs, inventory reduction, and improved asset utilization. When excluding the impact of the announced portfolio rationalization, ROIC stands at 9.9%, surpassing our cost of capital for the first time in several years. All business units contributed to ROIC improvement, with Orthopaedics more than doubling its ROIC in 2025, aided by margin expansion and reduced inventory. We foresee a further increase in group ROIC in 2026, driven by the continuation of these trends. Moving on to cash flow, trading cash flow reached $1.236 billion for the year, demonstrating a 102% conversion rate. This improvement arose mainly from reduced working capital costs, especially in inventory and payables. Capital expenditure totaled $433 million. Maintaining a focus on working capital remains important for 2026. Free cash flow rose to $840 million, a 52.5% increase year-over-year. This includes a one-off $26 million property transaction and a $58 million reduction in restructuring, acquisition, legal, and other costs. The $840 million significantly exceeded our initial guidance of over $600 million. We anticipate free cash flow in 2026 to be around $800 million. This projection includes a typical increase driven by profit growth, while also factoring in a minor temporary rise in restructuring costs due to further optimization of our manufacturing network involving the closure of our Warwick site, sourcing more into Memphis, and winding down manufacturing operations in Hull as we establish our new Wound facility in Melton. Overall, our cash generation and returns profile is significantly healthier, with further improvements anticipated as we proceed with our RISE strategy. Net debt saw a slight increase during the year to $2.76 billion, up by $50 million. We concluded 2025 with a leverage ratio of 1.7 times adjusted net debt to adjusted EBITDA, which aligns with our target of approximately 2 times. In terms of capital allocation, we continue to emphasize organic reinvestment in our business and pursue M&A to spur top-line growth. We are retaining our dividend ratio of 35% to 40%, and subsequently, we will consider returns to shareholders through buybacks, maintaining our target leverage ratio. Following the 2026 acquisition of Integrity Orthopaedics, our leverage remains below 2 times adjusted EBITDA. To wrap up, our outlook for 2026 anticipates around 6% organic revenue growth, which includes continual strong performance in Orthopaedics, Sports Medicine excluding AET, ENT in China, and Advanced Wound Management, especially in AWC and AWD. While we anticipate challenges in our skin substitutes segment, we expect AWD to continue growing, supported by sustained demand for SANTYL and growth in skin substitutes across physician offices and mobile channels. We project approximately 8% trading profit growth before M&A impact. As previously mentioned, we expect to face numerous extraordinary headwinds in 2026, yet we still forecast trading profit growth to outpace revenue growth, driven by operational savings and revenue leverage. Since our initial guidance, we've completed the acquisition of Integrity Orthopaedics which we expect will have a slight dilutive effect on trading profit in 2026, be neutral in 2027, and accretive in 2028. Including this dilution, we expect trading profit to be around $1.3 billion. We believed it would be beneficial to outline these two measures of trading profit so you can assess the business performance on an underlying basis as well as total trading profit, accounting for the acquisition’s impact. Finally, we anticipate around $800 million in free cash flow and greater than 10% ROIC excluding the impacts of Integrity. We forecast a stronger second half compared to the first half for both sales and profit growth, in line with typical seasonal patterns. We also expect ALLEVYN COMPLETE CARE to pick up steam throughout the year, and the launch of LANDMARK will boost the second half results. Please note that there is one fewer trading day in Q1 compared to 2025 and one more in Q4, which is particularly influential for our Orthopaedics business. With that said, I will turn it back over to Deepak.

