Smith & Nephew - H1 2023

Transcript

Deepak Nath (CEO)

Welcome to the Smith+Nephew second quarter and first half results call. I'm Deepak Nath, and joining me is Chief Financial Officer, Anne-Francoise Nesmes. I'm pleased to report another strong quarter of growth. In orthopedics, we've improved our underlying dynamics and are set up to accelerate growth in the second half. The momentum in sports medicine and advanced wound management has continued. These results have given us the confidence to increase our full year growth guidance. We saw the moderation we expected in the US after a very strong Q1, but that was more than offset by improving execution globally and the increasing ability of our organization to take part in stronger markets. Margin development in the first half was in line with our expectations, and this should represent the peak of the macro-driven cost pressures.

In the second half, we expect a clear step up in both trading margin and cash generation as we drive productivity gains and start to bring down days of inventory. Importantly, we're continuing to build the foundations for sustainable performance by delivering the 12-point plan. Overall, I'm pleased with the progress of the plan, and as with any initiative of this depth and breadth, there are varying degrees of completion, but most elements are either on track or ahead, and we're already seeing the benefits coming through. Product availability in orthopedics was much better than it was on the back of our own operational improvements, although external supply interruptions and shortages continued to hold back overall group performance.

Later on, I'll share with you the updated KPIs on operations and how we're positioned to convert those into better outcomes in the coming quarters.Our high cadence of innovation has continued right across the portfolio, and we've added new growth drivers in robotics and in extremities. We're also pleased with our progress on a number of other initiatives, including order-to-cash excellence, pricing management, and the pursuit of cross-unit business unit deals in ASCs. For now, I'll hand over to Anne-Francoise to take you through the detail of the quarter. Anne-Francoise?

Anne-Francoise Nesmes (CFO)

Thank you, Deepak. Good morning, everyone. I'll start with the second quarter revenue, which was $1.4 billion, representing dollars, representing a 7.8% underlying growth and a 6.6% reported growth. Performance was broad-based, with all business units and all regions contributing. I'll come to the detail in a moment, but you can see that orthopedics accelerated compared to Q1, and sports medicine and advanced wound management continued to perform well. Looking by region, established markets growth has remained above historical levels. Our US business grew by 6.3%, following a very strong first quarter. Other established markets maintained their performance and grew 8.5%, with elective procedure volumes remaining at a high level across Europe and Asia Pacific.

Emerging markets grew 11%, largely driven by a recovery in China, where surgical activity returned to more normal levels after COVID outbreaks earlier in the year. I'll now go into the detail of each business unit. Orthopedics grew 5.8% underlying. Growth in knees and hips reflected us lapping the impact of VBP. As a reminder, the lower VBP pricing from the tender was gradually implemented during the second quarter of 2022. While China still reduced growth by around 2 points in knees and 4 points in hips, that headwind fall away for the rest of 2023. Other reconstruction growth of 21% was driven by the ongoing adoption of robotics, our installed base of capital is increasingly nicely across both hospitals and ASCs, passing 650 units in total with a growing funnel.

Customers are showing their confidence in the platform by buying second and third Corys in multi-system deals. The range of surgical applications is being recognized, with the majority of deals including our hip software. Trauma and extremities grew 2.5% underlying. This was the first quarter after lapping the trauma exit in China, and there should be further growth uplift to come as we lap other markets exit in the second half. Looking beyond those effects, we can see our investments are starting to pay off. US trauma grew 7% in the quarter, with Evos large plates, plates both driving growth and showing the value of a complete solution by pulling through the use of small plates. In extremities, we reach another innovation milestone with the 510(k) clearance and the launch of Etos, our next generation shoulder.

Improving our orthopedics performance has been a key priority, and we're now seeing multiple trend breakers lining up in quick succession. Deepak will cover shortly the progress we've made in improving implant availability, and we're resolving supply chain challenges that limited our instrument deployments in the quarter. We have the highest pace of Cory sales activity we've seen. Evos growth has accelerated already, and the Etos shoulder makes us competitive for the first time in that large and high-growth category. Putting this all together, we're excited of what's to come for Orthopedics in the coming quarters. Now, moving to Sports Medicine and ENT, which grew at 12%, based on our multi-year stream of innovation across both capital and consumables playing an important role. Product availability remains somewhat of a constraint in the quarter, with restricted capacity at some component suppliers.

However, we were still able to drive an attractive level of growth. Looking by segment, Joint Repair grew 12.5%, with broad-based strengths across procedures and region. Regeneten, other shoulder repair products, and our knee repair portfolio all grew at double-digit growth, with knee growth helped by the new ACL solutions that we launched earlier in the year. AE grew 4.6% in the quarter, with Werewolf, Foreseal, and mechanical resection both being major contributors, offsetting a slower quarter in video. Of course, I know there is interest from many of you in the developments, in any developments in around the VBP in China. Our team remains in close contact with the Chinese government, and we expect a policy to be finalized later in the year.

ENT growth of 38.9% reflects the continued post-COVID recovery in our core tonsil and adenoid business. We expect to return to a more normalized level of growth later in this year as we lap more of the market recovery. ENT continued to be an attractive growth area beyond this for us. Now, moving to look at Advanced Wound Management, which grew 6.2% underlying. Within that, advanced wound care grew 2.7%, mainly driven by our foam dressings and a strong quarter in Europe. Bioactives grew 3.1% underlying, with a slower growth than Q1, mainly reflecting a normalized prior year comparator. Skin substitutes remained the primary driver of bioactives.

Our portfolio has been growing ahead of the market, and we believe the outstanding clinical evidence around graphics, in particular, positions us for continued strong performance. Finally, advanced wound devices grew 21.4%, reflecting double-digit growth from both our traditional and single-use platform, with similar drivers to recent quarters. In the traditional segment, we are driving account conversions to Renesis, with a good pipeline of further opportunities, and we're continuing to expand the single-use market with increasing penetration of PICO. Accelerating growth in negative pressure is a key component of the 12-point plan, as you know. Now I'll move to the financials for the first half. Revenue was $2.7 billion in the first half, up 7.3% on an underlying basis compared to H1 2022.

Reported revenue was up 5.2%, including a foreign exchange headwind of 210 basis point from the strength of the dollar against major currencies. As you can see in this chart, growth was balanced across all businesses, with all three units contributing. Now, moving to the summary P&L for the first half. Gross profit was $1.9 billion, resulting in a gross margin of 69.8%, which is 110 basis point decrease on the prior year. Operating expenses grew faster than sales, driven by increased spending on sales and marketing. This results in trading profit of $417 million, with a margin of 15.3%. I'll explain the drivers of the lower margin on the next slide. Slide 12 shows a more detailed trading margin bridge.

