Release Date: February 25, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Smith & Nephew PLC (SNN, Financial) reported a 60 basis points margin expansion for 2024, driven by operational leverage and productivity improvements.
- The company achieved 95% cash conversion, surpassing its target, and reported higher return on invested capital (ROIC) of 1.4%.
- Smith & Nephew PLC (SNN) delivered 8.3% underlying growth in Q4 2024, with strong performance in the US market, which grew by 11.9%.
- More than 60% of revenue growth in 2024 came from products launched in the last five years, highlighting the company's focus on innovation.
- The company has made significant progress in reducing inventory days and improving the quality of its inventory, contributing to better cash flow management.
Negative Points
- China posed a significant headwind, costing 280 basis points of group growth in Q4 2024, and is expected to continue impacting growth in 2025.
- The company faced a 40 basis points drag on gross margin due to the price impact of joint repair VBP in China.
- Smith & Nephew PLC (SNN) anticipates a 25% sales headwind from the expected China VBP process on mechanical resection blades and COBLATION wands in 2025.
- The company's Orthopedics business in China is currently not profitable at VBP price levels, raising concerns about its long-term viability in the region.
- Smith & Nephew PLC (SNN) has experienced market share loss in China, particularly in the orthopedics segment, due to increased competition from local manufacturers.
Q & A Highlights
Q: What gives you confidence that orthopedics in China will recover towards the end of Q1, and how are volumes in sports medicine?
A: Deepak Nath, CEO, explained that the softening in demand was primarily in the off-tender business, with inventories built up in the channel. They expect Q1 to be the low point for inventory adjustments. John Rogers (Trades, Portfolio), CFO, added that they are predicting a 60-75% decline in orthopedics for the first half of 2025, with some recovery expected in the second half.
Q: What gives you confidence that US hips and knees will grow in line with the market by the end of 2025?
A: Deepak Nath highlighted improvements in supply, commercial execution, and customer churn. They have improved product availability and commercial execution, leading to a more stable account base. John Rogers (Trades, Portfolio) added that they expect to achieve 3-4% growth by the end of the year, aligning with market growth.
Q: Can you discuss your efforts to reduce SKUs in hips and knees and its impact on margins?
A: Deepak Nath stated that SKU reduction is part of their plan, with significant reductions already achieved in Asia and emerging markets. However, platform transitions are more complex. While SKU reduction is important, it's not the biggest lever for margin expansion. John Rogers (Trades, Portfolio) added that operational leverage and manufacturing cost savings are key drivers for margin improvement in orthopedics.
Q: Could you provide more details on the headcount reduction and potential tariff risks?
A: Deepak Nath explained that most headcount reductions are from factory closures in orthopedics, with additional SG&A efficiencies. They have pulled forward some reductions planned for 2025 into 2024. Regarding tariffs, they are monitoring the situation, with potential impacts primarily in their Wound business due to manufacturing presence in China.
Q: What are the underlying assumptions for the additional VBP in AET, and what is left in sports medicine in China that hasn't yet had VBP?
A: Deepak Nath mentioned that the $25 million impact from AET VBP is split between price and volume adjustments and channel adjustments. Once AET is affected, there isn't much left in sports medicine in China for VBP impact. John Rogers (Trades, Portfolio) added that the $25 million impact is roughly split between $15 million in price and volume and $10 million in channel adjustments.
Q: How are you thinking about margins beyond 2025, and how much might you need to reinvest versus allowing it to drop to the bottom line?
A: John Rogers (Trades, Portfolio) stated that they expect margin accretion through 2026 and 2027, with cost savings continuing to come through. They aim to achieve $325 million to $375 million in total cost savings, with some savings coming from annualization of 2025 initiatives.
Q: Can you provide more color on the competitive landscape in the small footprint space for robotics where Cori plays?
A: Deepak Nath expressed satisfaction with Cori's traction, highlighting its placement in academic medical institutions and ASCs. Cori's unique features, such as the ability to do revisions and soft tissue balance, provide a competitive edge. They are also expanding Cori's applicability to shoulder procedures.
Q: Is there a path where you might shut down the China business, and what are the implications of plant closures on inventory costs?
A: Deepak Nath explained that they are maintaining a presence in China to monitor market developments, particularly in robotics. While orthopedics in China is not currently profitable, they are assessing its future potential. John Rogers (Trades, Portfolio) noted that the benefits of plant closures are already being realized in cash terms, but it takes about a year for these benefits to flow through the P&L.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
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