Deepak Nath, CEO

Thank you, John. The launch of RISE, our new strategy outlined during the Capital Market Day in December, aims to accelerate growth and improve returns. It's encouraging to see how this strategy is being embraced internally, focusing on expanding patient reach, driving innovation, scaling through investments, and enhancing execution efficiency. We are building on the behaviors established through the 12-Point Plan and our commitment to continuous improvement. Now, let me highlight the key factors influencing our performance in the first year of RISE, starting with Sports Medicine. First, the effects of the China Joint Repair VBP headwinds have fully annualized, which means we can expect our underlying Joint Repair growth to improve this year. Importantly, we anticipate the upcoming AET and ENT VBP processes to be much less impactful given the size of those businesses. Second, we are continuing to strengthen our Shoulder portfolio through our acquisition of Integrity Orthopaedics, and we look forward to increasing adoption of TENDON SEAM across our customer base. Third, we are awaiting FDA approval of TESSA, our pioneering spatial surgery arthroscopic platform, which will transform how surgeons visualize and perform procedures. Lastly, we are seeing continuous growth in REGENETEN, supported by recent AAOS guidelines that endorse the use of Bioinductive Implants in rotator cuff repairs, enhancing clinical confidence and usage. I want to elaborate on our acquisition of Integrity Orthopaedics, which we believe will be a significant growth driver for our sports medicine portfolio. Earlier this year, we announced a deal valued at up to $450 million, which includes performance-based payments. Integrity Orthopaedics was co-founded in 2020 by Tom Westling, who also founded Rotation Medical, the creator of REGENETEN, which we acquired in 2017. The growth of REGENETEN showcases our successful commercial execution in scaling an innovative shoulder product with our dedicated sales team and developing clinical evidence to encourage adoption. Integrity has created Tendon Seam, an innovative rotator cuff repair system that received FDA approval in 2023 and targets the $875 million biomechanical repair market. Rotator cuff repair is a significant and expanding area, with roughly 500,000 procedures performed each year in the United States. Despite its size, surgical techniques have shown little innovation over the past two decades, resulting in retear rates ranging from 20% to 40% and prolonged recovery times. This indicates a substantial unmet need where impactful innovation could capture market share. Tendon Seam features a groundbreaking biomechanical approach that distributes load across the entire tendon, minimizing stress at fixation points, leading to a stronger and more stable repair. Early clinical data is encouraging, suggesting potential for lower retear rates and faster patient recovery, while offering a more straightforward and quicker surgical procedure compared to current standards. The acquisition aligns with our RISE strategy to drive growth through strategic investments in high-growth, high-value clinical segments where we already have a solid presence, supported by our strong balance sheet. The deal is projected to be dilutive to trading profit in 2026 and, as John noted, broadly neutral in 2027, becoming accretive starting in 2028 as we scale the product. While integration is still in its early stages, it's progressing as planned, and we are committed to applying the same disciplined approach that contributed to REGENETEN's success. TENDON SEAM complements Smith & Nephew's comprehensive shoulder portfolio. With this innovative technology, it reinforces the initial repair structure in rotator cuff tears, and REGENETEN enhances that repair by promoting biological healing over time. Together, they offer a unique end-to-end solution that addresses both mechanical and biological factors essential for successful rotator cuff repairs. The total combined total addressable market for both products stands at just under $1.2 billion, where we currently hold about a 25% share with significant growth potential. In the fixation segment, we maintain our market-leading instability solutions, which include our Q-FIX and All-Suture Anchor portfolio, boasting 10 years of proven performance. In shoulder arthroplasty, our AETOS Shoulder System, which launched in 2024 with anatomical, reverse, and seamless options, is set to penetrate the high-growth replacement segment projected to see around 250,000 procedures annually in the U.S. by 2025. We will soon provide a powerful new offering with the launch of CORI Shoulder, allowing our handheld robotics to be integrated into the preparation and execution of shoulder replacement alongside AETOS, building on our existing CORIOGRAPH Pre-Op Planning. We now have one of the most extensive and advanced portfolios for managing shoulder issues, harnessing both mechanical and biological healing technologies across our Orthopedics and Sports Medicine businesses. Shifting to Advanced Wound Management, we have strategies in place to address CMS reimbursement changes for skin substitutes in physician offices and mobile settings while also expanding outside those channels. Beginning January 1, 2026, CMS will implement a price cap aimed at correcting historical market distortions caused by numerous players, often in