There were three major headwinds compared to the first half of 2022, with the first two representing what we expect to be the peak of the macroeconomic pressures. They were around 400 basis points from raw material and staff cost inflation, another 120 basis point from transactional effects. As you know, the transactional effects is the result of a strong dollar on a disproportionately dollar-based manufacturing cost base, delayed by from our hedging program. The final headwind was around increased selling and marketing spend as part of refreshing our commercial approach for growth in orthopedics and sports and came to 110 basis point. There were also significant positive offsets in the first half.

We saw around 220 basis point of positive leverage from volume and pricing growth. Around a third of which was driven by the 12-point plan. There were also significant productivity gains, with around 150 basis point from operations and procurement savings and 100 basis point from other cost savings initiative, including restructuring. I'll come to the outlook in a moment, but one thing you can see from this bridge is that while the headwinds are here to stay for some time, the headwinds are either one-off in nature or should significantly ease over the next period. The increase in Orthopedics and Sports commercial spend is not intended as a repeating exercise. We currently expect transactional effects to be broadly neutral in 2024. This first half should represent the peak of the pressure from input cost inflation.

Looking further down from the P&L, adjusted earnings per share declined by 8% to $0.349. That's slightly more than trading profit, mainly due to higher interest expense, with our average net debt higher than in the first half of 2022. The interim dividend of $0.144 per share is unchanged. Trading cash flow in the period was $110 million, with trading cash conversion of 26%. That is lower than in 2022 due to working capital outlay of $326 million. Whilst we reduce our receivables as a result of the order-to-cash initiative in the 12-point plan, the biggest driver of the capital, the working capital increase, in the first half was the inventory.

Let's look at the inventory movement, and there are three main drivers to the increase that we expect to reverse. Firstly, we've added some stock to support acceleration in negative pressure wound therapy. This is a compelling opportunity for the business that carries some upfront inventory requirement that we expect to gradually consume as the segment grows. In addition, we've had some accumulation of both products and instrument sets that are not yet deployed and are currently being held as inventory. This is a result of ongoing supply constraint for a small number of components, which hold back assembly, set deployment, set completion, sorry, and consequent deployment. Deepak will cover in a moment that we expect to accelerate deployments in the second half, which will start bringing down the inventory.

Then within this driver of inventory growth, we've also had some excess factory inventory from spot buying of raw materials to protect our manufacturing against external supply disruption. While there are still some areas with tight availability, general improvements in the reliability of global supply chains mean that we are now able to bring in tighter controls on raw materials buying, and we can certainly see the level of raw materials inventory coming down in the future. Finally, as you would expect, there has been inventory growth tracking the overall growth of revenue, and that component is neutral to D-DSI, but we should still see improvement in that portion as we execute the 12-point plan. Much of our inventory, as you know, sits in orthopedic, in orthopedics.

This is not a driver of the difference in, in the quarter or in the first half, but we're continuing to focus on driving down the orthopedics inventory. Overall, we're committed to bringing DSI lower, and you should expect to see clear progress by the end of the year. To conclude on the financials, net debt ended the half year at $2.8 billion. This is an increase of $314 million from the start of the year, including $201 million we paid for the final dividend of 2022. The effect of that is that the leverage finished the half at 2.3 times adjusted EBITDA, which remains within our target range of 2 times-2.5 times. Now I'll finish with our updated guidance for the full year.

On revenue, we are now targeting underlying growth of 6%-7% versus our previous expectation of 5%-6%. This reflects our strong growth in the first six months, further operational improvements in orthopedics as we execute the 12-point plan, and continued outperformance in sports and advanced wound management, while also recognizing the more difficult growth comparators in the second half of the year. Our guidance for the full-year trading margin is maintained for at least 17.5%, with headwinds from input cost inflation, offset by growth in productivity gains. I'd highlight that we expect to deliver this target also after absorbing 120 basis point headwind from transactional FX. Our outlook, therefore, represents what would be substantial margin progress on a constant currency basis.

I'm sure that you've also worked out that our guidance implies a step-up in the second half of the year, in line with our previous commentary that our guidance was H2 weighted margin and cost pressures would peak in H1. To give more perspectives on the driver of the step-up, slide 18 details the components of the margin expansion in the second half. Part of the step-up is a return this year to our historical margin seasonality. It should add around 270-300 basis points over the first half margin. This year, we also expect a further effect of productivity improvements accumulating over the course of the year.

Our cost reductions, including productivity and the 12-point plan savings, and the unwind, of course, should together come to at least a further 250 basis points of second half margin uplift. Incremental cost inflation should be relatively modest, with around an 80 basis point headwind from the merit uplift we made in H1. For what this will look like in your model, you should expect gross margin to be higher in H2 and our SG&S spend to be lower in absolute dollar than in the first half. Finally, as you think about EPSA, we have also updated our technical guidance and expect the full year tax rate on trading results to be around 17%. With that, I'll hand back to Deepak. Thank you, Anne-Francoise.

I'll start with a reminder of the transformation that's underway, at Smith+Nephew. Firstly, we're becoming a higher growth company with a target of consistent 5+% growth by 2025

Deepak Nath (CEO)

... That's more than in the past, and we have a clear path to get there. We're fixing the foundations of orthopedics, ensuring the continuing strength of sports medicine and advanced wound management, which are already outperforming, and converting the increased R&D investment into innovation-driven growth. Each of these elements is a step up from where we were pre-COVID, which contributes to building a more attractive growth profile than we've had in the past. We're also committed to driving profitability and returning our trading margin to at least 20% by 2025. We're coming through a period of elevated macro pressures, and we're rebuilding a margin through manufacturing and COGS optimization, productivity improvements, and growth leverage. On slide 21, the 12-point plan provides a detail of how we do this.

We're now approaching the halfway point of the 2 years. Slide 21 is an overview of where we are today, based on the milestone completion for each underpinning initiative. Taken as a whole, the plan is showing good progress. The varying stages of maturity reflect the breadth of the program, including some initiatives that could move forward immediately, and others that, by nature, would need longer preparation, such as portfolio streamlining or manufacturing optimization. We're now well advanced with our work to rewire orthopedics. We've refocused the commercial organization, simplified the selling organization, introduced enhanced commercial processes, and rolled out a new growth-oriented incentive structure. Our renewed demand planning process is in place and starting to bear fruit, and our asset utilization is moving in the right direction, with set turns now around 30% higher than at the start of 2022.

With better foundations in place and the delivery of key R&D projects in robotics and in extremities, we're now poised to start delivering on that second block of initiatives and win better market share with our technology. I'll drill into more detail of our progress in a moment. On improving productivity, we're quite advanced in our initiatives on value and cash processes. We've implemented better pricing across our portfolio. As Anne-Francoise set out earlier, we're driving DSOs down, and inventory days are poised to follow in the back half of the year. What will still take time is the work around manufacturing optimization. We've identified opportunities in our network. There's a process to follow before we can move ahead. The opportunities from simplification and the cost and asset inefficiencies along with it will come later in the plan.

