Smith & Nephew plc (SNN) Q3 2024 Earnings Conference Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reflects mixed signals: Financial performance shows growth but is hampered by challenges in China, affecting margins and revenue outlook. The Q&A highlights uncertainties about recovery in key markets and competitive pressures. Despite some positive developments in product feedback and growth outside China, the lack of share buybacks and flat dividend policy suggest cautious financial health management. Overall, the market reaction is likely neutral, balancing growth prospects with significant regional headwinds and strategic uncertainties.

Key Financial Performance

Underlying Revenue Growth 4% growth in the quarter, with a year-over-year change of 4%. The growth was attributed to operational improvements in product supply and commercial execution, particularly in the U.S. recon business, despite slower performance in Orthopedics globally and a weaker quarter in China.

Revenue $1.4 billion in the quarter, with a year-over-year change of 4%. The growth was neutral in foreign exchange, and trading days were unchanged from the prior year.

Orthopedics Growth 2.3% underlying growth, with U.S. knees growing at 0.7% and hips at 3.2%. The slower growth was impacted by reduced end customer demand and inventory adjustments in China.

Advanced Wound Management Growth 6.5% growth in the quarter, representing the strongest quarter this year, driven by broad-based strength across regions and categories.

Trading Margin Expansion Expected expansion of up to 50 basis points for the year, with a year-over-year change reflecting operational leverage and productivity improvements, despite headwinds from input cost inflation and VBP.

Trading Cash Conversion Expected to be around 85% for the year, indicating a stable cash generation outlook.

Expected Trading Margin for 2025 Expected to be between 19% and 20%, with a year-over-year change reflecting the impact of VBP and slower volume benefits.

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Operating Highlights

New Product Launches: Launched CATALYSTEM, a new shorter hip stem suited to the direct anterior approach, which represents around 50% of the U.S. market.

Innovation in Sports Medicine: 510(k) clearance for Q-FIX KNOTLESS, a new version in the established Q-FIX range of suture anchors.

RENASYS EDGE: Early feedback on RENASYS EDGE has been positive, with expectations for double-digit growth.

Market Expansion in Established Markets: Established Markets business grew 4% in the U.S. and 6.8% in other established markets.

China Market Challenges: China's surgical businesses faced a weaker-than-expected quarter, costing almost 2 points of growth at the group level.

Operational Improvements: Significant operational improvements around product supply and commercial execution have been made.

SKU Rationalization: 40-45% reduction in the number of SKUs largely in OUS markets, with ongoing SKU rationalization.

12-Point Plan Progress: The 12-Point Plan is driving operational efficiencies and is expected to lead to significant margin expansion.

Focus on Robotics: Continued focus on robotics adoption, with one-third of U.S. knees being placed with CORI.

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Risk or Challenges

China Market Headwinds: Significant growth headwinds in China, particularly in Sports Medicine and Orthopedics, are expected to continue into 2025, impacting overall revenue growth.

VBP Pricing Impact: The implementation of Value-Based Pricing (VBP) in China has led to a price impact without the anticipated volume growth, contributing to margin pressure.

Supply Chain Challenges: Reduced end customer demand in China has resulted in slower sales to distribution partners, leading to inventory destocking and affecting revenue.

Competitive Pressures: Increased competition from local products in China is causing some share loss, complicating the recovery of the market.

Operational Improvements: While operational improvements are being made, the pace of recovery in the U.S. recon market has been slower than expected, affecting overall performance.

Margin Pressure: The combination of input cost inflation, VBP impacts, and slower revenue growth has led to a downward revision of margin expectations for 2025.

Economic Factors: The overall economic environment in China is uncertain, which may continue to affect demand for multinational products, including those from Smith & Nephew.

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Guidance & Outlook

Strategic Growth Priorities: Continued progress on the 12-point plan, focusing on fixing Orthopedics and returning the U.S. recon business to growth.

Operational Improvements: Significant operational improvements around product supply and commercial execution have started to reflect in revenue.

Innovation and Robotics: Ongoing delivery on long-term growth drivers such as robotics adoption and innovation delivery.

12-Point Plan: The plan is aimed at transforming Smith & Nephew into a higher growth company with improved productivity and operating leverage.

Revenue Growth Expectation: Expected underlying revenue growth of 4.5% for the full year, revised down from previous guidance of 5% to 6%.