mobile settings, charging excessive prices. We anticipate a decrease in non-surgical volumes, particularly in mobile environments, as these changes make certain skin substitute offerings less economically viable for many providers. While this leads to a short-term value reset, it paves the way for a more sustainable, patient-centric, evidence-based market with a promising growth trajectory. As the market normalizes, we see opportunities ahead. At the end of last year, CMS also withdrew the local coverage determinations for skin substitutes, which we regarded as neutral to the business; therefore, this has no impact on our 2026 guidance. We believe that clinical evidence will remain crucial in this market, even without the LCDs. Towards the end of 2025, we launched ALLEVYN COMPLETE CARE, our latest 5-layer foam dressing that addresses both chronic wound healing and pressure injury prevention. It demonstrates 51% superior exudate management, and with its new silicone adhesives, it adheres better than competitors, making it ideal for chronic wound healing. It also offers a 55% greater reduction in strain relative to the competition, making it particularly effective for preventing pressure injuries. I'm confident that the market rollout of ALLEVYN COMPLETE CARE will help us capture market share in one of the largest and fastest-growing segments of wound dressings. We will also continue to enhance the portfolio in high-growth areas with unmet needs like SANTYL for wound bed preparation and reach new patient groups, including those vulnerable to surgical site complications or pressure injuries with PICO and LEAF. Now, regarding Orthopedics, we will keep driving procedure growth across all joints with our CORI platform, enhanced by our shoulder execution capabilities. CORI remains a vital differentiator for us. The popularity of handheld robotics is growing; CORI's compact size, mobility, quick setup, and low ownership costs make it suitable for both hospitals and ASCs. In knees, we will continue to expand our portfolio in 2026, having already launched our Legion medial stabilized knee to cater to a rapidly growing segment, and we're encouraged by the early traction. Our next phase will occur in the second half of the year with the launch of LANDMARK, our most innovative knee system to date, which will be available in both cementless and cemented versions, featuring exceptional tray efficiency ideal for ASCs. As the ASC channel grows, we are well-positioned for further expansion with our efficient implant suite like AETOS, CATALYST, and LANDMARK, complemented by CORI. In fact, 40% of all CORI procedures in 2025 were conducted in ASCs, underscoring the platform's compatibility with this rapidly growing setting. We're also realizing additional efficiencies through our Ortho360 program, which aims to replace fragmented region-driven strategies with unified objectives, integrated metrics, and systematic portfolio management. By evolving our sales and operations planning into fully integrated business processes, simplifying our portfolio, minimizing inventory, and enhancing capital efficiency, we aim to boost profitability, improve return on invested capital, and generate stronger cash flows in this business. Now, I want to provide an outlook on innovation's role in the duration of RISE, recognizing its historical and future significance to our growth. We are increasing our R&D investments in Sports and Wound while maintaining a robust pipeline across all business areas from 2026 to 2028. Over the past three years, we successfully launched 44 products on schedule and within budget, and we seek to enhance our launch velocity moving forward. We launched 14 new products in 2024, 15 in 2025, and we expect to introduce 16 in 2026. We are also building upon our two key scalable technology platforms, M-TECH and Biologics. In M-TECH, we plan to launch TESSA and LUMOS in Sports Medicine and our next-generation LEAF monitors for pressure injury prevention in Wound. Additionally, we have a rapidly advancing robotic platform aimed at driving procedural innovations across all joints in Orthopedics. In Biologics, we are enhancing our existing product lines with launches like Next GENETIN, the next iteration of REGENETEN. Before I conclude, I want to reiterate the midterm financial targets we expect our strategy to achieve. Through ongoing innovation and execution, we aim for an organic revenue compound annual growth rate of 6% to 7%, which is above our market growth. Our relentless focus on productivity, operational efficiencies, and prudent capital management will yield a trading profit CAGR of 9% to 10%, surpassing $1 billion in free cash flow by 2028, and achieving a return on invested capital of 12% to 13%. Looking at the near term, we've successfully positioned ourselves for growth in 2025 concerning revenue, margins, free cash flow, and return on invested capital, and we're optimistic about another strong year ahead. On revenue, we are speeding up growth, launching new products, and enhancing leverage within our profit and loss statements. We will maintain a disciplined approach to our cost base to ensure trading profit growth outpaces revenue growth organically. Our free cash flow generation remains robust, and we anticipate another improvement in ROIC, significantly surpassing our weighted average cost of capital in 2026. With that, I am ready to take your questions.