These initiatives represent an important part of the midterm margin target or margin improvement target. We've talked less about the initiatives to accelerate sports and advanced wound management. However, they're overseen by the same governance structures as the rest of the plan and are being driven with the same urgency by their dedicated teams. With both initiatives being able to move quickly at the start of the plan, we're starting to see progress in competitive conversions and negative pressure, and the pace in cross-business unit deals into ASCs, which has more than doubled just in 2023. Orthopedics is still the single biggest lever for changing our financial outcomes, and it is where we've had the most work to do, particularly around commercial delivery. The good news is that the fix in our orthopedics foundations is now well underway.

Our KPIs of product availability have continued to improve, and the charts update some of the metrics that we showed you with our full year results. Firstly, the value of overdue orders has continued to fall. These have halved since the peak in 2022, and with another 25% reduction since the beginning of the year. We've also showed data on LIFR or line item fill rate. LIFR measures the % of customer orders that have been filled, so it's an indicator of how well we're meeting demand. Our target is to bring our non-set LIFR to a level that matches industry best practice. As you can see in the chart, our KPIs continued on its improvement path and has now progressed to about 85% of the way to our goal from the trough level.

The gap to that industry standard is now small, and LIFR for key priority products is actually moving in the right direction. In particular, Evo Small has reached and maintained the target level, and Journey 2, our key product in recon, is more than 80% of the way there. An important part of how we've made this improvement has been the new planning process that we introduced a little over a year ago. Better matching supply to demand at both the volume and mix level has enabled these improvements in order fulfillment, as well as in other operational benefits. That's happened alongside other measures, like improved logistics, with a 60% improvement in customer replenishment speed, and significantly improved scores for the health of kits that are already deployed in the field.

Putting all of that together, we've been able to reduce our total production while continuing to improve product availability. This, in turn, will ultimately enable reductions in inventory and in manufacturing capacity. To convert implant availability into sales growth, we now need to step up the deployment of new instruments to customers. The sheer number of components in an instrument set makes this a complex process. We rely significantly on third-party providers, and just a single missing component could be enough to stop deployment. That has been the case in recent months, with supply chain disruptions resulting in incomplete sets. Even so, we've already made good progress in resolving these challenges. For example, in trauma, which was a challenged area in Q1, we had more than a 3,300% increase in EVOS sets deployed in Q2.

We expect this pattern of greater set deployment to also follow in hips and knees in the second half, and this is being supplemented by redeployment, redeployment of around 10% of existing sets across our network. I referred to this last year around this time. Greater pull-through of the more readily available implants should then follow. Innovation is another key component of our growth plans. You may remember from when I talked about this in February, that we expect more than half of our growth to come from products launched in the last 5 years. We also said that we expect to launch 25 new products in 2023, which is a clear step up from around our average over the previous 3 years of around 18.

I'm pleased to report that we've delivered 13 in the first half of this year, which is a notable inflection from our past and is well on track to deliver our full year expectation. That includes our ATOS shoulder system, which is an important part of our growth plans for trauma and extremities. ATOS is designed with both patient and surgeon benefits in mind. The MetaStem aligns with the market trend toward minimally invasive short stem devices. Short stems are easier to implant, have improved bone preservation, and are a better fit to anatomy. Also, its compact tray system for procedures allows for shared instruments between the short stem or existing long stem shoulder, and also future options. We're continuing to work on a stemless variant and also to bring compatibility with CORI.

Financially, adding ATOS to our offering enables Smith+Nephew to be competitive in the shoulder market. This is one of the fastest-growing segments in orthopedics, with a $1.3 billion market growing at around 9%. With this new shoulder opportunity, along with the completed EVOS platform and plates and screws, and the improvements in product and instrument supply, trauma and extremities is well positioned to step up to a higher growth rate. We've also added a further feature to CORI with a saw-based solution. This provides an adjustable cutting guide-based solution that fits into the existing CORI total knee workflow, and that's without the need for additional incisions that come with traditional pins. This features allows or adds powerful versatility to CORI, appealing to an even broader range of surgeons with varying preferences by offering both milling and sawing as options.

This is another step in our journey to adding features and functionality to CORI. In recent quarters, we've highlighted the introduction of revision capability and the unique digital tensioner, and the addition of the saw solution highlights our intention to continue to build out CORI at an accelerated pace. The delivery of this project is a testament to the speed of innovation that's being driven by the 12-point plan, as well as the agility of our teams in acting quickly to bring these features to market. We just received FDA clearance, that's in June, and expect the rollout to begin in the second half of the year. Finally, I want to mention a further development in our plans to strengthen the underlying foundations of the business and how we operate.

With the early changes from the 12-point plan more settled, it's now an appropriate time for us to move to a more focused way of operating. We recently began the realignment of our commercial model from franchises and regions to global commercial business units, with verticalized commercial teams for orthopedics, for sports medicine, and mood. ENT is already operating in this structure. In my own experience, and when I look across the industry, this is a better way of doing business. It drives greater accountability, faster decision-making and execution, and increased customer focus in every area of our portfolio. The previous regional marketings organizations will also roll in to the global business units, we'll have a single point of accountability for upstream and downstream marketing and sales, and better alignment and resourcing across regions and countries.

The business units are led by dedicated presidents for each of orthopedics, sports medicine, and advanced wound management, with full global P&L responsibility. In this structure, industry veteran Brad Cannon is solely focused on leading the transformational changes required in orthopedics. Scott Schaffner, who is already leading sports medicine, joins the executive committee as Business Unit President. We're still committed to cross-business unit opportunities, and we're driving them through the governance of the 12-point plan structure. Earlier this year, Dr. Vasant Padmanab expanded his role to President of R&D and our ENT business, which is already operating in this verticalized model. Vasant's blend of clinical and technical expertise, business acumen, and experience bringing novel therapies to market will help strengthen our focus on ENT. Last month, Dr. Rohit Kashyap joined as President of Advanced Wound Management, following Simon Fraser's decision to retire.

Rohit is a seasoned customer and team-focused leader with significant global multifunctional experience in wound care and surgical management. Rohit's career includes more than 20 years at Acelity, where he was one of the principal architects of the company's strategy and led its execution. Immediately prior to joining Smith+Nephew, Rohit was President of Wound and Surgical Businesses and Chief Commercial Officer of MiMedx, where for the past 3 years, he has led the business's turnaround in culture and performance to achieve consistent growth. Rohit is an example of the caliber of talent we're seeking and attracting to continue to drive and deliver growth, and increase our potential as a company. Others include a new head of U.S. orthopedic sales and an operations team of orthopedic specialists that we brought together in 2022.