Trading Margin Outlook: Expected trading margin expansion of up to 50 basis points, with a revised margin target of 19% to 20% for 2025.

China Market Impact: Headwinds from China are expected to continue into 2025, affecting overall growth and margins.

Cash Conversion Target: Targeting trading cash conversion of around 85%.

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Shareholder Return Plan

Shareholder Return Plan: The company has not explicitly mentioned a share buyback program or dividend program in the transcript. However, they discussed their expectations for trading margin expansion of up to 50 basis points for the year, with a target of improving trading cash conversion at around 85%. They also indicated a focus on operational improvements and cost reductions, which could indirectly support shareholder returns.

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Key Q&A

Q:Can you just kind of talk about what the drivers were, that lower end market demand was this unexpected? And do you expect to rebound or are they kind of lost volumes?

A:On China Recon, what we're seeing is the VBP component of the market and there's an off-VBP component of the market. What we are finding is the component of the market that's not covered by VBP, the in-market demand has been much, much weaker than expected. And that had an impact on top line, especially.

Q:Can you give a rough estimate of what your expectations are around timing to that?

A:On the sports side, what we had assumed was with the implementation of VBP that there was going to be growth in the market that would translate into higher volumes for us, for our business. And we didn't see that across the market, and we didn't see the volume uplifts in terms of demand for our products.

Q:How much of the downgrade is from other sources? And how much is from China?

A:The majority of the volume, the margin delta comes from the combination of these two factors. The U.S. Recon business did turn positive. It's a bit slower than we had expected. That impacts the outturn a little bit, but that is a smaller effect on all of this.

Q:How you're thinking about revenue growth for '25?

A:Revenue growth is broadly in line with what we had indicated around 5%. And so that remains in place.

Q:Is that still a valid target? And do you expect still to be able to generate some operating leverage beyond 2025 to see further margin progression?

A:We do expect to get to 20% gross margin. If you remember last, I think at the half, we talked about margin accretion coming through in '26 and '27. We expect that to continue to be the case.

Q:Is that a market phenomenon? Or do you think you're losing share?

A:There's definitely a market effect of what we had anticipated is on the back of the price implementation that more and more patients would be treated with these procedures. So we're not seeing evidence of that.

Q:Could China continue to have an impact?

A:As we mentioned, we expect that to continue into 2025.

Q:Even after adjusting for China, you look to be losing considerable share, OUS, in knees based on peer reporting. If you could talk to this and what you're seeing on the ground?

A:Our product availability in knees has lacked -- improvement has lagged that of hips.

Q:What are the biggest elements in terms of moving the numbers, I guess, over the next one to two years that -- did you still feel like you're not making as much progress on as you maybe thought before?

A:The biggest delta there is the China effect. I called out U.S. recon, but it's in the noise in terms of where we are relative to where we expect it to be around this period of time.

Q:How much visibility do you have on the inventory that's being held by your distributors?

A:We've got, I'd say, reasonable visibility we've taken steps over the last couple of years to get better and better line of sight into that inventory.

Q:When do you assess this plan and decide it doesn't work if it continues to not work?

A:We do have to parse things, as we said, there's a number of moving pieces. When we look at outside of the China effect, generally speaking, we are on track relative to what we set out to do.

Q:Would you look at doing things like releasing value through asset sales, shutting down business that don't generate cash?

A:We do believe that there is value to the businesses being here together. And we do believe that with the 12-Point Plan and the benefits of that coming through as expected, we will be well positioned to start to get back into a better place.

Q:Could you give us just any estimate of the percentage of U.S. knees that are being done in the surgery centers today?

A:Overall, in terms of ASC volume, we're kind of in the low double-digit proportion of our business going into ASCs.

Q:Can you give us just a reminder of where you are in terms of number of product families in hips and knees, and where you should get to in, say, the next three four years?

A:We have a relatively large number of products within hips. We've got four knee platforms all around the world.

Q:What could derail the story in 2025?

A:We actually have -- are rather bullish on our prospects and hip on the back of new launches that's coming.

Q:What is the potential contribution that we could see next year for wound device?

A:Early feedback has been pretty good. We're in the very early stages of launching.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer to questions regarding the specific timing of volume growth in China and the exact impact of local competitors on market share. Additionally, there was a lack of clarity on the specific elements of the 12-Point Plan that may not be progressing as expected, and the potential for asset sales or business shutdowns was not directly addressed.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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