Jack Reynolds-Clark, Analyst

Jack Reynolds-Clark from RBC asked about revenue guidance for 2026, seeking details on market growth expectations, the contribution of launches to that growth, and any contingencies included in the forecast. He also requested clarification on the revenue guidance by quarters and inquired about the anticipated timing for the CORI shoulder capability.

Deepak Nath, CEO

So with 2026 and actually right through RISE, one of the benefits of the program we have is the multiple sources of growth. We're not dependent on any one business unit or product to carry us through. We've exited 2025 significantly above our historical levels of low single digits and have now navigated to above 5%. Excluding the impact of China VBP, we were actually above 7%. We are targeting 6% to 7% growth for the next three years, with 2026 projected to be around 6%, which will be above our market. Each of our business units will contribute to that, and innovation will continue to be a key part. In 2025, about 60% of our growth came from new products. In 2024 and 2023, we were consistently above 50%, around 60%. For 2026, we plan to launch 16 new products and expect that they will continue to deliver above 50% growth. Therefore, in 2026, we anticipate around 6% growth ahead of the market, with contributions from each business unit and ongoing innovation driving our growth. John, do you have anything to add?

John Rogers, CFO

I can provide some insight into the timing. As mentioned in our presentation, we expect the second half to be stronger, with Q1 anticipated to be weaker due to having one fewer trading day. We expect U.S. Knees to perform a bit below expectations in Q1, but we believe it will improve in Q2. We project that the first half will achieve top line growth of approximately 4.5% to 5%. Q3 and Q4 are expected to be more robust, especially with the launch of LANDMARK and the growth of ALLEVYN COMPLETE CARE throughout the year. Q4 will benefit from an additional trading day, contributing to a stronger performance. For the second half, we predict growth between 7.5% to 8%. Combining the first half's 4.5% to 5% growth with the second half's 7.5% to 8% gives us an overall expectation of around 6% growth for the full year. In terms of the bottom line, we anticipate an 8% growth in our trading profit for the entire year. This growth is also expected to be weighted towards the second half, with profit growth in the first half around 5.5% to 6% and in the second half about 9% to 10%, which averages out to approximately 8%. While I'm not breaking it down per quarter, I hope this provides a better understanding. Overall, we are expecting growth throughout the year, influenced by one fewer trading day in Q1 and one additional trading day in Q4.

Deepak Nath, CEO

Regarding your question about CORI Shoulder. The CORIOGRAPH, our planning platform, was launched in the middle of last year. The key to its success is execution, and we are now starting the year with its launch. This enables us to utilize the full AETOS portfolio, including stemless, short stem, and CORI Shoulder for both planning and execution. We can perform reverse and anatomic procedures, as well as adenoid and humeral tasks, using CORI for preoperative, intraoperative, and postoperative insights. This represents not just a complete solution but a highly differentiated one.

Veronika Dubajova, Analyst

Veronika Dubajova from Citi. Two questions from me, please. The first one, I just want to go back to joint repair. Obviously, Deepak, you said that the China headwind has annualized out now, but we've had it for basically for eight quarters. So I just want to confirm what's happening in Joint Repair in China specifically and sort of what gives you the confidence this year that it's not going to be a drag to the overall Joint Repair number to the extent that we've seen. Obviously, the China improvement is a big part of the guide for the year. So if you can talk about that, please? And then just kind of a big picture question around the margin and organic and inorganic development. Obviously, very exciting to see organic margin improvement this year, but it is being eaten away by Integrity. So I don't know if you can maybe talk a little bit more broadly how you think about capital allocation and M&A sort of having an impact on the bottom line growth? And to what extent that's sort of a favorable trade-off that you're willing to take? And maybe if there is anything else in the pipeline beyond Integrity that we should be kind of looking out for this year?