You'll have the opportunity to hear from the presidents in due course, including at our Meet the Management event that's planned for November 29th of this year. In summary, I'm pleased with how the first half of 2023 has developed. We've delivered growth ahead of our plans, driven all three business units, and have improved our fundamental positioning through the continued operational fix and turning our innovation investments into a greater intensity of new launches. There's clearly still work to do in some areas. We're at an early stage on our productivity initiatives and are stepping up our profitability and cash generation in the second half. As we deliver that, we'll exit this year with momentum that puts us solidly on course to meet our midterm commitments.

Before I finish, I would like to say a few words about Anne-Francoise and her decision to step down as CFO next year. I am saddened to lose her as a colleague. I understand why she feels that as we make our progress with the transformation of Smith+Nephew, now is the right time for her personally to reflect upon what she wants to do in her next career. It's hard to encapsulate the impact that Anne-Francoise has made on Smith+Nephew during her time as CFO. She was instrumental in us navigating the financial challenges in the pandemic and in laying the foundation for the 12-point plan. She has also been a champion of our culture and purpose and has been a strong leader.

On a personal note, I am grateful for the support and the counsel that she has provided me during my time at the company. I'm also grateful that she's given us ample time, far, far more than she was required to, for us to identify a successor and ensure a smooth transition, and it is good that we will have her for the next few quarters. Now I'll take your questions, or we'll take your questions. Vicky will moderate.

Hi there. Thanks for taking the questions. Joe Reynolds Clark from RBC. Just starting with the revenue upgrade, obviously, it implies a change in your assumptions around kind of growth through H2. Wondering how much of that is coming from kind of your changes, changes in assumptions around market growth versus execution. Second question on pricing. I think you mentioned 2.2 percentage points of kind of leverage coming through on volumes and pricing. Wondering kind of how much of that is pricing, how much of that is kind of the result of your own pricing initiatives versus kind of general, generally more favorable pricing environment? On Cori, obviously, helpful detail in your release around the Cori placements.

Just wondering what your, your utilization level of Cori is at the moment. I think last time you disclosed it, it was around, around 20%.

Yes. Let me talk about the revenue picture. Our step-up in the second half is reflects seasonality, but our confidence comes from the fact that our revenue growth has come across all of our business units. It's orthopedics, it's in sports, and it's wound, and we expect that to continue. The primary driver for us increase our guidance is our own commercial execution. There is, of course, market tailwind, and that's primarily an orthopedics factor, and we expect to be able to better take advantage of that. As you'll recall, we have not always been able to take advantage of that market tailwind in, in, in, in years past.

We expect to be able to better take advantage of that, but it's fundamentally our own commercial execution that underpins that confidence and that step-up in growth in the second half of the year. Pricing is a component to that. We've been... it is one of the elements of the 12-point plan. Actually, Anne-Francoise has been personally leading that particular initiative. There, it's about our reaction to inflation and our ability to kind of pass along some of that price onto our customers. The more fundamental work we're doing is actually greater price discipline across our portfolio. That work should persist well past the current inflationary period. That's really the more fundamentals of our commercial execution that we plan to improve. Around Cori?

Anne-Francoise Nesmes (CFO)

If I.

Deepak Nath (CEO)

Yeah, please go ahead, Francesca.

Anne-Francoise Nesmes (CFO)

Finish that question.

Deepak Nath (CEO)

Yeah.

Anne-Francoise Nesmes (CFO)

Sorry to interrupt.

Deepak Nath (CEO)

Yeah, no, no.

Anne-Francoise Nesmes (CFO)

You referred to the 220 basis points. We, we have seen, to, to what Deepak said, referring to the second half, we have seen positive price momentum in the first half, we're continuing the strong discipline. We're not saying what the split is, you can assume there, there is a pro pricing built, built in that, compared to historic price deflation that we used to see.

Deepak Nath (CEO)

Yeah.

Anne-Francoise Nesmes (CFO)

So we're in positive territory for price and very successfully managing that.

Deepak Nath (CEO)

I give our teams a lot of credit for the discipline we're driving around that. Coming to your third question around Cori, we're pleased with the utilization. We're interested not just in placement of Cori, right? The numbers of Cori are less important to me. What's much more important is the role that Cori plays in driving our orthopedics business, driving our full portfolio. That utilization, I gave you the 20% numbers, only improved even further since that. It is a key metric that we track. We don't necessarily report on that every quarter, but as I've said in previous forums, it's, it's a, it's a means to an end. It's the number of Cori placements is a secondary lever or secondary importance to me.

Hassan Awakil (Analyst)

Hi, Hassan Awakil, from Barclays. I have 3 questions, please. Firstly, again, on the management change, Deepak. We've clearly seen a lot of management change at Smith+Nephew over the years. I, I wonder if you can elaborate on why this is happening now, and particularly early on in your turnaround. Related to this, Deepak, do you remain confident on the medium-term margin that you've highlighted, given the significant ramp required beyond this year of an excess of 250 basis points over 2 years? Secondly, the strength in knees looks to be driven OUS, with US growth of 2.8% below some of the peers who have already reported. What do you put this down to, and how do you consider the cementless knee ramp in the US?

Then finally, I, I'd love some commentary around how you see the US environment and backlog. Has the increased utilization peaked, and when do you expect a more normalized level of growth? Thank you.

Deepak Nath (CEO)

Sure. Hassan, the first question around management changes. These on the one hand, I talked about the importance of building a strong foundation for our business, and the move from a franchise to a business unit structure is a key part of that. What I'm trying to achieve is greater accountability, greater levels of accountability in the organization, speed of decision making, remove inefficiencies, de-layering the organization and simplifying how we operate. Those are some of the thinking behind the move from franchises into business units. I believe in my experience, they will stand us in good stead over the long term. In terms of the specific changes, some of those are associated with that move, but they've been independent things.

In, in Moon, for example, Simon Fraser deciding to retire was a personal decision for him to retire, nothing to do with the organizational changes. The appointment of Rohit Kashyap is a result of Simon's decision to retire. I had previously talked about Brad Cannon, whose focus into orthopedics. He's a veteran of the industry with a long track record of success. Given the scale of changes that we need to make in orthopedics, I needed someone of his caliber, of his kind of track record focused solely on orthopedics. That has already yielded great benefits in terms of how we operate and the progress we've made on the transformation journey.

Each one of these changes has had a particular context around it, but taken together, I believe that we're much, much better positioned as a company. One final point on that, which I mentioned in my remarks, in operations, we've assembled a team within operations that are drawn from the industry. It's the first time we've had such a group that are not only strong operations leaders, but actually come from the industry, focused on driving the improvements in the operations area that are key to us transforming orthopedics. Taken together, I believe we will be as stronger as a company, moving forward. That's the ops or the management changes point. Second, do I have confidence in the midterm guidance? Absolutely.

We've maintained our guidance of at least 17.5% for the year. We've kind of given you what the components of that are from H1 into H2. I am fully confident on our ability to deliver that. You asked about midterm and the latter up from 2023 onto 2025. We've provided some bridges in the past forum. I think there's a full year results. I am 100% confident on our ability to deliver to that. It's not just words, but rather the initiatives that underpin how we're going to get there. That's your second point. In terms of the comment on knees, you're right.