Deepak Nath, CEO

Right. So let me talk about Joint Repair. As we mentioned, Joint Repair has annualized at this point. So going forward, we'll have a clean kind of comp or rather Joint Repair growth alloyed by China VBP. And that is a key part of our growth story, as you highlighted. As we've called out a number of times, when you actually dissect our Sports growth, it's been well balanced across geographies. You take China out of it, and we've actually grown high single-digit growth, not only across markets but actually across categories, which is one of the key features of our Sports Medicine which is a balanced portfolio selling that we've undertaken. So I feel very, very good about commercializing our portfolio and now that the impact of China VBP and Joint Repair is going away. What is left, though, is AET. The AET part started last year. I think it will be Q3, right, John, something like that, Q3 or early into Q4 by the time we fully lap AET. But the impact to the group is relatively small at this point. And then the other part is we report ENT and Sports together. It's ENT that's not going through this. It started kind of towards late last year. We'll fully annualize that towards the end of this year. Again, both of those while important to those business segments at a group level will now be a relatively small portion of the portfolio. Overall, like I said, I feel very, very good about the continued momentum that we've built and capitalizing on that momentum as we go into 2026. In terms of margin, as we noted, we've driven 240 bps of margin improvement over the life of the 12-Point Plan program. That's a combination of leverage and cost improvement and all of the work that we've done over the 3 years of the program, not only deliver the 240 bps, but what's most impressive about that is the sheer scale of headwinds that we've overcome. If you just take China Joint Repair VBP, that's just 120 bps on its own. Adding that to 19.7%, we would be at 20.9%. I'm absolutely proud of what we as an organization have delivered with focus not only on the top margin. As we've said, going forward, the focus will be on revenue growth and driving sustainable above-market revenue growth and profit growth. So that's kind of what we are orienting and guiding toward, recognizing that we'll continue to drive productivity. We'll continue to take costs out in order to, in effect, drive margin as well. In terms of capital allocation, our focus remains on investments in organic to drive top line growth above market and to further accelerate our growth. That remains a key feature or a key priority for us in terms of capital allocation. What we've also said, of course, is that's a mix of R&D and M&A. And within our RISE strategy, what we've said is we will undertake M&A that allows us to scale in areas where we have strength. That's within Sports and within Wound and areas where we see clear ability to build on what is a solid foundation. Integrity fits very squarely within that. As I've highlighted, the advantage of Integrity is within Sports Medicine, it allows us to be a clear leader in biomechanical repair. We were very, very positively impressed with TENDON SEAM and all that it has to offer in terms of an alternative to existing approaches. Together with what we have, I think it will be a great complement in terms of mechanical repair. What's most exciting is when you couple that with REGENETEN, where we clearly have market leadership in biologics, that's a fantastic portfolio. We should expect us to act as the leaders that we are in Sports Medicine where we see an asset, unique technology that augments our position. But actually, what's even more impressive is when you couple that with what we've got in arthroplasty with CORI and a full portfolio of AETOS. We are now very, very strongly positioned within Shoulder. Just to remind you, there's significant channel overlap in Shoulders. So surgeons who do arthroplasty also do soft tissue repair. That's what's most exciting about this.