We had, compared to our peers who have reported so far, we clearly are ahead outside the United States than we are in the US. We are in the early stages of improving our operations. I talked about the appointment of a new US sales leader that occurred in Q2. In addition to that, there's several other components of changes. First, is we've simplified the organization. We've delayered the US organization. We've gone from having six regional heads in the US down to three, and made further simplifications downstream in that organization, which is the first component to that. The second component is fundamentally, as I mentioned, our commercial processes were not where you would expect us to be.

The, the, the new process that was rolled out, starting in Q1, right through into Q2 are starting to bear fruit. I do believe as the quarters progress, they will really start to pay off. The third piece is an, is an incentive, a new change, a change in incentives, where we had been in orthopedics, primarily focused on retention. We've now have incentive programs that are more growth-oriented, and that is on the back of improved product availability that we've already seen. I've shown you some of the metrics around that, which is the third component of that. A, a fourth and final component is refocusing the efforts of our commercial team around our, our portfolio. Right?

That required some fairly intensive training that we invested in the first half of the year that we alluded to. The combination of all of those things will start to yield. Obviously, the, the performance isn't quite there in the US yet, but I do believe we're well positioned in the back half of the year. That was, I believe, your, your third and final question. I think there was another one that I missed.

Speaker 8

Cementless knee.

Deepak Nath (CEO)

Ah, cementless knee. Yes. We are seeing sequential improvements, in terms of growth with our, with our leisure Consilock. We obviously have multiple offerings, in cementless. The Journey rocks construct, is, is an important component to that. We're pleased with the, with the progress. We obviously don't break out, individual product or, or, or, or family sales, but, we're continuing to see, see a good uptake in that area.

Speaker 8

I'm sorry, I did ask about US.

Deepak Nath (CEO)

Ah, yes.

Speaker 8

Utilization.

Deepak Nath (CEO)

I knew there was a fourth one. I, I, I lost track, track of that. Fundamentally, our growth assumptions or, or the guidance that we provide are based on our improved and improving commercial execution. Our guidance that we provided over the midterm does not assume some exceptional tailwind, right? It, it's built on, on more or less normalized, kind of macro, factors or, or, or procedure environment. Having said that, we do see tailwind. We saw that in, in Q1. We're seeing that, obviously in, in Q2 to a lower level than, than in Q1. In terms of how long, they persist or where they come from, whether it's backlog or something else, we don't really have the visibility to be able to call that, right?

As a, as a number four player, in orthopedics, as I've said in the past, where we're going through a performance improvement program, it can be difficult to kind of parse how much of it is you and how much of it is, is the market, right? That's in orthopedics. Having said that,

Speaker 8

Thought you'd be at this stage, and have you had to adapt any of them as you've moved along, if you've come across any difficulties? Then secondly, on Cori adoption, can you give us a sense for what proportion of those placements were in the ASC channel versus hospital? And more broadly, how did all those sales to the ASC channel fare during the first half?

Deepak Nath (CEO)

Sure. So with the 12-point plan, we are about where I thought we would be at this point of the year. We, we called out 45%. It's, it's based on progress in each of the underpinning initiatives and kind of relative to the, the schedule that we're on, right? So it's, it's built up a combination of those initiatives. So 45%, you know, about where we expect it to be. I'm particularly pleased with, and as I said, there are some, for the most part, we either on track or ahead in terms of KPIs, and that's true right across the board. Having said that, there are, you know, some areas that are better than others.

You know, in terms of where I'm pleased, you know, pricing is clearly an area we call that as one of the 12-point plan. Very pleased with the progress there. The order to cash initiative, very pleased with the progress that we're making there. The cross-business unit deals, which is the 12th element of the 12-point plan, both in terms of the volume of deals, the number of deals, I'm pleased with the progress that we're making, right? We really are taking advantage of the opportunity we have in the ASC. That's the third one. Wound, we're on track, I would say, against a fairly aspirational plan that we had around negative pressure. Product availability, you know, there's two components to it. It's improving lifer, which is really tied to replenishment of sets, right?

In orthopedics, is how well are we replenishing the sets that are already out there. You see the progress that we've charted, that's good. The part that's not good with that is we, the driving down the, the sales DSIs related to it. That, that has been slower, but we understand why it's slower, and fundamentally, it's because we've had supply interruptions, right? Individual components, in the Q1, it was cross-linked polymer, that are, are a key part of certain constructs, that we were challenged in terms of supply. So that inhibited our ability to complete sets or replenish certain portions of our sets. So there's things that are set, as Anne-Francoise said, are stuck in inventory rather than being deployed, in the field, right?

There's good reasons for why it is where it is, but the underlying improvements in process around our commercial operations and really our manufacturing operations and ability to connect commercial and sales, that we've made tremendous progress in. It's moving from kinda high-level, volume-based kind of forecasts to forecasts that are tied to mix, actual SKU level, and that's the real improvement that we need to make in order to better match supply to demand. I feel good about the progress, but the KPI of inventory, clearly, we've got work to do there, right? To give you an example where we are not where we need to be. In terms of have we needed to make adjustments to our plan, what I would say is not major ones.

Having said that, there's a very tight level of governance around this. It's every two weeks that we meet, I chair the meeting together with Anne-Francoise, the reason we do that is to make decisions at the pace that we need to make to be able to run a program, given the imperatives that we have around improvement. Within the range of those, we've had to make adjustments and refinements, but not major ones. That's not because we're loath to making them, it's because we've generally called it okay, right? If we need to make it, we'll do so. We've got a mechanism to do it, but we haven't needed to do it. That's the part. Your question around ASCs, about a third of our Corys are in the ASC channel.

We're seeing good growth, I think, 20% growth in ASCs in our recon business. We're participating in the shift of procedures that are going from, in the US, from hospitals into the, into the ASCs. Yes.

Graham Doyle (Analyst)

Thank you. It's Graham Doyle from UBS. Can I ask some questions on the margin?

Deepak Nath (CEO)

Yeah.

Graham Doyle (Analyst)

The, the H1 margin was kind of historically weak, and I know we had meshed in the start of the year that it would be H2 weighted, but it's also kind of like a historic step up in H2. Was this genuinely what you were expecting, or is it sort of the bottom of the range of what you were expecting for the first half? When I look at slide 18 and you've got the building blocks up, even if I add those building blocks, I'm not getting to much more than 17.5. Are we just less optimistic maybe than the start of the year than-.

Deepak Nath (CEO)

Yeah.

Graham Doyle (Analyst)

The margin?

Deepak Nath (CEO)

Do you want to take that?

Anne-Francoise Nesmes (CFO)

Yeah.

Deepak Nath (CEO)

Go ahead.

Anne-Francoise Nesmes (CFO)

Sorry, I was going to take this one, but-

Deepak Nath (CEO)

Yeah.

Anne-Francoise Nesmes (CFO)

Clearly, the, our margins, as we've said in the statements, are in, in line with our expectations and as anticipated. And we said at the beginning of the year that it will be the margins, and the profitability will be H2-weighted. What we, we're expecting to see is the operating leverage, as, as you're pointing out to slide 18, coming through, and importantly, returning to historical seasonality. Yes, the H1 margin is lower, but that was implied in our initial guidance, given that we, we're returning to historical seasonality and the productivity improvements we've always signposted were in the second half. We've already made progress in terms of cost savings, restructuring. On top of that, we're unwinding the cost, the, the cost spend, the pre-selling and marketing that we're seeing in the first half.

We are, you know, we're in line and tracking to what we said we would do.

Deepak Nath (CEO)

Just to accentuate the point, when we say on expectations, this is what our budget was built to. We truly are on budget to H1 of the year. I think the point is some of the favorability in revenue that we had up, that are ahead of our expectations, didn't necessarily translate into favorability and margin, and we've kind of given you the bridge around that. Truly, our budget was, as we came in. Yeah.

Graham Doyle (Analyst)

Maybe we just think about next year, and it's just a broader question. There's obviously a big step up as, as Sam pointed out, in terms of margin to get towards that target.

Deepak Nath (CEO)

Yeah.

Graham Doyle (Analyst)

What happens if the order market doesn't grow?

Deepak Nath (CEO)

Yeah.

Graham Doyle (Analyst)

You know, we've got a big backlog, you've got a tough comp, and I know there's obviously the absolute amount of revenue will still be quite high, but you've got to say you've got to go from taking very little share in the US, losing share, to taking a lot of share.

Deepak Nath (CEO)

Yeah.

Graham Doyle (Analyst)

Is that in the plan?

Deepak Nath (CEO)

Yeah. As I reflect back to how our plan is constructed and what's the anchor to our guidance, our guidance was built and our assumption was built on more or less normal, orthopedic volume. Any tailwind we have is a bit upside, right? Implied in that is share recovery, and here I want to parse what that means. Over the last couple of years, we have lost share, not because we've necessarily been displaced from accounts, but because we've given up procedures largely on the back of our failure to supply reliably, right? Recovering that share, though not easy, is easier than if you had to go back into accounts that we've completely displaced one.

I mean, to put it simply, there are surgeons that are already trained in our systems who have had to resort to other, you know, companies' products because we haven't been able to supply as well or as, as, as regularly as we should have been able to, right? It's that recovery that underpins the next couple of years. The second more structural component to that is our innovations, right? We have invested in R&D, in, in particular in orthopedics. Robotics is a big component of that, but it's not just robotics, it's, it's cementless, right? It's in, in trauma, in extremities and in other parts of our portfolio. Let's just take robotics, right? We have a high level of conviction around.

What we're doing in the 12-point plan is accelerating certain features and functionality that was previously contemplated in the pipeline, but not at the pace that we're bringing this out. There, you see this, right? Every quarter, I talk about something related to CORI, and that didn't just happen. It represents an acceleration of the plans that we had. When you take a step back and look at what we've brought onto CORI, right? We've got not only a milling-based approach, now we've accelerated our programs to bring a cutting-edge approach onto CORI, right? It's a platform that now has cutting and milling, and the intention is that it appeals to a broader range of surgeons. That represents an acceleration. The digital tensioner is another thing, right?

Which is another capability where surgeons are able to plan, right, their, their, their, their procedures before ever making a cut, right? That's a unique selling feature of the, the, the, the digital tensioner, right? We brought that out last quarter. Again, not to go down the rabbit hole in any one feature, but in totality, a significant investment. We believe in CORI. I do believe that will be a driver of growth, not just in terms of robotics, right? You see our other recon line, which is where we park our robotics numbers, there's reasonable amount of growth, but it's really how we use CORI to drive the rest of our portfolio. That's the refocus of our commercial organization that I'm talking about, right? There I do feel good about how we're positioned for the midterm.

Hopefully that gives you a bit of color around, around how our guidance is built up.

Veronica Dubaj (Analyst)

Thank you.

Deepak Nath (CEO)

There was a question on the phone, Vicky, and I'll see that. We've got 3 questions on the phone, and the first of which is Veronica from Citi. Perhaps we go to that before we go to other questions in the room.

Robert Davies (Analyst)

Veronica Dubaj from Citi, your line is open.

Veronica Dubaj (Analyst)

Excellent. Good morning, and thank you guys for, for squeezing me in. I have two, please. The first one is just Deepak, maybe to, to follow on a little bit on the competitive environment and how you're feeling about your performance in orthopedics. And, and maybe you can tie this also to the changes that you've made to the sales organization in the US year to date. Obviously, when we look at the growth rates, clearly the gap between you and the peers has narrowed this quarter. I appreciate there's a lot of comp effects in there and noise, but, but do you feel you are starting to make progress versus where you were twelve months ago?

I guess maybe just talk to how the commercial organization changes, including the training program and the restructuring you've done year to date, fits into that, and really what your ambition is as you move into back half of the year and into 2024. Then I'll have a follow-up after that, but maybe we start there.

Deepak Nath (CEO)

Sure, Veronica. Thanks. First off, I mean, the headline answer is, I feel good about where we are. As you, as you correctly note, the gap relative to competitors, at least the, the, the, we're ahead of one of them. We've narrowed the gap relative to the, to the other competitors reported so far, right? I, I am pleased with where we are, but this is. We're very much in the early stages of the, the improvement journey on commercial, right? You, you rightly note, you know, the, the changes in organization, the, the, the changes in commercial process. In the US, where our biggest challenge lies in terms of commercial performance in the US, we brought a lot of these together, in Q2. It started in Q1.

Actually, some of that, the, the seeds were sown back in 2022. They've come together in Q2. They've had impact very clearly yet, but the bigger impact is, is to come in the back half of the year and, and in, and time beyond. As you know, in commercial, it's, it's not a switch that you turn on, right? You've got to make sure you lay the foundations, you make sure you're thoughtful about the changes you're making, and then, of course, let the organization do its job. I do believe that we're well-positioned now, having brought together the major elements, but the proof will be in the pudding, and that will be best judged in terms of our performance here on out.

Just to give you a sense of timing, to accentuate it, a lot of these elements came together really in Q2, right? So I do feel good about it, but obviously, you know, the big part of the productivity or the improvements will come in the quarters that follow.

Veronica Dubaj (Analyst)

That's, that's very clear. Then maybe, and I apologize if, this is, the question might have come across as aggressive. It's not intended as that, but it's definitely one that has come up a lot in my conversations this morning.