John Rogers, CFO

If I could provide a bit more information on China, which is a frequent topic of discussion. To give some context, in 2024, our sales in Greater China were approximately $210 million to $220 million. For 2025, we are anticipating a roughly one-third reduction in sales due to various impacts we've discussed, bringing us to around $160 million. Looking to 2026, we expect sales to be similar to those in 2025. This situation arises from a mix of factors, including a slight recovery in our Sports segment. This improvement stems from our effective management of channel inventory in 2025, where we have successfully reduced inventory levels. We believe this will allow us to see some growth in our Sports business in China. However, for our overall sales to remain flat, there must be declines elsewhere, particularly in AET and ENT, which we expect to fully impact us in 2026. While these two factors balance out our top-line expectations, we will see a profit decline for 2025 that we estimate to be around $50 million to $60 million. We anticipate a $15 million to $20 million year-on-year decline in profit for 2026, primarily due to the VBP impacts on AET and ENT. We have effectively managed our inventory in ENT, which gives us some assurance regarding our projections. As we have emphasized, China will not drag down our top line in 2026 like it has in the past. It will impact the bottom line, but the effect will be limited to $15 million to $20 million, consistent with what we shared at the Capital Markets Day in December and are reiterating now regarding the VBP impacts for 2026. This gives us confidence. Excluding China, we experienced 7% growth in 2025, and since we are not anticipating that drag in 2026, we are confident in projecting around 6% growth in our top line, despite some of the challenges we have mentioned.

David Adlington, Analyst

David Adlington, JPMorgan. You've seen two or three of your competitors in skin substitutes downgrade their expectations in the last few weeks; you've maintained yours that you had before Christmas. Just wondered if you could talk about what you're seeing in the market and your assumptions around price and volumes for this year? And then secondly, one more for John. The inventory write-down, $159 million, is that all coming from the portfolio rationalization? Or is there anything more underlying in there? And is that now complete? Or should we expect more changes coming through?

Deepak Nath, CEO

In terms of skin subs, the channel is adapting to upcoming changes. The most significant impact is seen in the physician office and mobile channels, with mobile being more affected than the physician office or the hospital outpatient segment. However, we continue to see growth in the Surgical segment. Different players' statements relate to the mix of our business across these channels and the types of products offered. Product segmentation can occur from both customer and price perspectives. Overall, we are experiencing a noticeable impact regarding prices. Typically, payment terms in the physician office and mobile segments range from 30 to 45 days. As we enter a period with the first round of reimbursements completed, physician offices are beginning to see what CMS provides. There remains considerable uncertainty in the channel regarding not only utilization but also product reimbursement and the methods CMS employs for this. The guidance we've offered about our business's impact has not changed from last year. Nevertheless, I remain very optimistic about the segment long term. Once we navigate this adaptation phase, we believe the clinical unmet need will continue to exist. There will be a trend towards utilizing products supported by clinical evidence, and we have invested significantly over the years to develop both products and the clinical evidence necessary to encourage their proper use. This, along with the increasing unmet need driven by demographics, positions us favorably in the market.

John Rogers, CFO

I wanted to provide some clarity on how we arrive at our 20% to 40% impact on the bottom line. Previously, we mentioned that our skin subs business is around a couple of hundred million. From a pricing perspective, we anticipate a price reduction of approximately 20% to 25%. This decrease is less than the overall industry because we haven't been at the same high price points as the inventory average. We expect prices to lower slightly while our volumes should remain broadly neutral, possibly even slightly positive as we gain a bit more market share. Overall, we project a reduction in our revenues of about 15% to 20%. If you apply that to the 200 and factor it in with our margin, that leads to the 20% to 40% impact we detailed in our margin bridge. There are many assumptions involved, and it carries some uncertainty. However, based on market conditions to date, we remain confident in our guidance, which includes a fairly broad range of about $20 million to $40 million. Regarding inventory and portfolio rationalization, we view this as a very positive step. We've taken the chance to expedite the simplification of our product portfolio, resulting in roughly a two-thirds reduction in our Ortho SKU count and a 10% decrease in our Sports SKU count. These changes will likely account for only about 7% of our sales in 2026. This represents a significant number of SKUs but only a small percentage of our overall sales, which we expect to phase out over the next 2 to 3 years. Simplifying the portfolio will allow us to offer our customers our latest products. This is a continuation of the efforts outlined in the 12-Point Plan, now focusing more on Trauma, while the initial plan concentrated on Knees and Hips. We see this as a very positive development and do not expect any further changes. To clarify, the $159 million charge solely relates to portfolio rationalization; there's nothing else concealed within that figure. It is exactly what it appears to be, and we believe it will be very beneficial for the business.