Deepak Nath (CEO)

Yeah

Veronica Dubaj (Analyst)

... which is that 1.1 percentage points of spend that you've called out in selling and marketing. Was this always in the plan from the outset of the year?

Deepak Nath (CEO)

Yeah.

Veronica Dubaj (Analyst)

The nature of it, the, the spend of it, and I guess maybe just give us a background for why we had not heard about it until now. It's clearly a surprise on the profitability in the first half of, of the year for all of us.

Deepak Nath (CEO)

Yeah, sure. I mean, it's so some of it was planned. For example, we had always planned to bring together our commercial organization for a longer period of time than we historically do, with much more intensive training that, than we do, and that's all about the refocus and so forth, right? That was planned. The part that wasn't is around commissions. We saw, you know, a couple factors there, that, that were to a higher level than we had originally planned for. For example, you know, there, I called out supply chain interruptions. That's a very, very real factor, for folks in the field, right?

Whether in the orthopedics side, they're counting on sets to be delivered to drive growth, and when those sets aren't complete, that really impacts their ability to go out and get new business, right? It's a very real impact in the field. On the sports medicine side, we've had quite a few challenges in being able to bring the to deliver products needed to drive growth. The teams have done a remarkable job selling through that, but there's been tremendous component shortages in sports medicine, and we've had to make sure that we buffer, to some extent, the organization from those challenges. That part of the selling spend related to commissions was to a higher level than we expected.

In the back half of the year, a lot of these things are, are, are coming together because we've got line of sight to what we are able to produce, so we won't need, need those types of, types of investments. To your point, some of it expected, some of it not so.

Veronica Dubaj (Analyst)

That's very clear. Thank you, guys. I'll jump back into the queue.

Deepak Nath (CEO)

Thanks, Veronica. You can go back to the room, and then there's a couple more questions on the phone line, I guess. Go to one in the room.

David Evanson (Analyst)

Hi, David Evanson, JP Morgan. 3, please. Firstly, on the supply constraints, just wondered if you were able to give some more, more color in terms of what they actually are?

Deepak Nath (CEO)

Yeah.

David Evanson (Analyst)

How much of a headwind were they overall, and when do you expect them to resolve? Second one on free cash flow. Just wondering if you have any guidance for the full year, whether you expect to be in positive territory for the full year or not. Finally, just in terms of, on Chinese BJP for sports medicine, are you expecting any destocking ahead of that? If so, is that factored into the guidance?

Deepak Nath (CEO)

Sure. Do you want to take the, the, the free cash flow, one?

Anne-Francoise Nesmes (CFO)

Yeah. In terms of free cash flow and cash conversion, as we guided, we, you know, we, with the full year results, the, the, the movements will depends on the inventory. Quite clearly, as we said today here, that the, the drag on the cash flow has been the increase in inventory. We are looking to address that and bringing it back to more reasonable level. We, we won't be quite at historical level of free cash flow or trading cash conversion, but we're getting back. We'll, we'll be getting back to nearer or approaching those historical level as, as we return inventory to a more normal position until we start, you know, decreasing, particularly the DSIs.

Deepak Nath (CEO)

Supply constraints, just to give you a little bit of color. On sports, we rely on basically third parties to, you know, provide different components that go into the products that we make. We've had challenges as one or the other component, you know, for, for quite some time. Historically, it's been semiconductors that's really impacted our, our AET business in sports. That has improved from last year to this year, right? Residence was another area that I called out in times past. That has largely improved, not as, you know, pre-pandemic levels, but improved relatively where we were last year.

What hasn't improved is one or the other component, where it's not some big category, it's just an individual component related to a challenge that a particular supplier is having, either around labor or their own input, raw materials. There are about six or seven of those today. There was a much longer list. We whittled it down to six or seven today that are really impacting the pace at which we produce. It's just reflected in raw material inventory because we've got, you know, the 100 other things that we need to complete it, but we're, for the six or seven things that we're waiting on, you know, the stuff sits in inventory, it's in work in progress, and our field doesn't get it in the way they're expected to see it.

It's those, call it 6 or 7 things, individual components in sports, against a backdrop of improving kind of overall situation, semiconductor and residence, which was a topic last year for that business. In orthopedics, I want to draw a distinction between supply versus product availability. The reason we call it product availability in, in orthopedics, the by far the biggest challenge for orthopedics was US. Our ability to connect operations and commercial that led to us not being able to provide, bring the products where they're needed at the time that they're needed, right? There, the large part of the fix was things that we needed to do in-house. You know, all of the things that I've, that I've talked about today and in previous forms.

There, I feel good about the progress that we're making, but that doesn't mean there were no supply challenges in orthopedics, right? There were some. The, the one I've called, I believe I called attention to in Q1, was cross-linked polymer, which goes into some of the inserts that we make, right? It's a key part of certain knee constructs. When you don't have it, you don't have a construct that's complete, and you're in a painful situation in the field in terms of your ability to, to supply customers. That was a very significant impact for us in Q1 and impacted our ability to complete implant sets. There are other components that go into instrument sets, right? There, we are more reliant on third party versus our own manufacturing.

Those have been, I would say, irregular supply, where we get what we need, the quantities that we need it, when we need it. It's not a large number of components, so it's, it's a, it's really a small handful. Those handful can keep you from being able to complete those instrument sets, and therefore, all of the stuff that's in your inventory versus being deployed and being able to help you turn sets. It's a different type of problem, manifested in similar ways. Like I said, when I look out into the back half of the year, I do see some improvement in terms of what we are expecting to get, hopefully that gives you the color around around supply, to answer your first question.

Third, your third question around China VBP and around destocking. you know, in terms of timing of when that will occur, we're obviously in close touch with the government in China, around the authorities that are tasked with, with bringing this to life. It's hard to tell exactly when that will occur. Suffice it to say, we are-- we've got a range of plans to deal with, you know, destocking and other behaviors, that, that you might see when, when something like this goes into effect. We obviously have some experience with dealing with this, with the orthopedics VBP. We'll apply the lessons that we've learned in that process to manage, this, as best we can.

The next question, before we go to someone in the room, is Robert Davies from Morgan Stanley.

Robert Davies (Analyst)

Yes, thank you for taking my question. My first one was just around, I guess your EBIT bridge into the second half of the year. I also had a couple of follow-ups on that. First one was just around the second half weighting of that EBIT bridge is obviously higher even than the sort of pre-COVID levels. I know you sort of cited this sort of historic seasonality, but just wondered if you could kind of touch on the second half weighting of the EBIT as a percentage of the overall group seems to be, I think, 300-400 basis points above what the previous kind of highs had been in terms of the EBIT contribution as a proportion of the full year.

Just a couple, around just we had an FX, guidance, I think, of 120 basis points transactional. Just where that sort of fits into your guidance, in your H1, H2 margin bridge. Is that included in, in the underlying numbers as part of that seasonal pickup? Two sort of follow-ups. One was just on, just on the profitability, I guess, of first half margins compared to a couple of years ago, you're 240, 250 basis points below where you were. I'd just be curious, in terms of from a divisional standpoint, where are you seeing kind of higher or lower margins versus 24 months ago by a divisional basis? A final one, if I can just squeeze it in, is just on your innovation pipeline.

Is any of that extra innovation sort of spend in R&D push costing you on the margin side? Thank you.

Deepak Nath (CEO)

Do you want to unpack that on purpose?

Anne-Francoise Nesmes (CFO)

Yeah. there, there, it was quite... Good morning, Robert. There was quite a few here. In terms of the, the-

Robert Davies (Analyst)

Mm-hmm.

Anne-Francoise Nesmes (CFO)

weighting of EBIT in the second half, you're, you're right. I mean, historically, it's been 45%-47% to 53%-55% in the second half. Here, given the pattern, it's fair to say there's a higher % of EBIT in the second half. A lot of that driven by returning to the seasonal uplift we've seen, but also the flow-through of the productivity improvement and the cost savings. That's really what's, what, what's driving that, that proportion. The FX.

Robert Davies (Analyst)

Mm-hmm

Anne-Francoise Nesmes (CFO)

... impact is throughout the, you know, the various proportion. It shows through mostly in cost of goods, because that's a disproportion where we, we have our, our U.S. cost base. I would say, though, and that's why we should recognize that 120 basis points of margin erosion from FX, we, we're absorbing. When we talk about at least 17.5%, it's after quite a headwind in FX, and we should recognize that therefore, the, the efforts to improve margins are coming through. From the divisional or the segmental-

Robert Davies (Analyst)

I see.

Anne-Francoise Nesmes (CFO)

reporting. Clearly, there's a range, and you can find the information. Of course, from an accounting perspective, it's after allocating all cost and, you know, would it be facilities and actually allocating exchange rate. We're seeing good improvement in orthopedics. To the earlier question, you know, the improvement in the midterm margin is mostly driven by the orthopedics segment returning to the nearer to the historical profitability level we had, which is what we discussed in the full year results earlier this year. Orthopedics is on track. We're seeing good improvement. Sports is improving. When you look at the, there's a slight dilution in wound because of the investment we're making behind negative pressure.

All divisions are tracking very well and showing, you know, being where we want them to be. The final question on R&D margin, there's no further dilution of R&D. You, you know, we've made the step up in the R&D investment in 2018 and 2019. We've kept it through the COVID period. We're now at a right position, and that's not dilutive to margin. I think I've covered all your four questions, but I cheated. I took notes, whereas Deepak trying to memorize it.

Deepak Nath (CEO)

Store your notes.

Robert Davies (Analyst)

Thank you very much. That was very helpful.

Anne-Francoise Nesmes (CFO)

You're welcome. There's one more.

Deepak Nath (CEO)

Oh, there's... I'm told there's one more on the line. Chris Graetzer from Credit Suisse.

Chris Graetzer (Analyst)

Hey, good morning, Deepak and Francois. Thanks. I actually still have now 3 question left, you know. The first is just on the, the dressing business in, in wound care. Could you discuss that? You know, it looks like, you know, at least from our perspective, that you're losing share there. So could you maybe discuss, you know, how happy you're with the performance, you know, there? The second question would be on ATOS on CORI. I think you mentioned that in your prepared remarks. Could you maybe specify the timing when you expect, you know, that to become available? The third question is on just on the cost inflation, you know, given, you know, where we stand right now, you know, how should we expect that, you know, go into 2024?

It's obviously kind of easing substantially now in the second half, you know, that headwind, you know, maybe, you know, just give you, if you could give us, you know, an indication there, at the current levels, you know, how that would impact, you know, your business. Thank you.

Deepak Nath (CEO)

Sure. Maybe I'll take the first two, and you can take the third one. In terms of, let me start with the second question, which is CORI on shoulder. When would I want it? I'd want it tomorrow if I had my druthers. We have to sequence that in with the other CORI programs. We've made really good progress on knee. There's a couple more elements that are still coming on knee. There's a fairly robust pipeline of projects in hips that we need to prioritize. I'm quite excited about the applicability of CORI for shoulder. The anatomy of the shoulder is such that CORI is very well positioned to be to play an important role in shoulder.

We recognize that opportunity. We recognize that the, the, the form factor for a CORI is well suited for the shoulder. It's, it, it's in place, in terms of a pipeline, we just need to kind of factor it in with, with other, other CORI programs we have in place. We'll give you some visibility, a peek behind the curtain, when we have the meet the management session in November. So stay tuned for that. The first question, now, Chris, just remind me. I, I just drew a blank there. AWC. Yeah. Okay, sorry.

Chris Graetzer (Analyst)

That's right.

Deepak Nath (CEO)

Thank you.

Chris Graetzer (Analyst)

Exactly.

Deepak Nath (CEO)

I haven't reasoned so good, I guess. Maybe I actually should take, take notes. Fundamentally about wound, it's, it's about our portfolio. You're right. There is some, you know, with, with, with foams and dressings, there's a, you know, you can parse this all different ways. But fundamentally, what I'm actually pleased with is how our portfolio in wound is performing. We've got the broadest portfolio in the industry. Not only is it broad, it's actually quite rich in terms of what we have in each of our categories, right? So, you know, our biologics portfolio is performing very, very well. Our skin substitutes business continues to be above market. There's great data, clinical data that we've built up over a long period of time, that's fueling this growth.

I feel very, very good about where we're positioned there. Negative pressure is called out as a 12-point plan, a tremendous opportunity in the back of Renesis, a refreshed portfolio there to drive really growth in that category. When I see those, the growth drivers line up, I do feel good. There's also quite a robust pipeline in wound, particularly around around foams, and dressings, so I'm very excited about what the future holds there. When you add all of these things up, the, the, the story is one of each element of the portfolio plays its role, but it's the totality, it's the breadth and the richness that I'm most excited about. It's, it's the source of our competitive advantage, within, within that. In terms of cash flow, you want to take that as well?

Anne-Francoise Nesmes (CFO)

In terms of, of cost to, to finish off, I mean, clearly, as we've said here today, we, we expect the cost pressures or the inflation to have peaked. Our midterm guidance always assume that moderate inflation in 24 and 25. What we'd add, though, is, of course, as you know, the cost inflation will unwind through the cost of goods line as we sell the inventory that we've built at a higher cost. You know, there will be a phasing of that effect, as inflation comes down.

Deepak Nath (CEO)

Okay, good. I'm getting a note that-

Chris Graetzer (Analyst)

Thank you.

Deepak Nath (CEO)

We need to finish here because our first meeting is, I guess, in a few minutes. I want to take this opportunity to thank everyone for coming. Thank you for your questions and your engagement. I'm looking forward to coming back in the next quarter and continuing to show you the story of progress. Thank you very much.