Deepak Nath, CEO

Just to reinforce something here, which is we've called out Ortho360 a couple of times today. We've mentioned that in our Capital Market Day. It's very important to emphasize how we're running this business better than we have historically. Balancing capital deployment, growth and margin, so we achieve a better balance across those things we've historically done is an important part of how we operate this business. It's not chasing growth at all costs, but rather drive the right kind of balance. Historically, we haven't been as disciplined around deploying capital in this business, which has led to some of the challenges around ROIC and inventory that we've seen. It's really important to emphasize where we're operating this business better in a more disciplined way than we historically have done.

Richard Felton, Analyst

Richard Felton from Goldman Sachs. Two questions please, both on Shoulders. I think it's 13 or 14 consecutive quarters where REGENETEN has been called out as a strong contributor to growth. Could you help us with roughly how much that product contributes to your Sports Medicine business today? And then on the AAOS guidance, what does that change in practice? Is it because of that guidance, that shifts reimbursement conversations? Does that guidance have a material impact on surgeon behavior? Anything you can help us with to frame how material that shift in guidance is to be really helpful. And the second one also on Shoulders. Deepak, I think you referenced REGENETEN Integrity addresses a TAM of $1.2 billion. How do you get to that $1.2 billion? Is that all rotator cuffs? Is it a subset of rotator cuffs done with Bioinductive Implants today? Any parameters to provide color around that and how fast it's growing?

Deepak Nath, CEO

So regarding REGENETEN, we haven't previously highlighted it, have we? I need to be cautious with my statements. It's a significant growth driver for us, and as you mentioned, it's been an incredible story. When we launched it after acquiring it, it was relatively small, much like Integrity in its early stages. We integrated it into our commercial sales organization and invested in developing clinical evidence. In prior earnings calls, we've discussed the impressive data we've gathered over various time points, notably the statistically significant reduction in retail rates after one and two years. This has not only strengthened our commercial channel but also supported utilization through our investment in evidence. The guidance assists surgeons in determining the proper usage. There are various levels of clinical evidence, and while reimbursement will come over time, it’s currently part of the DRG without specific reimbursement for REGENETEN. The guidance helps surgeons utilize all the clinical data available from research papers. With the society's new guidance on appropriate usage, we expect to see increased adoption. The $1.2 billion market consists of about $875 million from mechanical and biomechanical repairs, which includes sutures, anchors, and everything associated with repairing rotator cuffs. The remainder comes from biologics, where we hold a significant share among other collagen-based implants. Combining the two sets us at about $1.2 billion in the market we participate in, where we have roughly a 25% market share with room for growth. In terms of fixation, we lead the market with our instability solutions, including the Q-FIX and All-Suture Anchor portfolio, both with a solid 10 years of performance. For shoulder arthroplasty, our AETOS Shoulder System, launched in 2024, includes anatomic, reverse, and seamless options, targeting the high-growth replacement segment, which is projected to see about 250,000 procedures annually in the U.S. by 2025. We will soon launch CORI Shoulder, which will allow our handheld robotics to assist in preparing and executing shoulder replacements with AETOS, enhancing our current capabilities with CORIOGRAPH Pre-Op Planning. We now offer one of the most comprehensive and advanced portfolios for managing shoulder issues, encompassing both replacement and repair, across our Orthopedic and Sports Medicine sectors.

John Rogers, CFO

Thank you. Overall, we've delivered on 2025 in terms of revenue growth, margin, free cash flow, and ROIC. We're looking ahead to another good year. We're accelerating growth, launching new products, and driving leverage through our P&L. Our focus remains on being disciplined with our cost base to drive trading profit growth ahead of revenue growth on an organic basis. Our free cash flow generation remains strong and will deliver another step-up in ROIC, significantly exceeding our WACC in 2026. So with that, thank you for your time and attention today.